Saturday, June 25, 2011

Structure before Strategy: A Counterintuitive Business Conundrum?

Ever since Alfred Chandler wrote his seminal work "Strategy and Structure: Chapters in the. History of the Industrial Enterprise" in 1962, it has been well established that structure follows strategy in organization development. Chandler examined the organization of E I du Pont de Nemours and Company, Standard Oil of New Jersey, General Motors and Sears, Roebuck and Co and found that managerial organization developed in response to the corporation's business strategy. Even in subsequent times, the logic behind the Chandler hypothesis has been as compelling as the evidence has, in fact been. Without a knowledge of what an organization would need to do achieve its goals (for example, whether to expand or consolidate, diversify or specialize, and so on) it would be counterproductive to establish an organizational structure. Every company that has successfully created new product lines or business units provides the proof for the validity of the hypothesis. Yet, in today's competitive world, which places a premium on speed and technology in business creation, there is perhaps a need to reexamine the hypothesis that strategy must necessarily precede structure in all cases.

Fundamental to such reexamination must be some definitional clarity. Many strategists and managements assume an aspiration to be a strategy. For example, becoming the largest wind power producer in the country could be an aspiration but can never be equated with a strategy. A strategy is one that analyses various environmental opportunities and risks as well as the company's strengths and weaknesses, identifies the goals for growth or consolidation, and develops a set of plans to achieve the goals. A strategy can be high level for a general appreciation but must be extremely detailed to achieve flawless execution. Similarly structure, though well understood, cannot be seen as an end in itself. Structure is not merely an organizational instrument to implement the strategy; it is actually a platform to attract and assemble the talent that can implement a strategy. A structure can, therefore, be defined as a core organizational nucleus to kick-start an activity or a detailed organizational hierarchy to run a huge operation.

The strategy matrix

Despite the great business complexity that has overwhelmed us, the essence of business remains simple at its core, in terms of a 2X2 matrix on product and market dimensions. Product, for this purpose, includes service as well. The strategy matrix is expressed in terms of existing products and existing markets (EPEM), existing products and new markets (EPNM), new products and existing markets (NPEM), and new products and new markets (NPNM). The role of the strategist is to identify the right strategy matrix for his organization and develop the right strategies for each chosen quadrant. The challenges of developing customized strategies vary across the four quadrants. The EPEM strategy may require a significant operational focus while the EPNM may require additional market knowledge, the NPEM new product knowledge and NPNM totally new knowledge on products and markets. Although such a strategy formulation activity is the responsibility of the strategy department, it would appear that consummate development of strategies for all quadrants other than EPEM would need exceptional knowledge beyond what is normally resident in a corporation.

For example, let us take the case of a manufacturer of thermal power equipment wanting to diversify geographically into new countries and also diversify into new products such as nuclear power plants. The knowledge basket required for detailing the strategies cannot be expected to be ordinarily available in the company. Even within an industry there is no assurance that product diversification can be accurately crafted by an existing skill set. It is not certain, as another example, that the strategist or other experts in a manufacturer of tablets in the pharmaceutical industry would have all the subject matter knowhow to detail a strategy to diversify into a totally new delivery technology such as inhalers. Most organizations tend to bridge the gap by resorting to consultancy arrangements to provide the pathway. Apart from the high costs associated with reputed consultants, organizations have discovered that an organic talent pool with prior expertise and experience is still necessary to refine and detail the strategy that is defined by the external consultants.

Structure before strategy

The strategy matrix leads us to the need for reviewing the “strategy precedes structure” hypothesis. If a corporation is clear about its goals as well as its strategy, the strategy may be deemed to have been laid out with internal expertise. If a corporation is unclear about the goals, let alone the strategy, there would be a need to resort to external help, usually in the form of of a high caliber consulting organization to conduct significant cross-industry analysis to identify the opportunity space. On the other hand, if the corporation is clear about the goals but unclear about the strategy and the underlying technology, there would be a need to bring on board subject matter experts who can quickly validate the goals and convert them into actionable strategies. Such corporations would need to create structures that can serve as base platforms to attract subject matter experts.

Creation of a structure ahead of the detailed strategy has significant merits in select situations of corporate growth or business reinvention. In emerging markets such as India particularly, growth opportunities abound in every sector. New products and services with a strong underlay of new technologies offer great scope for goal directed business. Many times, whenever the sectors are opened up there tends to be a significant level of competition with preemptive moves by different players. Speed of decision making and execution, and appropriateness of entry are vital for achieving success in such cases. The successful foray by large corporate groups into newly opened up areas like telecommunications, insurance, banking, retail, automobiles, oil & gas, and infrastructure in India, post-economic liberalization, has been reflective of opportunity-driven and goal-directed business entry. Typically, the groups have been able to realize their business aspirations by setting up early appropriate core structures.

Defining the structure

Many times, managers and leaders desist from taking any structural initiatives until a strategy is clearly in place with due approvals. Often, this could be of false comfort if the strategy is developed and approved with inadequate knowledge of subject matter. Creation of a structure to avoid such eventualities is aided if organizations view structure in a twin lens of minimalism and essential need. In NPNM segment, the structure could just be a one man cell or a small expert team to start with, brought in from the relevant sectors to provide a nucleus of ideas. However, soon the structure would morph into a new business or operational unit. In both EPNM and NPEM segments, the structure could be more elaborate and more hybrid, comprising external experts and internal specialists to combine the known and unknown. In these segments the structures tend to be larger from the beginning as the goals are in terms of leveraging existing products or markets to achieve new adjacencies, with a lower level of risk relatively.

Defining the right structure is contextual. In a NPNM goal, for example, a structure that gives due weight to both the product and market aspects would be necessary. The minimalist structure could, therefore, be as simple as comprising two experts while a larger structure may be mandated when the new product and new market canvas are large. In EPNM and NPEM segments, structures could be more elaborate, given the potential for early execution. Whichever be the segment, in the proposed paradigm structure and people (or organization and talent)e seen to be the same. This approach is found to be especially useful in educational institutions where new streams of education are woven around expert academicians rather than predefined structures. This leads us, as a follow-up, to the role of leaders as institutional knowledge structures.

Leaders as institutional structures

Leaders as much as they lead organizations also represent institutional structures of knowledge. Corporate groups following the NPNM opportunity in India have leveraged proven leaders as institutional knowledge structures. Such corporate groups have consistently leveraged retired senior bureaucrats or chiefs of public sector undertakings as the knowledge drivers for new businesses, especially in sectors such as oil, energy, and infrastructure segments, which were traditionally preserves of the State in India. In other market-facing segments, however, private sector leaders have uniquely filled the role. Reliance retail format was, for example, set by a private sector retail leader. Videocon benefited from structural leadership of a highly successful leader from the South Korean LG Electronics.

At another level, when corporations make major organizational policy shifts through appointment of top level business leaders, especially the chief executive officers, they are seeking to establish institutional knowledge structures as an instrument to drive a new wave of strategy and execution in the corporations. Extending the concept further, utilization of available organizational structures through breakthrough talent enables the paradigm of structure leading the strategy. As a corollary, when long established structures are dismantled or when longstanding leaders move out it would be tantamount to corporations losing institutional knowledge structures. Leadership thus represents an amalgam of structure, strategy and talent.

Synthesis of strategy and structure

Notwithstanding the several examples cited herein, structure in general would follow strategy, in most cases even in the current times. However, structure in this established paradigm refers to an elaborate organizational and hierarchy based structure aimed at the implementation of a detailed execution strategy. The counterintuitive paradigm of structure preceding the strategy presented here refers to specific cases of new business development, especially those that are opportunistic, and are pressured by considerations of speed and technology. In such cases, it would be impossible, and even incorrect to distinguish between strategy and structure or to sequence them in any order.

The 2X2 strategy matrix comprising product and market dimensions as described in this blog post presents a context for structure to precede strategy in certain strategic contexts. Structure in such cases is essentially an organizational platform to induct requisite knowledge, expertise and talent to carry out strategy formulation and execution in new domains that are beyond the grasp of current organizational framework. Structure in several such cases could be singular (as in the case of CEO appointments), minimalist or extensive (depending on the newness and sweep of the product-market combinations). In all cases, however, structure preceding strategy provides an opportunity to pursue new businesses where time and technology are of the essence.

Posted by Dr CB Rao on June 25, 2011

1 comment:

Narayanan said...

Winston Churchill famously remarked - A fanatic is one who can't change his mind and won't change the subject. As the author rightly observes, there is nothing fanatical about "strategy precedes structure"...horses for courses as they say. In the 1990's US Army War college coined the acronym VUCA - Volatile, Uncertain, Complex and Ambiguous....a combination of characteristics that is as relevant to business as it is to the military. In the VUCA world (as it is now referred to), one school of thought notably by Bob Johansen suggests that clarity on strategy (knowing where you are going) is vital, however how you get there has to be flexible. He goes on to suggest what is needed is Vision, Understanding, Clarity and Agility and therefore it would make sense to institute a structure and appropriate framework/governance as a precursor to a formal strategy in certain cases as highlighted in the article. However, it should be emphasized that the structure is a means to an end, not the end in itself. Leaders will need to be cognizant of the critical competencies required for successful execution of a "future" strategy in the "present" for seniority or past performance alone are unlikely to be predictors of long term success.