While most CEOs acknowledge the virtues of free markets, the companies they run are typically structured like command economies. As in the former Soviet Union, decision-making power is highly concentrated at the top. Changing this is essential to making our organizations more resilient, innovative, and human. To see how this might be done, we need to understand the conditions under which markets outperform hierarchies and then try to imagine how these advantages might be replicated within our organizations.

You’ll notice that the bank’s SG&A expenses (selling, general, and administrative costs) average less than 40 percent of revenue, versus an average of 67 percent for its rivals. This massive efficiency advantage gives Handelsbanken the ability to resolve the high-touch/low-cost paradox. When compared to its competitors, Handelsbanken underinvests in bureaucrats and overinvests in customer service. In so doing, it rejects the black-and-white thinking that is typical of other big banks.

In 1965, chief executives in the top 350 U.S. firms took home roughly twenty times the pay of an “average worker.” By 1980, CEOs in the same top bracket of firms took home thirty times the annual salary of an average worker, and by 2015, that number had surged to just shy of three hundred times. Adjusted for inflation, most U.S. workers gained a modest 11.7 percent rise in real wages between 1978 and 2016, while CEOs typically enjoyed a 937 percent increase in remuneration.

The horizontal axis determines which entity will capture the industry value—suppliers, producers, or buyers. If the suppliers are larger and more powerful than the producers, the suppliers will appropriate more of the value (think Microsoft and Intel in the PC business). If, on the other hand, the buyers are large and powerful, they will get a greater portion of the

value (think Walmart versus the many small manufacturers whose products fill their shelves). The degree to which there is fierce rivalry affects which group captures value too. If rivalry between competitors is high, the dynamic will facilitate the appropriation of value by suppliers or buyers. A low degree of rivalry will protect profitability for the producers. At P&G, the analysis of segment attractiveness was occasionally a decisive factor in setting the strategy. For Bounty, geographic segmentation, paired with an understanding of consumer preferences, demonstrated that the paper- towel business was only structurally attractive for P&G in North America, due to massive overcapacity and low willingness to pay in the rest of the world. The industry featured high rivalry, high buyer power, and plenty of substitutes. When assessing segment attractiveness for Crest, P&G came to realize that the health segment was not only the largest, but also the most structurally attractive.

Health claims need to be backed by clinical trials, and few companies—really only P&G and Colgate-Palmolive—have the resources and experience to play that game on an ongoing basis. This kind of analysis—crunching the numbers on the size and appeal of different segments—is crucial to determining the range of attractive where-to-play choices.

Both businesspeople and critics of business, then and now, exaggerate the benefits of size. The advantages of scale are technological and appear visible; the disadvantages are mostly human and less immediately apparent. If pricing power is not eroded by competition, as it usually is, regulation will generally follow. Large organisations develop entrenched interests which inhibit the development of collective intelligence and the adoption of new business methods and innovative products. We have Intel and Microsoft, not IBM, to thank for our laptop computers; Apple, not AT&T and Verizon, to thank for our smartphones; and Tesla, not General Motors, for pioneering electric and autonomous automobiles.