The optimal org size is shrinking. Will manufacturing follow?

The optimal org size is shrinking. Will manufacturing follow?


Traditional manufacturing companies are associated with large manufacturing facilities, manufacturing equipment and significant initial investment to take business off the ground. It is still true in many aspects. At the same time, manufacturing is changing. It becomes smaller, more agile and global. In addition to that, changes in IP ownership reshaping manufacturing industry. Similar how open source software changed the landscape of web development in the last decade, we can see new open source hardware is changing some fundamentals of manufacturing business too. What does it mean for future manufacturing companies?

The blog post “The billion-dollar, one-person startup” by Roy Bahat speaks about shrinking of optimal organizational size. It starts from a twitter chat bringing examples of software companies, investments and number of employees. Well… I’m not sure if we are going to see virtual no-employee startup with $1B valuation any time soon. At the same time, I found the discussion around this interesting. Here is an interesting passage that caught my special attention:

In the 1930s, the economist Ronald Coase theorized that companies exist because the cost of doing business inside a firm is less than the cost of doing business with parties outside of the firm. Trust, shared culture, more information, and other factors made it so you were more likely to trust an accountant who worked for your company than one who worked for someone else.

So, if the cost of doing business with outsiders falls, firm sizes might shrink – dramatically. As the quality of outside services goes up, and their way of doing business becomes more transparent to customers, and many companies who work together share a common culture (including communication tools, norms of behavior, and other patterns), companies might use outside partners for functions they’d have previously run themselves

Those companies can focus on what they do best – and that advantage might be delivered (as it was in the cases of Instagram and WhatsApp) by a tiny team. Maybe, one day, by a single person.

It made me think about surge of new hardware companies. While hardware is still hard, new manufacturing businesses are small, agile and relies on a network of providers – designers, freelancers, specialized shops, contract manufacturers and other service providers. If I will follow the same logic of the improved efficiency when doing business with outsiders, in the future we can see much smaller manufacturing companies focusing on what they can do best – innovate and develop new products and business models. If my assumption has some grounds, then we can see a growing number of small manufacturing organization operating in the network of diversified suppliers and manufacturing shops.

What is my conclusion? The manufacturing business is transforming. Large companies won’t disappear any time soon. However, I can imagine a growing part of small, agile manufacturing companies relying on an eco-system of suppliers and contract manufacturers. It will impact engineering and manufacturing software and will demand a new type of design, engineering and management tools. Just my thoughts…

Best, Oleg

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