Month: November 2011

I've been thinking about business models this week – what makes it easier or more difficult for companies to change or adjustment their model at regular intervals? Failure to do that has significant consequences as AT & T, a US telecoms company, found out. Originally established in 1885, in 2005 it was bought by SBC for around $16 billion. SBC was one of the 'baby bells' that was spun out of the company, known as 'Ma Bell,' as part of a 1984 court-ordered break-up.

The failure, at the time, of leaders of AT & T to change its business model in order to take advantage of new technologies such as wireless and internet were cited as reasons for the takeover. But they are not alone in this failure as Clayton Christensen, of Harvard Business School, and author of several books on innovation said on hearing that AT & T been bought. 'It is a tragic fall [for AT & T] and I lament the passing, because it was a huge disruptive success in its day. The world is filled with companies that are marvellously innovative from a technical point of view, but completely unable to innovate on a business model.'

As I was working on this I came across a white paper Retrench or Refresh? Do existing business models still deliver the goods.

The authors suggest that generally speaking, companies who are more adept at rethinking their business model have the following attributes:

1. Flexibility: to evolve to business models where a) products and services are able to be paid for on an as needed basis, for example, in the IT world from the software license model to the software as a service model, b) companies can scale up or down without loss of business continuity.

2. Ability to deliver short-term cost savings and/or efficiency gains to customers: to offer customers a greater level of granularity in the way products and services can be bought, for example Ryanair's menu of options compared with British Airway's all-in single price approach.

3. Capacity to drive innovation: to engage with those interested in participation in open-innovation (looking to people outside the organization to come up with new and/or improved product and service ideas)

4. Capability to enter new markets: to look outside their traditional markets and be in a position to offer products and services tailored to customers in these new markets.

5. Collaborative ownership structures: to achieve economies of scale and reduce competitive pressures

6. Use of the digital economy: to help reinvent what the company is capable of offering and how it offers it.

One way of developing the adeptness and attributes required was suggested by Peter Drucker (and I've written about this before). He called it 'Planned Abandonment' saying that the time to abandon a product, service, policy, rule, or other organizational element is much earlier than when it begins to cause problems. As a rule it is time to abandon when any of the three following conditions apply:

1. The product, service, market, process, or whatever still has a few good years of life
2. Its greatest virtue is that it is fully written off. Ask instead 'what is it producing?'
3. An old and declining product, service, market, process, etc is being maintained at the expense of new and growing products, services, markets, processes, etc.

Drucker suggested that the leadership team should regularly ask a series of questions aimed at pinpointing areas for abandonment. This is a good suggestion and one followed by Lenovo (a computer maker). Its team of nine leaders (down from two dozen at one time) are based in six cities and three continents, yet they meet every other month to review the business typically spending three or four days together in a key market, visiting local stores and listening to partners, customers, and employees.

The goal of these review meetings is to align the organization's goals, and take quick action where things are not working well. For example, following a leadership team visit to India, Lenovo restructured its business model there to drive growth in segments like small and medium business (SMB), government and education, which were not getting much attention earlier. The company separated SMB, earlier part of its consumer division, to make it an independent business. It also created different teams to handle its government and education business, as these required a different focus. These decisions were made because although it was the leading PC vendor in the enterprise space in India, success in that arena alone would not help to improve its share in India.

Lenovo, which launched its first personal computer in 1990, has the goal of becoming the first global consumer brand to emerge from China, and its management team is willing and able to change the company's business model as required to meet this goal. For other organizations a barrier to business model change are the skills of the management teams, and/or additionally the sheer complexity of the structures, processes, policies, and working practices that for any long established company have been in place over many years.

In a fascinating blog post, The Collapse of Complex Business Models, Clay Shirky, (writer, consultant, lecturer) discusses the idea that an organization's failure to respond to stress in the environment is not a lack of will it is simply that they cannot. One of the examples he cites is AT & T, mentioned earlier. His suggestion is that the complexities of long established organizations make them unable to change 'In such systems, there is no way to make things a little bit simpler – the whole edifice becomes a huge, interlocking system not readily amenable to change. .. Under a situation of declining marginal returns collapse may be the most appropriate response … Furthermore, even when moderate adjustments could be made, they tend to be resisted, because any simplification discomfits elites.'

What's your view? How easy is it to change a business model? What are your success stories in this?

Too frequently in the case of organizational problems arising the first response is to look to the organization chart i.e. names of jobholders in boxes that show a formal reporting relationship between the jobholders.

When people are trying to decide the 'best' structure for their organization they often forget that work has to flow through it, and that different structures have different attributes. For example, that adaptability is poor in a traditional hierarchy but good in a network. Instead structure decisions are made based on personalities, politics, and expediency. This is a mistake on two counts. First, failing to explicitly recognize that structure choices impact organizational capabilities, and second that getting work done efficiently in order to meet organizational goals is, or should be, the purpose of the organizing frameworks and structures.

On the first point – that structure choices impact organizational capabilities – Conway's law says the technical architecture of a computer system reflects the bureaucratic structure of the organization that produced it. Think about Microsoft as an example. It has the Windows Group, the Office Group and the XBox group, and their systems are isolated from each other. Although at one stage Office and Windows were 'joined at the hip', trust-busters made Microsoft erect a Chinese wall between the two organizations, so their architectures had to bifurcate.

On the second point – that getting work done efficiently in order to meet organizational goals is, or should be, the purpose of the organizing frameworks and structures – organization charts offer almost no insight into how work is done. Work occurs in what is commonly called the "white space" in the chart – and can be mapped by organizational network analysis, and social network analysis. In most cases the organizational network analysis chart showing how work is getting done via information flows and collaboration bears very little relationship to the formal organization chart.

The possibilities that technology now offer for charting the way work actually gets done in organizations and the advent of new business models raise the question about the future of the traditional organization chart. Are they of any real value? Three different but common scenarios make it a question worth thinking about.

Take the way work gets done. In many organizations employees play multiple roles, for example, working on project teams, (perhaps more than one at a time), contributing expertise and skills in a variety of forums, and they often work for more than one boss. In these cases, and even using dotted lines, it is not so easy to allocate them to a slot in an organization chart.

Now consider the business model of a new organization. LiveOps, established in 2000, deploys cloud computing to virtualize their business services. It is a cloud-based call centre service that manages a network of more than 20,000 independent at-home agents. Companies use the service on a pay-as-you-go model, either as a fully outsourced call center or to augment their own. The technology enables an on-demand, scalable service to subscribers. The relationship of the stakeholders – LiveOps, the independent agents, and the companies buying the services of the agents via Live Ops is not easily depicted in a standard chart. Nevertheless the three parties together form an organization that delivers a service to a customer.

In other organizations fully employed members of staff work side by side with contractors, consultants, and temporary workers. It is difficult to argue this type of staff augmentation is not part of effective organizational functioning and success (why pay for their services if not to contribute?) yet these people do not appear on a standard organization chart.

In all three instances – and others like them – organization chart development and maintenance could well be a redundancy that is better not introduced in the first instance, or if it is already established should be reviewed for its value. Is it enough to spend time, effort, and money to produce and maintain something that shows in broad terms the level of formal authority of various positions, their numbers, and their presumed reporting relationships?

Sun Hydraulics is an example of an organization, established in 1970 and profitable from the start, which decided not to have an organization chart. Its website explains:

Our workplace is as distinctive as our products, and provides just as many advantages. We have no job titles, no hierarchy, no formal job descriptions, organizational charts or departments. We have open offices, promoting open communication. This environment encourages innovation and helps develop a spirit of entrepreneurship throughout the organization. The result is a workforce inspired to satisfy every customer, no matter the challenge.

W. L. Gore, also very financially successful, takes the same approach

Gore has been a team-based, flat lattice organization that fosters personal initiative. There are no traditional organizational charts, no chains of command, nor predetermined channels of communication.

If the decision is made that it is of value to spend time, effort, and money to produce and maintain something that shows in broad terms the level of formal authority of various positions, their numbers, and their presumed reporting relationships then the start point is to determine the work flow, the activities, and the work volume that needs to be done to deliver the business strategy from this the number of people and their grade levels can be gauged.

Are organization charts as we know of any organizational value? What's your view?

(Thanks to Michael Stanford for contributions to this content)

In my research on organizational health I've been reading Warren Bennis's book Changing Organizations definitely a golden oldie. In it he has a quote from Wilfred Brown, Chairman and Managing Director of Glacier Metal Company (1939-1965) who said 'Optimum organization [forms] must be derived from an analysis of the work to be done and the techniques and resources available.'

This strikes me as eminently sensible, and is a precept I teach in the organization design training programs I facilitate. But it is highlighted by looking through the lens of organization health. Boiling down the many definitions and lists of characteristics that I gathered it seems that four attribute emerge. A healthy organization is one that has:

o Effective performance or functioning
o Well managed adaptation, change and growth
o A strong sense of alignment interdependency and community
o A spirit of energy, vibrancy and vigour, perhaps what the on-line shoe retailer Zappos defines as WOW

This being the case then what form should its organizing structures and forms take? Too frequently organizational forms are equated with the organization structure chart i.e. names of jobholders in boxes that show a formal reporting relationship between the jobholders.

What these structure charts lack is any acknowledgement of the work that has to flow through them. This is a mistake as failing to explicitly recognize that getting work done efficiently in order to meet organizational goals is, or should be, the purpose of the organizing frameworks and structures. Too often this formal structure chart is focused on personalities, politics, and decisions made that are divorced from a careful consideration of the business model and the work.

The business model is the 'what and how' of a business in terms of the choices and decisions made in relation to its specific operation. Think about Walmart (or Asda in the UK) for example. The choices and decisions that Walmart makes about its offer, partner networks, distribution channels, and so on make the company distinctively Walmart and not Tesco or a similar competitor. Walmart operationalizes a business model that is noted for:

o Low labor costs (it is a no union company)
o An authoritarian structure
o Hyper-centralized managerial control
o Requiring workers promoted to the managerial ranks to move to a new store in a different location
o Workweeks around 50 hours or more, which can surge to 80 or 90 hours a week during holiday seasons.
o Cutting out the middlemen and shifting costs and risks onto the manufacturer.
o Bringing warehousing, distribution and trucking in-house
o Building new stores around distribution centers
o Harnessing retail information through high-tech barcode and product-tracking software
o Revolutionizing the relationship between merchant and vendors.

These business model choices and decisions mean that the customer gets the lowest possible price for a product.

Through the formal organization chart that depicts hierarchies and formal relationships. It includes (in relation to job descriptions and level) formal allocation of accountabilities and authorities.

Through the informal organization chart that is revealed through social network analysis and the way people learn how to do their work in relationship with others. It includes networks of influence, and sources of informal power and authority.

Through a combination of explicit and informal in patterns that could be revealed by investigation and analysis. (For example why does person A ask her supervisor to make a decision, but person B in the same role but with a different supervisor makes the decision herself).

A healthy organization is one in which the four elements of business model, formal work organization, informal work organization, and the combination of formal and informal work organization are closely aligned.

Does this make sense to you? Have you seen alignment in your organization? Let me know.

I was on a flight last week reading the European Wall Street Journal. The front page (October 31) had a great photomontage showing that

1. Truck maker Scania plans to pare production by as much as 15%, beginning in November.
2. Volvo intends to scale back truck manufacturing next year.
3. PSA Peugeot Citroën plans to suspend production at a plant in Slovakia. The company also said it would lay off 6,000 workers, mostly in France.
4. Liquor maker Diageo restructured its European operation by centralizing certain functions and shifting investment away from Western European markets.
5. Saab Automobile agreed to sell Saab to Chinese companies Pang Da and Zhejiang Youngman for $141.9 million, following a two-year struggle to turn the company around after decades of losses.

On the next page were a further set of news items:

6. BT Group said it will complete the rollout of its fiber broadband network to two-thirds of U.K. premises by the end of 2014, one year earlier than originally planned.
7. Yahoo has been exploring a potentially tax-free way to dispose of its roughly 40% stake in the Chinese e-commerce company Alibaba.
8. Google announced the creation of about 100 online video "channels" on its YouTube website that will have new original programming involving celebrities such as the singer Madonna.
9. Meg Whitman is moving to stabilize H-P after 14 months in which the company removed two CEOs. Some seem to think her efforts are working, so far.

All of these major shifts in company strategy were attributed, for the most part, to the financial turmoil and the aftermath of the recession going on in Europe at the time. Reading this I wondered what was going on behind the scenes. The companies mentioned all presumably have strategists, organization design and development people, and line managers all geared up and ready to implement on the strategic change in direction.

Or do they?

Later in the week I facilitated a webinar for the Human Capital Institute on the ten myths of organization design. In the scene setting piece I mentioned the WSJ piece, commenting on the range of business strategy decisions and asking the participants, predominantly HR practitioners:

What is your response to this type of news item:
a) As a reader?
b) As a line manager in one of those organizations?
c) As an organization designer/consultant working with one of those organizations?

Then asking: Do these strategic business decisions require an organization design piece of work?

To my mind each of the strategic decisions requires an organization design/redesign series of activities and a commonly question came up from one of the participants – why is it that we get asked to implement on a decision that has been made, without having had input to the original decision?

This participant wanted to know what kind of questions to ask to demonstrate that his involvement earlier in the strategy decision making process would be helpful. This is a tricky one because once the decision has been made the options are more limited. In this case the types of questions that are useful run on the lines of :

Context questions.
This includes an awareness of what's happening in the context of the situation, including values, cultural issues, and environmental influences. Sample questions include:

• What is going on in this situation?
• What else do I need to know? What information is missing?
• How do I go about getting the information I need?
• What about this situation have I seen before? What is different /dissimilar?
• What's important and what's not important in this situation?
• What are the risks and rewards in this situation?
• How quickly to we need to act?

Assumptions questions
This involves analyzing assumptions about the situation as well as examining the beliefs that underlie choices. Sample questions include:
• What has been taken for granted in this situation?
• Which beliefs/values shaped any assumptions?
• What assumptions contribute to the way we are handling this situation?
• How can we challenge our assumptions to come up with other, potentially better responses?

Exploring questions
This involves thinking about and imagining other ways of looking at the situation, Sample questions include:
• What are two different responses to this situation?
• Are there others who might be able to help us develop more alternatives?
• Of the possible actions which are most reasonable?
Why are the others not as reasonable?
• Are there other resources that need to be mobilized?

A better route, that gets you into the dicussions earlier, is to develop organizational skills, political savvy, and business knowledge so that you are in the position of flagging things going on in the environment that are likely to require an organizational response. This means taking action yourself to keep up to speed. Things that I look at include TechCrunch, Science Daily, The Economist, Fast Company, McKinsey Quarterly, Strategy+Business, Harvard Business Review, WSJ, and the business pages of the FT and NY. Yes it's a lot but it does mean that I can be active in saying 'these are the things going on in the context that we need to be ready for when they hit us'.

How do you keep up to speed? How do you get in on the strategic decision making process?

Different point: I came across an excellent website with two training modules one on organization structure and one on organization design. Take a look – they're well worth it.