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 / Autumn 2008 / Issue 52(originally published by Booz & Company)


Design for Frugal Growth

Pull-based Functional Relationships
One aspect of organizational design that inhibits growth is the relationship between business units and functions. Although functions often operate in all three components of the organization — the core, the business units, and the infrastructure all have information technology, human resources, and finance staffs — the highest leverage lies in the relationship between business units and the infrastructure.

The way to increase the value of support services is through pull-based functional relationships. The business units pull services from the infrastructure, specifying their requirements and sometimes codesigning them, instead of having the services pushed on them in a company-wide package.

Pull-based functional relationships have existed for years. Many businesspeople still find the idea discomfiting; it means giving internal functions the autonomy to behave like a third-party provider. But a well-designed pull-based functional relationship becomes like the relationship between a loyal customer and a regular sup­plier. The supplier (the functional infrastructure team) cares about the customer’s opinion; the customer (the business unit leader) treats the functional staff as he or she would treat any favored external supplier, not like an internal team forced to jump through hoops. This level of mutual respect, when it occurs, is a far cry from the unfortunate dynamic in many companies, in which the business unit leaders and the functional infrastructure team tend to see each other as adversaries.

How can a company enable this type of relationship? One approach is to employ the same kind of service-level agreement (SLA) that companies use for shared services and outsourcing vendors. The trick is setting up the SLA internally and making it simple but effective. This contract establishes the types of services to be delivered, the internal cost of providing them (which can increase as the service improves), and the requirements for each side. At Amberville, SLAs are now required for all functional services, including logistics, finance, and IT. Any functional team, reporting through the infrastructure chain of command, effectively has a pool of 64 customers — the business units — and an incentive to learn from its services to each of them.

Differentiated Capabilities
No organization can be best at everything. The capa­bilities of a company are limited by the resources available, the skills of its population, the evolution of its existing infrastructure, and its experience. Choices must be made at the corporate core about the capabilities in which the organization will invest and the support to give them. The most important capabilities to invest in are those that distinguish a company from its competitors — or, as Alexander Kandybin and Surbhee Grover put it, those that can’t be copied. (See “The Unique Advantage,” s+b, Autumn 2008.)

One well-known example of a differentiated advantage is the “hot-fill” capability that PepsiCo Inc. gained in 2001 when it merged with the Quaker Oats Com­pany (and thus acquired the Gatorade brand). Hot-fill technology, used to bottle beverages such as juices and vitamin drinks without the need for preservatives, had previously been limited to relatively small brands such as Snapple (which had invented it); now Pepsi rolled out the technology in its Tropicana brand and in a new joint venture in bottled teas with Lipton, which was the first offering of its kind and which has since enjoyed an advantage over competitors.

A portfolio of capabilities is built primarily at the corporate core, because it involves significant long-term investment. (As with Pepsi, it may also involve acquisition.) The first step is a systematic evaluation of the “leverageable” assets of the company, those distinctive capabilities that determine what types of growth might be supported. Capabilities can be found in a wide range of functions, such as supply chain, manufacturing, product development, consumer insight, marketing, brand management, and customer management. Business units may be invited to collaborate in this as­sessment, making the case for the capabilities that they find most useful in the market. But ultimately, the corporate core makes these choices and investments.

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  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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