Scale and the Law of Diminishing Returns

The most common rationale for credit union growth is to achieve new scale. Larger size is meant to bring more efficiency, productivity and market clout. And hopefully member value.

In a situation where everything or everyone else stays constant, growing larger might produce this outcome. But even in the most hospitable circumstances, the law of diminishing returns sets in.

Learning From Another Industry Serving Consumers

In a recent plane flight I sat next to a mining engineer from Houston, Texas. We talked about the largest and deepest mines in the world including a mile-deep open pit copper mine run by Kennecott in Utah.

Productivity is measured by the ounces of ore (1-3 oz) per ton of rock extracted. The constant challenge for geological engineers is to try to find veins so mining is still economically feasible. But, sooner or later, ore recovery is not worth the additional cost.

Our discussion then turned to Houston’s recent floods in part exacerbated by the city’s paving over much of its surface area by concrete. As an example he mentioned that Houston had the widest highway system anywhere in the world.

I returned home and found this was no Texas exaggeration. The Katy Freeway covers 26 lanes of freeways, toll lanes, frontage and emergency roads. At Beltway 8 it is in fact the largest according to the Houston Chronicle.

The Result of Becoming the Biggest Highway

So did this investment from 2008 help traffic flow faster? At first, for a short time, it did. But now, traffic engineers call it a Monument to Futility.

For as capacity is increased, so does “induced demand.” In fact, the same journey now takes longer on this highway mammoth than before the expansion.

My flight companion told me one result of this new congestion is that companies the highway has meant to serve are now moving to less crowded areas of the Houston metroplex. Not just the head office, but also tens of thousands of employees jobs are relocating for more open spaces.

The moral is that scale changes things, some unanticipated or even unintended. Consumers’ loyalty to is rarely based on size or scale-“the biggest”. Rather satisfaction comes from service and personal responsiveness.

Many factors cause each credit union to be the size it is today. Understanding that legacy may be more valuable than yearning for bigger scale wherein existing comparative and competitive advantages are significantly lessened in exchange for unproven future benefits.

One Reply to “Scale and the Law of Diminishing Returns”

  1. Chip, I agree with your blog – and your seat companion was correct – no exaggerations. This is really a great lesson to consider – When investing resources into improving something, are you creating other unintended consequences that now make the original challenge pale in comparison to the new challenges?

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