strategy+business is published by PwC Strategy& Inc.
 
or, sign in with:
strategy and business

 
 

The Four Bases of Organizational DNA

At one industrial company, we found yet again that senior executives were spending too much time reviewing small projects. It turned out the company had not reassessed managers’ spending-approval limits in more than 10 years. We suggested the authorization process be adjusted so that managers lower in the organization could be accountable for the final approval of more projects. The capital expenditure amount requiring CEO authorization was raised from $5 million to $15 million. The objective was to free up senior management’s time to focus on the longer-term issues associated with market growth and potential acquisitions. Based on historical analysis, it was determined that raising the level at which projects required CEO authorization to $15 million would reduce the number of projects crossing the CEO’s desk by 49 percent. All large projects would still come to the CEO, so the aggregate value of projects approved at the top would decline by only 13 percent.

Decision rights become blurred for many reasons, not all of them intentional. After a large industrial company completed a leveraged buyout, the management of one of its business units became the new entity’s corporate management, charged with reviewing the operating decisions of all business units. That change required every level of management to take on greater decision-making responsibility — an unnatural act for executives accustomed to hands-on involvement in operating unit decisions. Rather than allow their general managers to make basic decisions about product design and resource allocation, the CEO and COO still involved themselves deeply in these activities. Meanwhile, they were neglecting other areas where their attention was expected, notably strategic planning, long-range business portfolio decisions, and the firm’s financial condition.

The solution was to create a process for corporate officers to delegate decisions to the business unit’s general managers. An executive committee was established to review business unit decisions, and several general managers were charged with integrating marketing, product engineering, and manufacturing. These structures and processes made effective delegation possible.

It doesn’t take a leveraged buyout to distort a company’s decision-rights structure. People naturally lean toward the familiar when faced with change. Executives promoted to new positions often cling to their prior responsibilities, burdening themselves with unnecessary tasks and disempowering their subordinates. The press of the urgent at the business unit level drives out the important at the corporate level. The lesser decisions seem concrete and knowable. Forward thinking and big decisions regarding long-term direction seem undefined, amorphous, and tougher to tackle.

Often the process of assigning decision rights is a response to a crisis or a shift in political power. When this happens, decisions can fall between the cracks. Or they can be made twice by different parties. Or they can be reviewed repeatedly, becoming a Sisyphean exercise in backsliding.

It is possible to assign decision rights systematically and rationally. At a global industrial company, we helped create an organizational matrix of functions, products, and geographies. The structure was undergirded by a set of specific organizational and decision-making principles, among them: responsibility does not imply exclusive authority; different units should have joint goals and performance measures; and certain positions need to report upward to multiple managers.

Over several months, we worked with the company to apply these and several other principles to more than 300 critical decisions. Because we undertook this effort explicitly while also changing the structure, the company was able to execute its new strategy faster, and with fewer missteps. The overall change process took two years (one less than had been anticipated). The company returned to profitability, reduced its net debt by the targeted amount, and reached several other critical financial goals a year ahead of schedule.

 
 
 
Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store

 

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)
 
Close