Organization structures are essential mechanisms for delivering strategic objectives. They are like the equipment shell or the chassis in (or on) which the rest of the hardware and software is integrated to develop a product that meets design objectives. That structure is an enabler for strategy is well researched and well validated. Alfred Chandler in his path-breaking work established that structure followed strategy. Yet, not much research is focused on the enabling and disabling capabilities of an organization structure, relative to its strategic objectives. Organization structure is an enabler to “house” qualified and experienced individuals to meet both strategic and governance requirements. It is also an enabler to fix accountability and responsibility. Rightly designed, therefore, it must provide competitive advantage to a firm.
Like structure, process is a key component of delivering strategic performance. In several ways, process is like the operating system of a computer. However, unlike the operating system of a computer, the processes are as varied as firms are. Even within a firm, processes can vary across businesses, functions, sites and geographies. Process follows structure because process prescribes how different parts of a structure “talk” to each other. The more efficient a process is the more effective a structure would be. In practice, however, organization structures, like equipment or houses, provide a base for talent but do not automatically enable complete deployment of talent while processes, like operating systems, require increasing complexity to achieve even minor differentiation in delivery. This blog post proposes that rather than the structure or process it is the level of structural and process impedance that determines a firm’s efficiency and effectiveness.
Impedance is the total resistance of electric equipment (a wire, for example, at the simplest level) to the flow of power. The lower the impedance the better would be the equipment efficiency. Electrical impedance depends on the geometry and material. A thin copper wire would be more resistant than a thick copper wire while an iron wire would be more resistant than a copper wire of the same thickness. The same principle applies to structural impedance too. If an organization structure is geometrically complex and if the individual parts are resistant to organization-wide change, structural impedance would be strong. Processes tend to get established to manage structural impedance. However, processes which are essentially aimed at information flow also suffer from process impedance. The flow of information also tends to be like flow of current in the electric wire. The mindsets of people determine the resistance level to information flow.
Conductance is the inverse of resistance. The greater the conductance of a material the lower will be the resistance. Interestingly, the flow of electrons in a material determines the levels of resistance and conductance. The principles of impedance are similar to principles of mechanical friction as well as hydraulics. The information flow, in particular, bears a similarity to pressure differential in flow of water from source to a destination, the pressure at later stage being lower than at source. The choice of materials and the geometry are important in design; so is the importance of additional accessories to achieve efficiency. For example, resistors and boosters are added in equipment and pipeline designs to overcome issues of resistance. The important point to note is that natural human elements as well as synthetic material elements display widely varying characteristics. It is necessary to choose options that meet design objectives.
Products, as we know, have design language. Organization structures and business processes also have their own design language. While a product’s design language is to appeal to customers in a differentiated manner, an organization’s design language is aimed at promoting internal efficiencies. The deployment of the right geometry in an organization design can lower the otherwise inevitable structural and process impedance in an organization. One of the best geometrical patterns in organization design is Rensis Likert’s Linking Pin Organization (LPO), which offers an elegant balance between vertical hierarchy and horizontal span, while ensuring absolute clarity on how chain of command and cross-functional links could work across an organization. There are several other organization design constructs and principles but few are as clear as the LPO is.
Clarity in organization design came to be affected over time as concepts of line and staff functions began to take root. The emergence of multi-business and multi-site global organization has led to several organization structures that sought to impose diversity on line-staff differentiation. Structural complexity has resulted in further efforts to impose additional structures to manage complexity. Firms adopting this route tend to be impacted, rather unknowingly, by the increased structural and process impedance caused by the complex organizational geometry. The increased fragmentation caused by such structures also has been inhibiting the ability of firms to develop leadership pipeline. The Strategic Business Unit (SBU) concept provides an ideal design solution to bring the simplicity of LPO structure to highly diversified businesses; the success of a diversified construction major such as L&T in India to find homegrown internal leadership succession is related to a combination of SBU and LPO structures.
While it is widely accepted that structure follows strategy in a generic sense, not many give attention to the need to let organization structure to follow business structure in a specific context. Strategic planning happens, in most organizations, every year to look at a five year perspective on a rolling basis. Many emerging businesses become mature businesses and mature businesses become declining businesses while green shoots of new businesses emerge in the strategic plan horizon. Mostly however, firms try to make do with only minor adjustments to organization structures that could hopefully accommodate strategic changes as much as possible rather than proactively reinvent organizational structures along with strategic shifts. The positive way is to make organization design an integral and concomitant part of the annual strategic planning process and make development of a new organization structure mandatory before any strategic investments are planned.
Structural planning should focus on creating independent but accountable organization structures for new strategies. Typically, today’s organizations should be created for tomorrow’s results. The costs of not being organizationally proactive could be immense. Tata Motors’ inability to make a sustainable growth path in the car market is attributed to its unwillingness to create an end to end discrete sales, marketing and dealership organization for passenger cars, distinct from that of its traditional commercial vehicles. Leading hospitality chains, from Hyatt and Hilton to Taj and ITC, are able to achieve complete market coverage by developing discrete hotel infrastructures and marketing organizations appropriate to each segment. These business strategy driven organization structures reduce structural and process impedance by design.
Managements, somewhat strangely, tend to prefer complexity rather than simplicity. Some managers find creation of new organization structures ahead of business development to be an avoidable expense. Some managers find it difficult to let go of career opportunities that could come along with additional responsibilities when an existing structure is burdened with additional scope. Some managers, of course, fail to appreciate the nexus between strategy and structure. The combined effect of these embedded behaviors is the creation of monolith firms that become unwieldy and complex. Enlightened managements, however, recognize that the costs of discrete organization structures are more than compensated by increased business efficiencies within each structure. The success of conglomerate business model is based on such realization.
The fear that individualization of organizational units promotes non-standardization or non-harmonization of enterprise processes is ill-founded. A linking pin organization that connects the leaders of individual organization structures into a conglomerate leadership group addresses most such concerns. Proactive organization design approach requires the choice of right heads for right structures and trust in their ability to lead accountably at SBU level and integrate responsibly at conglomerate level. Envisioning an organization of the future needs to be an integral component of leadership vision for new businesses, whether mono-product standalone businesses or multi-product conglomerate businesses. Understanding the physics and mechanics of organization structures and the role of structural and process impedances is a key component of successful organization design and development.
Posted by Dr CB Rao on June 28, 2014