The breakthrough mechanic is partially to avoid the potential exploitation of using unrealistic tiny formation elements. Even so, it is still only a second attack, not multiple attacks (so huge formation elements are not too useful). The other downside to many tiny elements is the micromanagement aspect, plus no commander support and probably no support from the rest of the hierarchy due to the lack of HQs. I need to add the various commander bonuses to the ground combat rules.
To make sure I understand:
1) massive overkill is the disincentive to making huge formations - even with a breakthrough attack, a 10x overkill size imbalance means you waste 40-80% of your combat power (could have killed 10 (or twenty with breakthrough), instead kill 1 twice)
2) breakthrough attack (plus micro management) is the disincentive to making tiny formations - if your formations are too small your opponent will get 2x kills.
I forget: are players allowed to move units amongst the 4 postures every 3 hours? If so, perhaps they should be able to "shatter" or "group" the level of combat formations they're using at the same time. Otherwise a lot of the efficiency in the combat will be a guessing game of "at what level should I group my formations".
Thought experiment: if a monolithic corps sized unit "A" is in combat with an enemy corps that is broken into battalions "B", the "A" corps could break up into divisions at the first 3 hour mark, brigades at the second, and so on. In the mean time, "B" would be breaking into companies, platoons etc to keep in the massive overkill mode until "A" got small enough to be in the "optimal overkill" range (presumably squad vs. individual") at which point "B" would start aggregating. This doesn't sound like a great result, so....
How about a unit can "shatter" as many levels as it wants, but can only "group" one level per turn. So in the thought experiment "A" could shatter into brigades or battalions (or even some of each) after the first turn. "B" could still try to race to the bottom, but "A" would be able to follow much more quickly.
Here's another suggestion to encourage large units: give a mild power to the combat power of a formation, e.g. adjustedPower = rawPower^1.1 or rawPower^1.2. That would encourage aggregation.
John