Conventional organizational structures may be obsolete. How about a model based on capabilities instead?
Note: This article was originally published by Booz & Company.
The prevailing functional model in most companies dates back to the 1850s. Some of the first private-sector functionaries were railroad telegraph operators who managed schedules. Soon after, food and tool companies created sales forces instead of depending on outside wholesalers as intermediaries. Then came finance departments, followed by in-house research and development labs, which took the place of R&D contractors—including the original labs of Thomas Edison and Alexander Graham Bell. By placing their specialists at headquarters, divided into corporate functional departments, large companies could make better use of their people’s expertise, give them career tracks, and harness the power of scale to build superior capabilities. During the decades that followed, as companies grew steadily, the “corporate staff” (as it was originally called) grew accordingly.
By now, the functional model has become the conceptual core of nearly all organizational structures, public and private. It is so ingrained in the daily activities of most companies that it is rarely questioned. Even when functions are seen as “shared services,” which would place them relatively low on the org chart in many companies, they are typically the most permanent parts of the enterprise. Business units come and go with the product life cycle, but finance, HR, marketing, legal, and R&D last forever. Even in matrix organizations, the functions maintain quite a bit of power, managing career tracks and a huge portion of discretionary investments.
The value of functions is undeniable; no company could do without them. But the business and organizational models that govern functions need updating. The most important business practices and collaborations no longer fall neatly into groupings designed many decades ago.
Perhaps the most obvious symptom of distress from the functional model is the widespread problem of incoherence. Most functional teams are good at many things, but great at nothing. They often struggle to meet the needs of all their constituents, juggling an endless (and sometimes conflicting) list of demands from line units; they never manage to build the type of advantage or differentiation that is required for long-term success. The underlying problem is not a lack of desire to focus, a lack of functional ability, or an inadequate budget. The functional organization simply no longer serves companies as effectively as it once did, in three important ways.
First, the expertise needed to differentiate a company and win in the marketplace is much more complex than it was in the past. If a company wants to be better than any other, at something relevant to its customers, it must be more efficient, technically proficient, and creative in its specialization than it ever was before. Walmart succeeds not because of generic supply chain expertise, but thanks to very specific logistics, inventory processes, buying standards, and labor models that it created for itself. Amazon succeeds not because its people apply broad marketing expertise, but because it excels at marketing capabilities that it developed. It has its own approach to the management of user-generated content, the in-depth tracking of consumer buying behavior, and the innovation of new features based on the resulting insights. Although these two companies compete and have even hired each other’s experts at times, they need distinctly different forms of specialized expertise.
Second, creating meaningful differentiation requires capabilities that are almost always cross-functional. For example, building a competitive global brand requires more than a marketing skill set. It requires a plethora of competencies, including managing digital media and tracking consumer insights (both of which involve IT), relationship building (which requires good customer service and interface design), ethnographic insight and employee engagement (enlisting talent and HR), highly targeted product design and development (engaging R&D), and more.
Real-world examples include Honeywell’s ability to launch breakthrough technology products tailored to market needs around the world, drawing on its capabilities in market insights, engineering, research and development, and customer service; and Inditex’s fashion-forward but low-cost retail model, encompassing marketing, IT, manufacturing, and sourcing. Some clothes sold in Inditex’s Zara stores are made in its own factories, and others are outsourced to garment shops overseas. The chain can thus offer all its wares at a lower cost than competitors can, while being more responsive to consumer taste and demand. Ikea’s stylish but utilitarian furniture, similarly, combines functional expertise in design, sourcing, manufacturing, pricing, packaging, logistics, the customer experience in its retail stores, and cost management; all of these reinforce the others. This level of collaboration is unfamiliar to many functional staff members; even in cross-functional teams, they don’t usually get opportunities for the continual, ingrained collaboration that is needed to build differentiating capabilities.
Third, functions have a natural tendency to become isolated organizational silos, focusing on their own excellence and performance instead of the company’s strategy. The specialists’ natural imperative—to be excellent in everything they do—leads to incoherence. Many functions have devoted a significant part of their budgets over the years to initiatives and technologies that make them world-class, but that have very little to do with the true drivers of the company’s success.
Although all these problems can be addressed in small ways, none of them can be fully resolved under the current functional model. In that context, it seems increasingly likely that the functional model is obsolete. But if so, what might replace it?
The most common solution used today is the cross-functional team. Many companies try to manage complexity by assembling committees of people from the relevant professional groups to solve particular problems. Unfortunately, many cross-functional teams fall far short of delivering effective and efficient solutions. They rarely have the time they need to resolve the different ways of thinking that people bring from their professional specializations. When the team members first come together to work on a common problem, they often misunderstand one another. The teams are also limited by their conflicting functional priorities and sometimes by a lack of clear accountability. Many of these teams are temporary; they will dissolve once the project is over, and their members may not work together again. They therefore have little incentive to overcome these hurdles.
Permanent cross-functional teams tend to fare better. A growing number of innovation groups bring together disparate functional skills (typically R&D, marketing, IT, and research) to facilitate the launch of new products or services. Frito-Lay, for example, set up a unit like this in the early 1980s; merchandising, IT, and supply chain executives worked together to develop the company’s celebrated direct-store-delivery capability, enabled by handheld devices that Frito-Lay developed itself. Similarly, in the early 2000s, Pfizer Consumer Healthcare (since sold to Johnson & Johnson) set up communities of practice that included lawyers, health professionals, and marketing experts who could help spread key ideas and best practices to brand and product groups around the world.
These permanent cross-functional teams vary in the degree of structural change they require. Some are relatively informal, whereas others involve major shifts to the organizational structure. Some may even have representation on their company’s executive team. Their leaders are officers with titles that represent cross-functional capabilities: chief risk officer, chief innovation officer, chief growth officer, and so on.
As they gain in maturity and in their level of contribution to their companies, these groups may evolve into a still more robust organizational construct: an overarching organizational structure, such as a center of excellence, based on distinctive capabilities. The members of these capabilities teams would be assigned completely to these units, reporting to them rather than through a functional hierarchy, and spending their entire workweeks, and possibly their entire career, within a cross-functional context. For example, a food company might have a single large group overseeing its remarkable distribution capability—professionals who were formerly part of marketing, sales, IT (for analytics), supply chain, sourcing, and legal organizations would all report to the same part of the hierarchy, all working together to maintain and improve their products’ presence on retail shelves.
This approach would link the specialists of the enterprise more directly to the capabilities that directly support the company’s core strategies, lifting them to a new level of accountability and reward above the status they would have had in functions like supply chain, finance, or marketing. Instead of providing services, they would be part of a team responsible for one of the organization’s core strengths. In other companies, new senior roles are coming to the fore, such as chief innovation officer, chief risk officer, and chief customer officer. These leaders oversee people from multiple functional groups, such as supply chain, marketing, finance, and R&D, with the idea of developing capabilities systems. For example, many companies, particularly those with complex or highly engineered products, are rethinking the product manager’s role. The “strong-form” model gives responsibility for top-line growth and other financial outcomes to one person, who also has cross-functional decision-making authority (see “Product Management Gets Stronger,” by Barry Jaruzelski, Richard Holman, and Ian MacDonald, s+b, Spring 2013).
In constructs like these, the original, more specialized functions may take on more of a role in people development, serving as a professional support community and training and development base for particular branches of expertise. Wherever they sit in the organization, specialists would be able to draw on this support; they would still be tracked and rewarded for their functional skills, but they would also have opportunities to cross over into broader roles. This is analogous to the way that symphony orchestras operate; conductors are responsible for the whole work, but if a soloist needs help, he or she will turn to masters of the particular instrument for guidance.
Different companies will find different paths, but every company will have reason to reconsider the functional organization as a primary way of managing specialized expertise. The most important factor shared by all these alternatives is the capabilities imperative: Companies need to be clear about what they can do better than anyone else, how this benefits them in the market, and how they need to build and improve their capabilities to fill the gaps. With this clarity, leaders can assemble the right expertise in the right combination. This will give functional leaders and staff the support they need to be truly fit for purpose, to match their own work to the overall business strategy of the enterprise.
The most farsighted functional leaders are not just waiting for these changes to affect them. They are taking the first step in the transition by helping evaluate the current state of their company’s capabilities system, and suggesting ways to bring it closer to its potential. This is part of the functional leader’s new mandate as a strategic partner for the enterprise: delivering not what individual constituents demand, but what the enterprise needs.
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- Paul Leinwand is a partner with Booz & Company based in Chicago, and coauthor (with Cesare Mainardi) of The Essential Advantage: How to Win with a Capabilities-Driven Strategy (Harvard Business Review Press, 2011).
- Cesare Mainardi is the chief executive officer of Booz & Company.
- Another version of this article appeared on the HBR blog network.