Playing To Win
Strategy and [Re]Organization
Last week I got asked about the need to reorganize in order to align structure with strategy. I get the question frequently, so I thought I would write my second Year II Playing to Win/Practitioner Insights (PTW/PI) piece on Strategy and [Re]Organization: Walls Don’t Disappear, They Just Move. You can find all previous PTW/PI here.
The Role of Organizational Structure
One could argue that there are many reasons for organizational structure, but at the absolute heart, focus is the driver. Think of a company with no structure, in which everybody just works for ‘the company.’ It can and does work in tiny companies — like a local C-store or laundromat — or maybe even a start-up. But the desire to produce focus is what drives an organization toward a formal structure in which some people focus on designing the product, other people focus on producing it, still other people on selling it, still other people on keeping track of the finances, etc. Or some people focusing on Product A, some on Product B, some on C, etc.
This structural focus accomplishes two primary things. It elevates skill enhancement. Personnel get down learning curves faster and farther if they can focus on one domain. And higher skill means higher productivity in the task in question. Also, it enables the concentration of resources/investments on a particular task/goal — e.g., get this product developed, ensure financial control, etc. Thus, the fundamental argument is that structure brings focus, which elevates skills and concentrates resources, which enhances productivity.
The Erection of Walls
Organizational structure inescapably brings another attribute to the company in addition to focus. It brings walls — you can call them boundaries, borders, or fences, but I like ‘walls.’ The instant you create structure — this is R&D, this is manufacturing, this is marketing, this is sales, this is finance — you erect walls within the confines of the company. For example, as an employee, you are in R&D or manufacturing. R&D reports up to a head of R&D who will focus on operating in a way that is consistent with the requirements of R&D, while the head of manufacturing will optimize to the requirements of manufacturing. Or you report to the head of Product Line A versus B. What was once seamless but unfocused is now focused and chopped up into domains with walls on all sides. It can’t be otherwise. The nature of the walls can vary but their existence cannot.
The Matrix Organizational Structure
The first dominant method of focusing companies that was nearly ubiquitous through the 1940s was focus by way of functional specialization. Each function (production, marketing, sales, finance, etc.) had a head, each of whom reported to the CEO. During the decades of the 1950s and 1960s, a transformation took place by which organizations became dominantly organized by product line with heads of the various product lines reporting to the CEO (and typically the functional heads reporting to the CEOs as well). (GM and Dupont were early movers on this front having abandoned functional structure for product line structures in the 1920s.) The rationale was again focus. In order to maximize the success of each product, there needed to be an executive with an organization dedicated to each product.
But that, of course, erected more walls across the organization. In addition to walls between functions, companies now had walls between products and functions, and between each product and every other product. However, the view — whether implicit or explicit — was that having a product line structure was better for the strategy of the company and as the management great management theorist Alfred Chandler said in 1962: structure follows strategy. If the consequence was more walls, so be it.
But this proliferation of walls was not without consequences. Large companies became increasingly concerned with how to manage the complex dynamics of running a product line structure plus their functions at the same time. What emerged in the 1970s was the notion of the matrix organization, which held that a company needed to think of two axes — product and function — which intersected at nodes across the company. (Though it became widespread in the 1970s, aerospace companies began experimenting with this change in the 1960s.) At each node, a functional manager and a product line manager needed to make decisions cooperatively.
That cooperative decision-making proved much harder to master than anticipated. And it became even more complicated in the 1980s and 1990s as the world’s largest companies globalized and added a third dimension — geography — to the matrix.
As a consequence of this challenge, one hears endless complaints that “my company adopted the matrix structure.” And many CEOs who fancy themselves as practical operators claim that they will “get rid of the matrix” and move to “single point accountability.” It is all wishful thinking. The minute a company decides to sell multiple product lines in multiple geographies, it has a matrix whether it admits or not. Of course, a company could turn itself into a pure holding company and set up each subsidiary as a single product, single geography functional organization and avoid having a matrix. But the pure holding company model has disappeared almost entirely, especially in countries with advanced capital markets, because there is no reason for a business to be part of a holding company that adds zero value to it.
So, if your company has consequential size, it will automatically have a matrix and the only question is how you operate the matrix. That, however, is still debated. A CEO client once fired me for having the temerity to tell him that he was fooling himself if he thought his reorganization was going to produce ‘single-point accountability’ in his company with dozens of product lines sold across one hundred geographies. And he was fired six months after firing me — a little karma, perhaps.
How to Think about Reorganization
If we go back to Chandler and structure following strategy, it is very plausible that a company should reorganize to better align with its strategy and/or reorganize to match a changed strategy. But it is really important to remember what structure does: it creates focus by erecting walls. You must remember both pieces — the focus and the walls. Imagine if your strategy is to utilize global scale in R&D to beat your competitors. And you note that your organization has R&D reporting to the (say) four regional general managers and that creates uncoordinated R&D that is inconsistent across the four regions. So, you think: “Ah, I could bring more focus to global R&D by reorganizing to have all R&D people/organizations report to the global head of R&D.” You observe the problem for focus created by the current walls, and you decide to eliminate the offending walls.
But you don’t eliminate walls by reorganizing. You simply change their location. In this case, you shift the existing wall from between regional R&D and global R&D to between regional general management and regional R&D. The principle echoes Newtonian conservation of energy: it is conservation of walls.
The consistent mistake I see made in reorganizing is in focusing on eliminating the problematic wall and not thinking at all about the wall you inadvertently create. It reminds me of 1986 economics Nobel Prize winner, James Buchanan’s view on public choice versus private choice. He observed that we often become disenchanted with the results of the choices customers and producers end up making in private markets. For example, we look with chagrin at the often-inadequate stock of affordable housing in cities that is produced by the private choices of real estate developers, landlords and renter. We focus on the problematic outcomes of these private choices — a ‘market failure.’ We then typically replace it with what he called a public choice model in which non-market participants make the choices — for example, government owned and/or subsidized housing and/or rent control. But we don’t ask the question: how will the choices be made in that public choice model, and will they actually produce a result that we like better? E.g., who will decide what to build and where and how to allocate subsidized housing? How will the bureaucrats in charge make choices that generate better outcomes?
In effect, Buchanan warned against focusing on the problematic wall that we want removed and not at all on the effect of the new wall that will automatically replace it.
Dealing Productively with Organizational Walls
If it is fantasy to think we can both generate productive focus and make organizational walls go away, then the key is to figure out how to deal productively with the walls that we inevitably create. That means, above all, being able to have productive conversations across walls. Unfortunately, a dominant motif in organizations is to throw things over walls — i.e., I did what I was supposed to do on my side of the wall, and I am pitching the resulting work over the wall for the people on the other side to do what they need to do on their side.
The key is for the managers at intersection points who share some jointness of responsibility to talk productively with one another in order to come up with the best joint decision for the company — not the best narrow decision for their side of the wall. That is why I believe that Integrative Thinking is one of the core skills of the modern company. It is the foundational skill for having a conversation about conflicting models and coming up with creative resolutions. And it exhibiting that skill is the only way to be a highly productive manager in the modern company.
It may sound as though I don’t care about organization structure. I do, but I rarely find reorganization to be a high-priority part or outcome of strategy. Sometimes reorganizing can help, but rarely as much as reorganizers think it will. Reorganization enthusiasts tend to focus on the harmful walls they believe they must remove and ignore the harmful places to which those walls end up moving. Because the flipside of the benefits of structuring for focus is the imposition of dividing walls within the organization, it is naïve to believe that one can get rid of a wall to increase focus. One can shift a wall to increase focus in one area at the cost of dividing in another.
For this reason, whenever someone proposes to you a reorganization to improve the functioning of the existing strategy or a newly created strategy, you should spend as much time understanding where the wall is going and what impact that will have as you do on appreciating how its removal from a given position will benefit the strategy.
Start by taking reorganization off the table and asking instead, how can we improve the quality of the conversations between managers at the organizational intersections that are critical to our strategy? Only if you can’t produce the result you desire without reorganization should you dive into a reorganizing effort. I predict that you will get more bang for the buck by sequencing your thinking in that order.