Innovation, speed, and local control: How big global companies are adopting ‘fractal’ strategy to stay competitive

Sound familiar? Many global companies across industries are facing these kinds of pressures, which stem from a growing mismatch between the way they are organized—globally, centrally controlled, and scale-driven—and the way they need to be organized to compete in a fragmenting global market with fast-changing local consumer needs. The new winners are often startups and local “subscale” companies who are beating them with local innovation, speed, and customer responsiveness at the “edge,” rather than scale advantage of the “core.” We described this in a previous article in Fortune and gave the new source of competitive advantage a name: fractal advantage. 

Why are many global companies struggling to adapt to this new world? What are the special ingredients of the business model of the companies that are able to win against companies that are bigger, better resourced, and more global? There are two explanations: First, scale and fractal strategies rely on fundamentally different organization principles. So it takes more than a few minor tweaks (or even major ones) to turn a scale-driven company into a fractal one. Second, while traditional global companies do not have to disavow scale to instill fractal principles—they are, in fact, two ends of a strategic continuum—finding the right balance of fractal strategy and scale before your competitors do is critical. And so far, many companies seem to be getting it wrong.

The 5 fractal design principles 

Over the past 50 years or more, as the global economy has become increasingly integrated, CEOs have organized their companies to exploit scale as a source of competitive advantage: building massive workforces, large factories, and continent-spanning supply chains, and tightly controlling them from a central headquarters through a complex hierarchical matrix management system. Typically, a two-way flow of information facilitated by a data management system supports this top-down decision-making process. Also, the trust between executives, employees, and external partners, which can take years to develop but which cuts transaction costs, is cemented by legal contracts. 

The new winners, seeking to exploit fractal advantage, turn this organizational model—with its five underlying design principles—on its head.

• From efficient “boxes” to interactive “links”

Fractal companies focus less on formalizing roles, responsibilities, and reporting relationships (as depicted by “boxes” connected by vertical lines on a hierarchical org chart) and more on maximizing the number of interactions between employees, customers, and external partners that cut across official organizational boundaries. The objective is to build a fluid organization which drives more “out of the box” ideas and turns them quickly into solutions for customers. As Roberto Marques, the CEO of Natura, the Brazil-headquartered global cosmetic giant that has institutionalized multiple “interaction pathways” to dilute working in rigid “boxes,” told us: This crisscross approach promotes a better balance between the efficiency that comes from global scale and the innovation, speed to market, and customer responsiveness that comes from local ownership of the business.

• From fixed assets to a network of flexible capabilities

Unlike scale-driven companies that rely on a set of fixed assets and tightly integrated and efficient but essentially slow supply chains, fractal companies rely on networks of dynamic, continuously evolving capabilities that can be speedily deployed to target local needs and micro-market opportunities. These networks can combine the building of proprietary “micro-factories,” such as those equipped with 3D printing technology; the renting of fixed assets from “asset-as-a-service” providers; and the orchestrating of dynamic ecosystems of local digital partners. The objective is clear: to develop new solutions for local customers on a continuous basis and to expand by taking them to multiple markets as fast as possible. Xiaomi deployed this capability-led “asset-light” strategy to rise quickly from a local mobile phone player in China to a Fortune Global 500 company selling mobile devices, home appliances, software, and IoT solutions.

• From central control to peripheral power

Fractal companies are decentralized and, unlike scale-driven companies controlled from a corporate headquarters, they distribute significant power to customer-facing teams located far from the center. The rationale is simple: Speed and responsiveness to local needs and new opportunities are paramount in a fragmenting, fractal world. Some traditional global companies are experimenting with ways to redistribute power to the customer-focused edge. Procter & Gamble has seen its performance improve significantly since it handed power to the individual country CEOs of its 10 major markets, giving them P&L responsibility, control of critical resources, key decision rights, a simplified reporting structure to the center, and privileged access to market intelligence in the company’s data collection. Haier, the Chinese appliance giant, has gone even further, developing an organizational model called Rendanheyi designed to ensure that there is zero distance between the company and its customers. After removing an entire layer of middle managers—some 12,000 employees—Haier distributed power to entrepreneurial local leaders of a large number of newly created, semiautonomous, customer-facing fractal business units, or “microenterprises,” all of which are connected through a common digital platform.

• From a two-way to a multidirectional flow of data

Fractal companies rely on what one business leader described to us as the “democratization of data”: the real-time, transparent, multidirectional flow of information inside and outside the company. The objective is to facilitate the global collaboration that is so essential for developing new ideas, taking fast decisions, and responding to customers. Again, some scale-driven companies are looking to become more data-democratic. Schneider Electric, a French multinational, has put in place a new global digital data management system to not just share data more widely, but also pilot new collaboration and value creation models.

• From contractual agreements to digital trust

Fractal companies, operating in an increasingly online environment, build what we call “digital trust” to facilitate the instantaneous sharing of information and stimulate the growth of online transactions. Instead of relying exclusively on ponderous trust-enforcing measures developed for the predigital era (such as codes of conduct for employees, companywide regulations, and legally binding contracts with external partners), fractal companies proactively embed digital trust in its processes by, among other things, investing in blockchain technology and a set of digital “trust and verify” tools such as “money back” guarantees and transparent customer reviews.

Advice to CEOs

We have intentionally presented the fractal company as the polar opposite of the scale-driven company to emphasize the profound differences. In reality, incumbents, depending on their industry and starting position, will have to build fractal characteristics while keeping many elements of scale. Technology today has increasing power to break this age-old tradeoff between global and local, scale and fractal. However, it takes careful design thinking, appropriate governance, and strong feedback loops to continuously improve this balance, which can make the difference between winning and losing in fast-changing markets.

We have four pieces of advice for CEOs. First, they should ensure the senior leadership team is laser-focused on achieving profitable growth. Without this, the company may be tempted to make strategic compromises—as many do—rather than drive through fundamental organizational change. Second, they should resist the temptation to come up with a design for the ideal fractal company and then launch a complete shake-up with that perfect “end state” in mind. Instead, they should pick one of the five design principles, and start building around that. Third, once they have started on their journey of transformation, they should keep going: The full benefits of a fractal company will only be realized when all five design principles are incorporated into an interlocking integrated business model. 

Finally, they should move fast, because one thing is certain: They won’t be the only firm trying to adapt to a fragmenting world. Every global firm is struggling with the challenges presented by startups and subscale companies. So the CEOs who can find the quickest way to transform their scale-driven business into a fractal advantaged one will stand the best chance of building an enduring legacy of success.

Arindam Bhattacharya is a managing director and senior partner at the Boston Consulting Group and fellow and cofounder of the BCG Henderson Institute. He is also the former head of BCG India.

Hans-Paul Buerkner is a managing director and global chair emeritus at BCG, and the former CEO and chairman of BCG.

Allison Bailey is a managing director and senior partner at BCG, and global leader of the firm’s people & organization practice.

Sharad Verma is a managing director and senior partner at BCG.

Some companies featured in this column are past or current clients of BCG.

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.