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 / Winter 2003 / Issue 33(originally published by Booz & Company)


The Four Bases of Organizational DNA

Making decision rights explicit in companies in which they are not requires management to set rules for the most common business situations — and for each position. In effect, the company is creating a constitution that says who will decide what and under what circumstances.

The decision rights of groups must also be clear. At a consumer goods company, we saw large numbers of executives meeting frequently to resolve conflicts among functional units. It appeared that operations, finance, and marketing were each doing an excellent job of analyzing new factories, new products, and new business opportunities, but they weren’t talking to one another along the way. Operations planned the perfect factory — without guidance from finance on the cost. In marathon meetings, managers from each function brought their independent analyses together. Then they struggled to reach a joint conclusion, because each unit, by that time, was wedded to its own recommendation.

To solve this silo problem, one top executive was made responsible for managing a cross-functional team, so there would always be communication across disciplines. As a result, only a few top executives were needed to make routine decisions, and the company reduced dedicated staff support for these efforts by more than 30 percent.

The third of the four bases in a company’s DNA-like makeup involves motivation. Employees generally don’t deliberately act counterproductively; they don’t try to derail a company’s strategy. Rather, they respond quite rationally on the basis of what they see, what they understand, and how they’re rewarded. An exhortation to follow the vision and pursue the strategy is only so much air if the organization’s incentives and information flows make it difficult for employees to understand and do what they’re supposed to do.

An organization can send confusing signals to individuals in many ways. Think about what happens when an appraisal system inflates performance ratings. At a consumer goods company we once worked with, employees were appraised on a 1 to 10 scale. Eighty percent received a rating of 9 or above, and everyone felt good. But superior employees didn’t feel they needed to do any better. Other workers thought their performance was acceptable when it wasn’t. Appraisers were avoiding the unpleasant task of delivering bad performance ratings, and the organization wasn’t giving them any reason to be tough. For every deficient employee who stayed at the company because the organization said he or she was competent, the company’s execution suffered. Because of its unwillingness to differentiate people’s contributions through performance assessments and raises, the company lost the opportunity to send important feedback to employees on what was relevant to executing the strategy — and where their performance was unsatisfactory.

Several years ago we worked with the new CEO of a technology company who had been the head of a business unit and had served for several years on the executive committee that made investment decisions. The new CEO knew from experience that the committee wasn’t tough enough on new investment requests. They were a collegial group; members supported their colleagues’ investment requests with the understanding their own requests would be supported in return.

The new CEO wanted a more discriminating process that would judge investment proposals on their merits. He also knew executive committee members faced little downside from approving unsound investment requests. Future bonuses might suffer if company performance wasn’t good, but that money wasn’t already in their pockets.

So the CEO introduced a new system to change this attitude: Each committee member was required to take out a personal loan of $1 million and invest it in company stock (the loan was guaranteed by the company, so the individuals could borrow at good rates). Unlike an outright stock grant, this scheme ensured that the executives had existing wealth at risk, and that they would lose money, and perhaps the ability to repay the debt, if they permitted poor investment decisions. With this new incentive to scrutinize investment requests, the committee became much tougher and more effective. And after a few sessions, teams began bringing better-researched and smarter investment proposals to the table because they knew if they didn’t, the committee was likely to turn them down.

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  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)
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