Real-world examples include Honeywell’s ability to launch breakthrough technology products tailored to market needs around the world, drawing on its capabilities in market insights, engineering, research and development, and customer service; and Inditex’s fashion-forward but low-cost retail model, encompassing marketing, IT, manufacturing, and sourcing. Some clothes sold in Inditex’s Zara stores are made in its own factories, and others are outsourced to garment shops overseas. The chain can thus offer all its wares at a lower cost than competitors can, while being more responsive to consumer taste and demand. Ikea’s stylish but utilitarian furniture, similarly, combines functional expertise in design, sourcing, manufacturing, pricing, packaging, logistics, the customer experience in its retail stores, and cost management; all of these reinforce the others. This level of collaboration is unfamiliar to many functional staff members; even in cross-functional teams, they don’t usually get opportunities for the continual, ingrained collaboration that is needed to build differentiating capabilities.
Third, functions have a natural tendency to become isolated organizational silos, focusing on their own excellence and performance instead of the company’s strategy. The specialists’ natural imperative—to be excellent in everything they do—leads to incoherence. Many functions have devoted a significant part of their budgets over the years to initiatives and technologies that make them world-class, but that have very little to do with the true drivers of the company’s success.
Although all these problems can be addressed in small ways, none of them can be fully resolved under the current functional model. In that context, it seems increasingly likely that the functional model is obsolete. But if so, what might replace it?
The most common solution used today is the cross-functional team. Many companies try to manage complexity by assembling committees of people from the relevant professional groups to solve particular problems. Unfortunately, many cross-functional teams fall far short of delivering effective and efficient solutions. They rarely have the time they need to resolve the different ways of thinking that people bring from their professional specializations. When the team members first come together to work on a common problem, they often misunderstand one another. The teams are also limited by their conflicting functional priorities and sometimes by a lack of clear accountability. Many of these teams are temporary; they will dissolve once the project is over, and their members may not work together again. They therefore have little incentive to overcome these hurdles.
Permanent cross-functional teams tend to fare better. A growing number of innovation groups bring together disparate functional skills (typically R&D, marketing, IT, and research) to facilitate the launch of new products or services. Frito-Lay, for example, set up a unit like this in the early 1980s; merchandising, IT, and supply chain executives worked together to develop the company’s celebrated direct-store-delivery capability, enabled by handheld devices that Frito-Lay developed itself. Similarly, in the early 2000s, Pfizer Consumer Healthcare (since sold to Johnson & Johnson) set up communities of practice that included lawyers, health professionals, and marketing experts who could help spread key ideas and best practices to brand and product groups around the world.
These permanent cross-functional teams vary in the degree of structural change they require. Some are relatively informal, whereas others involve major shifts to the organizational structure. Some may even have representation on their company’s executive team. Their leaders are officers with titles that represent cross-functional capabilities: chief risk officer, chief innovation officer, chief growth officer, and so on.
As they gain in maturity and in their level of contribution to their companies, these groups may evolve into a still more robust organizational construct: an overarching organizational structure, such as a center of excellence, based on distinctive capabilities. The members of these capabilities teams would be assigned completely to these units, reporting to them rather than through a functional hierarchy, and spending their entire workweeks, and possibly their entire career, within a cross-functional context. For example, a food company might have a single large group overseeing its remarkable distribution capability—professionals who were formerly part of marketing, sales, IT (for analytics), supply chain, sourcing, and legal organizations would all report to the same part of the hierarchy, all working together to maintain and improve their products’ presence on retail shelves.