It may be tempting to dismiss them as outliers. After all, how many such upstarts like BioNTech and Moderna are out there shaking up mature industries that include large global companies? Right now, the answer is relatively few. But their numbers are growing fast, from electric-vehicle startups shaking up the automotive industry, to local consumer players winning in their home markets against their global peers, to digital companies taking away fast-growing new profit pools from industrial incumbents. That’s because there is underway a radical disruption of one of the fundamental principles of building competitive advantage: global scale.

Ever since the Industrial Revolution, one rule of business has held true: Size usually won. Big companies triumphed by reaping the benefits of greater efficiency from building scale—of big factories, vast workforces, and presence in many markets. But it is increasingly clear that the links between “big,” “profitable,” and “advantaged” are now weakening, if not yet broken. Growing numbers of “subscale” businesses are competing with their larger rivals, and winning.

What is eroding this more-than-century-old hegemony of scale? In our view, we’re seeing the fragmenting of the global corporate battlefield from an unexpected confluence of three independent factors: New geopolitics fragmenting consensus around “market rules”; growth of advanced digital technologies fragmenting value chains; and the rise of so called deep-tech innovation fueled by venture capital fragmenting the new product development landscape. 

Even before the COVID-19 pandemic, these factors were beginning to put pressure on the traditional business model of big, global corporations. Many companies were reversing their global expansion plans, scaling back their operations in different markets to reduce the drain on profits. But in the past 18 months, these factors have become even more entrenched.

On the eve of the pandemic, the global consensus that had formed after the collapse of the Berlin Wall and China’s admission to the World Trade Organization was starting to unravel. The U.S. and China were engaged in a trade war, the U.K. had just withdrawn from the European Union, and countries were taking contrasting approaches to such supranational issues as climate change reform and the regulation of digital companies. Since then, the divisions have deepened, and global scale–driven companies whose business models are designed to capitalize on size and the capacity to spread costs across integrated markets have seen the lifeblood squeezed out of them. By contrast, in many industries smaller, subscale companies that built their business on being fast and responsive to the fast-changing needs of local customers have prospered.

As if this were not enough, the big global companies are combating startups and small companies that are not just targeting their customers but winning the battle for new, fast-growing opportunities by exploiting the digital revolution. These range from small, highly flexible plants that are super-responsive to customers to e-commerce platforms for fast, direct customer access to new offerings. 

Small can beat big in innovation

Even the scale advantage from investing in vast data “lakes,” powerful computers, and complex algorithms is being eroded. Small players using rented cloud-computing capacities are combining new technologies for simulation, replication, and anonymization with artificial intelligence and machine learning capabilities into powerful self-learning algorithms to draw winning insights, even from little data “ponds.” Companies don’t need to be big to be smart.

Nor do they need to be big to be more innovative. Traditionally, the big, global corporations have used their scale advantage to create large, well-resourced R&D operations that developed the most innovative products. But, as BioNTech and Moderna have shown, subscale companies can now produce world-beating innovations, and this is principally because of two developments: the emergence of the deep tech innovation process and the rapid growth of high-risk funding from venture capitalists.

Deep tech innovators develop new products by taking a problem, redefining it, and exploiting existing science and technologies to solve it. Often this means taking a scale-disrupting generative approach—working up from the molecular level and “growing” the solution—rather than taking a (relatively) scale-intensive extractive approach that involves working down from the existing raw material and modifying it to make the final product. This is precisely what BioNTech did by drawing on proven generative technology of synthetic biology to grow a strand of mRNA that carries instructions to the immune system to recognize and fight COVID-19. With its risk underwritten by VCs (BCG and Hello Tomorrow, a Paris-based technology think tank, estimate that VC funding increased from $15 billion in 2016 to more than $60 billion in 2020), deep-tech startups are leveling the playing field for new product development. 

Fighting an existential threat

This new fragmented competitive landscape poses an existential threat to big, global companies focused on driving scale advantage of their core products, assets, and processes. How should they respond? Clearly, they should build “anti-scale” strategies for this fragmented world. They must build an organization that can contest and win multiple local battles against super-responsive local competitors, instead of waging a scale-fueled global war. They must be able to constantly identify and swiftly target fast-evolving new opportunities instead of focusing on core, slowly changing products. And they must build the capabilities to draw insights from even patchy data sets for fast decisions by local teams. 

They must become advantaged at the “edge”—be it the local market, the new opportunities, or in exploiting external, local, or patchy data—and not just on the core.

We call this this “fractal advantage” (click here for more details). In the natural world, organisms have survived and thrived over eons by creating multiple, design-optimized self-similar pieces, or “fractals,” at the “edge” of their complex system, like for instance, a leaf on a tree. Now, in the business world, companies must build advantage in much the same way, focusing on each leaf at the edge rather than depending solely on bulking up the core “trunk.”

Fractal strategy has three fractal imperatives for companies:

First, is building the organization that can “think local, act global.” That is, companies should be able to think about what it takes to win in every local market where they compete and endeavor to replicate their successes in as many markets as possible—globally. 

Second, is winning the battle of edge revenues—the new high-growth opportunities that emerge at the boundary of every business. In the automotive industry, for example, customers are increasingly looking to buy mobility and myriad solutions, not just a core car. These edge opportunities, according to BCG analysis, are expected to account for 40% of auto industry profits by 2035. 

Third, they should develop smart-data capability—to build, train, and replicate a variety of learning models that can deliver insights from local, patchy data sets. What counts is not scale but the experience with clever algorithms.

So far, as the world has changed, small, local, subscale companies have been generally quicker to deploy fractal strategies and profit from the new source of competitive advantage. But there is no reason why big, global companies should not be able to do so, too. If they are to succeed, however, they will need to adopt the features of companies that thrive in a fragmented world, including local teams with decision-making powers, an open culture that encourages the fluid exchange of information and ideas inside and outside the organization, and a fast-response, customer-inspired, solutions-oriented approach to product development.

If they do this, they will be better placed to succeed in a world made for subscale, fractal advantaged companies.

Arindam Bhattacharya (bhattacharya.arindam@bcg.com) 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 (Buerkner.Hans-Paul@bcg.com) is a managing director and global chair emeritus at the Boston Consulting Group and the former CEO and chairman of BCG.