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Home > Performance Management Best Practice > Aligning Structure with Strategy: Recalibrating for Improved Performance and Increased Profitability

Performance Management Best Practice

Aligning Structure with Strategy: Recalibrating for Improved Performance and Increased Profitability

by R. Brayton Bowen

Executive Summary

  • Aligning organizational structure with corporate strategy requires financial “rethinking”.

  • In difficult economic times, it is not unusual for organizational leaders to demand across-the-board cuts of some arbitrary percentage to achieve bottom-line results.

  • Unfortunately, that approach often cuts into the “muscle” of critical functions that are vital to the successful performance of the enterprise and its future viability.

  • As an alternative, activity-based cost accounting quantifies the cost of specific work activities throughout organizational systems.

  • This approach to redesign helps the organization recalibrate how and where work can be better aligned with corporate direction.

  • The enterprise can achieve not only better organizational performance with this method, but also bottom-line efficiencies that improve financial results.

 

Introduction

Phlebotomy—the ancient practice of bloodletting—seemed logical when medical science centered on the belief that four humors made up the human body: yellow bile, black bile, phlegm, and blood. It was thought at the time that an ailing person could be brought to good health by vomiting, purging, starving, and bloodletting. Unfortunately, in the latter instance, any number of the sick bled to death! By today’s medical standards, the practice is considered quackery. Now when a patient is ill, the condition is diagnosed extensively until the source of the problem is identified. If an operation is required, the repair is made with surgical precision.

Oddly enough, phlebotomy continues to be practiced on the body “corporate” in any number of organizations, where the four key elements are considered to be: capital, equipment, product (services), and people. A poor-performing organization, like an ailing patient in ancient times, is “bled” of its people resource. If the economy turns down, more blood is let, until the enterprise either recovers, or dies. In rough economic times, it is not unusual for organizational leaders to demand across-the-board cuts of some arbitrary percentage to achieve bottom-line results—not unlike phlebotomy, where cuts were made on almost all parts of the body. Unfortunately, that approach often cuts into the “muscle” of critical functions that are vital to the successful performance of the enterprise, and its future viability. And, the reality is that once an organization goes through a major bloodletting, a.k.a., “downsizing”, “rightsizing”, or “rationalizing”, management will resort to doing it again and again. Invariably, the organization fails to achieve its performance objectives, and the scars of phlebotomy serve only to remind the employees who remain that they too may be the subjects of such savagery in the future. Trimming excess resource is certainly necessary from time to time, but keeping trim and fit on a regular basis should be the norm.

Designing from the Outside In

Why Are We in Business?

Ask anyone why he or she is in business, and the answer ultimately is “to make money.” Certainly, that should be the final result, but the mission is “to serve customers,” and the outcome should be “customer satisfaction.” Without customers, there is no business. Consequently, the design of an organization must be built from the outside in. In other words, it must begin with the end-customer in mind. Adrian Slywotzky makes the point in

What Is the “Essence” of the Business?

Continuous realignment requires the ongoing process of taking time out of the design, fabrication, and delivery cycles. Time savings equal cost savings. Increasing the value proposition for customers and shareholders requires the ongoing process of assessing the cost of doing business, as well as the return on investment. But, downsizing structure for the sole purpose of reducing cost, in and of itself, is not a sustainable strategy. Form must follow function. Structure must follow strategy. Consequently, any restructuring must begin with outcomes in mind, and the quintessential outcome in business is the value proposition for the customer. So, recognizing that businesses change constantly, how does one go about the process of continuous realignment? Rather than across-the-board cutting—like phlebotomy—consider the alternative: activity-based costing, more commonly referred to as “ABC” accounting. This approach more accurately assigns value to discrete activities, business functions, cross-organizational processes, and, ultimately, specific products and services. It even identifies the cost of what is not being done, like “waiting for instructions” or “idling in traffic.” Indeed, it is a process that encourages long-range thinking and strategic decision-making rather than short-term, knee jerk reacting.

Structural Redesign

Begin with Outcomes in Mind

Establish expectations from the outset by beginning with the outcomes to be realized, for example: · The proposed redesign will be aligned with the organization’s vision, mission, values, and major strategies;

  • The overall design will enhance the value proposition for the customer;

  • Opportunities for income generation will be identified, and a more effective allocation of resources will be proposed according to the income opportunities identified;

  • The new structure will be at least 80% aligned with the primary, value-adding initiatives of the organization;

  • Organizational members will be empowered to work in self-directed work teams to enhance the exchange of diverse opinions and the sharing of ideas and solutions;

  • The number of organizational levels will be reduced to facilitate the rapid transference of information;

  • Quality assurance and continuous improvement will be built into the collective cognition and processes of the new organizational design.

 

Of course, one of the expected outcomes might be a targeted reduction in the cost of people resources; but even if it is not a stated outcome, typically an organization will realize a 10% reduction in the cost of human resources as a result of more efficient and effective organizational design.

Once outcomes have been established, the next step is to identify all work activities.

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Further reading

Books:

  • Kaplan, R. S., and W. Bruns. Accounting and Management: A Field Study Perspective. Boston, MA: Harvard Business School Press, 1987.
  • Ostroff, F. The Horizontal Organization: What the Organization of the Future Actually Looks Like and How It Delivers Value to Customers. Oxford: Oxford University Press, 1999.
  • Pfeffer, J. The Human Equation: Building Profits by Putting People First. Boston, MA: Harvard Business School Press, 1998.
  • Slywotzky, A. J., and D. J. Morrison. The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow’s Profits. New York: Times Books, 1997.

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