Organization Design Part the Second

Agenda Reconfigurable organizations Designing around the customer Virtual organizations Bringing it all together – a design sequence

The Reconfigurable Organization Organizations have always been created to execute business strategies When advantages do not last long, neither do the organizations that execute them If change is constant, why not design an organization to be constantly and quickly changeable?

The Reconfigurable Organization Continually searching for new:  Segments, Categories, Technologies,  Channels, Customers, Solutions …is the key to stringing together a sequence of temporary advantages

Creating a reconfigurable organization Flexibility  Ability to quickly restructure along any dimension  Quickly align motivation and information  Bring in external partners Structure  One stable dimension (e.g. function)

Creating a reconfigurable organization Processes  Need accounting, data, and planning processes to be configurable  Transfer pricing between units  Common conflict resolution processes  Common new product development, strategic planning, and order fulfillment processes

Creating a reconfigurable organization People  Jobs will change and new skills will be learned  Need people with right personality, values, culture  “A reconfigurable person”  Continuous training

Creating a reconfigurable organization Rewards  Compensation systems can be the greatest barriers to change and flexibility  Pay plans need to be: approximate, flexible, simple, valid rather than:  Precise, complex, quantitative, nonaligned, out of date, and rigid

Creating a reconfigurable organization Rewards ctd.  Nimble reward systems have: Fewer grades Salary for skills not job title – the more you learn the more you earn –One time bonus, not fixed increment, skills degrade too Team-based or 360° appraisal

Costs of reconfigurability Direct costs  Cost of developing new systems Accounting Information systems Reward systems  Cost of training

Costs of reconfigurability Indirect costs  Conflict between units for resources More units, more conflict  Coordination and authority issues More meetings, who is in charge of what?  Loss of motivation? No ladder to climb, no sense of belonging, loss of status No fixed address

Organizing around the customer Globalization  Global companies want global suppliers  A ‘one stop shop’ with guaranteed service levels Customer relationships  Customers prefer fewer suppliers in long-term relationships Solutions  Customers want solutions or systems rather than standalone products  This may require extensive customization

Organizing around the customer E-Commerce  Web sites must be responsive to customer rather than organizational needs Buyer Power  Customers have more power therefore demand more service All this requires in-depth knowledge of customers and their needs

Capabilities Customer centric mindset  To find as many new and existing products to sell to a customer as possible  To create and customize solutions for a customer  To appear as one company to each customer  To develop a customer relationship  Contrasted with a product-centric company whose mission is to find as many uses and customers for each product as possible

Capabilities Lateral Networking Capability  Need for a customer network to cut across product, functional, and geographical lines  Could be formal or informal  Could include: Placing people in the customer’s organization, or Establishing a customer account coordinator  In matrix orgs, a VP or EVP is created to formally manage a customer or customer segment.

Customer-focused structures The front/back structure  Front End = customers and market  Back End = products and technologies

Telstra Customer Divisions  Sales, direct marketing, sales engineers  Corporate, Government, Business, Residential Product Management  Product marketing and product engineers  Basic access, DSL, prepaid cellphones Network Engineering  Technologies, platforms, infrastructure  Switching, transmission, access  Broadband, wireless, microwave

Issues Marketing should be in the front and back Roles and responsibilities should be clearly delineated  Front/back could both be profit centers Conflict management processes  What is the inherent conflict between front and back profit centers? Front and back linkages  Information must flow both ways. Why?

Evolution of a Customer Focus At Professional Service Firms  A few customer teams  More customer teams  Global accounts coordinator  Global accounts group  Global accounts units in countries  Customer profit centers An evolution not revolution

Creating a virtual corporation A virtual corporation  contracts out all activities except for those in which it is superior  A network of independent companies  Made possible by information technology Why?

Creating a virtual corporation Why useful?  In today’s market it is necessary to be best at everything not just one thing (!)  Enables a superior offering  Provides flexibility to change parts of network  Can be large (pooled purchasing power) and small (variety/flexibility)  Benetton buys material for 350 small firms of designers/manufacturers “scale without mass”

Creating a virtual corporation Disadvantages  Loss of proprietary knowledge  Loss of profit and value-added to others  Loss of control – more negotiation and conflict management  Risk of being dropped by the dominant partner

Designing the virtual corporation Partnering strategy  Company role Will you be a specialist or an integrator? Specialists must be best in world Integrator formulates the strategy and coordinates the work The integrator has the difficulty job of continually assessing what to do itself and what to outsource –At what point do you lose control of the network? Boeing. –At what point can you do something better? Amazon.

Designing the virtual corporation External Relationships  Processes to coordinate the activities performed by others Communication processes Joint decision making processes Commercial (legal) vehicle –Gives certain rights and responsibilities

Types of relations RelationshipStrength CoordinationDependenceValue capture Requiredon outside firm OwnershipStrong High Low High Equity Alliance Contract Market Weak Low High Low

Designing the virtual corporation Partner Selection  Understand the potential partner’s strategic intentions and values  Investigate their partnering history  Undertake experiments to build trust Small contract -> large contract Large contract -> Alliance Alliance -> Equity

Designing the virtual corporation Partnership structure  Alliances and joint ventures need to be structured One partner operates everything day-to-day –Other partner contributes capital and know-how –Operator role may be divided or change over life of project one partner does engineering, one does marketing Management is shared somehow –High potential for conflict Venture becomes autonomous of parents –Decisions are made within the venture

Designing the virtual corporation Supporting policies  Selection and development of people Who works in the joint venture and alliance? Biggest risk is loss of proprietary information –Training and policies are critical to prevent loss  Reward system Should one be rewarded for helping –one’s own company? –The joint venture project? –The partner? –If so, how?

Continuous organization design Organization design as a continuous process rather than a single event  The long range strategy provides the criteria for choosing the future organizational type  Design changes must be made to fix what is wrong today (consistent with the organization of the future)  Where do I start? Start with strategy and move clockwise…

Design Sequence Strategy -> Criteria Structure  What is the department type (key priority) Geography, functions, products? Defines vertical structure Key lateral processes Key people  Define roles and responsibilities

Design Sequence Information systems  Management will need information Performance measures and rewards  How will people be motivated Training and development  People will need skills to do their job Career paths  Grow the talent for current and future roles

Design Sequence What if strategy is not clear?  Set up processes (teams, task forces) to learn about future business opportunities  Processes are like software flexible and easily changed  If strategy is always in flux, the designer continuously uses processes  Departments are like homerooms as people move from team to team  Reconfigurable project teams are the essence of the flexible organization

How do I choose the right structure Diversity analysis – single or multiple?  Products, geographies, markets, technologies, knowledge/expertise, functions, workflows/processes Diversity is grounds for differentiation Must choose primary focus

How do I choose the right structure Economics  How important are economies of scale or expertise in a particular function? May call for a hybrid or front-back structure, or contracting out Repeat analysis  Choose lateral or matrix organization for next priority

Roles and Responsibilities Matrix of Decisions and Roles  Pricing  New product design  Capital investment Assign tasks to each role  Responsible  Approve  Consult  Inform  No formal role

American Heart Association Case Study  Was the first restructure a sound move?  What problems did it create?  As an org design consultant, what changes would you recommend to the existing structure?