SIZE MATTERS: COMPLEX ANALYSIS OF DUNBAR’S NUMBER IN BUSINESS OPERATIONS
You probably know by now that I love the study of Complexity Theory, which is the study of systems as they operate which is very different from the elements within the system. Interestingly, science has mostly been dedicated to reductionism. For example, how can I reduce a human being down to the smallest components? That process has been very additive to the collection of human knowledge. A human being is broken down from the skeletal system and the muscular system, and a digestive tract, and the circulatory system, but that doesn’t tell you much about the human being itself. The further you go, the less it tells you about the actual human being. So then, we go down from those elements to the cells inside the muscles and inside the cell you have molecules, and inside those molecules, you have atoms, within which you have electrons. Those electrons tell you absolutely nothing about human a being. As you reduce things to their most base elements, you learn a lot about the building blocks of a thing, but you'll learn less about what it does and more about what it is. We want to know what it does and how it operates because that determines predicted behavior and predicted outcomes.
For the purpose of today’s discussion, I’m going to address Complexity Theory in three categories. I’m going to address it in the scope of macroeconomics, or this big data that we analyze like demographics analysis like we've gone through in the past and how that impacts markets. Then, we’re going to look at specific investment themes taken from that data and how complexity impacts those investment themes and finally, we're going to look at how complexity impacts business operations within those investment themes.
I want to start by talking about the business operation side and how you might use Dunbar's Number to impact your investment decisions or your business operations. Robin Dunbar is a sociologist and anthropologist that studied primates and developed an algorithm based on the study of primates where he projected that human beings could only handle about 150 relationships in a close network. You can have extended relationships beyond that, but not close enough to really feel like you're connected. He did a study on how many Christmas cards people sent out during the holidays and that number turned out to be 153.8.
There have been lots of studies on the amount of networks people can manage in a truly connected way. We aren’t talking about networks like social media, we’re talking about a truly connected, real-life way and that number is 150. How he got there with this algorithms is in dispute, but the fact that the number exists is not in dispute. In fact, the number is present all throughout history. The Romans built their armies around this number- centurions were over a company of about 100 to 120 men, the typical size of Neolithic Farms was roughly 148 and what they found was that the subparts of this are even more interesting.
Five people make up your intimate group and that also comprises direct reports of business. If five people are your direct reports, then that’s a pretty optimal system. Some people say 7 or 9, but in that case it’s likely that two to three of those reports are more so administrative. So, five idea sharing direct reports and then 15 close relationships that are sympathetic and care about you and you care about them. Then you have 50 acquaintances, or friends that you wouldn't mind having dinner with, but might not share as liberally as you do with the 15, and then finally 150 community bound relationships.
So again, it’s a pretty fascinating number that has played an important role in human communities and human systems throughout history, so there must be something to it. As you increase the number of relationships, you decrease the connectivity between members of that community. You may not guess that from watching the interactions of just two people, or five people, or 10 people, but once you get to 150, things change and that’s an example of one of those emergent qualities.
So, let’s talk about that decreased connectivity in the context of business operations and how we apply that in business. One area where you see this emergent quality at work is in businesses’ mission statements. Typically, those mission statements set by the CEO don't translate very well down into the employee base. It's great for the executives to think of this mission statement, but down to the employee base, it’s just too ethereal. Procedures are necessary, but those procedures are sometimes difficult to align with the mission statement because there's a huge gap in between. How do you address the things that are not procedural but below mission statement level? How does the company handle that?
Most people would say that we handle that with rules, but rules are really only the way to do it when you get over 150 people. At less than 150 people, you do it with true culture. True culture is the people- they embody the culture. Rule-based culture is not culture. It's just a series of rules that have to be follow, but at over 150 people, that's kind of the only way to do it because at over 150 people, the relationships are stretched far enough to where I don't truly care what happens that 151st person- they’re too distant. You need closer relationships to have the culture be embodied in the people and to create a caring type of operation where the people care enough about each other that they don't want to embarrass them in their job and they don't want to be embarrassed in how they do their job. In this type of model, I care about what happens to you, and I also care what you think about me to the degree where I will do a good job.
There's a group called W.L. Gore and Associates (they talk about this in Tipping Point with Malcolm Gladwell) and this company literally uses Dunbar's Number. Now, they didn't know it was called Dunbar's Number, but over time, what they found was that quality, efficiency, and productivity all dropped off after about 150 people. With that knowledge, they built 150 parking spots in their factories’ parking lots and they would vertically integrate these factories from sales all the way through to deliverables, R&D, etc. , and once the parking lots were full, they would build a new factory right next door. That physical closeness of 150 people creates an integrated team that can leverage transactional knowledge. Transactional knowledge is incredibly important to the concept of Dunbar's Number. Information is stored not just in our minds, but also in other people's minds. For example, if I don't have to remember the chemistry in a particular formulation because I know that our chemist has that formulation in his mind, then I can focus on my job and what I'm best at. When I do need that chemistry, I know exactly who to talk to. When I’m working in a company of 3,000 employees, I don't know who to talk to and it's too much effort to figure it out. With a hundred employees, I know exactly who shares that transactional knowledge with me, we can access it quickly in a cross-pollination of ideas and that always leads to a better operation and optimal innovation.
So, use Dunbar’s Number and what you know now to your advantage and fill in that cultural gap with a carefully selected network of people to optimize your operations and your business development.