Thursday, November 08, 2007

The organization conundrum

It is a classic question. Should companies organize around functional lines or should they be designed around customer segments ? Or should they go for the infamous 'matrix' structure.

To take an exaggerated example, if you sell 10 types of ice cream to ten distinct segments, should you have 10 teams, each with its own marketing, sales, supply chain etc. ? Or should the functional departments be separate with each contributing to the efforts for all segments ?

Each approach has its pros and cons.

Organizing around product segments will ensure that each segment gets full attention with a dedicated team focused on its success. In this context, the functional structure suffers from the fact that no one is truly responsible for an entire product, and people feel more accountable for their own narrow areas of function ("I made the best ad. copy I could, now it's up to sales")

Organizing around functions will ensure that experts of each function remain focused on their areas of expertize and benefit from the learning curve. Instead of having 10 copy-writers, none of whom gets enough experience, you have one who gets better and better at his job. In this context a segment based organization suffers from making everyone a generalist and learning curve effects are wasted ("I need a real expert here, but he's working on the other segment")

So what's the solution ? Well it depends on the specific industry, on how close or distinct the product segments are, on how much cross-learning is possible between segments, on how much functional expertise is needed to do the job For instance intel must have dedicated functional teams developing microprocessors, the job is too technically complex and you need dedicated specialists who are focused entirely on their function. But Walmart can have generalists who look at all aspects of specific product lines.

It will also be the case that some high-skill functions will always be treated as functions, while the rest of the corporation is organized around segments.

So like many other business issues it is not possible to give a single solution that will fit all situations. But there are a few key ideas can be applied

One such key idea is to separate work content from incentives. At a high level, managers should be concerned with the overall health of the business. That does not mean that they have to be managing the entire business.

So while the work content will be tailored to the unique situations of each company and will inevitably fall somewhere along the functional-segment continuum, the explicit work incentives can be tied more directly to the success of the segments. This will ensure that while the individual functional experts are shared across segments and therefore get the maximum learning curve efficiencies, the experts will be compensated and incentivized based on the success of the segments they help develop. (quadrant [A] in the diagram)



Several things have to be in place for this to work.

First, the functional experts must enjoy a high degree of recognition for their own work - independently of the results. They must also understand what success of a segment means: is it sales ? revenues ? market share ? The management in this case will have to take an active role in sharing with everyone what the overall business results mean and how to interpret them. This also means in turns that the organization itself must have a clear vision - and the definition of 'success' must be well established and accepted by all.

While designing the most effective organizational structure is a complex business, the framework of separating content from incentives will help in better conceptualizing the challenges and constraints.

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