And then there’s IKEA.
Since its founding in 1943, the Swedish furniture behemoth has expanded to 487 locations worldwide. In 2024, the company reported Sales of 45 billion euros and nearly 900 million visitors to its stores — far outpacing its competitors in revenue.
A similar trend has emerged in many other industries. For example, Starbucks dwarfs mom-and-pop coffee shops, Procter & Gamble dominates detergents, and Coca-Cola and Pepsi are giants in carbonated beverages. “The leader in each of the areas is much bigger,” he says Sara Moreiraassociate professor of strategy at Kellogg.
Moreira wondered how these companies became so huge compared to other companies in the same product category. He collaborated with David Argente at Yale School of Management, Ezra Oberfield at Cornell University, and Venky Venkateswaran at New York University’s Leonard N. Stern School of Business to explore the potential driving forces behind the rise of these mega-corporations.
Through mathematical modeling and data analysis of companies in the consumer packaged goods industry, the researchers found that a key factor driving companies’ growth was standardization: the extent to which a company reuses assets, knowledge, and relationships across different product lines and locations.
In the case of IKEA, it became famous for using similar components and materials for different types of furniture. Similarly, Starbucks has relied on tried-and-true formulas for floor plans, menus, and barista training to efficiently open more locations.
This standardization has served as a kind of superpower, allowing businesses to grow faster and respond to increased demand more easily and quickly. The avalanche effect has led to the emergence of the giant corporations we see today. “The older they are, the easier it is for them to get older,” says Moreira.
The paradox of mega-companies
Traditional economic theory predicts that as a firm grows, it becomes increasingly difficult for it to grow even larger. At some point, managing and coordinating so many people becomes unwieldy and bloated teams become less productive.
The emergence of large companies like IKEA and Starbucks despite this prediction prompted Moreira and her colleagues to examine factors that traditional economic theory tended to overlook. Examining the impact of standardization “would allow us to explain that there are indeed forces that drive firms to be larger than others,” he says.
First, the researchers created a mathematical model to explore how standardization can affect a firm’s growth. In the model, different companies produced different numbers of products and could choose how much to standardize features between products.
The model suggested that firms with higher standardization benefited from a chain reaction. When demand increased, these companies did not have to spend as much money creating new products because they could reuse existing functions. And as their product lines grew, standardization became even more valuable, prompting them to expand further.
In other words, these companies could respond more strongly to demand. When customers clamored for new products, companies could produce them with relatively little additional effort, allowing the company to make balloons in larger and larger sizes.
Great score on standardization
The team then tested the model’s predictions. They obtained real consumer packaged goods data collected from barcode scanners at grocery stores, drugstores, and mass retailers between 2006 and 2015. The dataset covered more than a million products across multiple categories, including light bulbs and razors. For each product, the researchers identified several individual characteristics, including style, use, material and packaging.
With these details in hand, the team measured the degree of standardization between products for various manufacturers. They calculated a score for each company that captured how much the company reused specific features in its products. For example, a feature on razors might be the “rotating head”. If the same head type appeared on multiple razors in the company’s portfolio, this repetition would boost its standardization score.
Overall, the researchers found that “larger companies reuse features much more,” says Moreira. The finding supports the idea that firms with more products tend to exhibit a higher level of standardization.
Capitalize on higher demand
The team then investigated whether standardization actually gave larger firms an advantage when demand increased. Were they able to ramp up production more quickly in response? If so, instead of slowing down as traditional theory predicts, “they’re actually growing even more,” he says.
To investigate this question, the researchers looked at an episode that disrupted several industries between 2006 and 2015. During this period, imports from China into the US increased, putting pressure on American companies that make similar products. This negative “shock” affected residual demand for US firms and varied significantly across industries. Because of this industry-specific variation, the team could estimate how standardization affects a firm’s response to demand shocks while accounting for several confounding factors. As predicted, the researchers found that firms with higher levels of standardization—as reflected in their future size, number of products, and standardization—responded more strongly to demand shocks.
A similar pattern emerged when the team analyzed another sign of rising demand: higher home prices. They collected data on the locations of the companies’ stores—for example, all the coffee shops that a chain operated across the country. If home values in a certain area rose, people likely had more wealth, which would increase the demand for goods in that area.
The team found that larger firms expanded more than smaller firms when housing prices near their store locations increased, indicating that these firms more effectively took advantage of the opportunity to serve willing customers in those areas.
Using what you know
By highlighting the role of standardization, the research fills a gap in how economists explain firm growth.
“Our traditional models in economics have not incorporated the importance of standardization,” says Moreira. “When knowledge, investment and inputs are potentially scalable, this can enable firms to become larger.”
For smaller businesses aiming to grow, the findings suggest they could grow faster if they reuse existing materials and know-how when creating a new product, rather than starting from scratch.
Let’s say a company makes healthy organic snacks that are sold in high-end stores like Whole Foods. It may not be wise to branch out into a snack line where low price is the main concern, targeting customers who shop at Walmart. Since the company’s employees know how to source organic ingredients and have connections to high-end stores, they could more easily add, say, organic juices that require less additional effort to market. After all, the company has invested considerable time and money to build its existing facilities.
Managers should consider “if they already have a set of inputs, knowledge, expertise that will allow them to easily add to it,” says Moreira. With component reuse and hard-earned know-how, “it’s less expensive for you.”
