The Pitfalls of Averaging in Business Strategy: Why Granularity Matters?

What would you get if you attempted to distill the essence of Beethoven’s 9th Symphony into a single, average sound? Nothing more than a mere buzz. Beethoven’s 9th Symphony is a masterpiece in which each note, instrument, and crescendo contributes to the overall richness of the composition. Averaging it out would overlook the brilliance of individual elements and erase that complexity that makes it unique.

Similarly, in the realm of business strategy, which at its core is about making the best possible choices given the available data, averages can be misleading and even harmful when applied indiscriminately. Surely averaging, summarizing complex sets of data into a single value, can provide a quick snapshot of overall performance. However, relying on them too heavily can lead to disastrous consequences, especially when dealing with diverse markets and varying circumstances.

Consider a company that boasts a 20% market share overall. On the surface, this might seem like a fantastic achievement. However, digging deeper and analysing specific markets, we might find that in some markets the company commands a substantial 80% market share, while in others it languishes at a mere 2%. Markets can vary significantly in terms of consumer behaviour, regulatory environment, and competitive landscapes. Averaging market share across different markets overlooks these critical differences, resulting in a skewed perspective that may not accurately represent the company’s standing in each market.

Such a distorted perspective could be extremely detrimental in the context of strategic decision-making. If the company were to rely solely on the overall market share for decision-making, it might adopt a one-size-fits-all strategy, neglecting to address the specific challenges and opportunities unique to individual markets. For instance, in markets where the company holds a substantial market share, a defensive strategy against competitors should be prioritized, while in markets where it is absent, an expansion strategy should be considered.

Similarly, imagine a company evaluating its strengths and weaknesses. While it may perceive itself as proficient in key account management, the seemingly good performance in this area could be attributed to a handful of outstanding salespeople compensating for the deficiencies of the rest of the less skilled, mediocre sellers. In such a scenario, the company’s SWOT analysis would be flawed. Disregarding the variance significantly diminishes the quality of decisions made, such as whether to invest in developing a particular skill or not.

To overcome the disaster of using averages, businesses should embrace data granularity. This involves breaking down overall metrics into smaller, more specific datasets that provide a more accurate representation of performance in individual spaces and allow for tailoring strategies accordingly. Going back to the market share example, the company could deconstruct the 20% average into specific data for each market space, namely the intersection of a particular market segment with a specific company offering. This breakdown would unveil a more diverse and vivid picture, empowering the company to make informed strategic choices, such as boosting market share in those markets below the average and reaching an even bigger share in those above the average, thereby maximizing their impact.

A multi-billion-euro company operating in the distribution space painfully became aware of the disastrous consequences of relying on averages when it realized that its strategy was not delivering the expected results. With its business spanning several European countries, upon closer examination, the company’s management realized that their average market share was not meaningful, as none of the countries where they operated even came close to the average. Some markets were well above the average, while others were close to zero.

Gaining this more nuanced perspective assisted the company in refining its strategic decisions. In markets well above the average, they began outlining strategic priorities focused on defending their position. Conversely, in those significantly below average, they initiated plans to reach the average. This involved contemplating the sharing of best practices from the higher-market-share areas and also exploring targeted acquisitions.

The company also sidestepped the pitfalls of relying on averages when assessing its strengths and weaknesses. Having acquired several other businesses, they observed that certain capabilities were massive strengths, providing outstanding best practice examples, in some entities while they were significant weaknesses in others. Recognizing this disparity, they formulated effective strategic and enabling priorities that, through the sharing of best practices and training programs, facilitated a reduction in variance.

Thanks to this approach of deconstructing averages, the company steered clear of one-size-fits-all solutions. Instead, they tailored their strategy to bolster the company’s strengths and mitigate its weaknesses, thereby reducing the overall variance and potentially increasing their overall market share.

Next time you are tempted to use averages while strategizing, think about the Alps, which, with their towering peaks, deep valleys, and diverse ecosystems, represent a complex and awe-inspiring terrain. When you attempt to average out the elevations and features of the majestic Alps, all that remains is a bland plateau, devoid of the peaks and valleys that define their beauty. Remember that, much like the Alps, business landscapes are multifaceted. Averaging out market share or other key metrics oversimplifies the diverse challenges and opportunities present in different spaces. It’s important to navigate the varied business terrain with an awareness of its nuances and complexities, avoiding the flattening effect that comes with an over-reliance on averages.

References

Davide Sola and Jér?me Couturier, How to Think Strategically: Your Roadmap to Innovation and Results (Harlow, United Kingdom: Pearson Education Limited, 2014).

Alan G. Lafley and Roger L. Martin, Playing to Win: How Strategy Really Works (Boston, Massachusetts: Harvard Business Review Press, 2013).

Mehrdad Baghai, Stephen Coley, and David White, The Alchemy of Growth: Practical Insights for Building the Enduring Enterprise (Reading, Massachusetts: Perseus Books, 1999).

Geoffrey A. Moore, Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers (New York, NY: HarperBusiness, an imprint of HarperCollins Publishers, 2014.).

Mehrdad Baghai, Sven Smit, and Patrick Viguerie, “Is Your Growth Strategy Flying Blind?,” Harvard Business Review, May 2009, https://hbr.org/2009/05/is-your-growth-strategy-flying-blind , accessed November 2023.