Factors to Consider When Selecting the Unit of Analysis for Crafting Your Company’s Strategy
When making strategic decisions, organizations—whether corporations, investors, or nation-states—must first identify the appropriate level of analysis. While this may seem obvious, many decision-makers neglect to approach it systematically.
The Problem with Over-Aggregation
Large corporations often attempt to formulate detailed action plans based on highly aggregated analyses. This leads to the “average of averages” problem—combining vastly different units into one set of numbers and assuming uniformity. Profit margins from different divisions are averaged; plant productivity is assumed equal. As a result, data loses relevance, insights are distorted, and misfit solutions are imposed across diverse contexts.
This inability to generate actionable insights from overly generalized data partly explains the wave of conglomerate breakups: from over 60 in 1980 to just 24 in 2000. As the saying goes, if you average Beethoven’s 9th Symphony, all you get is noise.
The Pitfalls of Hyper-Granularity
Conversely, some companies develop plans at the most granular profit-and-loss unit and stitch them together into a so-called “strategy.” But without assessing synergies or aligning priorities, the result lacks coherence. Tactics remain fragmented, and initiatives compete for resources without a unified direction.
Why Granularity Matters: The ESG Example
The level of analysis can even reverse the conclusions drawn. ESG investing provides a clear illustration. At a high level, companies are labeled as “green” or “brown.” Investors may divest from high-emission companies and invest in low-emission ones. Yet, a deeper analysis reveals a different picture.
A 2021 study, The ESG-Innovation Disconnect, found that green innovation is largely concentrated within “brown” sectors like Energy and Utilities. Modest improvements there can yield greater environmental returns than investing in firms with little room for further emissions reductions. As Yale’s Kelly Shue observes, raising capital costs for polluters discourages innovation.
Granular analysis may suggest investing in targeted green projects within brown companies yields greater impact than rewarding already efficient sectors.
The Public Sector Parallel
Similar dynamics apply to governments. The choice to address issues locally, regionally, or nationally affects perceived needs and solutions. Consider parking requirements for bakeries. A mountainous rural area with limited public transport may demand more parking than urban areas well-served by transit. A regional average masks such nuances.
The EU’s Article 10(3) emphasizes local decision-making: “Decisions shall be taken as openly and as closely as possible to the citizen.” That means empowering those most affected by a decision to make it.
A national government shouldn’t set beachfront rental rates. Local authorities are better placed to weigh tourism, aesthetics, and taxation. But decisions like building high-speed rail networks—with national consequences—require centralized coordination.
Applying the Principle in Corporations
For conglomerates, corporate leaders should set overarching values and direction while empowering business-unit leaders to determine how to implement them. Applying the principle of “the smallest scale possible” offers benefits:
- Accountability: In small teams, people know each other. Peer accountability and social cohesion discourage opportunism.
- Risk Containment: Decentralization allows for experimentation. Failed approaches stay local; successful ones scale system-wide.
Choosing the Right Granularity: Three Factors
So how should executives decide the right level of granularity for strategic analysis?
1. Match the Level of Decision-Making Vision-setting requires cross-unit analysis. Execution demands unit-level plans. Misaligning these levels leads to confusion and inefficiency.
2. Assess Business Similarity Executives should evaluate whether:
- Assets are interchangeable or unique.
- Competencies are transferable or specialized.
- Markets have common or distinct customers, channels, and competitors.
If businesses differ significantly, a more segmented approach is warranted.
3. Foster Inclusive Strategy Development Involving managers from various levels ensures they understand the analysis and reasoning behind corporate objectives. This alignment encourages innovation and practical execution at the unit level.
So, How Many Strategic Plans Does Your Company Need?
It depends. Each organization requires a tailored approach. Strategy in Action (SiA), our proprietary methodology and software, helps organizations answer this question through a structured, expert-led process. COTRUGLI Business School is the official distributor of SiA in Croatia, Serbia, and Bosnia and Herzegovina.
Written by Luca Dal Porto, Project Leader and Head of the Italian Market at 3HORIZONS.
