Beyond Functions
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.
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.
by Paul Leinwand and Cesare Mainardi
http://www.strategy-business.com/article/00161?gko=68ead&utm_source=itw&utm_medium=20160519&utm_campaign=fixed
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