Strategy First… Then Structure by Mark Rhodes

The historian Alfred Chandler of Harvard Business School wrote a seminal book published in 1977 on the history of strategic decision making at the highest levels of Corporate America , including DuPont, General Motors, Standard Oil and Sears Roebuck.  The book was called The Visible Hand:  The Managerial Revolution in American Business.  In this work Chandler proclaimed a maxim for the ages that has been followed as doctrine by strategists and consultants alike ever since.  The maxim:

“Structure follows Strategy.”

That is to say, all aspects of an organization’s structure, from the creation of divisions and departments to the designation of reporting relationships, should be made while keeping the organization’s strategic intent in mind.

Strategy, of course, lines up the arenas and markets in which a company will compete, proclaims a targeted customer base, and asserts the matters by which the company will seek to differentiate itself.  Chandler described how the successful progress of mid-twentieth century General Motors can be attributed to the strategic foresight of Alfred P. Sloan, who laid out the famous divisions of GM:  Chevrolet, Pontiac, Oldsmobile Buick, Cadillac – listed here in order of pricing segment and lined up with market segments --  so that each division could seek to please an intended customer segment. 

This is structure following strategy. Chandler showed that the need to reorganize --  or to “restructure” --  is triggered by a strategic shift driven by new technologies or market changes.

The way that you organize your company or organization to optimize the pursuit of strategic objectives is an important part of organizational design.  Other design elements, such as hiring and personnel development practices, communication and decision-making systems, reward, recognition and renewal systems, all must be aligned around the chosen structure, but first you must decide upon the optimal structure for attaining your strategic objectives.

When considering a change in organizational structure, keep in mind the following criteria for a good structure:

• Aligns the organization to best follow strategic direction
• Allows for clearly defined roles and responsibilities
• Clarifies who makes what decisions.
• Enables clear accountability.
• Minimizes handoffs that affect the customer experience.  Minimizes the customer “runaround.”
• Minimizes handoffs that create confusion over who is responsible for what outcomes.
• Pulls together the people who most need to work closely with each other.
• Allows information to flow unrestricted to those who need it.
• Creates manageable spans of control.
• Is augmented by informal channels of cross boundary communication.

Generally, there are five ways to structure a company or corporation:  Organize by Function, Product, Customer Segment, Business Process, or Matrix.  Here are the pros and cons of each:

Functional Structure (e.g. Operations, HR, Finance, Marketing Departments):

Pro:

• People with a common profession work together so standards of performance are well understood
• People in a unit “talk the same language”
• Easy to maintain stability

Con: 

• Conflicts arise between organizations/departments since priorities and objectives often conflict
• Decision making must be done at the top, where a cross-functional team sits together at the same table

 Organizing around Product Lines or Programs

Pro:

• Strong identification with products
• High degree of coordination between functions
• Can allow rapid response to market changes affecting a class of product
• Employees can see big picture and relate to a common outcome
• Opportunity for employees to learn other functions
• Decisions can be made closest to those working on product, more bottom-up decision making

 Con: 

• Can be lack of coordination between product lines
• Functional or professional development can suffer as functional experts are isolated from each other
• Can be duplication of efforts across product groups.  R&D can be parochial, only focused on present clustering of products

 Organizing around Customers or Market Segments

Pro:

• Deeper understanding of customer needs.
• High coordination among functions aimed at meeting customer needs.
• More responsive to customers.  Greater flexibility within business units for purpose of adapting to needs of a particular customer segment.
• Team members see the big picture.
• Innovation is customer-driven.
• Can be more satisfying for workers, as mission of customer focus is clear. 
• Opportunity to learn new functional skills.

 Con: 

• Can be lack of coordination between business units.
• Functional or professional development can suffer as functional experts are isolated from each other.
• Can be duplication of efforts across product groups.  Team members cannot relate to disparate customer segments.

 Organizing as a Business Process (as championed by many experts on corporate “reengineering”)

Pro:

• Clarifies business outcomes at every stage of value delivery
• Organizes people in such a way that problems do not fall between the cracks or go unattended
• Enables people with a common language across the organization, making it easier to identify and reinforce accountability
• Facilitates cross-functional understanding of the business

 Con: 

• Can diminish focus on the customer unless customer-facing processes are truly prioritized
• Experts in functional areas such as Finance, HR, Marketing, etc. can be devalued and unheeded
• Can be duplication of efforts across process groups.

 Organizing as a Matrix (e.g. customer segment groups crossed in matrix form by functional, supporting departments.

Pro:

• Simultaneous focus on external and internal business requirements. Can lead to more integrated, holistic decision-making.
• Employees can be reminded of the needs of the whole business enterprise.
• Functional expertise can be directly and immediately applied to needs of program, product or customer issues.

Con: 

• Can lead to diffusion of accountability. 
• Can be difficult to locate cause of organizational issues.
• Can mean doing more with less people, and result in individual frustrations.
• Can lead to confusion among customers who wish for a single point of contact.
• Requires a very high level of competent lateral communication capability

Strategic Thinking and the Law of Nemesis

The Law of Nemesis is a useful concept for leaders, strategists and strategic planners. In a nutshell, the law states that if things are going well in your enterprises, you must be aware that Nemesis is lurking, since no successful effort goes unnoticed by competitors. Mark Rhodes of Strategy by Design explains the concept in this short clip of his teaching.

Click here to see Mark explain the law of Nemesis in a short YouTube video: The Law of Nemesis

Does it ever seem to you that just as prospects for your business begin to look brightest, someone will rise out of nowhere to pick off a valued client, or to introduce a product line that matches or trumps your own?  This dynamic is sometimes referred to as the Law of Nemesis: “Find a good thing and count on this: a nemesis will want to snatch it from you.  Nothing good is yours forever because others will always want a piece of it.”

Nemesis was the Greek goddess who meted out divine retribution for wrongdoing…  especially hubris.  If Nemesis believed that some mere mortal was having all the luck – or getting too much credit for things – she would find a way to smite the individual by sending bad luck and ill fortune in the direction of the offending person.  The Romans, too, believed that fate will eventually punish those who have gained unmerited advantage.

All of us, of course, have the notion from time to time that the luck always seems to fall the other way.  But whether these were matters of divine retribution or not, strategists know that one thing is certain:   Every positive situation in life and business bears the seeds of its own reversal.

Count on this:  Competitive advantages will always erode. Find a good corner for a gas station, draw some interest, and someone will open up another station across the street.  Work to craft a new offering of professional services, and copy cats come out of nowhere.  Design a nice blog or website, and find an exact duplicate a week later.  Without question, competitors learn how to imitate sources of competitive advantage.

To stave off the Nemesis, you must find sustainable advantages.  The strategist must slow the erosion of advantages, and continually seek new high ground representing future competitive advantage.  Moreover, the strategist must erect “barriers to entry” to protect present advantages.

Strategic planning must include plans for defending ground, for minimizing the work of Nemesis.  Companies can:

Continue to set up and defend barriers to entry in order to slow the entrance of new competitors and to stay a step ahead on the innovation curve.  This can mean locking in intellectual capital and proprietary procedures.  It can mean staying very close to existing customers and locking  in relationships by establishing mutual trust and dependencies.  It can mean making capital investments in improvements that competitors cannot match.

Another way to stave off Nemesis is through competitive intelligence gathering, so that you, as strategist, are aware of what the competition is up to and how competitors will likely react to your own initiatives.  Because so much information about competitors is now available over the internet and through public domain sources, many companies are empowering their entire work force in seeking information helpful in adapting to changes across the competitive landscape.

A simple way of thinking about this is that strategic decision-making is about putting your army onto the battlefield, your company into competitive space, armed with strategic advantage - a head start of sorts. Strategic advantage is essential.  Some say, as a matter of fact, "if you don't have advantage, don't compete."  Then, once you are in the game and have advantages in place, be aware the Nemesis is watching and that competitive advantages always erode.  Add the Law of Nemesis to your arsenal of thought as a strategic thinker, and enjoy success over the long term.

——————————————————————————— Mark Rhodes is a highly experienced organizational strategy and design consultant with Strategy By Design. You can reach him via email at markrho@mindspring.com.

A Key Strategic Choice: When to Outsource Work by Mark Rhodes

Nike makes shoes, right? Well, not exactly. Nike is a wonderful company with superb marketing capability. But Nike outsources the actual manufacturing process to someone else. So in that sense, Nike does not make shoes. Nike’s competitive work is the design and marketing of athletic shoes. Obviously, the company has succeeded for years at doing just that. Knowing when to outsource work and when to keep it in-house is a key to successful strategy. The underlying principle of business strategy is that you cannot excel at everything since resources are always finite and limited. Instead, you must make strategic choices. Key among these choices is a critical decision: which elements of work must be done by the company itself, and which elements should be outsourced? To make a sound decision of this sort, begin by identifying the work of the organization that is "mission critical." Mission critical work cannot be trusted in the hands of another organization.

As a start toward culling the mission critical work from work that can be outsourced to others, it is helpful to perform and assessment of all the work processes performed by your company and sort each into one of three categories. Once work is categorized, the organization can be aligned to properly support the requirements of each type of work. These three categories are:

Competitive or Strategic Work. This is mission critical work. It is the core competence of the organization. Strategic work is that which creates sustainable competitive advantage and distinctiveness. For example, Nike differentiates itself through its strategic marketing work (sending non-core work such as manufacturing overseas), while Apple excels at product design. Competitive Work is always performed and managed in-house.

Competitive Enabling Work. This work “leverages” the competitive work, or enables the competitive work. Companies that stake their reputation on the excellence of their personnel will often consider employee development and education to be Competitive Enabling work. As another example, while Wal-Mart's strategic differential and competitive work is considered operational excellence -- managing information and keeping stock ever present on its shelves – the company’s competitive enabling work is both the development and maintenance of their state of the art information technology (IT). If Competitive Enabling work is done better, the Competitive Work becomes more distinct in the eyes of stakeholders.

Business Essential Work. This work must be done to stay in business, but is work that customers don't really value. Even if done at a world-class level, business essential work does not create sustainable competitive advantage. Nonetheless, if done below industry standards, the outputs of business essential work can cause disadvantage and/or poor performance. Business Essential work includes “compliance” work which is performed to comply with governmental regulations or to mitigate legal risk to the organization. Designers of high performance organizations should heed this important guiding principle: Business Essential work, if left unabated, will consume the organization’s competitive work. That is, people can get so consumed by the busy work of the company that they put off and lose focus on the organization’s truly strategic endeavors.

It’s critical for leaders to understand that by categorizing work as Business Essential, it doesn’t mean that this work is not important to the organization. On the contrary, it is essential to the organization to stay in business. In fact, if Business Essential work is done below the industry standard, it can lead to disadvantage. At the same time, if leaders invest a lot to get this work above a level at parity with competitors, it will never lead to distinctiveness in the eyes of the customers.

Outsourcing selected business processes has become an important strategic option for companies wanting to maintain a focus on their strategically important or competitive work. Resourcing decisions should be dictated by the type of work and the nature of the individual skills and knowledge required to perform the work.

Work that is not categorized as competitive work is subject to consideration for outsourcing of one sort or another. To determine the best possible distribution of work, we use the following model

——————————————————————————— Mark Rhodes is a highly experienced organizational strategy and design consultant with Strategy By Design. You can reach him via email at markrho@mindspring.com..