If you make a product or provide a service, you invariably want more customers. If you’re a nonprofit, your instinct is to care for more people in need. And if you’re a city, you often have a very tangible incentive for your population to expand because federal funding is linked to size.

Serving more folks, in turn, requires higher headcounts, fatter budgets and added infrastructure. And it brings a certain luster to those executives in charge. Who doesn’t want to lead a giant?

Yet growth doesn’t always make sense. Sometimes, in fact, getting bigger is precisely the wrong thing to do.

The headlines are replete with stories of organizations that have pursued higher volume at the expense of quality. (Think, for instance, of the rough patch Toyota hit in 2007.) Such behavior “confuses fat with muscle, and busy-ness with economic accomplishment,” Peter Drucker wrote.

Drucker understood the importance of market standing; if an enterprise commands too tiny a share of a given industry, he warned, it “will eventually become marginal.” Yet he also recognized that there are situations in which being small is what’s most effective.

“Neither ‘big is better’ nor ‘small is beautiful’ makes much sense,” Drucker explained. “Neither elephant nor mouse nor butterfly is, in itself, ‘better’ or ‘more beautiful.’ Size follows function.”

Done right, shrinking can be immensely beneficial. Like a fruit tree that needs to be pruned, some organizations must get smaller in order to grow the right way. What follows are three cases—of a business, a nonprofit and a city—in which wise winnowing preceded renewal.

GETTING BACK TO BASECAMP

Last year, a Chicago-based web application firm called 37signals faced a problem: Its people were endlessly inventive.

The company’s principal product was Basecamp, a project-management tool that accounted for 87% of its revenue and 90% of its revenue growth. But enthusiastic employees had also come up with a couple dozen more applications. Among them: Ta-da List, a listmaking app; Writeboard, a text-editing program; and Sortfolio, a visual directory of web design firms.

Some of these products had already been laid to rest for failing to deliver sufficient results—a process that Drucker called “planned abandonment”— but others were still active. Highrise, a contacts manager, was the company’s second most popular application, but in many ways it had been neglected, as had several other products. With only about 40 employees, 37signals could not attend to its mounting portfolio without staffing up.

“We’d been having some internal head-butting about how big our company should be,” recalls David Heinemeier Hansson, chief technology officer and the business partner of 37signals co-founder Jason Fried.

To Hansson, keeping the company small was essential to preserving one of the things employees most liked: an informal, close-knit culture. Fried sympathized with Hansson but saw no way around expansion, given all the promising products that had been allowed to languish. Payroll, he thought, must quickly climb to 60.

Such was the tension confronting the privately held company last summer when Fried went on his honeymoon—his first break from the office in years. It was during his time off that Fried reconsidered his position. As he reflected more, he came to believe that offering fewer products was actually preferable to increasing in size. And not just fewer products, but one product: Basecamp.

Further, Fried decided, the very name of the company should change: 37signals should be known as Basecamp.

Fried emailed Hansson and a few other colleagues to call for an offsite at a Chicago hotel. “I didn’t say what it was about,” Fried remembers. “Just meet me there and that was it.”

A week later, everyone gathered and Fried laid out his plan. “The idea made a lot of sense to me,” says Hansson, who had been pushing for smallness. But others were unconvinced.

Coming up with nifty new products was part of the company culture. How, then, would employees channel their creativity if Basecamp was suddenly the whole ballgame?

Beyond that, 37signals was a respected name in the technology world. Why lose it? Customers, meanwhile, had come to depend on the products that Fried wanted to whack. What could be done for them?

And, most fundamentally, was it really wise to bet everything on a single offering?

TEAR DOWN THOSE WALLS

Leipzig, Germany, has produced a lot of famous names: Bach, Goethe, Mendelssohn and, in the present day, Chancellor Angela Merkel, who went to university there. But it has also had some bad luck.

Its population peaked more than 80 years ago, when the city had 713,000 inhabitants. After a steep fall in size during World War II, Leipzig regained residents until the mid-1960s. But it then began to lose population again—this time for more than three decades.

The initial causes of Leipzig’s population drop were lower birth rates and a policy by the communist regime of East Germany to spread industry across the country rather than allow it to concentrate in any one location. But Germany’s reunification in 1990 had an even more drastic effect. Eighty percent of the factory jobs that existed in the city disappeared in just a few years, and unemployment shot up to 20%, where it would stay for more than a decade.

With the Berlin Wall torn down, Leipzigers not only had the freedom to leave, thousands lacked a reason to stay. Between 1989 and 1998, Leipzig lost 100,000 people—a 20% decline. Likewise, some 60,000 apartments, about a fifth of the total stock, stood vacant.

The economics of such shrinkage are ruthless. Housing ceases to be a good investment because demand keeps going down. Many services must continue at nearly as high a level as before—maintenance of water lines, transportation routes—but fewer taxpayers can support them. In Leipzig, those services were stretched even thinner when, in 2000, the city wound up annexing its suburbs.

“Just when we should have been reducing the size of the city’s infrastructure, reducing the size of sewage and water supplies, we found ourselves paying to expand them,” a senior planning official later remarked.

Initially, Leipzig officials viewed the outflow as a temporary condition that would be succeeded by vigorous growth. But, unlike their peers in most other municipalities, they eventually came to a very different place: They faced up to reality.

In 2000, Leipzig became one of the first cities in the world to incorporate shrinkage into its planning.

Soon, officials came up with something called the “concept for development of Leipzig east,” which involved tearing down decrepit buildings alongside existing green areas and connecting the open space into larger expanses of nature.

At the same time, they concentrated on developing a single area: Leipzig’s historic core. They encouraged retail development and put in place incentives for owner-occupied housing in the old city. They also tried to lend out older buildings to organizations that promised to repair them—a “House with Guardians” program.

All of these ideas made sense. But the truth is, few of them panned out as originally imagined, if they panned out at all.

Only a dozen or so organizations took advantage of the House with Guardians program. Central Leipzig, the most attractive part of the city, was already drawing interest from developers and did not need special incentives to take off. Plans to create contiguous swaths of green were foiled by market realities that left rehabilitated buildings abutting condemned ones. Visions of lush urban forests thus gave way to a patchwork of vacant lots, pocket parks and parking lots.

And yet, despite the seeming failures, the city’s fortunes quietly began to turn.

Leipzig University expanded its enrollment, drawing several thousand young people into the city. BMW, DHL and Porsche opened large facilities in the area. Cheap rent compared with the rest of Germany attracted artists, some of whom gave rise to the “New Leipzig School” of painting.

The city’s population began to grow, passing the 500,000 mark in 2005, a significant increase from 437,000, its low, in 1998. Today, Leipzig has a population of about 550,000, and travel writers call it the “New Berlin.” A few years ago, one Leipziger concerned about the hipster influx dubbed the trend “Hypezig” and posted a Tumblr asking people to “please stay in Berlin.” But the term Hypezig only added to the city’s appeal.

So what, exactly, went right?

“Why Leipzig managed to come back and other cities did not is still poorly understood,” says Marco Bontje, a professor of urban geography at the University of Amsterdam who has studied Leipzig for a long time. Good fortune, such as the arrival of BMW and DHL, played a major role, he says.

Nevertheless, Bontje also believes that Leipzig’s razing of buildings made the city more attractive on the whole, and the local government “seemed quite aware of which parts of the city could become attractive again and which parts could not.”

Most important, the city didn’t come up with long-shot schemes. If there is a takeaway from Leipzig’s recovery, says Bontje, it’s that when forces are pushing toward a structure that is inherently smaller, “do not ignore it or pretend it is not happening, and also do not try to aggressively turn it around with unrealistic pro-growth policies, but try to adapt to shrinkage or slow growth first.”

In other words, the lessons of Leipzig may be less in what the city did than in what it didn’t do. It did not bank futilely on attracting people through new construction. It did not, like Detroit, sink $500 million into a “Renaissance Center.”

It did not, like Buffalo, build costly new infrastructure for a nonexistent surge in arrivals. And it did not expand government employment as the tax base shrank. Indeed, even as Leipzig managed to increase pay for government workers, it eliminated enough positions to reduce overall expenditures on personnel by a third.

By not insisting on growth, Leipzig wound up enabling it.*

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