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Opportunities for Action in Organization

A Survivor’s Guide to Organization Redesign

Survivors Guide Jan 03 1/6/03 5:00 PM

A Survivor’s Guide to Organization Redesign

Few people associate redesigning organizations withsurvival. But the fate of companies and their employ-ees can hinge on how a redesign is approached. Alltoo often, major organization redesigns create little, ifany, value. In many cases, they actually subtract value,frustrate managers, and lower employee morale.

For example, a major global company announcedsome time ago that a planned reorganization wouldlead to double-digit growth. The redesign was ambi-tious. Creating global business units would make itpossible to roll out products rapidly on a worldwidestage. Market development units would increase mar-ket responsiveness, and integrating back-office func-tions would lower costs. All laudable goals, but theresults were quite different: single-digit growth, a 30percent reduction in share price, confused decisionmaking, and high levels of frustration among thebest-performing employees.

How could a highly regarded and successful companyachieve such poor results?

• It assumed that the organization redesign alonewould spur growth. In fact, the problems the com-pany confronted were as much strategic as theywere organizational: category growth was slow,competition was increasing, and new productsproved to have limited differentiation.

• The redesign did not match the realities of thecompany’s business. Although the company didhave major global brands, 50 percent of its busi-


ness came from regional and local brands, makingglobal business units complex and awkward.

• The company assumed that structure would solveproblems with process. Because the same decisionscontinued to be made in essentially the same way,however, the structural changes did little to speedthe rollout of products.

• The redesign went too far too fast. Within a year,the company went from being a set of country-based units leveraging global brands to a set ofglobal brands trying to leverage country units.Undergoing such a drastic change that fast made it nearly impossible to redesign interactions andprocesses. The company did not have time to ad-dress such critical issues as how its global brandleaders would interact with country brand man-agers and who would set country priorities.

• The company didn’t get buy-in. The new designwas created in one month by a senior team fromthe corporate center. It was passed on to the rest ofthe organization for implementation without con-sulting managers and employees. Talented key ex-ecutives, such as country heads, found themselveswith dramatically reduced roles. Because they hadnot been involved in the redesign process and theirexpectations had not been managed appropriately,some of those executives quit.

So how does a company avoid such pitfalls and notjust survive an organization redesign but flourish inthe process?

Four building blocks will ensure successful results:identifying the right business issues, pinpointing the


right underlying obstacles, adopting the right designcharacteristics, and implementing change the rightway. (See Exhibit 1.)

Identify the Right Business Issues

Too often, executives despair midway through a re-design. What are we really trying to achieve with thisredesign, they ask, and why did we choose to do it this way? These executives have skipped the crucialfirst step in any redesign process: identifying the busi-ness issues and translating them into goals for theredesign.

Good design is based on good strategy—the questionsyou should be asking as you attempt to identify the

Rightissues

How do youcompete?

processesHow do youmake money?

How does yourorganizationdesign supportstrategy?

How does yourorganization worktoday?

Rightobstacles

Rightdesign

characteristicsRight

change

communicationflowresults

Where are theobstacles?

alignment ofgoals (company/employees)

resources

culture andvalues

An orientationfor interactions

Hybrid struc-tures andoverlays

Rewards forperformance

Open-sourceapproaches

A small butactive cor-porate center

An organizationbuilt to change

Organic rollout

Vision for action

Committedleadership

Rigorous programmanagement

Stakeholdersupport

Management ofemployees’emotions

Requiredcapabilitiesand culture

Alignedinfrastructure

•

•

•

•

•

•

Exhibit 1. Getting Organization Design Right

SOURCE: BCG analysis.


issues critical to your business are fundamentallystrategic. You need to understand how you want tocompete, where you make money, and what organiza-tional levers will enhance performance. You mightask, for example, How important is leveraging globalopportunities? How critical is cost to shareholdervalue? Where are the synergies across the businessportfolio? The questions raised by a functional re-design are equally strategic. When it comes toredesigning a sales force, for instance, you need tounderstand where customers get value from yourcompany, how they buy, and what opportunities arenot being fully exploited.

Consider what a leading industrial company uncov-ered when it went through a strategy review that wasdesigned to produce recommendations for organiza-tional change. The company was already one of theworld’s leading shareholder-value creators. The exist-ing business-unit organization was working well, andmanagement was reluctant to change it. However, op-portunities to improve performance within the unitsseemed to have hit a plateau. The strategy reviewidentified three opportunities to improve profits thatcut across business unit boundaries: cross-selling toexisting customers, increasing asset utilization by shar-ing production facilities, and lowering costs by moreeffectively transferring best practices. How could theopportunities be exploited while leaving as much aspossible of the existing, highly effective business-unitstructure in place?

The company concluded that so-called network over-lays, which wouldn’t require changes in the existingstructure, could address both cross-selling and best-practice transfers. Moreover, these overlays would beof mutual benefit to all business units. Sharing pro-duction facilities, by contrast, would be painful for


those units that would lose control over their ownproduction. Fortunately, the lion's share of the bene-fits could be achieved with just a few clearly identi-fied, critical interventions in the existing productionsystem. So rather than attempt a wholesale reform ofthe production organization to achieve these fewchanges, the company decided to mandate themfrom the center. It also resolved to give the center amore activist role in identifying and implementingnew critical synergy opportunities in the future.

Pinpoint the Right Underlying Obstacles

Once you have identified the right business issues,how do you know what it will take to address them?Rarely are these issues not already the objectives orresponsibilities of an individual or group. Commonly,however, there are obstacles to achieving solutions,and those obstacles must be pinpointed accurately toensure a redesign’s success. Sometimes the problemis a misalignment of goals and performance mea-sures—in effect, people do what is inspected, not whatis expected. It may be that there are insufficient re-sources or that the company’s values and culture aregetting in the way. Removing such barriers to perfor-mance requires a deep understanding of the organi-zational system as a whole. Unless you look at thecombined impact of incentives, culture, resource allo-cation, and information flows, recommendations willoften address symptoms instead of causes.

For example, we recently helped redesign the inter-face between sales and marketing teams at a majorpharmaceutical company. One symptom of the prob-lem confronted by the teams was that the marketingunits did not work well together, with the result thatthe sales forces they shared were being pulled in dif-


ferent directions. The initial thinking was that themarketing teams simply lacked an adequate commonmechanism for coordination. In fact, the underlyingproblem was worse: the teams had objectives and in-centives that encouraged them to compete with oneanother rather than cooperate. Until the companychanged those objectives and incentives, no coordina-tion mechanism would work. (See Exhibit 2.)

Adopt the Right Design Characteristics

There is no such thing as a “perfect” organizationdesign. But one thing is sure: some designs clearlydon’t work. The ones that do work manage the trade-offs inherent in any choice as well as the people af-fected by that choice. Successful designs also respondto three powerful forces driving today’s economy.First, the basic nature of business is evolving: indus-

Why don’t the marketingteams work together?

We are all structured differently.

Well, no, because we all sell throughthe same sales force, so I need tomaximize my share of voice.

So if you win, others lose?

Questions Marketing’s Answers

But when you do havetime?

But you sell to a commonset of customers?

So if you were structuredin the same way, youwould work together?

We don’t have time.

Our products are not related.

Yes. I’m interested in getting myproducts sold, even at the expenseof others.

Exhibit 2. Identifying Causes, Not Just Symptoms


A Case of Competition, Not Cooperation


tries are becoming increasingly global, companies aredepending more and more on information gatheringand exchange, and value chains are deconstructing atan accelerated pace. Second, the work force is evolv-ing—a development marked by more highly qualifiedstaff, increasing career mobility, and greater careerexpectations. Third, the route to competitive advan-tage has changed, hinging now on achieving greaterspeed, leveraging capabilities, and capturing scaleboth in corporate knowledge and in costs. (See Ex-hibit 3.)

These forces have produced a common set of charac-teristics that can guide any organization redesign.

An Orientation for Interactions. Structure is necessaryin any organization, but a redesign should focus evenmore on other aspects of how people work together—their objectives, their capabilities, their roles and re-sponsibilities in key processes, and the information

Sources of competitive advantage

An orientation for interactions

Hybrid structures and overlays

Rewards for performance

Open-source approaches

A small but active corporate center

An organization built to change

Industryevolution

Globalization

Informationtechnology

Deconstruction

Speed Capabilities Scaleknowledgecosts

Work forcetrends

Higherqualifications

Increasedcareer mobility

Greater careerexpectations

••

Exhibit 3. Organization Design Characteristics



flows and incentives that support them. Managersneed to work together not only within their own func-tion or business unit but also across organizationalboundaries with managers in other parts of the com-pany. Making this happen is more difficult and time-consuming—and provides less instant gratification—than redrawing lines and boxes on whiteboards. Butyou’re probably doing your organization considerabledamage if you’re simply changing structure whileneglecting other forces that drive employee behavior.

Hybrid Structures and Overlays. Forget about rigid,symmetrical structures. Companies require a variety offorms to reflect different business economics andorganizational realities. (See Exhibit 4.)

Salesforecasting

Orderforecasting

Productionplanning

Manufacturing

Continentalinventories

Local inven-tories anddistribution

Korea

Localknowledge,thereforelocalreporting

Germany

CanadaUnited States

Japan

GermanyFrance

Singapore

France

PhilippinesGermany

Mexico Thailand

IrelandFrance

Singapore

France

Germany

Canada Japan

GermanyFranceKorea

Fastdelivery,thereforelocalreporting

Regionaland globalproductionscale,thereforeregionalreporting

Key economicvalues

United States

United States

United States

United States


Exhibit 4. Economics and Organizational RealitiesOften Support a Supply Chain’s Hybrid Structure


Consider the global redesign of a supply chain. Thebusiness economics vary depending on the stage ofthe value chain—and so does the corresponding form. For example, in the supply chain represented in Exhibit 4, sales forecasting is best done with deeplocal knowledge as well as a strong commitment fromthe local organization, and thus should be relativelydecentralized. By contrast, production planning andmanufacturing, given their scale and reach, should beorganized more globally. And since speed to market isimportant, distribution should be organized locally.Business economics here require a hybrid structure:sales forecasting and local distribution should reportto country managers, whereas production shouldreport directly to heads of European, U.S., and Asianproduction.

Hybrid structures also help companies cope withorganizational realities that go beyond business eco-nomics. For instance, in the case of global companiesthat derive most of their sales from the United States,one organizational reality is that the heads of somebusiness units may need to have more control andpower than others. Some companies allow the headsof U.S. business units to report directly to the CEO,whereas the heads of European units report to theCEO through a regional manager. Such companiesdon’t appoint a regional manager for the UnitedStates out of concern that the role might become toopowerful. Conversely, allowing business unit heads out-side the United States to report directly to the CEOwould result in an unmanageable span of control.

In general, organizational structure tends to channeland constrain value creation. Structures exist to pro-vide formal authority for decisions and to arbitratewhen consensus cannot be reached. Those functionsare both necessary and valuable. But increasingly,


value creation is occurring across structural bound-aries through network overlays of one sort or another:functions work with other functions to improve themanagement of common processes; locations workwith other locations to share best practices; businessunits work with corporate centers to leverage knowl-edge and costs.

Companies are using a range of hybrid structures andnetwork overlays to achieve their goals. Some exam-ples include shared-service centers for otherwise in-dependent businesses, cross-customer sales teams,and best-practice-sharing groups. Whatever form suchhybrids take, their success depends on aligned goalsand incentives, a culture of cooperation, an effectiveinfrastructure for knowledge sharing, and clarityabout decision making.

Rewards for Performance. Individuals and businessunits need to be rewarded for performance, and mar-ket mechanisms are the ultimate measure of perfor-mance. Accordingly, many companies have success-fully adopted highly variable incentives for individualsthrough performance-based programs that extend fardown the corporate ladder. These programs are notconfined to such special cases as investment bankingand biotech start-ups. They also play an importantrole in the success of leaders in basic industries suchas steel minimills and fashion retailing, where shopfloor workers and sales personnel, respectively, re-ceive incentives.

To introduce performance incentives, you first haveto be able to measure performance. Companies withlarge business units that traditionally have been un-able to measure performance at a disaggregatedlevel—such as utilities, telecoms, and pharmaceuticalcompanies—are now creating smaller business units


and introducing transfer-pricing systems. Linked toprices in the outside market, such systems permitthese new business units to measure performancewhen supplying goods and services to one another.This is not a quick fix, however: great care is neededto make transfer-pricing systems work.

Open-Source Approaches. As corporate walls fall,companies are exploring novel, “open” approaches toorganization. Consider the example of customers andsuppliers becoming more integrated—a key to addingbusiness value. Such integration can take the form ofmore traditional supply-chain linkages between, say,inventory data and production. Conversely, once acompany is internally divided into many small busi-ness units, it is easy to redefine boundaries and out-source certain activities by spinning off some of thebusiness units and then buying back their services.Some companies are combining the benefits of bothcloser supplier links and outsourcing by building acommon industry supply-chain platform with com-petitors to lower costs. The joint purchasing anddesign exchange of the major automobile manufac-turers is one such successful effort.

In another type of open initiative, a major pharma-ceutical company has launched an innovative R&Dprogram on the Web. The effort is intended to speedup the solution of scientific problems by soliciting theinput of researchers from around the world. Severaldozen problems are posted on the program’s Website, with prizes of up to $100,000 for those who pro-duce solutions. A number of solutions have alreadybeen announced.

A Small but Active Corporate Center. In many compa-nies, the corporate center is drowning in “admin-


istrivia,” overseeing everything from tax, legal, andfinance functions to the synthesizing of business activ-ities. Many of these tasks would be better performedeither at the business unit level or in a shared-serviceoperation. The most effective centers are those withthe resources and capabilities to manage senior tal-ent, disseminate best practices, drive major changeefforts, and define and drive strategy.

An Organization Built to Change. Given all the evolu-tionary forces at play, change is now a constant—anda company has to institutionalize the capacity to re-make itself. Although much of the change effort ismanaged through existing business units, there oftenis a need for mechanisms that are linked to, but notpart of, the nuts-and-bolts structure that operates inthe here and now. This is especially true of the needto foster ideas that are critically important for futuregrowth but potentially disruptive to the existing busi-ness. Examples of change mechanisms include tem-porarily establishing incubators for hatching suchideas and making the task of directing long-termchange part of the core responsibilities of certain top executives.

Building for change doesn’t happen overnight orwithout costs. Typically, there is a period of trial anderror, of testing concepts and seeing how the newparts work together. A company may not have all the capabilities at first to do the job, but as it buildsthose capabilities, the changes can be refined. It mustbe prepared to make a large up-front investment inpeople, pilot programs, capability development, andtraining. And it must institute checks and balances,setting up structures and processes so that authorityand the status quo can be legitimately questioned.More radical approaches include insisting on the sep-


aration of the roles of chairman and CEO, deliber-ately duplicating R&D activities to create internalcompetition, and empowering internal-audit andbusiness-development functions to ensure a secondopinion on key quality and strategy issues.

Implement Change the Right Way

Successful organization redesigns—particularly thosewith the goal of dramatic, long-term change—tend tobe implemented more organically than mechanically.As noted, a test-and-learn mentality often prevails. Forexample, a global automotive company has pioneeredshared services in finance, human resources, andother support functions by first piloting the new orga-nization on a project basis. In stark contrast to thetroubled redesign of the global company described atthe outset of this article, the automotive company fos-tered broad buy-in. Indeed, it did not change its for-mal reporting lines until employees were confidentthat the new processes could deliver.

For a redesign effort to succeed, a company musthave a clear vision for action, committed leadership,and exacting project management. That is just foropeners. It also must rigorously manage its changeprogram to guarantee that key stakeholders are in-volved in and support the process, and it must moni-tor the emotional response of its employees. Thechange process must be addressed at the very outsetof the redesign—when the critical business issues arestarting to be identified. Waiting until the redesign isover is an enormous mistake: employees will alreadyhave made up their minds about the change, andtheir opinions will almost certainly be negative. Inthat case, the redesign effort may not survive. The


price of such a failure will be high, not only in finan-cial terms but, more important, in terms of the re-design’s impact on people.

Felix BarberD. Grant Freeland

David Brownell

Felix Barber is a senior vice president and director in theZürich office of The Boston Consulting Group and globalleader of the firm’s Organization practice. D. GrantFreeland is a vice president and director in BCG’s Bostonoffice and leader of the Organization practice in NorthAmerica. David Brownell is a senior vice president anddirector in the firm’s Melbourne office and leader of theOrganization practice in the Asia-Pacific region.

You may contact the authors by e-mail at:

[email protected]

[email protected]

[email protected]

© The Boston Consulting Group, Inc. 2003. All rights reserved.


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