the concept of "shattered" units is good,
however as long as the capital is the absoulute center of the world for the countries, it will lead to weird results
Edit: Jmland is onto what I'm trying to explain
A shattered unit is essentially one that fights hard (sometimes too hard) but ends up utterly destroyed in the process. It's basically an abstraction of what happens sometimes in battle on the divisional scale. Think of it as a combat event from hoi2, like breakthrough. The enemy breaks through your divisional positions and wreaks total havoc, destroying and capturing your equipment, and cutting off the chain of command--all before that division can retreat in any cohesive manner. In this case there is so much chaos and confusion the division and it's subdivisions simply can't function. As the enemy continues their attack you are helpless to do anything but grab what you can and disperse in total defeat with whoever is left around you, or hold your position and get slaughtered. It might be a mixture of poor command, lack of supplies or equipment, overwhelming enemy forces, or simply getting out-maneuvered that leads to this kind of mess.
None of these details are really important though because the game doesn't go beyond brigades with stats to calculate the battle equations. It's an abstraction of a division failing totally either by its own error, the success of the enemy, or both. I am not certain but I assume factors from both sides determine shatter probability, as would make sense.