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Published: August 26, 2008

 
 

Design for Frugal Growth

Accountable Business Units
Just before its redesign, Amberville had 25 global divisions, all located in the company’s headquarters in the United States. Over the course of the following year, they were reconfigured into 64 market-facing business units — some devoted to regions such as southeast Asia, others to product brands in categories such as ice cream and chewing gum. Quadrupling the number of Amberville’s business units also meant quadrupling the number of business leaders, and giving each responsibility for his or her operations.

Businesspeople often talk about “owning” their assignment, but it’s not always clear what that means. At Amberville, “ownership” meant taking on a dramatically increased level of accountability. The managers of business units now defined their market, operations, and strategic space to decide how they would deliver superior growth. Business units were granted greater control over the cross-functional resources assigned to them, including the sales and customer service staff. Business unit managers could deploy these resources flexibly on the basis of shifts in market needs. In­formation technology staff were assigned to work with each business unit to help it obtain faster, more complete access to market and customer data.

Before the reorganization, the P&L-based budgets for marketing, R&D, sales, and other functions had been set by the core, and the business units had to operate within these limits. For example, if a business unit had received US$100 million for its R&D budget, that was the limit of its innovation spending. Now, each business unit leader had a top-line revenue and a bottom-line profit target. All the funds in between could be deployed as needed. If one product’s strategy de­pended heavily on innovation, the business unit leader could invest $150 million in R&D, taking the money from other functions. Meanwhile, a business unit whose strategy was based on operational excellence might cut back on R&D and invest instead in production skills.

Amberville’s core was now treating the business units the same way a heavily involved private equity investor might treat its favored companies. The business unit leaders rapidly learned firsthand what it was like to be an entrepreneur. They defined their strategy, they executed it, and they reaped personal rewards if they succeeded and suffered personal consequences if they failed to deliver their targets. Their own money wasn’t at risk, but their career advancement was, and they had fewer institutional means of masking poor performance. Business unit leaders came to think of their new system as “autonomy with boundaries”: They could accomplish much more on their own, but their limits and reporting responsibilities were clearer and less ambiguous than they had been before.

Meanwhile, the jobs of the division heads and core leaders shifted from operational involvement to guidance. They could approve requests for funds, help de­velop investment plans, give advice on the hiring of key players, and assist with customer relationship development. They did not have the authority to create strategies or manage operations, but their own careers were closely dependent on the success of the more junior business unit leaders. “It’s like being a football coach,” said one core leader. “You’re not directly playing, but you’re still responsible for the business. If your team loses three years in a row, you’ll still get fired.”

Amberville’s experience is typical. When business units — whether organized by geographic region or product and service category — are accountable for their strategy and operations, they deliver superior growth. They can execute their plans far more quickly, without having to wait for approval and second-guessing the internal politics of the core. They have more to gain from delivering results, and no place to hide when performance falls short. Decision rights go to those who have the closest understanding of consumers and the external market. Because accountable business unit leaders pay close attention to business practices, the learning curve of the entire operation accelerates. Indeed, the business unit becomes more skilled at reducing overhead than ever before, because its leaders know that they can rapidly apply their cost savings to profitable investments as they see fit. So much for cost and growth consciousness being at odds.

 
 
 
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Resources

  1. Barry Jaruzelski and Kevin Dehoff, “The Customer Connection: The Global Innovation 1000,” s+b, Winter 2007: Study of R&D spending data shows that alignment with strategy and customer insight boosts the impact of innovation on performance.
  2. Andrew Martin, “In Live Bacteria, Food Makers See a Bonanza,” New York Times, January 22, 2007: Story behind the Danone launch of Activia yogurt.
  3. Gary L. Neilson, Karla L. Martin, and Elizabeth Powers, “The Secrets to Successful Strategy Execution,” Harvard Business Review, June 2008: Complements the suggestions in this article by showing why effective organizational redesigns start with decision rights and information flow.
  4. Sankaran Venkataraman, “PepsiCo: The Challenge of Growth through Innovation,” University of Virginia Working Paper No. UVA-S-0133, 2006: Compelling case study of Pepsi’s innovations and growth strategy, demonstrating many of the precepts in this article.
  5. For more thought leadership on innovation, sign up for s+b’s RSS feed.
 
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