By Tom Bradley

A writer in the Financial Times this morning suggested that BMW and Mercedes need to worry about scale. With Fiat and Porsche playing the role of consolidators, the auto industry is going to have fewer, larger players. Therefore, as the logic goes, the small guys need to do something. BMW and Mercedes must have a bigger sales base over which to spread their R&D and drive costs down.

The writer may be right, but I find it interesting that there is always an underlying assumption that bigger is better. Scale is always the default position. (Note: My last post was about size in the investment industry, specifically the drive by Ontario Teachers Pension Plan and OMERS to get bigger)

But this bias is not confined to autos and investment management. It is a theme that runs through all industries. The rationale for getting bigger is invariably rooted in cost reduction – reduced overhead, better buying power, shared distribution and more efficient research and development. When companies talk about ‘revenue synergies’, I usually tune out. Cost cutting is reasonably predictable, but revenue enhancement is rarely fulfilled.

What is often missed, however, is that there are distinct disadvantages to scale. Senior management gets spread too thin. A bigger market share makes it more difficult to grow. In some cases, managers are forced to move from offense to defense – i.e. they have to defend what they have (bought), as opposed to grabbing for more.

The scale argument is more balanced than it often appears. Executives and commentators are too quick to trot out the need for scale.

After all, GM has scale. Chrysler has scale. AIG, Citigroup, Merrill Lynch, Bear Stearns, Lehman Brothers, Countrywide Financial and Royal Bank of Scotland all have (or had) serious scale. And Canadian companies like Abitibi, Canwest and Teck are players of international proportion.

Would I like to increase my margins via cost reduction? You bet. Am I willing to sacrifice having a tight, talented management team that is focused on eating the competitors’ lunch and building on the strengths the company has? No way.

Give me focused excellence over mega-mediocrity any day.