There is a "profound misunderstanding" regarding the link between structure and performance, according to Marcia W. Blenko, Michael C. Mankins and Paul Rogers writing in Harvard Business Review.
They insist a corporation's structure will improve performance only if it enables key decisions to be made and executed better and faster than competitors.
Reorganisations are popular with chief executives, but the authors say: "Despite the fanfare that usually greets them, most reorganisations fall flat."
They cite a recent Bain & Company study of 57 reorganisations between 2000 and 2006 which found that fewer than one-third produced any "meaningful improvement in performance". In fact, "most had no effect, and some actually destroyed value".
Blenko, Mankins and Rogers insist: "Contrary to popular belief, performance is not determined solely by the nature, scale, and disposition of resources, important though they may be.
"An army’s success depends at least as much on the quality of the decisions its officers and soldiers make and execute on the ground as it does on actual fighting power."
So radical rethinking on reorganisation is necessary; structural changes should start with what the authors call a "decision audit" rather than an analysis of strengths, weaknesses, opportunities and threats.
The authors explain: "The goals of the audit are to understand the set of decisions that are critical to the success of your company’s strategy and to determine the organisational level at which those decisions should be made and executed to create the most value."
They add: "If you can align your organisation’s structure with its decisions, then the structure will work better, and your company’s performance will improve."
Begin your decision audit by identifying the key decisions you need to make and execute according to your strategy.
"It may be that the reorganisation is an attempt to improve an existing strategy," say the authors, "in which case you’ll end up with a comparison between the decisions you ought to be concentrating on and the ones you are actually making."
There are two types of critical decisions to consider and categorise:
• Big decisions made on a one-off basis which will have a significant impact on the organisation.
• Small decisions made on a routine basis that will add up to have a significant impact.
Once those have been identified, you can work out exactly where those decisions should be made in the organisation.
Blenko, Mankins and Rogers suggest you ask: "In which decisions is scale a critical factor? Which decisions are better made by business units or functions? Which need coordination across many businesses?"
The authors suggest that big capital-allocation decisions are usually best made by the corporate centre "so that senior leaders can design and execute a coordinated portfolio strategy across the company", while IT investments, for example, can be left to functions or business units.
However, they warn: "Decision placement is more of a challenge for product, customer, and channel decisions, which typically involve complex trade-offs."
For example, pricing decisions should be coordinated across customer segments and channels, while product decisions have to be be considered from "both an internal and an external perspective".
Blenko, Mankins and Rogers say: "In companies with many different products or services, both the critical decisions themselves and where they should be made may vary widely across the organisation."
Having performed your audit, you might find that you can make and execute decisions better and faster than the competition without reorganising. If this is the case then your performance problems might not be structural and you'll need to look elsewhere.
But if structural change is deemed necessary, you can begin building your decision-driven structure – and you should do so by looking at the sources of value in your business and organising the macrostructure around them. For example, you might wish to organise by customer segment and "place accountability for decisions that directly affect customers, such as service levels, positioning, and product bundling, in the business units".
The next step is to work out exactly what level of authority decision makers require – regardless of their status in the organisation. Make sure the people who are best equipped to make decisions don't depend on excessive layers of approval from "higher-ups" which will delay execution and reduce effectiveness. Levels of management might have to be eliminated in order to get the process running smoothly.
You should also look to align other areas of the organisational system.
The authors advise: "Any change in structure may necessitate changes in decision roles, incentives, information flow, performance metrics, and processes."
With all of the above measures in place, it remains necessary to help managers develop the skills and behaviours they need to make decisions quickly and execute them effectively and consistently.
Blenko, Mankins and Rogers explain: "Smart companies mesh individuals’ capabilities with the organisation’s decision-making demands. They invest as needed to ensure that people have the skills required to be better decision makers over time."
The authors warn that "any new structure will create new boundaries that people may find hard to cope with and that may make effective decision making more difficult".
However, they advise: "To get around this problem, it may be necessary to overlay your new structure with some connections that help people reach beyond those boundaries."