The organisation of the future is fractal

Three powerful forces are reshaping the competitive landscape in a fundamental way: The influence of geopolitics, particularly the decoupling of the United States and China; the impact of digitisation in the value chain; and the growing number of “deep tech” innovators winning the product development race.

Scaling the core, a formula developed for a stable, integrated, globalised economy that is rapidly fragmenting, has given way to innovation, speed, and responsiveness at the edge. Many incumbents, unable to compete, are descaling their global footprint. At the same time, a growing list of sub-scale or “scale-disadvantaged” companies — start-up innovators, local consumer companies, large but nimble digital giants with no residual scale in a particular industry — are overtaking their much larger global peers by exploiting a new source of competitive strength — a fractal model, which operates as a collective of several basic but interacting units with the ability to evolve over time, unlike a more traditional top-down command-and-control hierarchy.

As we move from the industrial age to the information age, we are starting to see the demise of hierarchy, flattening of organisations, and inherently collaborative fractal organisations, which allow, as one business leader described, the “democratisation of data” through the real-time, transparent, multidirectional flow of data and information inside and outside the company, all of which are even more critical as the pressure of regulatory compliance, which can vary across countries, grows.

Tata Steel is an example in India. The company’s fast-growing consumer solutions business, where (in contrast to its traditional B2B business) competitive advantage will not be driven by the scale-driven cost efficiency of the steel mill, but the fractal advantage created by speed and innovative solutions — allowing the company to not only respond to customer needs but also to shape them. Instead of a few large-scale plants supplying all markets, the company’s consumer-solutions business will be supported by a network of smaller in-market assets that the company does not necessarily own — electric arc furnaces, for example, which use scrap steel and are often powered by renewable energy, and which (unlike traditional-scale blast furnaces) are cost-effective at lower volumes. The winning formula is not cost efficiency, but the fractal levers of speed and local innovation to offer customised steel solutions, delivered by this capability network of “micro-assets”.

What’s so special is the way these fractal companies are organised (perhaps unknowingly), a structure that allows them to compete and win even though traditional management theory — with its emphasis on maximising the value of the core and extracting the economies of scale — does not give them much of a chance?

Our conversations with leaders at dozens of successful and not so successful companies — from start-ups to global behemoths and digital giants — led us to two surprising conclusions.

First, scale and fractal strategies rely on fundamentally different organisational principles. It takes more than a few minor tweaks to turn a company designed for scale advantage into a company that can successfully exploit fractal advantage. Second, while incumbents do not have to disavow scale to instill fractal principles — they are, in fact, two ends of a continuum — finding the winning balance before your competitors do is critical.

As we try and begin to understand its design principles, it’s interesting to see how business leaders can adapt them as they prepare their companies for the fight to stay ahead in a fast-changing competitive environment.

Consider also relative digital newcomers such as China’s ByteDance, for example, with no legacy hierarchy to deal with. The company has designed its organisations ground-up to be fluid and non-hierarchical and built to foster new ideas while working on current problems two to three times faster than its peers. The organisation also drives a shared purpose. Together, these create pattern integrity and often also high levels of participation in ideas and solutions and help with decision-making at local levels. It is not alone as several other companies, including those in traditional industries are building fractal global delivery networks by adapting the traditional matrix structure. Natura, the Brazilian cosmetics giant, is a case in point, which is forming a network of horizontal links, or “bridges,” across the usual vertical lines; which they believe 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.

The question for incumbent CEOs is to find a way to help multifocal leaders bring the many different interlocking fractal elements together to really deliver on the full potential of a fractal organisation to unlock sustained profitable growth. The winning advantage can come only by moving proactively to become a well-designed fractal organisation before being forced to do so by activist shareholders or competitive pressures.

Arindam Bhattacharya and Sharad Verma are with BCGThe views expressed are personal