During the past two decades, some of the world's most admired public companies have been explicitly built on the promise of dominant scale. But there are significant limitations to the advantages of size, and rather than focus on a scale-as-endgame strategy, high-performance businesses pay greater attention to achieving the right balance
between scale and other key performance factors.
By Tim Breene and Paul F. Nunes OutlookJournal, October 2004   In the realm of business, scale is not what it used to be. Perhaps it never was.
One of the axioms of business analysis is that all industries consolidate as they mature, and that those companies that scale up and survive the shakeout inevitably win big. By extension, in
an era of globalized markets, global survivors are presumed to win very big. And, in fact, during the past two decades, as sector after sector has moved through consolidation, some
of the most admired public companies have been explicitly built on the promise of dominant scale.
Faith in the scale-as-endgame strategy retains a powerful hold on many business thinkers. Contrary to this belief, however, Accenture research shows that there are significant limitations
to the advantages of scale. High-performance businesses—defined as those that consistently exceed their peers
in total return to shareholders, as well as in revenue and profit growth—are rarely those that have sought success through market position and scale alone. From automobile manufacturers to personal computer makers, the list of companies that dominated their industries for a time, only to fade away as shifts in demand, technology or business models eroded their base, is a long one.
No wonder the average life span of an S&P 500 company is now only about 15 years (and is expected to shrink to about 10 years by 2020).
Given that scale-as-endgame strategies are, at best, unreliable at delivering high performance, is there a better approach a company can take to improving its business performance while at the same time being mindful of the contribution scale
can play in preserving its long-term competitiveness?
Yes. Our research finds that high-performance businesses do not disregard the need to attain the right scale and position in their markets. But unlike companies that focus on scale for scale's sake, their extraordinary success is based on paying greater attention to balancing the performance contributions of three factors.
In addition to concentrating on market position and scale—where relevant or optimum scale is defined in the context of a thorough understanding of current and future value levers—top performers also focus on mastering distinctive capabilities relevant to their target customers and on the creation of a high-performance anatomy that underpins their sustained ability to out-execute their competitors. (For related articles, see "Measuring High Performance," Outlook, February 2004; "The Art and Practice of Mastery," Outlook, June 2004; and "In Search of Performance Anatomy.")
Sustainable Performance
In the right context, scale can, of course, deliver certain well-documented competitive advantages: increased production efficiencies and purchasing power, greater brand prominence and more widespread G&A amortization, among them. However, the results of our investigation suggest that the scale-as-endgame approach is not sufficient
to sustain high performance. Although most of the approximately 75 companies Accenture has identified as high performers show some measure of scale—within a business segment, for example, or a particular geographic area—in only a few cases
are they the absolute revenue leaders
in their industries. Indeed, many high performers compete successfully at a fraction of the size of revenue leaders.
 Publicly available data show that of the 172 companies that had spent time on Fortune's list of the 50 largest companies between 1955 and 1995, only 5 percent were able to sustain
a real, inflation-adjusted growth rate of more than 6 percent across their entire tenure in this group. It also shows that fewer than 5 percent of
all publicly traded companies maintain a total return to shareholders greater than their industry peers for more than 10 years. Why? Because
to sustain such superior performance over the long term, companies must successfully navigate across business cycles in which industry structural conditions, key success factors, competition and business models all inevitably change. Market position and scale strategies alone are not
sufficient—and can even be a liability—in navigating these transitions.
 We found even less correlation between return to shareholders and scale-driven strategies. Accenture examined the performance of the US companies that grew their capital bases most—in actual dollars, not percentages—to see if these likely scale players were equally successful in growing market values in proportion to capital growth (see Figure 1). Very few could keep up the pace, and most diluted their market value-to-capital ratio.
Our research points to a number
of conclusions.
- The source and nature of scale benefits are overstated.
- The increased complexities that come with scale lead to their
own "diseconomies."
- Mergers and acquisitions are
relied upon excessively in pursuit of scale (see Figure 2).
- Large-scale enterprises—particularly those that rely on fixed assets—become more vulnerable
to disruption as they grow.
Scale and Competition
We do not suggest that high-performance players have disregarded
a need to achieve an appropriate size in their markets. Our study of performance through various industry inflection points shows that scale is absolutely essential at certain stages of a sector maturity cycle. There are also times when the scale players have defined high performance in
a sector: Carrefour and Wal-Mart in retailing, Microsoft and SAP in software, Dell in personal computers.
So scale is important, but it's not
an absolute requirement for high
performance. Many times, companies display high-performance characteristics while competing at only a fraction of the market leader's scale. In the automotive sector, for example,
of the four companies that meet our high-performance criteria, only Toyota is a tier-one global scale player. Our research shows that some other industry giants enjoyed bursts of high performance, but only for short periods.
Distinctive Capabilities
As we have suggested, Accenture research shows much higher correlations between scale and high performance when companies have also developed distinctive, difficult-to-replicate capabilities. Classic examples include Toyota, with its production system, and Wal-Mart, with its distribution systems. In these cases, scale may result from the capabilities, but it is not their cause.
These companies illustrate a pattern that, as we see it, is comprised of five stages.
First, these companies master a core competence. Second, they focus relentlessly on innovation and improvement within the core competence, driving down the experience and learning curve as others seek to copy or emulate their entry success. Third, they extend the initial core competence by linking it to other critical market-relevant competencies that, when taken in combination, form a distinct business model. Fourth, they seek out new market opportunities, using the business model to give themselves a competitive advantage over existing incumbents.
Finally, these companies leverage their market position, the distinctive capabilities built into their business models and their high-performance anatomy in a continuously renewing cycle. Dell is the classic example here, with its powerful combination of dynamic pricing, supply chain management and after-sales service, all IT-enabled.
Even General Electric, for many years the paragon of a scale-driven business, embraced this approach. Its ruthless insistence on a number-one or number-two share position in every business in which it participated is cited, perhaps simplistically, as the driver of its extraordinary revenue, profit and stock-price growth. Conversations with executives who led the company during this period suggest, however, that GE's real accomplishment was building organizational attributes that enabled it to tackle changes and surprises more effectively than any other company. GE's current emphasis on innovation and organic growth, sometimes portrayed as a departure from the previous model, actually builds on this less appreciated achievement.
To better understand how mastery of a distinctive capability can complement a market positioning strategy, consider the Finnish mobile phone giant Nokia. The product of a government-encouraged merger of forestry, rubber and cable interests, the company did not enter the consumer telecommunications sector until 1981, and only arrived at its current core strategic focus on mobile technologies in the mid-1990s. With a very small domestic-market base of just 5 million people, the company resisted the temptation to seek global scale in its traditional businesses, and instead took a capabilities-based view. The rest is history: In 1993, Nokia introduced digital phones, expecting to sell 400,000 of them the first year. Instead, it sold 20 million.
Though the phones were certainly highly sophisticated technologically, Nokia credits much of its initial advantage to its core capabilities in user-centered design (case in point: the company had grown its rubber boot business substantially by offering its once all-black product in a variety of popular colors). These capabilities proved critical in making mobile communication workable as a consumer product.
Early in 1994, to help the company get down the learning curve faster and free up resources needed to build related capabilities, CEO Jorma Ollila initiated a strategy of exiting Nokia's old businesses to focus on telecommunications. Nokia complemented its core consumer-focus competence by extending its existing expertise in other capabilities, including low-cost global sourcing of materials, and by adding new capabilities such as global brand building. The result has been a successful business model centered on consumer-friendly mobile communications that has yet to be surpassed,
as well as a brand that consistently ranks as one of the most valuable
in the world, according to BusinessWeek's annual survey.
 Now Nokia is again challenged, the result of a combination of fierce competition from low-cost, copycat entrants and some of its own market missteps. But management has kept the company tightly focused on the renewable combination of customer-oriented capabilities, scale and its own performance anatomy. Nokia's future success is predicated not on new hit products but upon a vital, self-renewing high-performance business model. In terms of sustaining high performance, the distinction is quite significant.
Open Innovation
For decades, certain assumptions have driven the pursuit of scale. Accenture research and general market observation suggest that for some companies, those assumptions are outdated. For many years, research and development was one of the classic proving grounds of proprietary scale advantage, used by companies such as DuPont, Merck & Co., GE and Boeing to create decisive competitive advantage as well as significant barriers to entry. Some enterprises and even industries still operate according to this paradigm, even as the rules have changed around them.
In the 1990s, this closed model of innovation broke down as the in-creased mobility of skilled labor in many industries and venture capitalist-backed ideas led to the creation
of new business models. Most important, perhaps, was the "open innovation" model, pioneered by companies such as Cisco, Intel, Amgen and Genentech, which have encouraged their organizations to deliberately capture, extend and exploit the research capabilities of others.
Companies in more mature sectors have adopted this approach as well. At Procter & Gamble, for example, the company's leadership has publicly committed to expanding the proportion of externally sourced innovation from 10 percent to 50 percent within five years.
Equalizers and Catalysts
Given these shifts, the continued pursuit of proprietary scale may be the wrong investment choice for some companies. For decades, heavy investments in IT-driven automation gave an advantage to those enterprises able to shoulder the cost of proprietary back-office infrastructure, as measured in hardware, software, facilities and staff. Within the past five years, however, the availability of inexpensive, off-the-shelf processing software, the increase in outsourcing options, and the proliferation of third-party utilities has enabled small to midsize companies to forgo in-house investment, and to compete on cost and scale with their largest competitors.
The new third-party utilities are increasingly relied upon as nonproprietary scale equalizers. In the
airlines industry, for example,
Navitaire, an Accenture business pro-cess outsourcing firm that focuses on reservations and systems, now serves more than 40 airlines, including six of the world's 10 largest airlines and a growing number of leading low-fare and midsize airlines, neutralizing the advantage once enjoyed
by airline carriers with proprietary reservations systems. Navitaire offers its clients IT and back-office operations capabilities; just as critical,
it has shortened the all-important cash-flow cycles between ticket purchase and reimbursement. By doing so, Navitaire itself has become an industry change agent, one of the contributors to the collective rise of the low-cost airline model that is restructuring the industry.
Navitaire is a particularly dramatic example of the growth of business process outsourcing, which has
rippled outward from its origins
in certain sectors or functional capabilities to become more and more common. BPO is steadily moving up the value chain, no longer confined to transactional processes but beginning to include more
complex human resources, finance and e-learning functions. With this development, the catalytic affect of BPO on various industries is now both quantitative and qualitative.
Companies can now compete equally on scale further and further up the value chain. Moreover, as some BPO providers become best-in-class, their clients can go beyond merely equaling proprietary scale players to outperforming them. As is often the
case with significant revolutions in business thinking, it has taken a while for the general pattern of business process outsourcing to become apparent, to be understood as more than just an increasing number of seemingly similar examples.
Our conclusion is that many of today's largest companies are at junctures where there is opportunity to leave behind long-held assumptions about scale and market position. High-performance companies achieve their extraordinary success by balancing management's concentration on gaining scale with a proportional focus on the mastery of distinctive capabilities and the creation of
a high-performance anatomy. The scale-driven perspective is not without merit; it is simply incomplete. About the Authors Tim Breene is Accenture's group chief executive of the Management Consulting capability group and is the company's chief strategy officer. He is also a member of the company's management , executive and capital committees, and he chairs Accenture's Innovation Council. Since joining Accenture in 1995, Mr. Breene has held a number of senior positions, including managing partner of Accenture Strategic Services and managing partner of the company's global service lines. Mr. Breene is based in Boston.
Paul F. Nunes is an executive research fellow at the Accenture Institute for High Performance Business in Wellesley, Massachusetts, where he directs and conducts studies of business and
marketing strategy. In addition to his frequent contributions to Outlook, his work has appeared regularly in Harvard Business Review as well as in numerous other publications and newspapers. His most recent book is Mass Affluence: Seven New Rules of Marketing to Today’s Consumers (Harvard Business School Press, 2004).
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