For companies to grow, why bigger is not always better

September 15, 2014, 12:45 PM UTC
Photo by Bloomberg — Getty Images

Growth has long been the imperative in economics and business. As the world’s population tops 7 billion, and soon 8 and 9, it’s becoming clear that the best performing organizations, and perhaps countries, will be less defined by absolute size and more defined by the speed and agility that comes from clarity of purpose, strategic insight and decisive action. As the scale of human organizing expands to unprecedented levels, the winners will be those people, organizations, and countries that can: focus on what matters most to their core stakeholders; rapidly process new information, learn from it, and then thoughtfully and deliberately act amid the complexity.

Think Airbnb. They’ve experienced explosive growth – and not by the traditional means of buying or building more properties. They did it by understanding what really mattered to those booking hotel rooms. They did it by studying the emergence of the “sharing economy.” And, absent a vast footprint of physical assets, they did it by acting decisively to create a whole new model for meeting this traditional need – a model that delivers competitive advantage through scale but not in a traditional sense of physically controlled properties. Indeed, Airbnb not only created a new model, it created a new market.

In today’s global marketplace that operates 24/7, the traditional barriers to entry are falling, and traditional conceptualizations of growth as increasing in size and span of control are losing their potency. Market and customer access have become easier; product and idea life cycles are shrinking as ideas, data, and knowledge travel fast and openly across the Internet. Competitive advantage gained from expensive product innovations is shorter-lived. And brands are losing their stickiness amid an onslaught of data, ideas and emotional triggers that compete for human attention, loyalty and spending.

In light of these changes, it’s not surprising that we’re seeing new approaches to driving growth throughout the Fortune 500. One example is the recent spate of mammoth splits at traditional powerhouse firms including Motorola (MSI), Kraft (KRFT) and Abbott. In each case, powerful CEOs chose to divide the size of their companies (and spans of control) in half in order to increase focus and speed growth. For the same reasons, portfolio rationalizations are now commonplace; e.g., Procter & Gamble (PG), ITW and Unilever (UN). And even more recently, expensive inversions have become in vogue, including firms like Eaton and Abbvie.

CEOs of traditional mega-conglomerates are literally slicing up and uprooting their organizations in order to fuel growth. And they have to because the successes of companies like Airbnb and Uber have shown that smaller firms with simpler and more nimble infrastructures can win – just look at the market caps being attached to these asset-lite firms. This is not to suggest that building scale and pursuing acquisitions are no longer important drivers of growth. It does mean however that these strategies will be held to greater scrutiny as the idea that “bigger is always better” becomes quaint.

And who is going to lead these firms of the future? We’ll need leaders with deep insight into their organizations’ markets, customers and capabilities; leaders who create and leverage more flexible architectures for connecting and collaborating; leaders who foster cultures based on constant self-scrutiny, innovation and an ability to forge unexpected partnerships; leaders who can keep pace with new market opportunities and ever-more-aggressive investor herds; leaders who can inspire new kinds of growth.

Sally Blount is dean of the Kellogg School of Management at Northwestern University.