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Published: March 28, 2003

 
 

Treating the Troubled Corporation

Dimension 2. Knowledge: What They Need to Know
Information is the lifeblood of the large modern corporation. Almost every manager has been in a situation when, despite having the best intentions and even explicit incentives, he or she didn’t have the right information to make an effective decision. The key to success for a company is to identify the critical information required to make the correct decisions and to ensure that this information is in the decision maker’s hands when he or she needs it.

Dimension 3. Incentives: What’s in It for Them?
A successful operating model must ensure that reward and incentive systems provide decision makers with clear direction and compelling reasons to act in the firm’s best interest. In other words, incentives — defined broadly to include both financial compensation and nonfinancial rewards, such as promotions, recognition, and perks — should be carefully crafted to motivate people to make the right decisions. At the front-line employee level, where decision authority is limited and success is predicated on how well the individual manages the trade-off between quality and quantity of output, an ideal incentive program might be a variable pay structure based on quantity of output and number of defects. A division manager with broad decision-making authority, on the other hand, might require a wider array of incentives — some financial and some not: stock options, fast-track promotions, and enhanced exposure to the CEO, to name a few.

Framework for Action
A large U.S.-based agribusiness company successfully put this approach to the test when it had to develop a new operating model to respond to pricing pressures from low-cost overseas producers. All three dimensions of the alignment framework came into play.

Companies need to build themselves with three critical dimensions: people, knowledge, and incentives.
First, people. In an effort to better distribute knowledge and decision-making authority so that individuals could react more quickly to marketplace conditions and growing conditions, the company delegated to the farm profit centers “local” decisions regarding planting, irrigation, and cultivation. Meanwhile, authority over harvesting schedules remained centralized to promote optimal utilization of shared resources, including harvesting equipment, mills, and grain elevators.

Second, information. New decision-support systems were built to provide farm managers the information they needed to make the best use of their new authority.

Third, incentives. A bonus system was designed to compensate farm and corporate managers for overall firm profitability, and farm manager bonuses were also based on individual farm profitability targets. All profitability targets were adjusted for a range of crop price levels, to focus managers on those factors that they could control, rather than exposing them to uncontrollable crop-price risk.

After it realigned its operations in this way, the company’s key transformation was to convert individual farms from cost centers into profit centers and to redefine the way corporate headquarters supported them. Shareholder value climbed 48 percent in the two years after this new operating model was introduced.

A New Model Is Born
A focus on organizational concerns, or rather the critical organizational constraints that underlie them in a systemic fashion, is often the key to unlocking unrealized potential and vastly improving financial performance.

A focus on organizational constraints is often the key to unlocking potential and vastly improving financial performance.
To resolve persistent organizational problems, executives must first understand where critical breakdowns are occurring and why they’re happening. They must then determine what changes to the operating model are necessary to create the conditions for optimal performance. In designing these changes, leaders must be mindful of the ripple effects that can cascade across an organization once one element of its architecture is altered.

 
 
 
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Resources

  1. “Karen Stephenson’s Quantum Theory of Trust,” by Art Kleiner, s+b, 4Q 2002. Click here.
  2. “The Organization vs. the Strategy: Solving the Alignment Paradox,” by Jeffrey W. Bennett, Thomas E. Pernsteiner, Paul F. Kocourek, and Steven B. Hedlund, s+b, 4Q 2000. Click here.
  3. “In a Slump? Realign, Don’t Re-Engineer,” by Jeffrey W. Bennett and Steven B. Hedlund, s+b enews, 5/01/01. Click here.
  4. “Constrained Change — Unconstrained Results,” by Jeffrey W. Bennett, s+b, 3Q 1998. Click here.
 
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