10 Organizing for Performance
coherent our principles, the fewer internal contradictions, and the better the organizational design.
This starting point is well known in management and organization theory, and is known asfit. Theorists, consultants and designers alike, use fit between external and internal environment – and between the different elements of that internal environment – as the dominant criterion for judging organizations. The famous quote by Sumantra Goshal and Christopher Bartlett (1999), ‘You cannot manage third generation strategies with second generation organizations and first generation managers’, is a typical example of a fit approach. It prescribes fit among strategy, organization and managerial behaviour. Fit approaches are also known as contingency theories: the optimal design must take the relevant contingencies into account.
A relevant organization theory has to answer two questions: (1) What are the most relevant elements in our framework? and (2) How do these elements ‘fit’? Our approach is summarized in Figure 10.1. We identify three critical domains: challenge, structure (or formal organization) and behaviour. Each domain interacts with the other two, and the relationship between any two elements is dependent on the third.
Challenge
Challenge is a very fruitful starting point in understanding organizations.
Challenge is understood as the set of expected outputs or results. The most important organizational challenges are of a strategic or competitive nature: trying to be cheap, operationally excellent, different, innovative, service-oriented, achieving a large reach or a large richness, etc. But not all challenges are of a strategic nature. One has to be organized to produce more efficiently, to serve clients and to meet deadlines. When this challenge is made explicit, concepts such as (strategic) objectives, performance targets and goals are used. A challenge, of course, can remain implicit. Management prescriptions, however, tend to impose clarification
Figure 10.1 Basic elements of organizational design
of challenges by installing ‘management by objectives’, ‘smart’ objectives and budgeting processes. EFQM and Balanced Scorecard models are endeavours to make challenges explicit.
Challenges can be chosen or imposed; they can be very local or all- encompassing (‘strategies’); they can be intuitively present in the company culture or the object of an elaborate strategic decision-making process;
they can be long-term or short-term.
Challenge is closely related to organizational design, which is largely determined by the expected output of the organization. It is clear that a chemical plant will be organized differently from a psychiatric institution or a university (although many colleagues maintain that the latter two might be rather similar). Challenge is closely related to the ‘primary task’, the raison d’êtreof the organization. A psychiatric institution is there to cure mentally ill people, a paper mill to produce paper, and a biscuit factory to produce and sell biscuits. When the primary task shifts, becomes ambiguous or when consensus on what it is is difficult to reach, it is almost impossible to get organized. When the main emphasis in the psychiatric institution shifts towards prevention, the institute might become a PR office, a governmental lobby or a publication house. Do armies fight for national glory, to destroy the enemy or is their primary task peacekeeping? Different answers will lead to different designs.
Each dramatic shift in challenge creates a shift in dominant design logic.
Until 1960, emphasis in challenge was on efficiency. Organizational designs reflected this challenge. The dominant design was a machine-like ideal:
clear job descriptions, narrow jobs, a strong hierarchy and bureaucratic rules. Over the next 30 years, organizations became market-orientedand tried to adapt to continually evolving markets. The dominant design reflected that shift: ‘Organize yourself in such a way that you can follow the market.’ Divisionalized structures and matrix forms became the norm.
Since the 1990s, the challenge has become innovation, adapting to new technologies and worldwide competition. The dominant design is now oriented towards change, flexibility and adaptability.
Challenge is closely related to the ‘dominant operational logic’ of the organization. Hospitals, nuclear power stations, theatres, fast-food restaurants and insurance companies all have a dominant operational logic. This could be defined as the ‘logical’ way processes take place.
Outsiders can guess what that dominant operational logic is, insiders know it or at least are disciplined to observe it. Real disasters (and very exceptionally, real breakthroughs) occur when the dominant logic is not respected: patients get sicker, power stations explode, performances are cancelled or the audience leaves in the middle of the play, the hamburger outlet has no fries, and the insurance company has no money to pay its liabilities. Dominant operational logic makes it clear that the freedom to organize is more or less restricted. The dominant operational logic is the result of years of experience, careful observation, early mistakes and collective memory. A radical change in operational logic is very rare and
constitutes a real ‘paradigm shift’. Typical examples are the shift towards non-inventory production systems (Kanban, Just-in-Time, etc.), Internet banking and self-service in the 1950s.
When the challenge becomes very focused and obvious to all parties involved, when room for interpretation has become very narrow (such as in crisis situations), the dominant logic becomes very clear. That is why crisis managers are not supposed to be familiar with the ‘classic’ dominant logic; instead, they are supposed to organize according to the ‘new’
(overcoming the crisis) dominant logic.
Structure
Structureis the formal way an organization divides up and coordinates its relevant elements. Designing organizational structures is deciding on differentiation and integration. The first question deals with differentiation: how shall we divide this organization into sub-units? This is a very important question because differentiation can lead to specialization and steep learning curves. The differentiation question seems to dominate practice: How shall we divide up our employees?
(What kind of organization do we need? Product-based? Matrix? Market- based? Functional?) The coordination question seems to dominate theory.
The problem of grouping We group the tens, hundreds or thousands of employees into work units. Robert Simons defines a work unit as a grouping of individuals who use a firm’s resources and are accountable for performance. Accountability defines the output that a work unit is expected to produce and the performance standards that it is expected to meet (Simons, 2000). This definition implies that the ‘grouping problem’ will become very cumbersome when individuals are not aware that they are
‘using the firm’s resources’ and when output and performance standards are difficult to define. Knowledge workers, artists, creators of all kinds very often do not use many of a firm’s resources! That, of course, makes it difficult to ‘organize’ hospitals, universities, law firms, or R&D departments (unless modern technology overshadows the individual star).
In many cases, ‘organizing’ simply means trying to convince the professional that he or she is using the firm’s resources! Although Simons explicitly mentions ‘a university history department’ as a work unit accountable for performance, we wish him luck in defining the output it is expected to produce and in reaching agreement on the performance standards. Is he going to count the number of students taking history classes and the number of pages professors and research assistants publish?
Although this is common practice in many universities, we wonder whether the best historians really care about all this? In the end, is not a great historian the one who defies the practices and standards?
Unfortunately, for all people wanting to ‘organize for results’, modern organizations are more and more inhabited by people who have become
aware (or who think) that what the firm is offering them in the way of resources is much smaller than what they offer the firm and who produce output even their superiors have the greatest difficulty judging.
There are very few rules regarding how to divide or group. The most
‘natural’ rules seem to reflect a principle from experimental design: be sure that the variance within each group is much smaller than the variance between the groups. When you sell similar products to very different markets, organize yourself on a market basis. When you sell very different products to similar markets, be sure that your divisions are product divisions. When the consumers in different countries react very differently, organize yourself by country or operate from one central point.
There are two fundamental ways to form work units: (1) grouping by function (or work-process) or (2) grouping by market (business unit or division) (Simons, 2000).
Units clustered by function The most natural way to streamline a growing organization is to group people by specialized work processes or functions, for specialization can lead to efficiency, steeper learning curves, standardization and the optimal combination of people and tasks. In a functional organization, people specialize in ‘sales’, ‘quality control’ or
‘accounting and record-keeping’. With the exception of the general manager, each manager is accountable for one functional area. A functional organization is clear, simple and cheap. Coordination between departments, however, is only possible at the highest level, leading to the well-known ‘bottleneck’ symptoms, where the entire organization waits for ‘coordination solutions’ provided by the top. More problems stem from a natural tendency towards sub-optimization, where each department specializes in its own priorities and professionalism (including professional hobbies). Loyalty is often to one’s own profession, not to the organization.
Functional organizations can be very successful in smaller companies operating in homogeneous markets, where an internal focus is rewarded by strong efficiency gains. Organizations cluster by function when an internal focus and efficiency (which is the major benefit of specialization) are more important than an external focus and effectiveness or market responsiveness. Of course, this is the main reason why universities and general hospitals are organized functionally and why banks are shifting from functional organizations to ‘client segment’ organizations.
Units clustered by market focus When companies want to reflect their external focus in their organizational design, they will create market- focused divisions, where differences between divisions will be large and differences within divisions will be small. When differences between products are large (compared to differences between regions and customers), units will be clustered by product. Product divisions create economies in production, R&D, distribution, and so forth. Market leaders
in the 1980s used product divisions. For example, Philips had product divisions for lighting, CD-players, computers, white goods (e.g., dish- washers), and IBM had separate divisions for mainframes, personal computers, typewriters, etc.
When differences between regions are large, units will be clustered by geography. When differences in local cultures, tastes, legislation and economic environment overshadow differences between products or even between clients, regional businessunits create unique solutions to unique contingencies. ‘Foreigners’ have a tendency to underestimate differences between countries in Asia or within the European Union, or between states in America. ‘Locals’ tend to overestimate them.
When customers have very distinct needs and attributes, client divisions emerge. One can have divisions oriented towards government, industrial customers, type of industry, private clients, small or large companies, professional clients, etc.
Of course, all hybrid forms do co-exist. Sooner or later, companies have to organize on a regional basis. Two salespeople cover separate regions, two plants cannot occupy the same spot, and two entrances must be guarded by two different caretakers (who do exactly the same job, but one at the northern entrance and one at the southern). Still, choosing an organizational design depends on the question: What is our primary criterion for splitting up into groups? A functional organization where the sales are divided into five regions is a functional organization, not a regional one.
From grouping to coordination Once the organization is logically divided, the coordination question arises. How shall we integrate the different parts? This will be achieved by influencing the so-called design parameters. The most important design parameters are formalization of jobs, formalization of processes, amount of training and indoctrination, and (de)centralization of decision-making. A machine-organization is primarily characterized by elaborate job descriptions, many rules and procedures, limited but highly specialized training, slow and implicit socialization, and centralized decision-making. On the other hand, innovative designs in high-tech start- ups have almost no job descriptions, only a few informal rules, extensive training and visible indoctrination, and decentralized decision-making.
Behaviour
Behaviouris, of course, the ‘odd man out’ in organizational design. Until recently, we could look at organizational design as though it was a rational process, oriented towards the smooth execution of a challenge. However, the organization chart is not the organization. People must ‘carry out’ the design. They will or will not understand the challenge, or they will interpret it in very idiosyncratic ways; they will read job descriptions in order to see what is notin the description; they will bluntly neglect some
rules and might strongly react against socialization processes. People bring in undesirable as well as desirable variation. This occurs when safety or quality measures are not respected, when key people arrive late for important meetings, or when people do not respect the budgeting systems. Desirable variation is introduced when people come up with new solutions for old problems, when creative approaches appear in areas where conservatism has reigned. People are fun. People are the manager’s nightmare. And they are both at the same time.
We drew Figure 10.1 in a very classic way: challenge (‘strategy’) is the most important element, structure follows strategy, and management has to look for goal congruence between the organization and its people in order to put the right person in the right place. This is of course artificial.
One could put ‘people first’ and create the right job for talented employees and define the ‘right’ challenge for the existing people. At first glance, this may sound woolly. However, consider all the organizations where professionals dominate and where the kinds of patient one attracts, the kinds of research topic one studies, or the kinds of consultancy project one takes on are determined more by the kinds of available professional than by the ‘strategy’. This direction from people to structure is also well known: the more top managers refuse to adjust their structures to their people, the more they simply want it for themselves. Some top structures (such as two CEOs) often reflect a (lackof) strong personalities, more than anything else.
Even more unusual might be to put ‘structure first’. But the fact that the
‘structure follows strategy’ paradigm has been heavily challenged proves that this principle is not self-evident. The clearest examples can be found in the fundamental discussions on Business Process Re-engineering (BPR).
BPR can be seen as a reaction against the trade-off between simple jobs and complex structures. BPR consultants strongly favour complex jobs and simple structures. Even better, of course, is reducing overall complexity, the first step in all good BPR. The basic question then becomes: What drives complexity? Complexity drivers are very often a direct result of strategic choices, the formulation of challenges. In other words, reduction of strategic complexity is a consequence – not a cause – of a change in organizational structure. It is an example of ‘strategy follows structure’.
Other elements of organizational design
Organizations can also be understood starting from the links between the three constituent elements (see Figure 10.2). The link between the formal organization and the individual people (in other words, between structure and behaviour) is the organizational culture. This is the way the rules of the organizational game are played. People try to make sense of, to understand, what the organization means. Organizational culture describes ‘the way we do things around here’. Corporate culture is a strong stabilizing force.
The link between challenge and organizational structure is realized through technology, or howtasks are carried out. Technology encompasses techniques, equipment and know-how. It is a much broader concept than pure technical infrastructure and also includes ‘soft technology,’ such as interviewing techniques and market approaches.
Finally, the link between challenge and behaviour is realized through influence processes, such as charismatic leadership, principal–agent structures, reward systems or governance, as we move in the direction from challenge to behaviour. Moving in the other direction (from behaviour to challenge) is also realized through influence processes, such as attention management, sense-making and market-for-ideas.