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

Book: How Organizations Should Work

Provocative Essay: Strategy Should NOT Drive Structure

designing your organization around today's strategies guarantees failure at tomorrow's

by N. Dean Meyer

In 1962, Alfred Chandler famously said, "structure follows strategy."

Book: How Organizations Should Work

Later that same decade, Jay Galbraith's Star Model® put structure and strategy side by side, again imbedding strategy in the organizational design.

They're both saying that structure should be designed to optimize business strategies.

This old trope, "structure follows strategy," while still widely accepted, is not only obsolete; it's dangerous.

Why This Old Trope is Now Wrong

This paradigm emerged at the tail-end of the post-World-War-Two era of steady economic growth. The business world was relatively stable, so strategies could be long-term.

Also, competition was not so intense. With much of the developed world's productive capabilities destroyed during the war, and with steadily growing markets, there was room for everybody. Within market segments, competition was generally based on price, quality, functionality, and marketing.

In all, competitiveness may have depended on efficiency (speed), but generally didn't depend on agility (quick changes of direction).

But the world has changed -- a lot! It's now a VUCA world: volatile, uncertain, complex, and ambiguous. Consider just a few drivers: the potential demise of democracy in the US and elsewhere around the world; the annihilation of Ukraine and Ukrainians, and with it the world order of national sovereignty; the horrors of southern Israel and Gaza; genocide in Sudan; natural disasters from accelerating climate change; unabated gun violence; the unknown positive and negative opportunities arising from emerging technologies such as AI....

And the world has shrunk. Competition is global and intense, and based on agility to at least as great an extent as the traditional price, quality, and functionality.

And that means that the nature of business strategy has changed:

  • Strategies are multi-faceted; organizations pursue multiple strategies at the same time.

  • Strategies are dynamic; organizations must respond quickly to threats (competition, economic volatility, world events such as wars and pandemics, the business environment including legal/regulatory changes, climate change, political extremism, and more), and to new opportunities (for example, innovations in technologies such as AI and biotech).

So, here's the crux of the problem: Organizations tuned to today's strategies will fail at tomorrow's unless they restructure themselves every time strategies shift, which could be multiple times in a year. That, of course, is impractical.

Worse, organizations designed around today's strategies will fail to discover tomorrow's strategies.

In addition, they're just not very effective. There are fundamental structural flaws in the two common ways people imbed strategies in structure:
[Click to see the explanation.]

Strategy silos

Some people advocate create groups (e.g., business units, innovation groups, program-management groups) dedicated to specific strategies. These "silo" groups are wholly and exclusively accountable for a given strategy, and contain most of the talent needed to pursue that strategy.

In reality, many strategies draw on a common set of capabilities and competencies. Engineering, marketing, IT, sales, indeed most business functions are relevant to all strategies.

Building silos around strategies involves scattering those capabilities among the many strategy-dedicated groups that need them. That reduces specialization. For example, a centralized marketing function might contain specialists in branding, market research, communications channels like advertising and social-media engagement, and so on. But if each strategy-dedicated group has its own marketing function with only a fraction of the enterprise's marketing headcount, they're forced to depend on small groups of marketing generalists rather than teams of the right specialists from a variety of marketing groups.

Reducing the depth of specialization always reduces performance. Generalists just aren't as capable as specialists. They're slower, less reliable, lower quality, and more costly. And innovation slows because they can't keep up with the literature across multiple sub-disciplines.

Furthermore, across the enterprise, there's a lot of redundancy and reinvention. That adds costs, slows everybody down, and undermines cross-business-unit synergies (which is the reason they're all within the same enterprise in the first place).

Another insidious affect is that designating groups dedicated to strategies creates entire swaths of the enterprise which are not strategic. It wastes so many bright minds who are told they don't need to think strategically.

Plus, it creates second-class citizens who are not considered strategic (despite the importance of keeping the current business running and competing effectively today). They're not allowed to be innovative; not visible to the enterprise executives who plan their careers; and have limited career opportunities. They're put in dead-end jobs where they can never prove themselves to be innovative, creative, strategic thinkers. To me, this is just not ethical.

Meanwhile, the strategy-dedicated groups don't have easy access to the institutional knowledge and competencies of the legacy organization.

For all these reasons, dedicating groups to strategies ultimately harms everybody (including strategy-dedicated groups), and undermines the reasons they're all part of one enterprise.

And again, what happens when a new strategy comes along? A massive reorganization of the enterprise's structure and talent, of course.

And in this structure, neither the strategy-dedicated groups nor the legacy groups are accountable for finding tomorrow's strategies.

Strategy councils

An alternative to silos is a "council" -- a committee to oversee strategic initiatives being executed by the appropriate functions throughout the enterprise.

This is better in that it doesn't involve the decentralization of talent, which is the cause of lost specialization. At least it has the right specialists contributing to each of the strategic initiatives.

But this bureaucratic approach assigns accountability for strategy execution to a committee made of executives whose job is to run their respective functions. If they fail, you can be sure there will be lots of finger-pointing. There's no single point of accountability (the "one throat to choke").

Furthermore, these committees disempower the managers of the resources controlled by the committee. And yet, no doubt, those managers are still held accountable for the performance of their staff.

These strategy councils are nothing more than a patch for poor cross-boundary teamwork. There's something broken in the organizational operating model that affects both strategic and operational initiatives alike. This approach does not fix the root causes of poor cross-boundary teamwork and priority coordination.

The bottom line: To prosper, today's organizations must be innovative and agile, not locked into yesterday's strategies.

This begs new thinking on organizational design.

Some Basic Truths

Competent organizational designers will tell you that there are some fundamental truths that offer clues to a better approach to strategy execution.

Truth 1: You don't need to put people under a common boss (or committee) to get them to work together. Project teams can be assembled from multiple groups across the enterprise to accomplish strategic initiatives. A process of dynamic cross-boundary team formation can be installed (described below), obviating the need for compromising the organization chart to make up for poor cross-boundary teamwork.

Truth 2: A given group can serve multiple internal "customers" with its products and services; some of those customers may be working on strategic initiatives, and others on operational imperatives. Resource-governance processes tell them what to produce for whom, not structure. True, there's the tyranny of the urgent over the important; but that doesn't have to mean that operational challenges (which have finite funding) can lay claim to resources reserved for strategic initiatives (beyond the needs of true crisis responses).

Truth 3: The group accountable (in whole) for a strategic initiative doesn't have to report at a high level in the enterprise organization chart to be important, or to be resourced to do their job. It shouldn't require a top executive to bully all the contributors to a strategy to cooperate.

Truth 4: In a VUCA world, everybody should be thinking about strategies all the time.

Distinguishing Strategies from the "Machine"

The challenge of aligning everybody with strategies is real. But embedding today's strategies in an organization's design is no longer an effective approach.

There is a better way. The key to finding it is to see how strategy and organizational design (including structure) interact.

Think of an organization as a machine. It's an ecosystem which sends signals that guide everybody in their decisions and behaviors.

Customers' strategies are inputs to that machine, giving the organization the fodder to produce products and services which are of strategic value to customers (the so-called "customer-centric" organization).

And the enterprise's own business strategies are outputs of the machine. The organization must continually adapt and invent business strategies to succeed in a VUCA world. In other words, the machine must continually produce business strategies.

An input to the machine.... An output of the machine.... But strategy is not an attribute of the machine.

What that Machine Must Do

The challenge in a VUCA world is to create organizations that, by design, continually do a number of things:

  • Align their precious resources with ever-changing, multi-faceted strategies and operational imperatives, without breaking down into silos that undermine specialization and synergies.

  • Execute every initiative (strategic and operational) with excellence, engaging the right team of specialists and resourcing them adequately.

  • Continually assesses its customers' strategies and changing market conditions, and identify new opportunities for its capabilities (including new products and services).

  • Continually generate its own strategies -- for every function at every level -- to be prepared for tomorrow's challenges.

What's Required

To do all that, there are a number of requirements for that organization's design to adapt to multi-faceted and ever-changing business strategies.

A foundational paradigm that can guide the design of a dynamic, but stable, organization is thinking of every group as a business within a business. This is not a matrix structure where everybody has two bosses. It's the "Market Organization." It's an organizational operating model where the hierarchy houses a network of empowered internal entrepreneurs.

This vision is implemented through the redesign of fundamental organizational systems:

Structure: The organization chart must contain all the needed capabilities and competencies, with a maximum of specialization (not silos of generalists).

New strategies may reveal the need for new capabilities (as distinct from innovation in current capabilities); and that warrants new groups. But those groups are not dedicated to the strategy that triggered their formation; they're a new line of business, and their capabilities are available throughout the enterprise.

But if a function exists and just needs to innovate and augment its capabilities, invest in it! Don't leave it to languish while you start a new group with essentially the same capabilities (new versus old) to compete with the old group; that reduces specialization and creates internal strife.

In a Market Organization, each group has a catalog of products and services, and "sells" them to both external and internal customers. It's accountable for supporting its past sales, delivering new projects/services, and innovating to keep their own products and services up to date.

For example, in IT, internal lines of business include: applications engineering, core engineering (e.g., infrastructure), operations, customer support, and business relationship managers (sales).

Teamwork through subcontracting: As new strategies emerge, teams must form dynamically, combining just the right talent from across the enterprise for each unique project/service. Within each team, there must be one group that's wholly accountable for the project/service. And everyone else on the team must have clear individual accountabilities for the delivery to the team of their own products and services.

A Market Organization satisfies all those requirements. For each strategic initiative, there's one (and only one) group that's in the business of "selling" that result. As the "prime contractor," they subcontract to other groups throughout the enterprise for needed help. And those subcontractors can, in turn, get help from other groups if needed.

Thus, each team contains the right people. Every group's accountabilities are clear. And there's a single point of accountability for the entire project. We call this team-formation process "walk-throughs."

For example, clients "buy" applications from IT applications engineers. As the "prime contractor," they, in turn, may buy from core engineers deliverables such as logical data models, physical data models, platform engineering, interfaces, testing, etc.

Investment-based budgeting: You don't go to the store and give them money to pay their costs (rent, electricity, compensation). You give them money for the products you want to buy.

Similarly, in a Market Organization, budgets aren't to cover groups' costs. They're to buy deliverables -- strategic initiatives, operational services, planning initiatives, compliance initiatives, etc. This is termed "investment-based budgeting."

The funding for each deliverable (including strategic initiatives) includes not just the prime contractor, but also all needed subcontractors. This is how the many groups' priorities (resources) are aligned with strategies (and all the other things they must deliver), and ensures that strategic initiatives are fully resourced.

For example, if a digital-business strategic initiative is funded, budget is provided for the business leader (the prime contractor, perhaps a product manager or business-unit leader), plus any needed subcontractors such as IT (the applications engineer and all needed IT subcontractors), marketing, etc.

Dynamic priority setting: The enterprise must be able to reallocate its resources dynamically throughout the year to quickly align with new strategies and operational challenges. And to keep everybody aligned (essential to teamwork), priorities must be set at the enterprise level (not by each manager for their own resources).

Again, the Market Organization has the answer: Think of your budget not as yours to cover your costs. Its money put on deposit with you at the beginning of the year to buy your products and services throughout the year. It's a checkbook that your customers use to buy your deliverables.

Who gets to write checks out of that checkbook? Just like in the real world, customers (not suppliers) decide what they'll buy. Priority decisions are made by business leaders, not internal service providers. This is far more effective than leaving it to managers to decide their own priorities, perhaps with a clumsy and rigid overlay of cascading objectives.

This dynamic priority setting process -- sometimes termed demand management, investment-portfolio management, or just project intake and priority setting -- allows the organization to quickly resource emerging strategies. Demand is limited to available resources (because internal customers' purchases are limited to the checkbooks, a.k.a. budgets). And priorities are aligned across the enterprise.

In the above example of digital-business, IT resources may be fully engaged in supporting and enhancing existing applications. But once this strategic initiative is identified, priorities are adjusted such that IT stops (or reduces) other lower-priority deliverables to release resources for the digital-business initiative. The decision as to what other deliverables are cut is made by the business as a whole, not by IT.

Culture: Culture is best defined through behaviors, not vague values. And given the VUCA challenge, it has to work for any and all strategies, as well as operational deliverables.

To do that, behavioral principles must be defined at the appropriate level. For example, a strategic initiative may require more risk tolerance than operational processes. Culture must tell people how to analyze risks, not prescribe a specific risk preference.

In a Market Organization, a comprehensive set of behavioral principles document the specific behaviors that add up to customer focus, entrepreneurship, teamwork, empowerment, risk, and more. This way, culture lubricates the other dynamic systems.

Metrics/rewards: Performance objectives also must be defined at the appropriate level.

It should not be a matter of listing key projects and services, and then checking the boxes when they're delivered. That would be a moving target, since a plethora of strategic (and operational) initiatives come and go throughout the year. It would be a bureaucratic nightmare, as well as confusing, to update one's performance objectives continually.

There's another problem: Equating performance objectives with a list of major projects puts at risk all the other things every business-within-a-business must do, for example, small projects that don't make it to the level of a performance objective, maintaining its infrastructure and capabilities, innovation, and planning its future.

In a Market Organization, resource-governance processes (investment-based budgeting, dynamic priority setting) align everybody with strategies. That's not a job for metrics.

Instead, metrics should assess all the things that internal entrepreneurs must do to run viable businesses.

Putting the Pieces Together

Designing structure around today's strategies is a shortcut that doesn't work in a VUCA world.

Instead, leaders need to design organizations as dynamic systems, using solid engineering principles to define structure, resource-governance processes, culture, and metrics.

A foundational paradigm that can guide the design of those organizational systems is thinking of every group as a business within a business. This is not a matrix structure where everybody has two bosses. It's the "Market Organization."

The challenge of strategy alignment and execution depends on all the same organizational systems as operational imperatives. What's needed is a transformation strategy (as distinct from a business strategy) -- a road-map of organizational changes that implement an agile, high-performing organization. The Market Organization is a powerful vision that can drive that transformation.


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