Listening to more doom and gloom from the financial pundits this morning risks becoming depressing; I’m going to try to focus on what’s next. Not only more cheerful, but if we’re lucky and can pool some good thinking, we might collectively prosper. This entry centers on organization structure; while technologies and offerings clearly will drive an economic renaissance, their creation requires organizing individuals and teams.

Over the past century, technology advancement, globalization and capital market innovation have dramatically increased the speed of doing business and raised the standard of excellence in business performance. Alfred Chandler, in his classic Strategy and Structure developed the theme that new structures were required to mobilize capital and organize workers in larger physical plants than the world had ever seen. Increasing need for specialization required managerial coordination of clearly-defined roles and largely self-contained processes (production, accounting, sales) through a series of hand-offs. The first great advance was the functional structure, which relied on tabulator technology to control diverse operations and whose attributes include functional accountability, command-and-control decision making and, ultimately, management by objectives. [Note, if you haven’t already, you might want to read a couple of my related prior posts, first here, then here, and finally here.]

Tabulator era

Tabulator era

Henry Ford’s River Rouge plant, which became the world’s largest integrated factory on completion in 1928, is a prime example of a vertically-integrated functional organization. Eventually employing over 100,000 workers, initially a seemingly-impossible organizing task, the plant was able to turn raw materials into running vehicles within a single complex. It had its own docks, 100 miles (160 km) of interior railroad track, its own electricity plant and ore processing.

However, while Ford focused on reducing cost, GM President Alfred Sloan‘s new methods of managing a complex worldwide organization, focused on customer segments, propelled GM to industry sales leadership by the early 1930s, a position it retained for over 70 years. He established a structure to prevent product lines (from lowest- to highest-priced) Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac from competing with each other, and keep buyers in the GM “family” as their buying power and preferences changed as they aged. And, thanks to consumer financing via another organizational innovation, GMAC (founded 1919), easy monthly payments allowed far more people to buy GM cars, while Ford was moralistically opposed to credit. GM under Sloan became famous for managing diverse operations with financial statistics such as return on investment, adapted from DuPont, which at the time owned 43% of GM.

Yet, however successful Sloan’s GM organization was, the major difference between Ford and GM was that GM had five self-contained functional divisions v. Ford’s one.

Mainframe era

Mainframe era

IBM’s announcement on April 7, 1964, of the model 360 – the ‘mainframe’ – portended the next great advance in organization – process and team orientation. As companies increased their information processing capability by orders of magnitude, they were increasingly able to extend processes beyond individual operations through increased managerial span of control. This was  facilitated by scientific approaches to job design (first tested in the WW II Office of Price Administration by Ned Hay, Hay Group’s founder) and managerial competencies (derived from psychologist David McClelland’s work on achievement motivation; his consulting firm McBer was merged with Hay Group when both were owned by Saatchi and Saatchi in the 1980s).

Eventually, this resulted in significant management delayering – including at IBM in the early 1990s – as process coordination improved work flow across functions, geographies and industry sectors, something previously provided by hierarchies of middle managers. It also paved the way for early matrix structures.

Client-server era

Client-server era

This set the stage for the next phase: technology- led organization deconstruction, heralded in 1993 by Champy and Hammer’s massively successful (2.5 million copies – for a business book!) Reengineering the corporation. This launched the Business Process Reengineering movement, enabled by the distribution of processing power through the rise of client-server computing. Add in new Enterprise Resource Planning software, and the increasing quality and reach of the build out of the early internet (Web 1.0), and now processes could realistically be performed without direct line-of-sight, independent of location, either a very good or very bad thing, depending on where you sit. The first great experiment was the outsourcing of Y2K coding to India in the late 1990s, when companies in the industrialized world, unable to find enough skilled programmers to do the necessary work to prevent feared shut downs of their operations on January 1, 2000, desperately searched the globe for the necessary skills. Once the outsourced Y2K work was completed, in a modern example of Say’s Law (“supply creates its own demand”), the Indian companies began moving up the business process food chain.

Networked era

Networked era

Technology, of course, never stands still, and even as firms were grappling with the possibilities to reduce costs offered by outsourcing, much like Henry Ford, new Alfred Sloans are arising, enabled by the capabilities poffered by the ever improving global infrastructure. Now, global networked eco-systems, built on ‘Web 2.0’ IT platforms promising varying degrees of geeky attributes like open architecture, interoperability, virtualization and standardization, extend the reach of more traditional human attributes like collaboration and socialization.

While we don’t know yet how this will play out, we are already seeing some of the possibilities of this networked world, bringing to life the reality portended by Hamel and Prahalad’s 1990 piece, “The Core Competence of the Corporation.” Self organizing networks, aided by evolving contractual arrangements, can now bring together – sometimes for a single task – specialized organizations (and individuals), regardless of location or affiliation, to conceptualize, develop, design, manufacture, market and distribute products, eliminating industrial-age line-of-sight managerial overheads required to coordinate work flow (current models include the film and construction industries). With a relentless focus on results and productivity, as the need for a specific eco-system ends, these organizational components seek new eco-systems to join, driven by economic self-interest, and the failure to adapt to new needs has dire consequences.

While technology-led business transformation has enabled companies to respond to new challenges, the increasing demand of investors for greater accountability has more recently created significant operating tension between the financial need for control and line managers’ need to respond to the market. More and more, managers are resorting to ‘heroic efforts’ to accomplish ‘undoable’ jobs caused by outdated organization structures. But individual heroic efforts are not sustainable, risking burn out, and the most significant challenges organizations face now are creating operating models to meet future demands, followed by designing doable jobs, then training leaders in the necessary competencies and finally adapting their cultures so employees can thrive.

While I’m working on my next post, I hope you’ll read about how Hay Group helps organizations bridge the gap between strategy, operations, structure and people, without losing the focus on execution, here.

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