My theory of “why large organizations are so susceptible to getting out of touch with reality?” First, a little math background:
- The volume of a sphere scales like it’s Radius cubed
think of the number of internal parts of the organization, the number of people ‘inside’, the number of offices, departments, and so on
- The surface area of a sphere scales like the Radius squared
think of the number of people in regular contact with the outside world, the external neighborhood, the current and potential customers, suppliers, regulators, and all of the external environment of the organization
- The fraction of the organizations people, time, and opportunities to be “in touch with reality” (as opposed to being involved with the artificial environment internal to the organization) is then the ratio of “Area” divided by “Volume”. This is then ~ R-square/R-cubed, i.e. 1/R.
Hence, the members of an organization that’s twice as large* as another will have only 1/2 the rate of contact with the external reality.
- What this means is fewer people involved with a sense of urgency for survival and growth of the organization, and relatively more motivation to “climb the corporate ladders”, and compete in a “zero-sum game” with other members of the organization.
Later, we’ll discuss the relation of this topic, with that of the “Network Effect” aka Metcalfe’s Theorem.
* 1/R if ‘size’ is based on a linear dimension. If ‘size’ is based on Volume, V then 
This is very interesting… If this were the case, could we redesign large organizations to be a network of linked smaller spheres in order to increase the organizations’ ‘surface areas’ so to speak, with each sphere-unit handling much of its own “outside world” contact? We could think of there being a loose bubble around the group of spheres to still tie them together as a single organization, but one that is more a guiding concept that binds them, rather than a single barrier to the rest of the world…
Although … this might increase the need for information linkages too…
Yes, excellent point! That’s what large corporations do when they create relatively autonomous sub-divisions to pursue new technologies, business plans, and markets. Creating smaller units, unfettered by the larger bureaucracy, they have the ability to be more agile, innovative, and responsive to the ‘real world’. Of course that takes some courage, because some folks need to shoulder the responsibility for the success, or failure, of the smaller unit. If an upper level manager feels safely ensconced within a large corporation, what is her motivation to risk it all? She may feel she has more to lose, than to gain. Such decisions likely need to be made at the very highest level of an organization… where there’s less danger of being second-guessed if things don’t turn out well. A wise Board of Directors may choose to support their CEO in delegating unusual ‘freedom’ to an entrepreneurial sub-division, if they deem it necessary, and timely.
One modern dictum of entrepreneurial success is to fail quickly and often, learning as you go. As the old saying goes: “Where does good judgement come from? Answer: ‘experience’. Question: “where does experience come from? Answer: “Bad judgement”.