The Limits of Structural Change

“At the end of the day, the essence of a company is not what you do — it’s what you know.”1 GARY HAMEL

In the last decade of the 20th century, businesses devoted considerable energy determining and structuring “what they do.” In addressing business problems, the tool of choice for managers has often been periodic reorganization — to enable them to better serve customers, product markets and channel partners. They’ve created structures that simplify execution of key processes and have even invested effort to optimize and reoptimize organization designs, right down to the project level.

Indeed, generations of leaders have looked first to changing organizational structure as a way to improve business performance. In the 1920s, Alfred P. Sloan and others articulated a doctrine that came to be known as the “3 S’s” — having crafted a strategy, senior managers must find a structure to fit it and align the two with supporting systems — and this logic became widely taught in the American academy.

In light of the speed of change in today’s economy, however, this view has come in for some criticism, perhaps epitomized by Michael Hammer who, with unintended irony, disparages “the widespread malady of ‘structuritis,’ whose principal symptom is the propensity to issue a new organization chart as the first solution to any business problem.”2

The pattern of frequent restructuring, prevalent across industries, is not without logic. Over the years, cement and paper manufacturers have migrated from functional to regional profit-center organizations to better manage their difficult constraints of low-value commodities and high transport costs. Conversely, semiconductor companies have evolved into product organizations, as their products’ more favorable economics allow them to serve multiple geographic regions without maintaining all the costs of a local presence in each one. Elevator service companies, which used to organize regionally to help supply local needs for service and spare parts, no longer need to do so, now that cab failures are both less frequent and more manageable through the use of remote electronic sensors.3

On the one hand, all of this restructuring has had substantial ameliorative effects on business performance. On the cost side, suitably aligned structures have often achieved the cost efficiencies they’ve targeted. On the revenue side, service improvements have generated more satisfied customers and commensurately increased orders.