I spent the weekend in Scotland, where one cannot escape RBS’s logo, RBS standing for The Royal Bank of Scotland. Its brand imagery stands out exiting the airplane, passing city billboards, and reading or listening to local media.

Today, the people of Scotland own close to 70 % of RBS because the former (duly fired) CEO and his board believed that bigger is better. With a small domestic market of 5.2 million residents (about the size of Minnesota) and strong English competitors, RBS acquired what turned out to be a poorly run Dutch bank in order to grow. Thankfully, a strong domestic position will keep the bank in business; but it will be a long time before Scottish taxpayers are repaid for keeping RBS afloat.

Small is beautiful.

Consider PNC, the regional bank headquartered in my hometown of Pittsburgh compared to Bank of America and Citibank. Leaders of the latter two organizations grew by rapidly consolidating the banking industry, becoming two of the “too big to fail” financial institutions federal policy makers are so worried about today. My bet is that these two behemoths will succeed only by shrinking.

Just as a big ego is in fact too little ego, growth for the sake of growth destroys value when it adds more complexity than it enhances competitiveness. Why do I reach this conclusion?

Remember the “telephone line” game we played as kids, whispering a sentence to one person only to laugh when a completely different meaning emerged from the 15th person in the line? Large company management is like this telephone line. When growth does not complicate, the telephone line remains short and the organization retains its focus.

When growth adds complexity – different businesses, different markets, different technologies, and different competitors – more management time and new management layers are devoted to managing numbers and communications versus managing the business. Focus gets lost. Growth at a higher scale demands still more acquisitions financed by squeezing existing businesses. Realized organic growth versus the inherent potential of the businesses to grow falls woefully short.

When is bigger better?

Here are four situations in which acquisitions to gain scale are advised:

• Your industry has excess capacity and consolidation is vital to fiscal health. This is why Phillips-Van Heusen Corporation is close to closing a deal to acquire Tommy Hilfiger for $3 billion and Stanley Works is acquiring Black and Decker Group for $3.5 billion.
• There are economies of scale (doing more lowers costs) along a vital element of your value chain. I’m not surprised that Coca-Cola Company and PepsiCo are acquiring their large independent bottlers.
• Your business model strategy depends upon a broader offering. Biotech leader Invitrogen (now Life Technologies) grew to billions through acquisitions while Promega remains well below $1B in revenue due to different business models. Life Technologies dominates many markets owing to its stronger business model.
• You are too small to attract great talent or afford required internal processes. Lack of scale causes many start-ups to sell out to larger companies in their industry. Rapid synergistic acquisitions might have built an independent powerhouse.

When public image trumps the bottom line

All too often, leaders fool themselves into thinking their situation fits one of these four occasions when it does not. A common example is “If we’re bigger we’ll leverage our overhead costs.” What’s really going on when leaders claim false synergies is they’re stumped about how to grow profits so they acquire companies to cut shared costs and show profit gain. Or, they desire more prestige, which most business leaders equate with size.

We have the INC. 500 and Fortune 500 after all, not the Business Week 30,000-30,500.

This decade will be especially cruel to leaders who make the wrong call on size and acquire merely for the sake of growth (versus grow as an outcome from doing the right things well). Markets are fragmenting left and right, talent’s seeking meaningful workplaces, and nimbleness has become a new requirement for success. Woe to the leaders whose acquisitions do little to strengthen their organization’s value promise or hard-to-copy advantages.

As for RBS? CEO Stephen Hester communicates that small can be sublime by reminding his leaders that risk-adjusted rates of return matter, not the level of absolute profits. Smart.

Can you suggest other instances when bigger is better?
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For insight on business model strategy, read my recently released book, Beyond Price.