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© 2024 N. Dean Meyer and Associates Inc.
Excerpt from www.NDMA.COM, © 2024 N. Dean Meyer and Associates Inc.

Use Case: Multi-product, Multi-geography, Maximum Synergies

optimizing synergies across product-line, functional, and geographic boundaries

by N. Dean Meyer

[excerpt from the book, How Organizations Should Work]

You're a multi-product-line company, and you do business in multiple geographies.

You might be organized into business units for each product line, or for each region, or perhaps a hybrid of the two.

But what if your organization were really great at teamwork? I mean really great -- high-performance teamwork -- across all boundaries. By boundaries, I mean across all your product lines, across all functions, and across all geographies.

If you were that good at teamwork, would you design your organization differently?

Of course you would! Here's why, and how....

Synergies in Differences

Consider where synergies come from.

Let's say you had a number of people with essentially the same personalities and perspectives. Putting them together on a team solves the challenge of volume. But there are no synergies -- no new capabilities, tools, or out-of-the-box ideas in the team.

But if you assemble a team of people with diverse life-experiences, there are synergies. That's one reason why teams perform better than an equal number of individuals.

The point is, synergies come from differences.

Now let's apply that principle at the corporate level. Let's say you acquire a company, but leave it to operate independently. You may get some financial synergies. But neither the acquired company nor the mothership will operate any differently. Neither will perform better. You won't get any other synergies.

But let's say those business units share Marketing staff (as a shared service to both). Instead of Marketing staff in each business unit who only see their own product lines, you now have people on the team who see the big picture -- the market across product lines. That should lead to brand synergies.

And let's say they use a shared-services IT department. Instead of systems that support only one business unit, shared services can produce integrated systems and data, giving the enterprise a common view (across business units) of customers, suppliers, products, etc. Again, more synergies. And that can be true even if applications are tailored to the needs of individual business units.

Mini case study: decentralized IT....

I personally experienced the effects of decentralization of IT as a customer of an insurance company.

The decentralization of its IT function resulted in multiple customer databases. Since customer-numbers varied, the enterprise was not able to spot customers who bought from multiple business units.

One day, the Specialty Automotive business unit cancelled the policy covering my vintage sports car, saying they were no longer interested in that type of business.

Annoyed, I moved all my insurance to another company -- the policies for my other cars, my home, my personal liability umbrella, and my corporation.

Of course, they never knew this. Because their customer databases were fragmented among their business units, they knew me as a few discrete policies, not as one customer with diverse needs.

Shared Engineering sees opportunities to reuse components across product lines. For example, in a heavy equipment manufacturing company, nobody said that one size fits all when it comes to tractors and construction equipment. But sharing a common parts list of nuts and bolts makes a lot of sense.

A shared sales force creates opportunities for cross-selling.

The more that business units share, the more they get the benefit of enterprise perspectives and the greater the synergies. And that's true even when shared-services functions produce unique solutions for each business unit. Synergies accrue even without a one-size-fits-all approach.

Performance Through Specialization

There's an even more lucrative source of synergies: diversity in capabilities, tools, and talents -- i.e., specialization.

When each business unit has its own function, that function does everything for their business unit. That could mean covering a lot of ground. For example, their IT group has to support networks, infrastructure (including cloud), applications, end-user computing, customer service, vendor management, etc.

When you put them together into a shared-services IT department, that larger combined group can afford a higher degree of specialization (without being one-deep).

In the IT example, applications engineers can specialize in the various types of data and applications, e.g., financial systems, customer systems, supply chain systems, etc. The bigger they get, the more specialization they can afford. Continuing the IT example, a larger financial-applications group can subdivide itself into teams specializing in general ledger, orders, tax, etc.

This is critical because specialization improves performance.

There are many reasons why specialists outperform generalists. Specialists accumulate deeper knowledge and experience in their disciplines. As a result, they're faster (they've done it before, and they have templates and tools). They produce higher quality and lower risks (they know what they're doing). They reduce costs (they're faster, and produce more efficient solutions). They're more innovative (they're better at keeping up with the literature in their fields).

In every way, specialists outperform generalists. In fact, specialization is why organizations exist. A company of generalists may as well be broken up because being one company delivers no synergies. Only through specialization can a company perform better than an equal number of individuals.

If you have any doubts about the value of specialization, ask yourself if you'd trust your family doctor to do surgery. Probably not; you'd go to a specialist. Why? They perform better.

Independent business units necessarily have relatively smaller groups for each needed function (marketing, sales, finance, IT, HR... any discipline).

As business units share these functions, they grow and specialize to a greater degree. And teams of those shared specialists outperform small groups of relative generalists in each business unit.

Economies of Scale

In addition to synergies, shared services presents opportunities for economies of scale.

For example, shared Operations presents opportunities to rationalize assets like manufacturing plants, warehouses, and transportation systems.

Savings may be found in greater negotiating power with vendors, reduced safety stocks in inventories and staff, access to larger and more efficient assets, etc.

The more that business units share functions, the more economies of scale and synergies they get.

Vision of a Fully Integrated Organization

It's a spectrum. On one end is a company made of completely autonomous business units. It's essentially holding company, like the conglomerates of the 1960s.

More on the demise of conglomerates....

Conglomerates are breaking themselves up. Abbott spun out pharmaceuticals (Abbvie). Johnson & Johnson followed suit. GE spun off financial services, and now is breaking itself into three companies.

There are many examples of conglomerates that failed to get sufficient cross-business-unit synergies. Without those synergies, there's little value in being under one corporate umbrella.

Generally, stock prices rose as a result of these break-ups. The market likes industry-focused stocks that are easier to understand.

But one can only wonder what their shareholder value would have been had they achieved all the available synergies and economies of scale. If they were fully integrated, every business unit would outperform what it could do alone.

On the other end of the spectrum is a fully integrated organization that maximizes synergies.

In a fully integrated organization, everything is a shared service. Imagine:

  • Product managers are responsible for each of the enterprise's product lines globally. They have profit-and-loss accountabilities, and the authority they need to manage those externally facing businesses. They're the only function that's not a shared service.

  • Product managers get help from a shared Marketing function (with experts in market research) to find and define new-product opportunities.

  • They use a shared Engineering group to design those products. That Engineering department has a high degree of specialization, including product engineers as well as experts in shared (reusable) components, packaging, user experience, etc.

  • A shared graphic-arts group contributes visual designs to the Engineering team (and later to Marketing).

  • With designs in hand, product managers acquire an inventory of the new product from Manufacturing. The shared Manufacturing department has some plants that are good at flexibility, able to quickly change tooling for the new product (albeit at a higher unit cost). The new product may start there, to get to market more quickly. Later, Manufacturing may shift production to other plants that are designed to handle longer production runs at a lower unit cost.

  • Product managers use a shared Logistics function to warehouse their inventories and fulfill orders. Logistics has state-of-the-art automated warehouses, experts in inventory management, and locations in many geographies.

  • Product managers buy marketing communications from that shared Marketing function. Thanks to its size, Marketing has experts in branding, social media, search-engine optimization, advertising, etc. And the new product benefits from existing brand reputation.

  • Product managers buy selling (a service) from a sales force which covers multiple geographies, and has account representatives assigned to multi-national accounts. Where customers buy multiple products from the enterprise, they're able to cross-sell and offer package deals. And with just one sales rep calling on each major account (rather than one from each business unit), Sales is able to build a much stronger relationship with each customer.

  • Product managers get support from global shared services like customer service, field technicians, data analytics, and the business office (IT, Finance, HR, Procurement, etc.). New products benefit from existing infrastructure and specialists.

  • And when shared planners and policy makers support multiple product managers, integrated strategies tap all the potential market and operational synergies.

In a fully integrated organization, all support functions serve multiple product managers and product lines. (They're shared services.)

They all have global scope, and place staff in the appropriate geographies as needed. So, if you need local presence or country-specific tailoring, they're there.

"In our fully integrated company (no country general managers), we can draw the best talent from anywhere in the world into enterprise leadership positions."
Sergio Paiz, CEO, PDC

And they're all led and staffed by the best executives the world has to offer.

Note that there are people in the enterprise representing a product-line view, as well as all the support functions. Those functions include people focused on customers and markets (sales), and on geographic locations where needed (design localization, sales, marketing messaging, field technicians, regulatory compliance, etc.). But they're all managed globally.

That's how you'd maximize synergies and economies of scale. The logic is clear: Fully integrated organizations can perform significantly better than silos of independent business units.

High-performance Teamwork

There is a big "BUT...."

Sharing support functions only works if you're really good at teamwork across boundaries -- across organizational, functional, and geographic boundaries.

The better you are at teamwork, the more product lines can share support functions, and the greater the enterprise synergies.

On the other hand, without high-performance teamwork, you have no choice but to establish independent business units and forgo the potential synergies and economies of scale.

Let's clarify the goal: What is high-performance teamwork? There's a lot more to it than people liking and trusting one another (traditional teambuilding).

"In this digital world, geography is just a psychological barrier."
Sergio Paiz, CEO, PDC

One important factor is telecommunications and collaboration tools. Christopher Columbus had to be self-sufficient, having no means of communications back home. Now, we can work closely with people anywhere in the world.

But it takes more than the ability to work side by side to engender great teamwork.

High-performance teamwork has the following attributes:

  • Teams form laterally. Peers get help from one another, without having to work their way up the hierarchy and back down to the needed support group.

    On the other hand, if everybody has to wait for their common boss somewhere up the chain of command to assemble teams and get people to work together, the organization would be too slow and its senior leaders would be bottlenecks. That's why organizations that don't team well need independent silos with a boss managing all the required functions within each.

  • Teams include just the right specialists.

    It's not a fixed team for every project, as in carefully engineered business processes. Rather, each team includes all the specialists needed for that particular project -- people from anywhere in the enterprise -- and no one else (no others who are on the team without a clear purpose).

  • Specialists on the team come and go.

    They're not assigned for the duration of the project. They contribute what they're there for, and then move on to the next project.

  • Accountabilities are clear.

    In every team, there's one group that's accountable for the entire project deliverable. That alone distinguishes this approach from the more typical team of people doing tasks, and no one short of a common boss ensuring that all those tasks come together into the ultimate project deliverable.

    Team members (the various specialists) are each accountable for their respective sub-deliverables (not just for being there and "pitching in," a.k.a., meddling in other team members' specialties).

  • There's a chain of command within each team (nothing to do with job grades or the enterprise organization chart).

    Issues are resolved within the team as everybody presents their ideas, and then it's clear who's to make the decision. The group that's accountable for the entire project has the final say. Accountabilities and authorities match.

High-performance teams are agile, diverse, accountable, and work great together.

The Market Organization

Here's the logic so far:

Synergies depend on bringing diverse people together on teams. The more teams include diverse perspectives, the better they do.

The most powerful form of diversity is specialization -- diversity in capabilities, tools, and talents.

The more business units break down silos and share support functions, the greater the degree of specialization, and the greater the synergies across the organization.

But sharing support functions (enterprise specialists) depends on high-performance cross-boundary teamwork.

Pragmatically, how can an enterprise achieve high-performance teamwork across product-line, functional, and geographic boundaries?

Book: How Organizations Should Work

A Market Organization is the answer.

In a Market Organization, every group on the organization chart is defined as a business within a business. Each is an entrepreurship, with customers inside (and in some cases outside) the enterprise.

This network of internal entrepreneurs is tied together through internal customer-supplier relationships.

(This does not require chargebacks. What's more important is the paradigm: viewing other groups as customers and suppliers, and contracting to "sell" one another your products and services.)

Internal entrepreurship has tremendous value in its own right, inducing customer focus, accountability for results (products and services), frugality (to be competitive), innovation (to stay in business), and employee engagement (a sense of purpose serving customers with valued deliverables).

On top of all that, the Market Organization is the key to teamwork. Here's how it works:

  • For every project, there's a single group that's in the business of "selling" that product or service. That "prime contractor" is fully accountable for the entire project.

  • A prime contractor has the right to "buy" help from subcontractors (other groups within the enterprise). It's just like a general contractor who's building a home, and who subcontracts for an electrician, plumber, etc.

  • Subcontractors may, in turn, buy help from other groups -- subs to subs.

  • In each of these transactions, the internal customer is buying a deliverable -- a product or service -- not just a warm body on the team.

This dynamic team-formation process is called a "walk-through." It assembles the team, and produces a tree-structured set of internal customer-supplier transactions (prime buys from sub; sub buys from sub-sub) which provides the basis for more detailed project planning.

The result is high-performance teamwork:

  • It's clear who's accountable for delivering the entire project.

  • Teams form laterally as that prime contractor buys help from peers. This is a key contributor to organizational agility.

  • Teams are dynamic. They include just the right people for the project at hand, because entrepreneurs don't buy more than they need.

  • While a culture of team-spirit induces everybody to share freely with one another, individual accountabilities for specific deliverables within the team are clear.

  • With clear individual accountabilities for results, combined with customer focus and an entrepreneurial spirit, team members can be trusted to deliver promised products and services. Project management gets a lot easier when the prime contractor manages a suite of deliverables rather than a long list of everybody's tasks.

  • Conversations within teams focus on the deliverables and how they'll plug together. There's no need for collaboration on how each team member produces their respective deliverables (other than offering friendly advice). With this focus on results, the quality of collaboration goes up, even as the quantity and frequency of interactions goes down.

  • Once subcontractors deliver their accountabilities, they drop off the team and go on to serve other customers.

  • There's a chain of command within the team -- from prime, to sub, to sub of sub -- so issues can be resolved within the team (without having to resort to escalation to a common boss). Ideas are shared openly, without causing confusion or bogging the team down awaiting consensus or a decision from above.

Serendipity (noun): Unplanned Fortunate Discoveries

As if global synergies and economies of scale weren't enough, the Market Organization offers additional benefits:

  • Agility: The enterprise can quickly assemble teams to meet each new challenge. It's "in the habit" of pulling the right people together from anywhere around the globe.

  • Scalability: As a Market Organization grows, internal lines of business expand. They may subdivide into groups at the next level to attain a higher degree of specialization. But no fundamental change in the enterprise's operating model is required. The organization is infinitely scalable.

  • Acquisitions-ready: To integrate an acquisition, simply decontruct its organization chart into the lines of business in each group. That provides the map to integrate it into the enterprise structure. With that integration, the acquisition benefits from access to specialists throughout the entire enterprise; and the entire enterprise benefits from the unique capabilities of the acquisition. Again, maximum synergies, in both directions.

  • Employer of choice: A Market Organization is a great place to work. People are empowered (authorities and accountabilities match). There's a creative element to jobs (entrepreneurship). And people have a sense of purpose (serving customers who get value from their work).

It takes time and investment to implement a Market Organization. But it's a great investment. And the alternative -- lost synergies, higher costs -- doesn't seem like a great long-term strategy!

How to Implement a Fully Integrated Organization

Now, on to the practicalities.... How is a high-performing Market Organization implemented?

It's not a matter of quick hits -- a new process or two, some training, perhaps some preaching from leadership. (You get what you pay for.)

Implementing a Market Organization is a transformation process. It takes systemic change.

Consider the five organizational systems and what needs to be implemented in each:

  • Structure:

  • Internal economy:

    • Investment-based budgeting is used annually to ensure that all groups (primes and all their subs) have the resources to accomplish projects.

    • A demand-management (priority-setting) process at the enterprise level aligns priorities. (This is critical because if each manager sets their own group's priorities, a prime's highest priority may be a subcontractor's lowest, and teamwork breaks down.)

  • Culture (in themes such as the following):

    • Customer focus, which includes respecting internal customers.

    • Entrepreneurship to ensure viable internal suppliers.

    • Integrity, including delivering on every commitment, so that subcontractors can be trusted.

    • Teamwork practices, including subcontracting instead of doing it yourself, and fulfilling commitments to internal customers just as reliably as those to external customers.

  • Methods, processes, tools:

    • Project management methods and tools further enhance teamwork.

    • Telecommunications and collaboration tools enable better collaboration across geographic distances.

  • Metrics, consequences:

    • Incentives for empire-building (instead of teamwork), such as job grades that are linked to the size of one's budget or headcount, are eliminated.

    • Metrics of entrepreneurship, such as customer satisfaction and competitive rates (unit costs), are added.

All these systemic changes are implemented in a well-planned organizational strategy -- a transformation road-map.

The bottom line: organizational strategy is the way to implement a Market Organization, which will maximize synergies and economies of scale in multi-product, multi-geography companies. It may be the best investment you can make.


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