How to Implement a New Strategy Without Disrupting Your Organization
Throughout most of modern business history, corporations have attempted to unlock value by matching their structures to their strategies. As mass production took hold in the nineteenth century, for instance, companies generated enormous economies of scale by centralizing key functions like operations, sales, and finance. A few decades later, as firms diversified offerings and moved into new regions, a rival model emerged. Corporations such as General Motors and DuPont created business units structured around products and geographic markets. The smaller business units sacrificed some economies of scale but were more flexible and adaptable to local conditions.
These two business models—centralized by function versus relatively decentralized by product and region—proved durable for a long time, largely because the evolution of business organization was fairly incremental. Indeed, the product division structure remained the dominant model for 50 years or more. But as competition intensified in the last quarter of the twentieth century, problems with both models became apparent, and companies searched for new ways to organize themselves to unlock corporate value.
Many multinationals adopted a matrix arrangement in the belief that they could retain both the economies of scale of centralized functions and the flexibility of their product-line and geographic business units. But matrix organizations were difficult to coordinate. Managers operating at a matrix intersection had to juggle the dictates of two masters, which led to conflict and delay. The business process reengineering movement of the 1990s introduced another model, in which the corporation organized around its various processes instead of its traditional functional, product, and geographic boundaries. But multiple process-focused units still had problems coordinating and aligning their activities; a silo is a silo whether it is a business process, a function, or a product group. More recently, we’ve been hearing about “virtual” and “networked” organizations operating across traditional boundaries and the “Velcro organization,” a company capable of being pulled apart and reassembled in new ways to respond to changing opportunities.
The continual search for new organizational forms is driven by basic changes in the nature of competition and the economy. First, advantage today is derived less from the management of physical and financial assets and more from how well companies align such intangible assets as knowledge workers, R&D, and IT to the demands of their customers. Second, the opportunities and challenges that globalization affords are forcing companies to revisit many assumptions about the control and management of both their physical and their intangible assets. Today’s computer company, for example, can manufacture components in China, assemble them in Mexico, ship them to Europe, and service the purchasers from call centers in India. This dispersal creates demands for new structures to align internal and outsourced units around the world.
As companies have struggled with these issues, many have gotten caught up in expensive and frustrating cycles of organizational change. ABB is a classic case: The company went through one reorganization after another following its first experiment with the matrix form in the late 1980s. As Pankaj Ghemawat of Harvard Business School describes in his November 2003 HBR article, “The Forgotten Strategy,” this restructuring churn is expensive and often creates new organizational problems as bad as the ones they solve. It takes time for employees to adapt to new structures, and a great deal of tacit knowledge—precisely the kind that’s become most valuable—gets lost in the process, as disaffected employees leave. On top of that, companies get saddled with the vestiges of previous organizational decisions, such as obsolete local and regional headquarters and legacy IT infrastructures. Given the costs and difficulties involved in finding structural ways to unlock value, it’s fair to raise the question: Is structural change the right tool for the job?
We believe the answer is usually no. The lesson we’ve drawn from our work with hundreds of organizations on strategy maps and balanced scorecards is that companies do not need to find the perfect structure for their strategy. As we will demonstrate in the following pages, a far more effective approach is to choose an organizational structure that works without major conflicts and then design a customized strategic system to align that structure with the strategy.
We will see how two very different organizations—DuPont Engineering Polymers and the Royal Canadian Mounted Police—took their existing structures as given in the belief that tinkering and realigning authority, responsibility, and decision rights would not produce the magic needed to achieve corporate-level synergies. Instead, executives in these two organizations used the tools of the balanced scorecard strategy management system to guide the decentralized units in their search for local gain even as they identified ways for them to contribute to corporatewide objectives.
What Kind of System Do You Need?
A management system can be defined as the set of processes and practices used to align and control an organization. Management systems include the procedures for planning strategy and operations, for setting capital and operating budgets, for measuring and rewarding performance, and for reporting progress and conducting meetings. It is fair to say that, historically, most companies have relied entirely on financial systems—usually centered on the budget—for these various processes and practices. But relying on the budget as the primary management system caused short-term financial considerations to overwhelm longer-term strategic goals. In the 1980s and 1990s, many companies introduced total quality management as a new management system. But while TQM enabled firms to focus more effectively on process improvements, the ability to implement strategy across organizational units remained elusive. Companies’ management systems were still tactical and operational, not strategic.
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