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The Four Bases of Organizational DNA

We showed in a simulation that if farm managers could bid for use of the mill on particular dates, it would strikingly improve the company’s efficiency. If a manager saw that his highest-yielding acreage was ready to harvest and couldn’t wait because rain was predicted, he could bid more for mill time. No longer would someone back at headquarters have to hunker down with a spreadsheet, making educated guesses based on the previous year’s yield data and taking frantic phone calls from farm managers. Market-based pricing of mill time would allocate scarce resources better than a central planner could. And with this new system, decisions would reflect the real-time knowledge of the farmer in the field observing the sky, testing the ripeness of the crop, hour by hour, acre by acre.

Adaptive DNA
Although we have illustrated the four bases of organizational DNA separately to emphasize their distinct characteristics, they clearly are intertwined. Changing structure requires changing decision rights; to make effective decisions, employees need new incentives and different information. At the agricultural grower and processor, the new structure touched each of these elements — the individual farm as a business required new decision authority for farm managers, new metrics by which to measure their performance, and new rewards based on their individual success. This interdependency is evident in all of these company stories.

Considering — and changing — a company’s DNA holistically means weaving intelligence, decision-making capabilities, and a collective focus on common goals widely and deeply into the fabric of the organization so that each person and unit is working smartly — and working together. It’s one thing to achieve well-coordinated intelligence among senior executives. It’s another thing entirely to touch every level of an organization all the way down to the loading dock. What every employee does every day, aggregated across the company, constitutes performance.

The best organizational designs are adaptive, are self-correcting, and become more robust over time. But creating such an organization doesn’t happen quickly; it can take several years to get the basics right, and there is always a need for fine-tuning. This may explain why leaders of companies that are truly ailing — and who need to reassure shareholders as fast as they can — often don’t have the patience for changing decision rights, motivators, and information flows. They’re more likely to cut the structure and see what happens than to take time to ensure that structural changes actually result in sustained productivity improvements and steady gains in shareholder value. But neglecting this hard work may also partly explain why some of these CEOs are no longer in charge.

No company may ever totally master the enigma of execution. But the most resilient and consistently successful ones have discovered that the devil is in the details of organization. For them, organizing to execute has truly become a competitive edge.

Focus: Testing Quest Diagnostics’ DNA

DNA testing can be as valuable to corporate health as it has become to human health care. An analysis of a company’s “genetic material” can isolate the underlying causes of and potential solutions to organizational dysfunctions, and even head off problems before they start.

Consider the case of the U.S.-based medical laboratory testing company Quest Diagnostics. Originally a division of Corning Incorporated, Quest Diagnostics grew in the 1990s through the acquisition of hundreds of small independent testing laboratories. Spun off from Corning in 1997, the company was losing money and battling fines for billing fraud and other abuses in a number of the laboratories it had bought. Chairman and CEO Ken Freeman, then the newly appointed leader of Quest Diagnostics, recognized that the DNA of an enterprise formed by the union of so many different entities, each born in a different time and place, with many different parents, could readily become a monster. So he was determined to focus his attention on improving organizational DNA across the entire company.

Immediately after the spin-off, Mr. Freeman and his top management team took control of key decision rights to ensure that the company’s turnaround effort was coherent and driven hard. When the company acquired SmithKline Beecham Clinical Labs in August 1999, they again deliberately centralized decision rights among a small senior team. A set of integration teams headed by the leaders of both companies methodically worked through the long-term vision and short-term tactics for each area of the new company, again, to ensure consistency across the enterprise. The financial payoff was immediate: Prior to the deal, revenues had typically declined upward of 20 percent following a major acquisition. In this case, Quest Diagnostics not only didn’t lose business, revenues grew at or above industry growth rates during the integration process. This was the first time such postmerger growth occurred in the industry.

As Quest Diagnostics’ turnaround progressed, decision rights were decentralized gradually, first by placing supervisors into various units who led change and taught employees new behaviors, and then by empowering frontline staff. Although many parts of the Quest Diagnostics organization are now high performers and largely self-directed, it has taken seven years to get there.

Today when Quest Diagnostics acquires a company, Mr. Freeman and his team concentrate on two of the four organizational bases, motivators and information, recognizing their interdependency and combined influence on individual and organizational behavior. Among the first “gene therapies” they perform is to introduce a comprehensive and varied set of metrics that go well beyond the typical financial performance measures that most companies use. There are measures for customer retention, the time it takes to pick up a call in the call center, the time it takes to process a specimen in the labs, employee satisfaction and attrition rates, and more. The system is designed so that all employees know how they can personally influence one or more core performance measures.

The only way this information can influence the day-to-day behavior and decisions of employees throughout the organization is if decision makers have the information on hand when they need it. Quest Diagnostics posts various metrics on different timetables depending on the type of management issue: Customer retention metrics are posted at least once a month; specimen turnaround time is posted every morning.

Finally, the company ties these metrics to individuals’ bonus payments so that information not only informs, but also motivates productive behavior. Since virtually everyone in the company can affect customer retention in some way, Quest Diagnostics uses the customer retention metric very broadly in its performance-based compensation programs. Ultimately, the bonuses of all 37,000 Quest Diagnostics employees depend in some way on meeting the customer retention target.

“If we have a shared goal that says we’re going to reduce customer attrition, that doesn’t mean it is only for people in sales. It impacts people picking up the specimens, people who draw and perform tests on the specimens, and certainly people in billing. If there are lots of complaints, the customer is going to leave. By having shared goals, you get speed and alignment,” says Mr. Freeman.

To make the motivators as specific and powerful as possible, customer retention metrics are measured not just organization-wide. They are divided up by region, so that people are paid on the basis of customer retention performance in their own region, where they can have the greatest influence.

The aligning and motivating power of bringing information and incentives together is reflected in the firm’s strong financial performance. Since Quest Diagnostics was spun off from Corning in 1997, the company’s stock price has increased 730 percent, compared with a 41 percent increase in the S&P 500 Index during the same period. Having successfully carried out a classic turnaround and taken the
lead in consolidating the industry, Quest Diagnostics is now driving growth organically and has become the clear leader in the U.S. medical laboratory testing market. Last year, the company earned $322 million on $4.1 billion in revenues.

— G.N., B.A.P., and D.M.

 
 
 
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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)