Sizing up revenues by division or region can be downright misleading. Only a fine-grained view of performance will reveal the most—and least—promising pockets of opportunity.
In early 2007, U.S. senators asked then–Lieutenant General David Petraeus how much sectarian violence might erupt if U.S. forces withdrew from Iraq. He admitted being uncertain: “It’s hard from this distance,” he said, to understand “the real granularity of what’s going on.”
The Senate questioners sought the big picture—something CEOs are continually told it’s their job to provide. Yet for that big picture to be meaningful, Petraeus needed “granularity”—which few chief executives have the time to pursue.
For most of the past century, CEOs have coped with this tension fairly elegantly by organizing their companies into business units and geographic regions and then holding those entities accountable for performance. Over the past two decades, however, advances in information technology have made it feasible both to target ever-finer-grained market segments and to measure the sources of growth—market momentum, mergers and acquisitions, and market share gains—in an increasingly detailed way. So far, few organizations have figured out how to turn the oceans of data available to them into islands of insight about their best opportunities for growth. Even fewer have attempted to structure and manage themselves with sufficient granularity to match the texture of the markets in which they play.
Therein lies largely untapped potential for companies to accelerate their growth and separate from the competition. By looking microscopically at their markets and their current performance relative to rivals’, companies can develop far better growth strategies. In most cases, the new strategic direction will highlight a need for significant changes in how the company allocates resources, deploys people, and reviews results. This additional granularity becomes especially important during economic downturns because it enables much more nuanced strategies, both in terms of cutting costs and of going on the offensive.
This article describes how the world has become more granular—through, for instance, the global expansion of markets and the impact of advanced information technologies—and the challenge that presents for companies as they try new ways of understanding their growth potential and then wrestle with the organizational implications of their enhanced understanding. It is meant to be a practical road map that builds on our recent book, The Granularity of Growth, with new analyses and descriptions of several companies’ experiences adopting more granular approaches to growth. It is increasingly clear to us that granularity and economies of scale can—indeed must—coexist, and that mastering this balancing act will confer competitive advantage through the downturn and once the economy begins to recover.
Growth Is Granular, but Most Companies Aren’t
During the early twentieth century, a new organizational form emerged in the United States: the multidivisional company, in which business units corresponded to key product lines and shared a central set of resources. DuPont was an early pioneer, and Alfred Sloan took the form to fruition during the 1920s, when he reorganized a hodgepodge of companies and brands into the General Motors Corporation. By adopting this new structure, DuPont, GM, and many others honed their precision in making decisions, measuring performance, managing their workers, and organizing themselves.
Our research suggests that firms today can benefit from an even more granular approach than Sloan could have imagined possible. A snapshot of one large European manufacturer of personal-care products illustrates how (the unnamed companies in this article are disguised examples). The company has three lines of business and appears at first glance to labor in a number of low-growth markets (growth forecasts for the three divisions range from 1.6% to 7.5%). But a deeper look reveals a prodigious spread in anticipated growth rates among countries and product lines within each division. What’s more, some of the most promising segments in the company happen to reside in the division with the lowest overall growth forecast (see the exhibit “Unearthing Hidden Growth Segments”).
Unearthing Hidden Growth Segments (Located at the end of this article)
This is not an isolated phenomenon. We reviewed growth patterns of global firms from 1999 to 2006 and found that the correlation between overall growth rates and sector growth rates increased dramatically for companies that had taken a granular approach to management and analyzed smaller slices. In other words, companies can get a much more accurate picture of their growth prospects by digging deeply into micromarkets (typically ranging from $50 million to $200 million in value) than by looking at the divisions commonly used for measuring, organizing, and managing.
Over the past decade or so, the rapid pace of innovation on the internet, and in the information and communication technology world more generally, has made that more feasible. To understand why, consider the basic economic problem associated with greater granularity. As companies target finer-grained market segments, the sales benefits typically increase quite quickly but then start to taper off as smaller and smaller variations are tried. At the same time, adding complexity by catering to a broader range of customer needs can boost costs sharply. However, as the cost of technology platforms drops, so does the cost of targeting ever-narrower segments of customers—as Chris Anderson argued in The Long Tail.
A few examples show what we mean. Let’s start with a well-known one: Amazon, the online retailer unconstrained by physical storefronts, has a scalable, sophisticated IT platform and infrastructure and delivers many of its books not from its own warehouses but via a virtual supply chain. As a result, Amazon can efficiently indulge the tastes of narrow customer segments, literally down to the individual buyer, at very low marginal cost. Technology also enables companies in emerging markets to build scale rapidly while continuing to take a granular approach. Ping An, one of China’s largest insurance companies (with more than 40 million customers), is able to manage a fragmented sales force of about 300,000 agents by using a mobile-based sales management platform, thus overcoming the lack of fixed-line telecom infrastructure in some regions. Similarly, packaged-goods companies in Latin America are increasingly tailoring their product and service offerings, displays, distribution approaches, promotions, and incentives to the needs of microsegments of mom-and-pop retail outlets: Salespeople armed with wireless devices feed information to headquarters in exchange for concise recommendations on tactics.
Despite such possibilities, our experience is that a great many companies continue to measure, manage, and organize themselves on the basis of relatively aggregated data. These companies are likely to miss important shifts in their performance and their markets. Excessive aggregation also leads to unrealistic performance targets, misinformed priorities, and misdirected leadership efforts.
