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Do You Have a Well-Designed Organization? by Michael Goold and Andrew Campbell Reprint r0203k HBR Case Study r0203a The Coach Who Got Poached Idalene F. Kesner First Person r0203b The Trouble I’ve Seen David N. James Different Voice r0203c Everything I Know About Business I Learned from Monopoly Phil Orbanes The 2002 HBR List: Breakthrough Ideas r0203d for Today’s Business Agenda The Virtue Matrix: Calculating the Return r0203e on Corporate Responsibility Roger L. Martin The Hidden Challenge of Cross-Border Negotiations r0203f James K. Sebenius Making Sense of Corporate Venture Capital r0203g Henry W. Chesbrough The HBR Interview r0203h Edgar H. Schein: The Anxiety of Learning Diane L. Coutu Frontiers r0203j Predicting the Unpredictable Eric Bonabeau Tool Kit r0203k Do You Have a Well-Designed Organization? Michael Goold and Andrew Campbell March 2002 Copyright © 2002 by Harvard Business School Publishing Corporation. All rights reserved. 5 Creating a new organizational structure is one of the toughest – and most politically explosive – challenges that an executive faces. Here are nine tests to guide the way. Do You Have a Well-Designed Organization? by Michael Goold and Andrew Campbell To o l K i t or most companies, organiza- tion design is neither a science nor an art; it’s an oxymoron. Or- ganizational structures rarely result from systematic, methodical planning. Rather, they evolve over time, in fits and starts, shaped more by politics than by policies. The haphazard nature of the resulting structures is a source of con- stant frustration to senior executives. Strategic initiatives stall or go astray be- cause responsibilities are fragmented or unclear. Turf wars torpedo collabora- tion and knowledge sharing. Promising opportunities die for lack of managerial attention. Overly complex structures, such as matrix organizations, collapse because of lack of clarity about respon- sibilities. Most executives can sense when their organizations are not working well, but few know how to correct the situation. A comprehensive redesign is just too intimidating. For one thing, it’s im- mensely complicated, involving an end- less stream of trade-offs and variables. For another, it’s divisive, frequently dis- integrating into personality conflicts and power plays. So when organization de- sign problems arise, managers often fo- cus on the most glaring flaws and, in the process, make the overall structure even more unwieldy and even less strategic. What’s been lacking is a practical framework to guide executives through the complexities of organization design. That’s what we aim to provide in this article. We have reviewed the principles of good design, studied the structures of dozens of companies, large and small, and observed how executives go about making design decisions. We have en- capsulated our findings into nine tests of organization design, which can be used either to evaluate an existing struc- ture or to create a new one.The first four F ating initiatives (product launches, fac- tory automation). List these sources and initiatives, and check how the design addresses them. In a perfect world, you would have a single unit, or department, dedicated to each source and initiative. In reality, however, market advantages often require coordination across units. For instance, your source of advantage in one segment may be superior new- product development. To achieve that advantage, the business unit responsi- ble for the segment may need to collab- orate with a central research function. Or your advantage may be an economy of scale in manufacturing that requires coordinated production across numer- ous business units. Because collaboration across units is always more difficult to manage than collaboration within units, any source of advantage that requires cross-border links–particularly complex ones–should be a cause for concern. You’ll need to be confident that the design will enable the unit managers to give sufficient at- tention to maintaining the links. Some compromises may remain; they’ll be further analyzed by the good-design tests below. The Parenting Advantage Test. Does your design help the corporate parent add value to the organization? Just as parents play varying roles in families, corporate headquarters play varying roles in different companies. The focus of this test is to make sure the organizational design is tailored to sup- port these roles. First, explicitly define and list your company’s “parenting propositions”–the corporate-level activ- ities that provide real value to the over- all company. The propositions might involve narrow tasks–for example, man- aging government relations – or broad tests are what we call “fit” tests. They provide an initial screen for design alter- natives, revealing whether the struc- tures support the company’s strategy, talent pool, and situation. The next five are “good design” tests. They can help a company refine a prospective design by addressing potential problem areas, including the balance between empow- erment and control.This set of tests helps you establish the right amount of hier- archy, control, and process–enough for the design to work smoothly but not so much as to dampen initiative, flexibility, and networking. Many of the tests, and their underly- ing principles, will sound familiar. Their power stems not from their innovative- ness–we’re not trying to promote a new theory of business organization – but from their rigor and completeness. To- gether, they provide a company’s man- agement with a structured approach for analyzing all the key variables of or- ganizational success. Individual design decisions will still be difficult, often re- quiring subjective judgments and hard trade-offs, but using the framework will help make the debate more rational, shifting it away from issues of person- ality and toward issues of strategy and effectiveness. Getting the Fit Right The Market Advantage Test. Does your design direct sufficient manage- ment attention to your sources of competitive advantage in each market? In formulating a strategy, a company has to ask itself two fundamental ques- tions: Which markets should we com- pete in, and how will we gain an advan- tage over competitors in those markets? It may seem obvious that these ques- tions should also drive the company’s organization design, but many struc- tures end up impeding market strategy rather than furthering it. Some distrib- ute responsibilities in ways that distract the management team’s attention from target customers. Others create divisions among units that make it difficult for them to operate in ways that provide the company with a competitive edge. The penalties of such misalignments can be enormous. The first and most fundamental test of a design, therefore, is whether it fits your company’s market strategy. You should begin by defining your target market segments. The definitions will vary depending on which part of your organization is being evaluated. If GE, for example, were designing its overall corporate organization, it would use broad definitions such as “aircraft en- gines” or “broadcasting.” But if it were looking only at the design of its financial services unit, it would use much nar- rower definitions, probably combining particular service lines with particular geographic markets: “aircraft leasing in Europe,” for instance, or “receivables financing in Mexico.” There should be no dispute about the relevant market segments; if there is, you need to do some fresh strategy thinking before you proceed with the design effort. Next, determine whether the design directs enough attention to each market segment. Here’s our rule of thumb: If a single unit is dedicated to a single seg- ment, the segment is receiving suffi- cient attention. If no unit has respon- sibility for the segment, the design is fatally flawed and needs to be revamped. Often, the analysis is not so clear; a unit may have responsibility for a number of segments. (This is often the case with small, but rapidly growing, market seg- ments.) You will need to evaluate such situations carefully, making judgments about whether the division of responsi- bilities will allow sufficient attention to be focused on the segment. It’s also important to determine whether the design supports your key sources of advantage (speedy introduc- tion of products, for example, or low- cost manufacturing) and related oper- 6 harvard business review T O O L K I T • Do You Have a Well -Designed Organization? Michael Goold and Andrew Campbell are directors at the Ashridge Strategic Man- agement Centre in London. They are the authors of Designing Effective Organizations: How to Create Structured Networks (Jossey-Bass, 2002) and The Collaborative Enterprise: Why Links Between Business Units Often Fail and How to Make Them Work (Perseus, 1999) as well as several HBR articles. ❶ ❷ The People Test. Does your design reflect the strengths, weaknesses, and motivations of your people? When an organization doesn’t work right, executives are often quick to blame “people problems.” But that’s wrongheaded. If an organization is not suited to the skills and attitudes of its members, the problem lies with the de- sign, not the people. For this test, first look at your key players – the members of the top management team and other individuals deemed critical to the busi- ness. For each, ask whether the design provides the appropriate responsibili- ties and reporting relationships and wins their commitment. If, for example, your CEO is a marketing type and the design focuses her attention on perfor- mance management, you’ve got a prob- lem. If your CFO is a hands-on, detail- oriented guy and your design has the top finance manager in each business unit reporting to the unit head instead of to him, you’re setting yourself up for big conflicts. Now look at the pivotal jobs in the de- sign – the positions that will need to be staffed by highly talented people if the organization is to work well. Typically, these will include the heads of all key business units and the managers of all functions involved in critical cross-unit relationships. Do you have outstanding people to staff these jobs today? Do you have the career paths and development initiatives needed to create and retain new talent for tomorrow? If you had to find replacements outside, would you be able to attract and hire them? A de- sign that cannot be staffed with compe- tent managers should be abandoned. If you’re creating a new structure, you also need to look at the losers – the em- ployees who will forfeit status or power in the revamped organization. All re- designs create losers, and losers can turn cynical and resistant, becoming road- blocks to change. You need to make two difficult judgments. First, determine which of the losers are influential. Then decide how to deal with them – either buying their support through added compensation or neutralizing their in- fluence by changing their roles or letting them go. march 2002 7 Do You Have a Well -Designed Organization? • T O O L K I T coordination roles, such as maintaining strong research capabilities across all units. Or they might entail specific initia- tives, such as implementing a company- wide ERP system. (See the exhibit “How Parents Create Value.”) Next, determine whether the design gives sufficient attention to these value- adding tasks and initiatives. If, for exam- ple, one of the parent’s key roles is en- couraging knowledge sharing among a particular group of units, it’s important to ask whether there is a manager in the parent unit focused on that task. You’ll also need to look hard at the organiza- tional links among those units. If the units are located in different divisions, it may make sense to change the design so that they become members of the same division, making collaboration much easier.Sometimes, this test will highlight difficult trade-offs that need to be made. If one of the parenting propositions is to spur high-speed innovation, for instance, you will need to decide whether it makes more sense to centralize R&D in a cor- porate unit or disperse it in the business units, which are closer to the market. The parenting advantage test can help companies see more clearly the organizational implications of their strategies, as agriculture giant Cargill recently discovered. One of the most important parenting propositions of Cargill’s headquarters was encouraging a greater focus on broad customer solu- tions rather than on individual prod- ucts. When top management viewed the organization in this light, it saw that cer- tain fundamental changes were needed. Cargill created new, more market- focused business units, and it grouped them together into broad “platforms” with management teams that could pro- mote a coordinated approach to cus- tomer relationships and solutions. The Food Applications platform, for exam- ple, brought together all of Cargill’s businesses that sold products to food manufacturers; the businesses that dealt with farmers became the Farmgate plat- form. The exercise enabled Cargill to more clearly define its parenting prop- ositions and create an organization that supported them. How Parents Create Value To be effective, parent units need to think through the ways in which they can create value or add value to the rest of the organization. We call these sources of added value “parenting propositions,” and, in general, they fall into five categories: Select Propositions The parent unit creates value by acquiring units or people for less than they are worth or disposing of activities for more than they are worth. Build Propositions The parent unit helps units expand their size and scope of activity by, for example, helping with globalization or product extensions. Stretch Propositions The parent unit helps units improve costs, quality, or profitability by, for instance, setting stretch targets or providing benchmarks. Link Propositions The parent unit helps units work together in ways they would find difficult if left to themselves. For example, it might centralize activities or alter incentives