"Lorem ipsum ?"
Two common models of organizational structure and why they don’t work in today’s world:
Organizations often try to unlock value by matching their organizational structure to their strategic objectives and can often disrupt their organization rather than mobilize it as a result.
Senior leaders often centralize the organization by function, a model which worked well during the first industrial revolution of the 19th century as organizations created economies of scale by centralizing operations, marketing, sales, and finance but is no longer fit for purpose in the modern age.
In the 20th century, some organizations decentralized around product lines and geographical regions to be more flexible and adaptable to local market conditions however as we now enter the 4th industrial revolution, problems with both centralized and decentralized models have become more apparent and a new way of thinking is needed.
Many large corporates have attempted to fuse the two models together in a matrix organization, however, these are notoriously difficult to co-ordinate and create many barriers to collaboration as middle management invariably must answer to two masters which causes resourcing issues, conflict and invariably delay in decision-making.
In the 1990s business process models became popular – organizations structured themselves around process rather than traditional functional, product or geographic lines however alignment of people, process, culture, and activities were still problematic. Then, as now, restructuring required time for people to adapt to and valuable tacit knowledge often got lost in the process as disengaged employees sought to leave.
As Pankaj Ghemawat of Harvard Business School describes in “The Forgotten Strategy,” this restructuring churn is expensive and often creates new organizational problems as bad as the ones they solve.
Companies often get saddled with the vestiges of previous organizational decisions, such as obsolete local and regional headquarters and legacy IT infrastructures which create expensive and frustrating cycles of organizational change that have not had the desired transformative effects.
Historically most organization have relied entirely on financial processes, usually focused purely on financial systems and budget. Doing so means short-term financial considerations can overpower long-term strategic goals. More recently virtual or networked organizations operating across traditional functional, product line or geographic regions have become more popular as have “Velcro organization” which see these units like Lego bricks that can be pulled apart and reassembled in different way to respond to changing opportunities as the need arises.
Unfortunately, these organizational transformations are driven by a traditional mindset. In the volatile, uncertain, complex and ambiguous world we now live in however, competitive advantage is driven less by the control and management of physical and financial assets and more from how well companies align their intangible assets like subject matter experts and knowledge workers, their research and development departments and the technology they utilize internally. Competitive advantage is really focused on how well these are aligned, work with and relate to the demands of changing markets and ever-increasing needs of customers.
Organizations do not need to be structured in a way that aligns perfectly with their strategy – simply realigning authority and decision-making rights and responsibilities very rarely produces the transformative effects required to create corporate level synergies. A more effective approach is to create an organizational structure that creates an environment of collaboration and is culturally aligned and then design a strategic system that overlays this to align that structure with the strategy holistically from different perspectives e.g. financial, customer, internal business processes, and learning and growth perspectives.
7 key steps to implement a new strategy without disrupting your organization
- Fact-based decision making in an organization should continually collect and analyze data on internal performance, competitor and market performance in order to improve decision making accuracy, achieve consensus, and allow prediction based on past history.
- Translate the strategy to operational terms. Strategy cannot be executed if it cannot be understood.
- Align the organization to the strategy. Organizations are traditionally designed around functional specialties such as finance, manufacturing, and sales. Communicating and coordinating across functional lines is often difficult. Executives in strategy-focused organizations replace formal reporting structures with strategic themes and priorities that enable a consistent message and consistent set of priorities to be used across diverse and dispersed organizational units.
- Align employees to the strategy – communication and education, developing personal and team objectives, and incentive and reward systems are fundamental to making this work.
- Make strategy a continual process. By using a double-loop process that integrates management of tactics and the management of strategy to adapt strategies as the world changes or the strategy matures. Three themes are important in implementing such a process:
- Linking strategy and budgeting by setting stretch targets, often replacing fixed budgets with rolling forecasts
- Closing the strategy loop with internal and external feedback systems
- Testing, learning, and adapting strategy based on feedback
- Mobilize change through executive leadership. If those at the top are not energetic leaders of the process, change will not take place, strategy will not be implemented, and the opportunity for transformation will be missed. Initially, the focus is on mobilization and creating momentum. Then, the focus shifts to governance: executives must establish a process to guide the transition to a new performance model. Finally, and gradually over time, a new management system and mindset evolves.
- Communicate in a clear, timely way with relevant information in the way that best suits your external stakeholders e.g. customers and investors.
This practical and proven framework helps leaders shapes their organizations to meet the challenges of today’s volatile, complex environment. It helps them not only clearly articulate and formulate a holistic strategy, embed the required change and make it work.
Much of our experience at Hundred has centered on implementing M&A strategies and strategies for business units with a holistic view of their customers, competitors, technologies, and workforces. Now organizations are applying a similar framework to describe how the organization creates value beyond its individual business and support unit. We help organizations identify, map and measure the sources of corporate value creation from financial, customer, process, and learning and growth perspectives:
Finance:
We help organizations create financial synergies in several ways: By instituting effective processes for resource allocation, corporate governance, mergers and acquisitions, integrating new business units, and collaboration with external entities such as governments, private equity, partnerships and suppliers.
Customer:
We help organizations create corporate synergies by leveraging relationships across multiple business units to offer common customers lower prices, greater convenience, or solutions more complete than specialized competitors can provide.
Process:
We help organizations create corporate synergies through process by sharing common processes and creating economies of scale by integrating and consolidating both front and back-office operations.
Learning and growth:
We help organizations create corporate synergies through activities specifically related to human capital development such as recruiting, training, and leadership development activities and knowledge management e.g. best practices throughout diverse organizational units). Intangible assets can account for 80% of an organization’s value in today’s knowledge economy, the corporate benefit from effective cross-unit collaboration—to develop human capital, for example—is a huge driver of corporate synergies.
Why having strategic themes is important in the development of your corporate value proposition
Many organizations align corporate strategy and business unity strategy but articulating a corporate strategy and encouraging business units to develop strategies that work towards achieving the corporate financial objectives, whilst being aware of and responding to local market conditions and competitive environment. This is where many organizations fall down as by using the budget system as the primary coordinating mechanism for complex matrix structures, this encourages business units and functions to focus on local controllable measures and activities meaning they often become siloed – they can perform well on local measures but fail to contribute to regional, divisional or corporate synergies.
More and more we now see ambitious, high-performing organizations are adopting strategic themes that describe their corporate value proposition. Each theme has cause and effect relationships linking objectives, measures and initiatives that focus on the four key areas of strategy: financial, customer, process, learning and growth. These themes highlight how business and functional units can collaborate effectively to realize the value proposition. These themes link local strategies together and emphasize where cross-functional collaboration is required to deliver the value proposition.
As a very simple example, an organization may break down a corporate value proposition into 3 main themes:
- Lower the cost of serving existing customers
- Deepen relationships with current customers by cross-selling additional products/services
- Acquire new profitable customers
For deepening relationships with current customers theme, one objective for learning and growth may be capability building training in client relationship management, leadership development and taking accountability effectively. For acquiring new profitable customers, the learning and growth objective could be to introduce new technology such as customer relationship management systems that provide complete visibility into all deals, team performance, and market changes and deliver actionable insights to close more deals.
What is important when implementing these changes is to ensure the employees personal goals are aligned and relevant incentives to motivate them are put in place to achieve the objective of investing more time with high-potential customers which creates organizational readiness. If these learning and growth objectives are achieved, employees should then be able to sell more products/services as solutions and ensure customer satisfaction (process) which increases the company’s share of customers’ investment (customer) leading to higher revenues and profit margins (financial).
Setting strategy and measuring performance by linking together specific strategic themes gives organizations a way to communicate shared priorities and motivate people to share them in even the most complex businesses. In effect, the themes describe a virtual organization in which decentralized units pursue their local strategies while simultaneously contributing to corporate priorities.
To underscore the importance of these strategic themes within the organization and executive sponsor is usually put in place to be responsible for each theme. This involves coordinating and monitoring data reporting and performance, overseeing and approving the theme’s objectives, measures and targets in relation to the business units’ strategies and convening periodic meetings to review and revise action plans.
Because no single organizational unit had complete ownership, responsibility, or accountability for any of the themes, this process promotes cooperation and integration among business units and functions, allowing them to share lessons learned and best practices.
The responsibility for execution does however remains with the business unit. In this way all business units are held accountable for their local performance and contribution to the corporate level strategies priorities related to the value proposition.
This creates an extraordinarily powerful system for uncovering opportunities for value creation, for communicating corporate priorities to local units, and for facilitating reviews of resource allocation, strategy, and management effectiveness.
This overcomes one of the main weaknesses of a matrix organization – the debates among business units, functional departments, and geographical regions about resource allocation. Clarity in strategic themes that cut across units, regions, and functions, helps senior leadership teams to highlighted corporate priorities effectively and make it easier to understand why resources are allocated as they are.
This often leads to more productive discussion based on a shared understanding of the fundamental drivers of overall business performance, helps people to gain support for their local agendas and project and achieve outcomes collectively beyond what business units would accomplish independently based on a common understanding of strategic priorities and objectives.
If you’re interested in finding out more, we suggest the following articles and books:
Reference:
- Pankaj Ghemawat “The Forgotten Strategy https://hbr.org/2003/11/the-forgotten-strategy
- Kaplan, Robert S., and D. P. Norton. The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. Boston, MA: Harvard Business School Press, 2000.
Thanks for reading and feel free to share! We love feedback so please send us your thoughts or questions and check out our other insights and strategic transformation solutions.