Organizational Alignment

Large organizations are inherently complex. What drives the complexity? Growth. Companies grow by adding layers of management and expanding the labor force to capture additional markets and business opportunities. Over time, organizations get to the point of being so massive and bulky that it becomes difficult for them to perform as needed to remain competitive.

As a result, executives find themselves unable to advance on critical priorities. Many feel constrained by the slow ‘normal’ execution times. A standard response is to accept the notion that this is the way things are done. Another is to create task forces and special teams, which overload the organization even more. Not surprisingly, managers often feel overwhelmed with proliferating roles and responsibilities.

Things don’t have to be this way. What you have to ask yourself: Why are we here? And, how do we get from here to high organizational performance?

GROWTH AND ORGANIZATIONAL COMPLEXITY GO HAND IN HAND

Companies grow large and complex as a consequence of their success. Growth drives organizational complexity in two ways. Growth initiatives require additional market focus and dedicated resources, including sales, marketing, and other functions, or stand-alone units altogether. Growth initiatives also call for greater coordination across organizational units, including facilitating information sharing, knowledge transfer, and communication. As a result, the organization grows larger and more complex.

Here are some examples of growth initiatives and the associated complexity.

• Product line expansion. As the number of product lines increases, the need for coordination of the various products across all functions increases. As a result, the amount of coordination, scheduling, and administration gets larger with a wider product line.
• New market expansion. A strategy of new market expansion or diversification requires a greater focus on the market being served and a higher degree of autonomy and self-containment by the unit. Consequently, coordinating efforts becomes paramount.
• Micro-segmentation. Micro-segmentation involves splitting the market into finer segments for greater penetration. The structural impact is often the creation of small units to follow the market closely and take quick pro-active initiatives. Clearly, coordination activities get larger.
• Vertical integration. Vertical integration concerns the expansion of the business across the value chain, with or without more productive capacity. Naturally, this type of growth places an additional administrative burden on management to coordinate value chain activities across the organization.
• Merger integration. Upon merging, the cost objective usually calls for fusing organizations to reduce redundancies and derive cost synergies. Invariably and whether the synergies are realized or not, the organization grows in size and complexity.

THE TROUBLE WITH SIZE

Size invites counterproductive side effects. For one, large companies become slow to move as organizational inertia creeps in. They adopt a tendency to follow established patterns of behavior and continue using processes, values, and relationships that made them successful in the past. When met with environmental shifts, managers double down on their tried-and-tested ways of doing things, slowing things down and making the problem even worse. As a case in point, Kodak did not see digital photography as a disruptive technology, which ultimately destroyed its film-based business model.

Ineffective strategy implementation is another effect. When steering a new strategy, management’s message from the boardroom to the front line gets diluted along the way. Far geographical distance, tall hierarchies, multiple communications channels, poor information transmission, and slow decision-making act as brakes to execution as opposed to accelerators of change. For instance, GE’s complex organizational design kept CEO Jeff Immelt from executing a transformational strategy, causing a spectacular decline.¹

Finally, there is the inability of companies to take appropriate action when under attack. Large organizations often struggle to respond to “disruptive” change and at times go unprotected altogether. Nokia, Motorola, and Firestone are prime examples of market leaders that couldn’t respond effectively to impending market change and lost considerable value.

Two types of companies are particularly susceptible to bulk. The first type comprises highly matrixed organizations. They are large and complex because they require a market focus on multiple fronts. The second type includes firms in industries such as aerospace, electronics, physical distribution, chemicals, pharmaceuticals, and industrial goods, where the size of the fixed asset base confers economies of scale.

WHAT WINNING COMPANIES DO

The good news is that companies can do better. Leading firms can trim organizational bulk, overcome corporate inertia, and reduce bureaucratic complexity. Following are four key actions that managers can undertake to address this challenge.

• Reduce organizational layers and increase the span of control. Reducing management layers means getting closer to the front line to achieve faster responsiveness to changing customer needs. Moving to a flatter structure usually increases managers’ span of control.Given the relatively high level of managerial salaries, reducing the number of managers provides the opportunity to lower overhead cost. Depending on the number of layers cut and the increase in the span of control, indirect labor cost often can be trimmed anywhere from 10% to 25%.In 2015, when Wal-Mart simplified store operations by eliminating the zone manager role, one layer of in-store management, it cut six managers per store across 4,500 stores.²
• Improve decision effectiveness. Robust decision-making processes lead to better decisions, higher productivity, and improved company performance. A valuable tool is formal decision rights. It sets a means for managers to review, accept, consult, and influence decision making. The process makes decision-making explicit, reduces conflict of interest, advances decisions from one station to the next, and holds managers accountable.Another great tool involves data-driven decisions, which typically comes in the form of applied business intelligence. Manufacturers who adopt data-driven decision-making and delegate decisions to the front lines gain a +3% productivity improvement on average in each plant.³“High-velocity decision-making” is becoming increasingly necessary in the digital economy. Accordingly, in the 2017 letter to Amazon’s shareholders, Jeff Bezos set forth three principles for employees to follow: (1) don’t wait for all the information before acting, (2) agree to disagree, and (3) sometimes, an agreement isn’t possible.⁴
• Accelerate strategic processes. A few factors are driving a faster pace of change in the digital economy. They include globalization, technology, customer power, and commoditization. Companies need to speed their operations to keep pace with the rate of change in the market. Trying to speed up all functions and processes can be overwhelming, and often goes to produce internal conflict. Instead, it’s essential to focus one’s efforts on those parts of the business where speed has a significant impact on overall performance. For instance, General Motors adopted online CAD/CAM collaborative technology to speed up its design process, shortening the cycle time of car design by more than 30%.⁵
• Choose the right structure. From time to time, it becomes necessary for management to redesign the organizational structure of the company. This type of fix is needed when the company can no longer operate with its current design because its capacity to tolerate threat and exploit opportunities is impaired. Change here concerns realigning the organization with its environment.For example, Google reorganized into Alphabet Corporation in August 2015 to keep its lead as an innovator. The reorganization separated the company into independent businesses, including Google, cloud computing, photo sharing, satellites, life sciences, and many other companies far afield of its main internet products for greater market focus and faster speed. The new structure slimmed down Google allowing management to keep focus on the extraordinary opportunities within Google while allowing other businesses to prosper and remain nimble through strong leaders and independence.⁶

These measures confer tremendous benefits to a management team. A performing organization means feeling empowered to make actionable decisions, i.e., decisions that the firm can implement. Managers can take confidence that a new strategy will get executed within a rapid time frame. Even more broadly, they can feel assured in taking action, knowing that the organization will be ready to move.

Outlook

Is it time to change? Don’t wait for a crisis to reorganize. Several triggers can signal the need for action, including the following:

• High rate of market change
• Increased globalization
• Technology disruption
• New types of competitors
• Slow strategy execution

In today’s fast-cycle market environment, managers must rethink their organizational design. High-performance organizations are trim, nimble, and strategically aligned – a powerful source of competitive advantage.