A widely held view on strategy in the 1980s defined two ways to compete: firms could pursue either a low-cost advantage (usually through scale) or a differentiation advantage (by building intimate customer relationships).
The prevailing approach to running a firm at the time (what we call the professional management system) was perfectly tuned to steer most large companies toward the low-cost, scale-driven option. There were clear metrics to track progress (experience curves, relative market share, relative cost position). Firms also worked from established playbooks as they shed noncore assets, cut costs and used scale-driven M&A to get bigger. The signature firms of the era, companies like General Electric and Texas Instruments, generated massive value by pursuing this path.
But there was also a major drawback: an inverse relationship between scale and intimacy. The larger and more complex companies became, the more likely their customers grew to hate them. In the US life insurance industry, for instance, Net Promoter® data shows that USAA captures by far the highest level of customer loyalty. The scale leaders, meanwhile, have deeply negative Net Promoter scores (see Figure 1). The same pattern holds in fast food, pay TV and many other industries. In the new era—the era of scale insurgency—that disconnect has become a significant liability. The top performers today are outcompeting their rivals by offering customers the benefits of both scale and intimacy. Take Netflix, which is not only the US leader in terms of streaming share, but also has a higher Net Promoter Score® than its major competitors. Ditto for leaders like Apple, Vanguard and Salesforce. These companies have figured out a new paradigm: They are using scale to generate the benefits of leadership economics for their customers and they are combining an insurgent mission with technology to better understand (and deliver) what individual customers want.
Leaders in the scale insurgency era will be companies that overcome the traditional trade-off between scale and intimacy
Scale insurgents are business builders. They are innovators, to be sure, but what sets them apart is the ability to develop go-to-market models that create economic advantage at the level of gross margin and—eventually—operating margin. More often than not, this demands scale. Our research shows that one or two companies control 80% of profits in most markets, and that 60% of the time, those companies are also the scale leaders. Scale, in other words, will remain one of the most important paths to profit leadership in the new era.
But how companies achieve scale is changing. Scale now extends beyond the physical into digital and data assets. Technology allows companies to achieve superior economics and pass those advantages along to customers via significantly more intimate and personalized relationships. Think about how much Amazon knows about you and how it translates that knowledge into personalized value. The same could be said for Google, Tencent or Naver.
Peloton has taken the intimacy of the exercise-bike studio—a dozen students with their trainer at a specified time on a specified day—and uses a powerful blend of technology and talent to make that experience available to riders across the world, at any time they want. In rapid order, it has grown to $700 million in revenue (in 2018), with one million members and thousands of archived classes. Scale and intimacy.
Discovery Group, a South Africa-based financial services firm, is another great example. Its core business is insurance, hardly an industry known for powerful customer relationships. But Discovery has found a way to win hearts and minds even as it grows to scale. The company is best known for its Vitality product, which tracks customers’ behavior and rewards them for making healthy choices. The success of Vitality depends on the quantity and quality of its data, which enables better underwriting decisions as well as deeper customer engagement. Data is the company’s new metric of scale. Discovery is expanding internationally and has entered new markets by partnering with existing leaders in those markets (such as AIA, Generali, Manulife, Ping An, Sumitomo Life). By tapping into this deep pool of new customers, Discovery has access to vast new sources of data. More than 65% of Vitality’s 10 million members worldwide are from these international partnerships. Results have followed: Discovery has one of the highest valuation multiples in the insurance industry.
Most firms struggle to balance scale and intimacy because they succumb to the growth paradox: with growth comes complexity and complexity kills growth. As companies grow to scale, they add product and service lines to meet new pockets of demand. They accumulate layer after layer of management and the matrix starts to take over. Inevitably, they turn inward, focused on the processes needed to build and manage scale. Customer intimacy suffers because the voice of the front line gets drowned out by the din of planners and span breakers, and that leads to poor execution, customer confusion and an inability to offer a compelling value proposition.
As we will discuss in upcoming blog posts, deploying micro-battles can be a powerful way to break through complexity and resolve the scale vs. intimacy dilemma in favor of the customer. In micro-battles, small, cross-functional teams take a bold strategic initiative and translate it into a prototype that can be tested in the marketplace. They turn a winning prototype into a repeatable model that can be scaled across the organization. Critically, however, each micro-battle team has members who represent the benefits of scale and those who fight for the benefits of customer intimacy. The right prototype strikes a balance: It offers an innovative solution that both delights customers and can scale across the organization.
Micro-battles help a company rediscover and maintain its Founder’s Mentality®. They ensure that the insurgent mission remains fresh, the owner’s mindset is celebrated and the front line—not the professional managers who support them—are the day-to-day heroes. Firms that look and feel like this not only build the most intimate relationships with customers, but they create the highest levels of employee advocacy we have ever seen. These are the firms that have the best chance to keep on growing by transforming themselves into scale insurgents.
James Allen is a partner in Bain’s London office and former coleader of the firm’s Global Strategy practice. James Root is a Bain partner based in Hong Kong and chairman of Bain Insights. Andrew Schwedel is a Bain partner in New York and chairs the firm’s Macro Trends Group.
Net Promoter System®, Net Promoter Score®, Net Promoter® and NPS® are registered trademarks of Bain & Company, Inc., Fred Reichheld and Satmetrix Systems, Inc.
Founder’s Mentality® is a registered trademark of Bain & Company, Inc.