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The Four Bases of Organizational DNA

This structure kept the consumer goods organization from executing to its potential. Among specific dysfunctions we found:

  • Because there were no clear standards that allowed basic decisions to be made at lower levels, decisions regarding such matters as authorization for PC purchases and travel were decided too high in the organization.
  • Managers and supervisors tended to discourage their staffs from troubleshooting to resolve routine problems on their own.
  • Managers rotated rapidly through jobs, reaching senior positions without sufficient experience. Not only did they require close supervision, but they continually struggled to figure out what they needed to know.
  • The company seemed to rapidly promote its best and brightest just so it could retain them. This added unnecessary layers to the hierarchy and created more work at lower levels.
  • Large cross-departmental meetings filled the workday. The rationale was to have all parties “in one room to resolve the issues.”

All of this activity is costly — these are managers with salaries in the low six figures. Their compensation, plus the actual cost of their activities, pushed the company’s general and administrative costs to a level that was 20 percent higher than the average of our benchmark companies. Because each of its many layers got involved in almost every decision, the company’s speed to market was slowing, and it was losing share to new, more nimble competitors in several categories.

The obvious structural change was to reduce layers and increase spans — that is, to add direct reports to each manager. We recommended a new structure that resulted in a reduction of 10 percent of the positions in the management ranks across all six divisions. Ultimately, with the elimination and repositioning of managers and support staff, about 2,300 management jobs were cut, which saved the company more than $250 million.

Still, simply cutting layers and extending spans would have had little long-term effect if underlying behaviors didn’t change. One way the company could do this was by setting clear standards (e.g., which PC to buy and which airline to fly) so high-level managers would not need to review every transaction and provide approvals. With a monthly report, they could easily track exceptions to the standards. Another solution: Reset promotion expectations to slow the upward movement of managers and encourage more horizontal moves — use promotions not just as a reward, but to develop a manager’s breadth of experience. Long and cumbersome reporting processes designed to satisfy the information preferences of each layer and the tremendous desire for detail also had to go. In their place would be a report on the key lagging and leading measures of critical business activity, a top-down setting of targets, and the monitoring of variances. To further dissolve the reflexive addition of layers, the company also had to do more managerial training and communicate better about the change in promotion principles. Following the restructuring and changes in management, time to market for product introductions shrank by months, enabling the company to regain the first-to-market advantage it had traditionally held.

Decision Rights
Decision rights specify who has the authority to make which decisions. Clarifying these rights puts flesh on an organization chart and makes crystal clear where responsibility lies.

Clear decision rights enable wider spans and fewer layers, which translates into lower costs and speedier execution. Unarticulated decision rights are more than a time sink; they’re a central cause of substandard performance — and even of nonperformance. An employee at a financial-services company expressed this problem quite concretely in a focus group we conducted, saying, “Responsibilities are blurred intentionally around here so everyone has an excuse for not getting involved.”

 
 
 
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Resources

  1. Jeffrey W. Bennett, Thomas E. Pernsteiner, Paul F. Kocourek, and Steven B. Hedlund, “The Organization vs. the Strategy: Solving the Alignment Paradox,” s+b, Fourth Quarter 2000; Click here.
  2. Paul F. Kocourek, Steven Y. Chung, and Matthew G. McKenna, “Strategic Rollups: Overhauling the Multi-Merger Machine,” s+b, Second Quarter 2000; Click here.
  3. Chuck Lucier, Rob Schuyt, and Eric Spiegel, “CEO Succession 2002: Deliver or Depart,” s+b, Summer 2003; Click here.
  4. Gary Neilson, David Kletter, and John Jones, “Treating the Troubled Corporation,” s+b enews, 03/28/03; Click here.
  5. Randall Rothenberg, “Larry Bossidy: The Thought Leader Interview,” s+b, Third Quarter 2002; Click here.
  6. Michael C. Jensen, Foundations of Organizational Strategy (Harvard University Press, 1998)