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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
This Third Edition of the groundbreaking book Designing Organizations offers a guide to the process of creating and managing an organization (no matter how complex) that will be positioned to respond effectively and rapidly to customer demands and have the ability to achieve unique competitive advantage. This latest edition includes fresh illustrative examples and references, while the foundation of the book remains the author's popular and widely used Star Model. * Includes a comprehensive explanation of the basics of organization design * Outlines a strategic approach to design that is based on the Star Model, a holistic framework for combining strategy, structure, processes, rewards, and people * Describes the different types of single-business, functional organizations and focuses on the functional structure and the cross-functional lateral processes that characterize most single-business organizations. * Features a special section on the effects of big data on organization design, and whether or not it will result in a new dimension of organizational structure Highlighting the social technologies used to coordinate work flows, products, and services across the company, this new edition of Designing Organizations brings theory to life with a wealth of examples from such well-known companies as Disney, Nike, IBM, and Rovio (Angry Birds) to show how various kinds of organization designs operate differently.
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Seitenzahl: 451
Veröffentlichungsjahr: 2014
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Table of Contents
Title Page
Copyright
Series Page
List of Figures and Tables
Figures
Tables
Preface
Chapter 1: Introduction
Today's Organization Design
Drivers of New Strategies
Drivers of Organization Designs
Summary
Chapter 2: The Star Model
The Origins of the Star Model
Strategy
Structure
Information and Decision Processes
Reward Systems
People
Summary
Chapter 3: Single-Business Strategy and Functional Organization
The Evolution from Start-Up
The Lateral Organization
Summary
Chapter 4: Designing the Lateral Organization
Formal Groups
Integrating Roles
Summary
Chapter 5: Types of Single-Business Strategy
Product-Centric Strategy
Customer-Centric Strategy
Cost-Centric Strategy
The Real-Time Business Strategy
Customer-Centric Real-Time Strategy
Summary
Chapter 6: The Reconfigurable Functional Organization
Competing with No Sustainable Advantage
The Reconfigurable Organization
Creating Reconfigurability
The Cost of Reconfigurability
Summary
Chapter 7: Designing the Network Organization
The Network Organization Model
Creating and Managing Ecosystems
A Network Organization
Summary
Chapter 8: Multibusiness Strategy and Organization
Portfolio Strategy and Organization
Aligned Models
Summary
Chapter 9: The Mixed Model
Strategy
Structure
Processes and Policies
Summary
Chapter 10: Adding Value
Portfolio Strategy Today
Creating Value
Summary
Chapter 11: The Value-Adding Conglomerates
Conglomerate Performance
Quantitative Studies of Performance
A Look at Value-Adding Conglomerates
Summary
Chapter 12: Synergy Portfolio Strategies
Synergy
Leveraging Intellectual Property
Synergy Through Solutions
IBM Organization
Summary
Chapter 13: Organizational Design Challenges and Opportunities Resulting from Big Data
What Is New About Big Data
Organization Design Challenges
Summary
Bibliography
About the Author
Index
Copyright © 2014 by Jay R. Galbraith. All rights reserved.
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Library of Congress Cataloging-in-Publication Data
Galbraith, Jay R.
Designing organizations : strategy, structure, and process at the business unit and enterprise levels / Jay R. Galbraith.— 3rd Edition.
pages cm
Includes bibliographical references and index.
ISBN 978-1-118-40995-4 (hardback); ISBN 978-1-118-41729-4 (pdf); ISBN 978-1-118-46382-6 (epub)
1. Organizational effectiveness. 2. Strategic planning. I. Title.
HD58.9.G35 2014
658.4′012— dc23
2013040235
List of Figures and Tables
Figures
Tables
Preface
The last revision I did for this book was standard. I updated the examples and references, modified some ideas based on new research, and added a new chapter or two. For this revision, I took more time and substantially rewrote the book. The basics, like the Star Model and lateral forms of organization, remain the same. But the organization design thinking throughout the book is much more driven by strategy. It follows the research and theory that started with Alfred Chandler's Strategy and Structure (1962).
The first couple of chapters explain the approach of strategic organization design. It is a top-down approach as opposed to a sociotechnical systems approach, which is bottom up. Sociotech is much more influenced by the actual work of the first level of the organization. The strategic approach to design is based on the Star Model, a holistic framework for combining strategy, structure, processes, rewards, and people. (I am the holder of the copyright and trademark on the Star Model.) In addition to discussing the Star Model, the first chapters set the methodology of growth leading to strategic transformation. I assume that companies pursue growth to attract capital and talent and, for those that are publicly traded, to drive their stock price. However, a company can grow only so far in its core business and home country. As a result, growth drives a diversification strategy from a single business into a multiple business portfolio. These two stages of growth—a single core business strategy and a multiple business portfolio strategy—are covered in this book. Growth also drives companies to expand outside their home country into host countries. These companies take on three-dimensional structures where functions, businesses, and geographies all report to the CEO. I have described these organizations in more detail in Designing the Global Corporation (2000).
A fourth-stage organization arises when companies focus on a customer dimension. I discussed these organizations in Designing the Customer-Centric Organization (2005). In chapter 13 of this book, I speculate about a fifth dimension that could result from the impacts of analytics and big data. Throughout the book, I refer to “big data,” which denotes the greater volume, variety, and velocity of data that are available today.
In chapters 3 through 7, I describe the different types of single-business functional organizations. Chapters 3 and 4 focus on the functional structure and the cross-functional lateral processes that characterize most single-business organizations. In this edition, I highlight the growing interest in social technologies to coordinate work flows, products, and services across the company. I also distinguish between the different types of business strategies and organizations. I follow Treacy and Wiersema's (1997) three organizational types: cost-centric, product-centric, and customer-centric. In chapter 5, I discuss the organizations for each of these strategies along with several case studies to bring them alive. In that same chapter, I present some ideas about the real-time decision processes that are enabled by big data.
Chapter 6 is devoted to the reconfigurable organization. When competitive advantages do not last long, neither do the organizations that implement them. So today we design organizations to be easily and quickly changeable. This capability requires us to become even more adept at lateral forms of organization. The final chapter in this group, chapter 7, focuses on the network organization. Rather than vertical integration, many companies are using virtual integration. That is, companies are using partnerships rather than ownership to coordinate the components of their businesses. This is particularly true for companies using embedded microchips in their products. Such companies are building networked ecosystems of app developers to write applications for their software platforms.
Chapters 8 through 12 examine the variations on the enterprise strategies and organizations. In chapter 8, I review what we know about portfolio strategy and the continuum spanning from related portfolios to unrelated or conglomerate portfolios. Historically, the literature has focused on either pure types of strategies in the related portfolio with its multidivisional structure or on conglomerates with their holding company structures. Chapter 9 elaborates on the mixed model. Chapters 10 and 11 treat the subject of how corporate centers add value to their portfolios. That is, these companies create portfolios that are more valuable than the sum of their stand-alone businesses. I focus on three conglomerates: General Electric, Danaher, and Illinois Tool Works. Finally, chapter 12 examines two different approaches to creating value through synergy. One type leverages intellectual property across business units. Disney and Armani are examples I use to show how companies leverage characters, brands, and fashion designs across diverse portfolios. The other model is the solutions strategy. IBM and medical products companies combine products, software, and services from diverse business units into smart solutions for their customers.
In chapter 13, I speculate about the effects of big data on organization design and whether they will result in a new dimension of organizational structure. Disney and Nike are already creating digital divisions that are generating new sources of revenue.
Therefore, this edition is both an update of the basic content of organizational design and a presentation of a lot of new material. As social networking and big data work their ways through organizations, there will be much more to uncover and analyze in the years to come.
Jay R. GalbraithBreckenridge, ColoradoDecember 2013
Chapter 1
Introduction
Organization design, as opposed to organization theory, is a prescriptive body of knowledge. It is intended to inform the choices of how to organize and manage institutions and serve the leaders who have been entrusted with the stewardship of these institutions. These organizations are purposeful: they have been created to accomplish specific goals and objectives. Organization design is therefore focused on creating organizations through which these goals and objectives can be accomplished.
The knowledge base underlying the choice of organization designs has its roots in scientific management and classical management principles. The practitioners and scholars who developed the knowledge in these areas were searching for the one best way to organize. Those early thinkers created many of the principles, like span of control, and much of the useful language, like centralization, that we still use today. However, it was not difficult to find effective organizations that violated many of the principles of classical management. As a result, modern organization design grew out of efforts to explain these exceptional observations.
Modern organization design came out of a variety of work in the 1950s and 1960s. One stream, developed in the United States, is best illustrated by the work of Alfred Chandler in Strategy and Structure (1962). He found that the different organizational structures we had observed could be explained by differences in companies' strategies. Therefore, different strategies lead to different organizations. This stream, referred to as strategic organization design, is a top-down design process that begins with the entity's strategy and can be applied at the enterprise, business unit, geographical, and functional levels.
A second stream of thought developed in Europe around the work of Eric Trist and his followers (Trist and Murray, 1993). It was referred to as the sociotechnical systems approach. It was bottom up. It focused on the alignment of the technology involved in doing the work and the social system that could be created to perform that work. Sociotechnical systems' thinking and tools are best at designing organizations at the bottom levels of the structure. The strategic design thinking and tools are best used for designing organizations' top levels. The strategic organization design approach is the one that I follow in this book.
Today's Organization Design
The interest in organization design has been increasing over the past couple of decades. One of the reasons is that our organizations have been increasing in complexity over that time. “Doing what comes naturally” is not a sufficient guide to organizing today's institutions. Most leaders today rose up through a far simpler structure. Nor are the old dismissives relevant: “All you need are good people. They'll make any organization work.” And people do make a misaligned organization work, but at a price. The people in an organization that is misaligned with its strategy and stakeholder environment cannot serve its customers and work around the system at the same time. They can perform much more effectively when the system supports them in doing their work. Besides, high-performing companies do not want organizations that just work; they want organizations that excel. The discipline of organization design has evolved along with the increasing organizational complexity and the desire to create high-performing organizations.
In the following chapters, I trace the organizational stages through which companies have progressed from the simple, single-business strategy to the complex multibusiness, multicountry, multicustomer segment strategy. The first organizational stage is the single-business strategy, sometimes called the U form, or unitary form of organizations. Almost all companies start as a single business that is organized around functions, like sales, marketing, operations, product development, finance, and human resources. It is a unitary or one-dimensional form because it is structured only around functions. All people reporting to the CEO are functional leaders. Chapter 3 is devoted to the design of the single business or business unit, I introduce the concept of the lateral or horizontal organization. In order to get anything done, companies have to work across functions to deliver customer orders, new products, and projects. These processes are executed through lateral forms of cross-functional coordination. The functional structure or hierarchy is the vertical form, and the processes are the lateral forms, which vary from informal and self-organizing processes, to formal teams, to the matrix form. Lateral forms are present in all types of organizations, but I present them in a discussion about business units in chapter 3 since they are the principal design challenge facing business unit leaders.
The second stage arrives when a single business diversifies into new business areas. The company then creates a business unit and a profit and loss center for each new business area. Each business unit is another functional organization. The organization design challenge is thus to create a corporate center to govern the various business units. This center typically contains functional staffs to coordinate the functions across business units. The role and size of the center vary with the diversity of the businesses in the corporate portfolio. Since the CEO of the enterprise has both functions and businesses reporting to the center, the company has a two-dimensional organization structure.
The third stage develops when a company expands out of its home market into new host countries. This strategy adds a third dimension—a geographical dimension—to the organization. Initially companies simply add a geographical division to their multiple business unit divisions. But when international sales reach around 30 to 40 percent of total sales, the international division disappears. In consumer goods companies, the division is replaced by regional profit centers, one of which is the home country. In the business-to-business (B2B) world, the international division is split and the parts are added to their respective business units, creating global business unit profit and loss centers. However, in the global business unit structure, there is still an international or regional overlay on the global business units. And in the regional structure, there are global business units that are overlaid across the regions. So reporting into the corporate center are functions, business units, and geographies. The organization design challenge is balancing power and authority across the three-dimensional structure. The resulting power distributions will be driven by the global portfolio strategy (Galbraith, 2000).
The fourth strategy stage begins with a focus on the customer (Galbraith, 2005). Driven partly by demands from global customers like Walmart, companies such as Procter & Gamble, IBM, and investment banks are adding global customer or customer segments to their structures. Another contributing factor is the conversion of products and services into digital offerings. In the digital world, everything talks to everything else. Vendors, like IBM and Accenture, can combine digital hardware, software, and services into smart solutions for their customers. They can easily customize and codevelop applications with customers for customer segments, like financial services and utilities. This solutions strategy is best executed by organizing around the customer or customer segments called verticals. So in these solutions-oriented companies, we find customer segments reporting into the corporate center along with business units, countries, and functions. The challenge for organization designers is to integrate four dimensions into a one-company strategy and organization. Integration becomes the task of the company's processes. As we will see, the more complex the structure is, the more important are the processes.
Inevitably, the question that comes up is, “Is there a fifth stage?” In the concluding chapter, I speculate about a fifth stage. It appears that the forces around big data, meaning the increased volume, complexity, variety, and velocity of available data, may very well manifest themselves in a fifth strategy and organizational dimension.
Drivers of New Strategies
It is natural to ask why companies are continually changing their strategies. What is driving this movement through the stages? Usually managers prefer to keep things simple, so why are they moving to ever more complicated strategies? There are at least two reasons. One is the pursuit of growth. Many companies are driven by a growth imperative. And the other is the continuing fragmentation of the stakeholder environment.
Growth
Every publicly traded company wants to grow and drive its stock to trade at a premium price. If there is no growth, the company's stock is flat and trades like a bond. A high stock price makes it easier to attract capital and reward employees. The elevated stock also can serve as a currency to make acquisitions. More important, talented people want to join a growth company that has a bright future. But while growth is desirable, it also faces limits. A firm can grow only so much in its core business and its home country. So when growth in the core business slows, firms diversify into adjacent businesses and become multibusiness companies. When growth slows in the home country, firms expand across borders and become multinationals. This pursuit of new growth opportunities causes firms to change strategies and move through the stages.
Fragmentation of the Stakeholder Environment
The other driver of strategic change is the movement from mass markets to ever smaller market segments. In the twentieth century, businesses used mass production to supply mass merchants to serve the mass market. Now, with ever-increasing data, firms can focus on ever smaller customer segments. Consulting firms can now identify 650 microsegments in the food market. Some of these microsegments are declining, some are flat, and others are growing. So food companies are focusing on these growth microsegments, like Hispanic moms and senior foodies. Both the growth imperative and market fragmentation lead to customer-focused strategies.
So it is largely the growth imperative and market segmentation that drive firms to continually evolve their strategies. But not all companies progress through all of the stages. Some companies, like utilities and defense firms, remain domestic enterprises, and some family-owned companies remain in a single business. Andersen, Marvin, and Pella focus largely on residential windows and doors. Most companies, however, become three-dimensional, multinational enterprises like General Mills, Pfizer, Siemens, Canon, and Johnson & Johnson, while others, like Experian and Nike, progress or are progressing through four or even five stages. My point is that different strategies drive different organization designs. It is not size or industry that is the primary shaper of different organizational forms. Size, industry, and nationality all have their effects, but in this book, I start with strategy to begin the design process.
The other point about strategy stages that is important for organization design is that the strategies are cumulative. Chandler called this feature concatenation. That is, a multibusiness enterprise also has stage 1, single-business strategies that guide its business units. And when the stage 2 enterprise expands across borders, it adds third-stage international strategies to its stage 2 multifunction, multibusiness strategies. This cumulative stage-wise progression is what increases the complexity of organization designs and gives organization design its challenge and its priority to create high-performing enterprises.
Drivers of Organization Designs
There are three major shapers of organization designs. The first is the one that we have been discussing: the diversity and variety of units that must be coordinated for the company to execute its mission. The second is the degree of interdependence between these diverse units. Usually the units in a company are not independent but require coordination, and the amount depends on the degree of interdependence. This interdependence results from the initial division of labor into functional specialties that are needed to execute the business's activities. The third factor is the dynamics of change associated with a business. The dynamics consist of the rate or pace of change combined with its predictability. The predictability of change is the key. Even if a business is subject to constant change, if that change is predictable, a company can use plans and schedules to coordinate interdependence among units. If each unit can meet its planned goals and delivery schedules, the organization greatly reduces the amount of ongoing communication that it needs to coordinate its work. It is when change is constant and unpredictable that plans and schedules need constant revision and renegotiation. These organizations require designs that permit high levels of communication, flexibility, and adaptation.
Variety and Diversity
It is actually the interaction of the three shapers—variety, interdependence, and change dynamics—that drives organization designs. To illustrate, let us start with a single business that conducts its affairs through seven functions: development (of products and services), operations, marketing, procurement, sales, finance, and human resources. These seven functions must coordinate their efforts to conduct normal business for the existing product already in the market. They must also synchronize their activities to launch a new product, and they probably need to agree on the priority and features of the next product in development. The communication and decision making to arrive at the plans and schedules for the existing product in a seven-function organization must take place across twenty-one interfaces. (Links = ½ n [n – 1]. Thus, 21 = ½ × 7 [6].) Communication and collaboration must also take place across these same seven functions and twenty-one interfaces for the launch of the next product and yet again for the initiation of the new product. The process repeats itself for each product that is added to the single-business, functional organization. So variety, as measured by the number of products in this case, increases the volume of information processing and decision making that a single functional organization must execute. And every functional organization has a limited capacity for communicating and deciding. Then when the growth imperative causes the single business to follow a diversification strategy, it will add one or two new businesses. At this point, the coordination task exceeds the company's capacity to coordinate. As a result, it will move to a stage 2, multibusiness company and multibusiness structure. The functional organization does not have the information-processing and decision-making capacity to manage multiple businesses within a single functional structure.
Dell is a good example. Dell started with a single product line of desktop personal computers. In order to maintain its growth, it added desk-side computers and laptops. Then it added new businesses of personal desktop printer, personal desk-side storage, and low-end servers. It also migrated from a single personal computer business into a multibusiness unit, multiprofit center company. It changed its name from Dell Computers to Dell. Each profit center was a functional organization capable of managing a single business, like personal computers, printers, storage, and servers.
Interdependence
Interdependence is the degree to which activities in one organizational unit affect the activities and goal accomplishments of other units. Interdependence has been a driver of coordination since the work of Thompson (1967), who identified three types of interdependence, which increased in magnitude. These types are shown in figure 1.1. The simplest interdependence is pooled interdependence whereby field units, shown in figure 1.1a, share the same pool of funds and talent resources. Other than sharing resources, these field units, like sales units, perform their work completely separately. There is a minimal need to coordinate and communicate between one another. The next type, sequential, shown in figure 1.1b, indicates a higher level and greater amount of interdependence. In sequential interdependence, the output of manufacturing is a necessary input for the performance of the sales function. In order to achieve successful performance, company management must coordinate the flow of work across sequentially interdependent units. The sequentially interdependent units, however, also possess pooled interdependence. The greatest amount of interdependence exists when units are reciprocally interdependent, as in figure 1.1c. The output of both is the input of the other. Engineering design groups are a good example. The reciprocally interdependent units possess the greatest amount of interdependence because they possess all three types. They require the greatest need for coordination as a result.
Figure 1.1 Types of Interdependence
Interdependence is a variable that can be changed and can lead to different amounts of coordination. For example, the new product initiative referred to above may have greater interdependence among development, marketing, operations, and procurement than it has with the other three functions. Therefore, the interdependent four functions can form a core new product team, which has more limited communication with the other three functions. But when you add the other functions to the core team, it becomes the extended product team. One of the reasons that interdependence drives organization designs is that a principle of design is to create structural units based on the degree of interdependence. A designer should maximize the amount of interdependence and coordination that takes place within an organizational unit and minimize interdependence and coordination across units.
Today the most competitive management practices—lean processes, speed to market, and real-time decision making enabled by big data—increase the interdependence among functions. Previously companies reduced interdependence by using sequential work flows across functions. Between each stop in the flow of work were buffers like in-process inventories and order backlogs. These sequential work flows, called “loosely coupled systems,” uncoupled the functions so that they could solve their issues independent of other functions. The loosely coupled systems reduced the amount of information processing and decision making so that the complexity of coordination fit within the business unit's capacity. However, loose coupling led to the barriers between functions that we refer to today as silos.
The competitive practices referred to above are creating tightly coupled systems that remove the buffers that uncoupled sequential flow across functions. And in their place, we need to create communication links across the interfaces between functions. We need to break down the silos. One of these practices began as lean manufacturing, such as in the Toyota production system. In lean manufacturing, all the buffers were seen as waste to be eliminated: they consumed resources and created no value for customers. From manufacturing, “lean” has progressed into services and now to the lean start-up (Ries, 2011).
The new product development process has been redesigned to reduce time to market. Previously the process was sequential. Engineers designed the product. They then gave the design to procurement, which contracted for the components and to operations, which designed the manufacturing process. Almost all manufacturers today use parallel processes called simultaneous engineering or concurrent design. The engineers still design the product, but they are joined by manufacturing engineers, quality engineers, and service engineers to jointly design a better, and more complete product, faster.
A third practice for speeding up decisions is the need to decide and act in real time as events unfold in social media. Nestlé has a digital acceleration team to constantly monitor social media conversations about its brands and categories, and then engage consumers in conversations. The team is not composed just of social media experts. It includes many functions like brand managers, consumer insights, legal, customer account managers, agency personnel, and food scientists if needed. The purpose is to act quickly on bad news before an incident goes viral. The digital acceleration team is a good example of a reciprocally interdependent group of functions.
All of these practices increase the speed of decision making and the amount of interdependence across functions. Usually to implement these practices, cross-functional teams are needed to short-circuit the hierarchy. The organizations take on a strong lateral or horizontal orientation. Many refer to these designs as networks. I address these in chapters 3 and 4.
Dynamics of Change
The predictability of an organization's work has been identified as a shaper of designs for a long time. March and Simon (1958) identified programmed decision making as the appropriate process for predictable tasks and unprogrammed decision making for unpredictable work. Burns and Stalker's (1961) case studies revealed two types of organizations that they called mechanistic and organic, with the appropriate organization depending on the work to be performed. If the work was predictable, a hierarchy or mechanistic form was appropriate. If it was unpredictable, an organic form was appropriate. By organic, the authors meant lots of lateral forms to foster coordination. The work of Lawrence and Lorsch (1967) was the most revealing. (Their results are shown in table 1.1.) They compared companies in the plastics, food, and container businesses and measured the amount of revenue in each company that came from new products introduced in the previous five years. This variable was a proxy for predictability of the work. Revenue due to new products varied from zero for containers (can companies) to 15 percent for food to 35 percent for plastics (packaging).
Table 1.1 Matching Strategy and Organization
This work was performed by functional organizations. The container companies were able to achieve cross-functional coordination with only voluntary or informal personal contacts across the hierarchy. These companies had the most predictable work to perform. Cans were a commodity, and the focus was on operational excellence. The food companies faced moderate amounts of unpredictability associated with 15 percent of their revenue coming from new products. The impact of more unpredictable work can be seen by the number of additional resources that were invested in cross-functional coordination. In addition to the hierarchy and informal contacts, the food companies employed integrators (product managers) and formal groups (cross-functional product teams). In addition to the managers in the functional hierarchy, the food companies used 17 percent more managers for coordination.
The results are even more striking with the plastics companies. These companies compete with new products and continually face new and unpredictable tasks. These companies employ integrating departments (product management departments) and formal groups at three levels (cross-functional product teams). They employ 22 percent more integrators to coordinate all of this cross-functional, new product coordination. So the effect of unpredictability on interdependent work flows is dramatic. When companies are designing, making, and launching new products, the effect of unanticipated issues causes them to make and remake decisions repeatedly. They must process information from all of the interdependent functional groups, which requires an organization designed specifically to execute a new product strategy.
The effect of unpredictable work is much less dramatic when the work is independent. A law firm may work on uncertain cases for different clients. Each case has a team working it, and each case is independent of the others. There is minimal pooled interdependence and minimal need for continuous decision making and information processing across the case teams. The law firm can function with a much less complex organization. So the design challenges come from the extreme values of the shapers of organization design. That is, the challenge is to design an organization that is providing a variety of products and services through an interdependent group of functions when change is rapid and unpredictable. But most companies have been following strategies that push us to the extremes of these design-shaping factors. These companies need the accumulating design knowledge to create the high-performing organizations they desire.
Summary
This book will follow a school of thought called strategic organization design. That is, we start with a company's or a unit's strategy and design the organization from the top down. This school of organization design follows from Chandler's work, Strategy and Structure. His model states that every twenty or thirty years, companies add a new strategic dimension to their portfolio. Not all companies follow this stage-wise progression, but many publicly traded companies do in order to pursue growth. In so doing, they adopt ever more complex strategies. This complexity is behind the rise of organization design to guide the choice of organizations with which to compete in global markets.
If growth creates complex strategies, it is diversity or variety, interdependence, and change that shape organizations. As a framework for the book, I describe the trajectory of a typical company as it evolves through the stages of increasing diversity and increasing complexity. To the extent possible, I provide examples of actual companies to illustrate the points being discussed. But before beginning the chapter on the single-business strategy and functional organization, I define what I mean by organization and use the Star Model for this purpose. I also identify the design factors that leaders can use to create the organizations that they desire.
Chapter 2
The Star Model
Strategic organization design began with Alfred Chandler's Strategy and Structure (1962). Since that time, the topic has been expanded beyond structure to include several other factors: information and decision processes, reward systems, and people practices that make up the human resources function. Collectively they define what we mean by organization. In this chapter, I place those factors into the Star Model and describe their interactions. In so doing, I define what we mean by organization design.
The Origins of the Star Model
I created the Star Model on the basis of my experiences in trying to apply information and decision processes. My initial training was in the areas of production and inventory control. In 1967 and 1968, my colleagues and I had built a number of models that could make decisions about scheduling and inventory levels in a supply chain. We were quite proud of our models: our simulations showed that they would lead to some significant performance improvements in a number of supply chain applications. However, as we tried to apply the models to client problems, we always had a great deal of difficulty in convincing managers to use these models.
As we tried to uncover the problem, we discovered that the performance of managers in the supply chain was measured on the basis of accounting costs and standard costs. This was a problem because we always used economic costs in our models. We used variable and marginal costs, so the decisions that came from the models were different from what the managers would normally have decided to do. And since they were measured on the basis of standard costs and rewarded with bonuses on the basis of their decisions, they were not going to follow our models. In fact, they thought that our models would lead them to make incorrect decisions according to their metrics. In order to implement the kinds of information and decision models that we were creating, we would have to modify performance measurement and the reward systems under which the managers were going to operate.
The second issue we ran into was that we were also going to have to modify the structure of the supply chain. Decisions at the time were made in the factories at the level of the plant or the department. In order to profit from the information decision models that we were creating, the company would need to centralize those decisions so that they applied across its entire supply chain. The managers in the various companies with whom we worked found that they would encounter a lot of resistance from the current occupants of the roles in the structure, and so that became difficult.
The third issue was that if they implemented this model, the company would have to hire some new people—people with quantitative skills who could operate the model and reach the kinds of decisions that would be optimal for running the supply chain.
In the end, what we found was that if we wanted to make a substantial change in the information and decision processes of a company, we also had to modify its performance measurement and reward system, the structure, and the skill sets and mind-sets of the people. As we realized that we needed to change all of these factors in a way that reinforced one another, we learned to take a holistic or systemic view of an organization. We saw that we could not change organizations piecemeal. It is necessary to see the organization as a complex social system. The Star Model was the framework that allowed us to take a systemic view.
So this was the origin of the Star Model, which is shown in figure 2.1. It gives a holistic way of thinking about an organization as consisting of a structure, information decision processes, reward systems, and people. And this is the model that leaders and general managers need to refer to when they're considering changing their organization.
Figure 2.1 The Star Model
Some other models of organization are similar to the Star Model, including the McKinsey 7-S model. Today, in fact, almost every consulting firm has a model that looks something like the Star Model or McKinsey 7-S model. They all have a common set of messages.
First, these models say that different strategies lead to different structures for implementing them. That seems obvious, but in the heat of debate concerning organization structures, organization often follows fashion. For example, in an organization that consisted of four relatively autonomous business units, the conversation started at the corporate level about whether to centralize the supply chain. The debate started when several competitors had centralized their supply chain and another competitor was considering whether to do so. The fact that the competitors had changed their structure and others were going to change theirs seemed to be the compelling argument. The idea was that this was the trend in the industry: centralization was what everyone else was doing, and the company was going to be falling behind if it didn't get on the bandwagon soon. “This is the trend,” they said. “We need to join it.” The argument that the company should centralize the supply chain seemed to be carrying the day.
It was then that the conversation shifted: the leaders looked at the company's strategy and asked whether centralizing the supply chain would lead to an advantage or whether the company then would simply be a poor imitation of its competitors. Instead, the leadership team confirmed that the company's key strategy revolved around new product development. It was quite effective at taking new technology and getting it to the market ahead of its competitors and thus achieving a first-mover advantage. As a result, its supply chain was not centralized. However, some aspects of the supply chain were centralized—for example, the choice of some of the trucking companies that it used. Current practice involved over one hundred trucking companies, so some benefits were attained, but the company maintained its autonomous business unit structure. More recently, some of its competitors have been licensing technology from it. So different strategies mean different organizations. The lesson is that you start with the strategy and design the organization to implement the chosen direction.
The second point is that organization is more than just structure, yet frequently, leaders make changes that are structure only. They thus fail to make the compensating reinforcing choices around the kinds of people they need, the kinds of performance measurements that would be introduced, and the types of information and decision processes that would work across the structure. They are making the same mistake as my colleagues and I did some forty-five years ago when we were implementing new analytical models.
If companies use a matrix organization, they frequently spend inordinate amounts of time arguing over solid lines and dotted lines of authority. I will address this later when I consider matrix organizations, but there's very little value in having a debate about dotted and solid lines of authority. The time is better spent defining roles and responsibilities, investing in the planning and budgeting processes, and finding individuals who work effectively in matrix organizations. Thus, it is better to take a holistic view and design the whole organization than focus solely on the structure piece.
And finally, the third feature of the Star Model is that an effective organization is one that has all of these factors in alignment: they fit together and reinforce one another, and the people in the organization get a consistent message about the appropriate kinds of behavior. When the factors are not aligned, frictions develop, people are confused about the direction, and time and energy are wasted on unnecessary conflicts. So no matter which model is used, these are the three design principles to follow.
We are often asked why we chose this particular set of factors to include in the Star Model. There are basically two reasons. The first is that these factors are directly controllable by leadership teams. Leaders can decide on the structure, the processes they use to make decisions, the people they're going to recruit, and so on. And second, these are the factors that have an impact on people's behavior. If you measure and reward particular kinds of behavior, you're more likely to receive those behaviors. You're more likely to get cooperative kinds of behavior if you hire people who are naturally collaborative, and so forth.
The fact that culture is not one of the elements of the Star Model is frequently questioned, and the reason is that leaders cannot directly control the culture. They can change it, as we will see, but they do so by making changes to the four factors I've described. If the strategy is to become more customer-centric, the leaders choose to organize by customer segments, accentuate the customer relationship management process, reward people on the basis of customer satisfaction and customer retention, and hire people who are relationship oriented as opposed to transaction oriented. If the leaders make all those decisions, they're most likely to generate the kind of behavior that then leads to a culture of customer-centricity. The balance of this chapter describes each of the factors of the Star Model in more detail.
Strategy
Strategy is the direction in which the company is going to grow. It is set so that people in the organization know how they should be guiding their own behavior. Strategy is also important to determine and make choices. That is, the organization needs to decide what it's going to do and what it's not going to do because it has limited resources. The scarcer the resources, the more clearly defined the strategy needs to be. As a matter of fact, the only reason companies need a strategy is that they have very limited resources. Companies face an enormous amount of opportunity but limited resources. Therefore, each one must decide what it is going to do, and do well, and what it is not going to do. These choices then guide decisions about organization structure, rewards, processes, and people practices.
The Monitor Group has developed a framework for guiding the strategy of a business unit, a region, a function, and even the entire enterprise. Strategy consists of three pieces: what to do, where to play, and how to win. What to do refers to goals and objectives. As I said in chapter 1, all publicly traded organizations pursue growth as one of their goals in order to keep the stock price advancing. Other goals could be, for example, market share or, for customer-centric companies, customer share or a specific return on investment. These are some of the choices around goals and objectives for both short-term and long-term decisions. Most organizations are fairly effective at making what to do kinds of strategic choices.
The second element, where to play, is literally about the question, “Where in the world are we going to be present and do business?” There is a choice of countries in which to be present and also a choice of products. What will be the portfolio of products that we offer? Which markets are we going to address, and where in that market will we compete? Will we compete at the high end, the low end, or somewhere in between? Where along the value chain will we conduct business? Where will we outsource and buy services and products from other people? So for each type of industry, there are where to play kinds of choices in terms of segments and microsegments, products, channels, countries, and so on.
Companies continually add dimensions to their strategy, and therefore their organization. Initially they compete within their home country and then expand into a host country. They start in their core business and then add different products, customer segments, and so forth. The where to play decision is made continuously over time as the organization seeks out its growth objectives.
The third strategic element, how to win, is all about competitive advantage: What is our recipe for success? What's our formula to compete? This is a harder decision yet an important one, and it has a lot to do with the distribution of power in the organization.
Some companies are product-centric. Pharmaceutical companies, for example, focus on discovering, patenting, and introducing blockbuster drugs. The blockbuster strategy is a product-centric kind of strategy. Pharma companies would achieve a patentable position for some number of years, and that would give them an advantage. Today these companies are finding that that strategy is more difficult and are now becoming more customer-centric—that is, they try to address the health outcome needs of a population. In Australia, the government has given some companies specific populations to target, along with a fixed amount of money. In this case, pharmaceutical companies look at providing not just drugs but health information, hot lines, support groups, and other elements in the effort to become more customer-centric for a particular population.
Procter & Gamble has always been a good example of getting advantage through quite favorable views of its brands like Tide and Pampers. But it also is able to maintain these brands by having greater insights into why consumers buy and behave the way they do. Citibank has achieved a competitive advantage by being located in more than one hundred countries. By taking deposits and making loans in local currencies, it allows companies that are its clients to avoid currency risks. The closest bank to Citibank is the Hongkong and Shanghai Banking Corporation (HSBC), which is present in fifty-six countries. Citi clearly has an almost unattainable advantage by its presence in so many countries. IBM has pursued the solutions and “Smarter Planet” types of offerings based on its in-depth customer knowledge and an ability to integrate hardware, software, and services around a customer's problems or needs.
It's also important to know how long a competitive advantage will last. All advantages are temporary, but they last for different time periods. It's safe to say that most industries are now seeing increasingly shorter-lived advantages. In fact, experts recommend that companies work continually on their next advantage rather than try to sustain a current one. It's also important to know how long a competitive advantage is likely to last, because that is how long the current organization will last. In fast-moving, high-rate-of-change industries, the organization needs to be capable of moving from one advantage to another and concurrently of moving from one organization to another.
Structure
The structure of an organization is about the distribution of power and authority across a hierarchy. All organizations that we know of have hierarchical forms. In this section, I describe the forms that that hierarchy can take: the functional organization, product or business unit organization, customer business unit, channel organization, geographical organization, hybrid structures, and matrix organization. Then we look at the other dimensions of structure, such as the distribution of power (both horizontal and vertical), the division of labor, and the shape of the organization. We start with hierarchy and then move to the other forms in which the hierarchy can be configured.
Hierarchy of Authority
Today there are discussions of choices between networks and hierarchies as a form of organization. In fact, a hierarchy is a network—a particular form of network, so it's best to think of hierarchies and networks. It's difficult to find an organization of any size that has existed over any length of time that is not a hierarchy. The reason is that for large numbers of people to act in an organized way, it's necessary to create some kind of division of labor. That is, people must simultaneously sell the products or services, while other people are producing and delivering those products and services. And at the same time, other groups of people are designing the next generation of services and products. Still other people are recording the transactions and receiving funding from sales of those products and services. Another group is looking for funds to grow the enterprise. And so on. There is a division of labor of a large number of people whose behavior needs to be integrated.
This large number of people cannot continually communicate among themselves and decide on what they're going to do. Instead, we select a few people and place them in a hierarchy of authority. They decide what directions other groups will take, what the prices should be, what the schedules should be, and so forth. A hierarchy arises because organizations do not have the information-processing and decision-making capabilities to get a consensus among a large group of people. A consensus is particularly difficult when the people are really quite talented and have minds of their own. It's even more complicated when they're facing uncertain futures with limited resources and high stakes.
The function of a hierarchy is thus twofold. First, decisions are made in a hierarchy in order to coordinate the behavior of a large number of people who cannot otherwise make timely decisions among themselves. Second, it is a path of escalation in order to resolve disputes among people about the direction of the enterprise. And the likelihood of disputes is high when there are strong people, high stakes, high future uncertainty, and limited resources. For these reasons, it is difficult to find a large, ongoing institution that is not a hierarchy.
One example is the US court system. The population of the United States would still be arguing over who won the 2000 election, Bush or Gore, without the Supreme Court, which debated the issue and then voted five to four. The justices chose Bush, and the country went about implementing that decision. Why did half of the US population decide to go along with this, even though they disagreed?
The reason is that the US Supreme Court has legitimate power that we refer to as “authority.” It is the consent of the governed. That is, people eventually comply with a decision made by a legitimate hierarchy of authority, even if they disagree with the decision. And it is this dispute resolution power in a hierarchy of authority that allows collective action among a large number of people. Authority therefore enables collective action to take place in an integrated manner. Alternately, there is no hierarchy for fiscal policy in the United States. As a result, there has not been a budget for several years. Instead, we have sequestration and gridlock, which no one wants.
The lesson from the US legal system is that there is a hierarchy of authority: unpopular decisions get made, and everyone moves on. An important feature to note is that that it isn't always an individual who is at the top of the hierarchy. It can be three people, as in an appeals court, or it can be the Supreme Court of nine people. The decision process itself takes place within a hierarchy so that a decision can be made and action can take place within reasonable time frames.
