Category Archives: Organization Structure

Customers, Strategy and Structure

Structure follows strategy. Strategy follows customers. It all starts with a customer.

  • Who is your target customer segment?
  • Who is your best customer?
  • What is your best customer’s profile? How do we recognize them?
  • What does your customer need? What is necessary in your customer’s life?
  • What does your customer want? What is your customer’s preference?
  • How will you collect that data? How much data do you need?
  • How will you analyze that data?
  • How will you verify the accuracy of your analysis?

Strategy follows customers?

  • Based on what your customer needs, what is necessary in your customer’s life, what product or service can you produce to satisfy that need?
  • Will your customer be willing to pay a price for your product or service that allows you to make a reasonable profit?
  • In the profit for your product or service, is there enough volume to sustain your company’s operation?
  • Is your product or service exclusive to your company, or do competitors offer a similar product or service perceived on an equal basis?
  • Based on your customer’s preference, what will make your customer decline your competitor’s offering and buy from you? What is your competitive advantage?
  • How can you create that competitive advantage in a way that is sustainable, difficult or impossible to copy by your competitor?
  • How can you effectively communicate the competitive advantage to your customer?
  • How can you operationalize your competitive advantage to make is real, observable and obvious?

Your responses to these questions will guide your structure.

  • What core functions do you need to create the product or service your customer needs?
  • What support functions do you need to meet your customer’s preferences in the way they want to buy?
  • In each function, what is the level of work required to sustainably produce the desired outputs?
  • In what way does each function need to integrate with its neighboring functions related to work handoffs?
  • What is the output capacity of each function, and how does its output match the output capacity of its neighboring functions?

Customers drives strategy, strategy drives structure.

What’s the Level of Work Required?

From the Ask Tom mailbag –

Question:
You say that management initiatives (like communication, efficiency, goal setting and teamwork) will flounder if laid on the wrong structure. How do you get your structure right?

Response:
Determine the number of layers (only minimum necessary).
Determine the functions required.
Inside each function, determine the level of work required.

You are the captain of your business model, you get to decide the level of work that is necessary. Think about core functions and support functions. Some functions will require more intensity than others, and some functions not at all.

  • Marketing – If your business model only requires a brochure type website that gets updated from time to time, you will likely outsource that project, and need only skeleton support in marketing. If your business model requires a sophisticated website that attracts customers who roll over into an online order, you may need Marketing at S-III.
  • Sales – If your business model is a telephone center receiving product orders from consumers, likely 2-4 minutes on the phone, you may only require order takers at S-I. If your sales cycle is longer, 3-4 months, you may need S-II account executives. If your sales cycle is longer than a year, you may need S-III.
  • Account Management or Project Management – The level of work you need will likely depend on the length of your project. Two to three weeks with very few moving parts may only require Hi-S-I. If your projects are 2-3 years in scope, you may need S-IV project management.
  • Operations – the level of work you need in Ops will need to consider the length of time the project is in direct service delivery or production, but must also account for the lead time on resources, mechanical maintenance, or special technical elements.
  • Quality Assurance or Quality Control – may require timespan consideration through the production cycle, but may also need to consider the length of warranty periods or product lifecycles.
  • Research and Development – in new product development cycles, level of work may easily require system work and root cause analysis at S-III. Sustaining engineering may only require S-II.
  • Logistics – may be just in time loading dock work at S-I, but may also include long term contracts with carriers at S-III.
  • Human Resources – level of work depends if you only need clerical filing of required forms, active recruiting from your labor system, or strategic recruiting in specialized technical fields.
  • Accounting and Finance – level of work will depend on the sophistication of your accounting requirements, simple bookkeeping to project costing, to credit facilities.

You get to decide the level of work required.

Define Your Functions

From the Ask Tom mailbag –

Question:
You say that management initiatives (like communication, efficiency, goal setting and teamwork) will flounder if laid on the wrong structure. How do you get your structure right?

Response:
Determine the number of layers (only minimum necessary).
Determine the functions required, and the level of work required in each function.

You are the captain of your business model, you get to decide. Think about core functions and support functions. Some functions will require more intensity than others, and some functions not at all. Quicklist –

  • Marketing
  • Sales
  • Account Management or Project Management
  • Operations
  • Quality Assurance or Quality Control
  • Research and Development
  • Logistics
  • Human Resources
  • Accounting and Finance

Your business model will determine the functions you need and the level of work in each function. Often, your core functions are related to operations, and carry more robust levels of work. Your support functions are there to support the core – business development, marketing, human resources, finance and may not require a full complement of levels of work.

How Many Layers?

From the Ask Tom mailbag –

Question:
You say that management initiatives (like communication, efficiency, goal setting and teamwork) will flounder if laid on the wrong structure. How do you get your structure right?

Response:
There are a number of steps, let’s take them one at a time.

Limit the number of layers to the minimum required. Layers are necessary, but no more than necessary.

Stephen Clement (co-author Chris Clement) in their book It’s All About Work, describe the non-warfighting side of the US Army with 12-15 layers, but the warfighting side only seven layers. Tested in the crucible of combat, too many layers between the top and the bottom got people killed. The US Army is a very large organization and only needs seven when it counts.

  • S-I organization, typically a Mom and Pop who are self-employed only need one layer.
  • S-II organization, is a Mom and Pop, self-employed, but want a day off. They need two layers.
  • S-III organization, contains a single core function, does it well, with only a skeleton of support functions. Three layers.
  • S-IV organization, has a robust internal core function with healthy, mature support functions, integrated together. Four layers.
  • S-V organization, robust internal core function, integrated internal support functions, sensitive and responsive to external systems like market, regulatory, finance, labor, technology. Five layers.

Most domestic small to medium size businesses up to several thousand employees can be managed with no more than five layers between technical production (S-I) and the business unit president or CEO (S-V). Limit the number of layers to only what is necessary.

Why Structure?

From the Ask Tom mailbag –

Question:
In your workshop, you say that everything starts with structure, or organizational structure. There are so many other management issues to focus on, like communication, efficiency, goal setting and teamwork. Why do you always focus on organizational structure?

Response:
You are correct. Communication is important, lean initiatives bring efficiency, goal setting keeps us focused and teamwork helps us work together. But, all of those efforts will underperform if undertaken on top of a faulty structure. You may even see short term improvement by setting goals, or being more efficient, but in the long run, a faulty foundation will rip those improvements apart.

Get your structure right, and many of your issues related to management and motivation will disappear (almost overnight).

Leadership Charisma

Leadership is a billion dollar business, yet all around us, we rarely see effective leadership. There are books, seminars, groups and programs to build better leaders (that’s the billion dollar business), yet much of that effort is wasted and fruitless.

The effectiveness of an organization is based on its structure and the role of leadership is to design and build that structure. Effective leadership has less to do with charisma and personality, more to do with building an organizational system to get work done.

Structure begins with the founder, a structure of one. There is work to be done and the founder is doing the work. There is always work left over, so the founder hires three or four people. These people do a little bit of everything. The work is organized around the scarce resources of infant structure. At some point the founder realizes the work can no longer be organized around the people, the people have to be organized around the work.

Organizing the people around the work requires that specialized roles be defined, tasks, activities and expected outputs from those activities. This is the emergence of roles.

This organization is no longer a structure of one, but a structure of many. It is not enough for each person to play their role, the roles have to be designed to work together, more complex than a structure of one, a structure of many. And, organizational structure is born.

Organizational structure is simply the way we define the working relationships between people. The two things that must be defined are –

  • In this working relationship, what is the accountability?
  • In this working relationship, what is the authority? Authority to do what? Make decisions and solve problems the way I would have them solved.

And, so the structure of one becomes the structure of an organization. I don’t care about your personality or charisma as a leader. I only care whether you can design and execute the structure, to get some work done.

Communication Problem Only a Symptom

From the Ask Tom mailbag –

Question:
Hi Tom. In the seminar I attended, you said something about communication not being an issue in an organization, and I was surprised at that, as I believe communication is often a problem in organizations. Maybe I misunderstood. Will you please elaborate?

Response:
Communication breakdowns are often a symptom of a deeper darker problem.  Companies believe they have communication issues, so they conduct a communication seminar that RARELY solves the problem.  Whenever a client reports a communication problem, I start with accountability and authority.  The identified communication problem is a symptom of an accountability and authority problem.  Communication breakdowns can help us locate the problem, but not to resolve it.

Most communication problems are between two people who have to work together, but are not each other’s manager.  This is the dotted line phenomenon on most org charts.  The problem with the dotted line is the undefined accountability and undefined authority.  As managers, we hope the two will be able to figure it out, which is where the communication breakdown begins.  Technically, these are cross-functional role relationships (two people who have to work together, but are not each other’s manager).  When we define the role relationship, we have to define the accountability and the authority in that relationship.

Example –
Would it be a good idea for sales to coordinate with marketing and marketing to coordinate with sales? Yes.
 
But, is the Marketing Manager the manager of the Sales Manager, and is the Sales Manager the manager of the Marketing Manager?  No.  

But, do we require they work together in a coordinating relationship?  Yes.  That sounds great until one begins to complain about the other, and so, we think we have a communication breakdown (or worse, a personality conflict).  What we failed to define in that working relationship is the accountability and the authority.

In a coordinating relationship between the Sales Manager and the Marketing Manager, who each are accountable for their respective budgets, can we require they consult with each other and coordinate their budgets to leverage that working relationship?  Yes.  Why?  

Because we said so, by virtue of a coordinating cross-functional role relationship.  They are required (accountability) to schedule meetings with each other to consult, share information, resources and tactics.  Each has the authority over their respective budgets, but they are required to coordinate.  When we make the accountability and the authority clear, the communication breakdowns disappear almost overnight.

It’s Not Your People

It’s your structure. Peter Schutz (1930-2017), former CEO at Porsche quipped, “the successful companies are those that get extraordinary results from ordinary people.” It’s not your people, it’s your structure.

Structure is the way you think about your company. That includes your business model, who you think your customers are, how you think they use your product or service, why you think they use your company vs a competitor. It’s your structure.

Organizational structure is way we define the working relationships between people. The first level is every person playing their role. The second level is the way those roles work together. It’s your systems. The way we think about roles and the way those roles work together determines the effectiveness of the organization.

Every company has people. Every company thinks their people are special (and they are). It’s the structure that determines the company’s success. Extraordinary results from ordinary people. It’s your structure.

Appropriate Timespan of Goals

From the Ask Tom mailbag –

Question:
I would like to roll out a goal-setting program for my team. Management by objectives (MBO) is a process where everyone in the company is required to set annual goals. I think it will go a long way toward results based performance.

Response:
The big failure of MBO is the focus on annual goals. If you look at the sequence below, you can see that MBO is appropriate for only a small slice of your workforce, and some of the most important goals and objectives are beyond two years.

Goals Framework and Timespan

  • S-V business unit president – longest timespan goals – five years to ten years
  • S-IV executive manager, VP – longest timespan goals – two years to five years
  • S-III manager – longest timespan goals – 12 months to two years
  • S-II supervisor – longest timespan goals – three months to 12 months
  • S-I technician, production – longest timespan goals – one day to three months

Goals and objectives should cascade through the organization starting with the longest timespan goals first, most often from the CEO. Each successive layer should have shorter timespan goals that support the goals from the layer above. You can also see, based on timespan, that longer timespan goals are more strategic (conceptual) in nature, and that as timespan falls below 3-4 years, those goals become more tactical, below 1-2 years, exclusively tactical.

While we have a general orientation toward marking our lives in annual timeframes, goals and objectives require a more specific orientation in the timespan of each role.

Scalability

From the Ask Tom mailbag –

Question:
We have worked very hard to refine our core process. We believe we have the highest quality in our product offering and simultaneously have driven out extraneous costs. So, our customers enjoy a high quality product at the most competitive price. In spite of that, while sales growth is steady, our profitability suffers. Our gross margin is good, but by the time we get to the bottom line, the net is not so good. We have tried to cut SG&A, but that seems to make the net even worse. The more we try to take our company to the next level, the more frustrated we become.

Response:
You are in that No Man’s Land dilemma, too big to be small (amongst your competitors) and too small to be big (among those companies who have the biggest market share).

This is a classic integration issue. You describe your refined core process, which is clearly a step up to S-III. Your core system is well-honed, but scalability is elusive. Your core system creates your gross profit, right where it needs to be, but it sits among other systems that drag down the net profit. Companies at S-III have great products, but scalability only happens at S-IV.

  • S-I – Product
  • S-II – Process
  • S-III – Core system (sequenced processes, critical path)
  • S-IV – Integrated systems (multiple critical paths)

Your core system is critical, it is the product that your customers want, but it is now surrounded by other systems. Not only do these systems have to be effective and efficient, but they also have to be integrated together, and that is the challenge at S-IV.

Most core systems exist in a defined operation function, and are surrounded by a marketing function, sales function, project (or account) management, quality control, research and development, sustaining engineering, human resources, facilities and finance. You may have a strong core function in ops, but your company will never scale without the integration of all those internal systems.