Companies are being pulled by their strategies and pushed by increasingly assertive customers to restructure their organizations around customer groups rather than functions or products.1 Responding to competitive pressures and looking to improve operating profit margins, a growing number of corporate managers are dismantling organizations and cultures that were built on selling particular products and replacing them with new structures designed to be more responsive to customer needs. Intel Corp., which in 2005 announced plans to create five new market units, became one of the more high-profile companies to move in this direction. Rather than designing discrete chips and then assuming customers would adopt them, new units were expected to bundle whatever combinations of processes, chips and software made sense for their own customers.2
The push to restructure around customers is more than the latest management fad. It is supported by success stories at companies including IBM, Cummins India, Fidelity Investments and Imation, and applauded by organizational specialists who have studied the performance of smaller, market-responsive units.3
Companies transitioning from being product-oriented organizations to ones centered on customers progress along a continuum. The first stage involves informal coordination within the company to overcome the familiar deficiencies of product or functional silos. If that is not sufficient, companies often add integrating functions such as key account managers and customer segment task forces. Companies achieve greater levels of structural alignment by reinforcing the customer dimension of the organization matrix with segment managers or customer-based front-end units.4 (See “The Stages of Organizational Alignment.”)
1. See J.R. Galbraith, “Designing Organizations: An Executive Guide to Strategy, Structure and Process” (San Francisco: Jossey-Bass, 2002), 91–115; N.W. Foote, J. Galbraith, Q. Hope and D. Miller, “Making Solutions the Answer,” McKinsey Quarterly 3 (2001): 84–93; D.K. Rigby, F.F. Reichheld and P. Schefter, “Avoid the Four Perils of CRM,” Harvard Business Review 80 (February 2002): 101–109; and G.S. Day, “Creating a Superior Customer Relating Capability,” MIT Sloan Management Review 44 (spring 2003): 77–83.
2. For background on Intel’s reorganization, see C. Edwards, “Shaking up Intel’s Insides,” Business Week, Jan. 21, 2005, 35; “Intel’s Right-Hand Turn,” Economist, May 14, 2005, 65–66; and A. Lashinsky, “Is This the Right Man for Intel?” Fortune, April 18, 2005, 110–120.
3. H.E. Aldrich, “Organizations Evolving” (Thousand Oaks, California: Sage, 1999); and J. Child and R.G. McGrath, “Organizations Unfettered: Organizational Form in an Information-Intensive Economy,” Academy of Management Journal 44, no. 6 (2001): 1135–1148.
4. D. Miller, R. Eisenstat and N. Foote, “Strategy from the Inside Out: Building Capability-Creating Organizations,” California Management Review 44 (spring 2002): 37–54; and R. Eisenstat, N. Foote, J. Galbraith and D. Miller, “Beyond the Business Unit,” McKinsey Quarterly 1 (2001): 54–63.
5. P. Burrows, “The Un-Carly Unveils His Game Plan,” Business Week, June 27, 2005, 36.
6. L.V. Gerstner Jr., “Who Says Elephants Can’t Dance? Inside IBM’s Historic Turnaround” (New York: Harper Business, 2002), 248.
7. R.O. Crockett, “Reinventing Motorola,” Business Week, Aug. 2, 2004, 82–83.
8. D. Sharma, C. Lucier and R. Molloy, “From Solutions to Symbiosis: Blending with Your Customers,” Strategy + Business 27 (2002): 39–48.
9. The trade-off between specialization and coordination was first identified by P. Lawrence and J. Lorsch, “Organization and Environment” (Cambridge, Massachusetts: Harvard University Press, 1967).
10. S. Ghoshal and N. Nohria, “Horses for Courses: Organizational Forms for Multinational Corporations,” Sloan Management Review 34, no. 2 (winter 1993): 23–35.
11. J.P. Kotter, “Leading Change” (Boston: Harvard Business School Press, 1996).
12. M. Sawhney presents a similar notion in “Don’t Homogenize, Synchronize,” Harvard Business Review 79 (July–August 2001): 101–108. He notes the most difficult challenge is getting the back-end product groups to view the internal customer-facing units as their primary customer, rather than the external end-users.
13. F. Reicheld, “The One Number You Need to Grow,” Harvard Business Review 81 (November–December 2003): 49.
14. R. Howard, “The CEO as Organizational Architect: An Interview with Xerox’s Paul Allaire,” Harvard Business Review 70 (September–October 1992): 107–120.
15. This description of the Cisco reorganization is based on R. Gulati and P. Puranam, “Organizational Inconsistencies After Reorganizations: Good for Performance?” working paper, London Business School, London, 2005.
16. Under the burden of high costs relative to new competitive entrants, and a slowing of global demand, net income collapsed from $2.7 billion in 2000 to a $1 billion loss in 2001.