Tag Archives: organizational 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.

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.

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.

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.

Why is Culture Important?

From the Ask Tom mailbag –

Question:
What is culture? Everyone talks about it, says how important it is. I know it is there, but it’s one of those warm and fuzzy concepts that’s like nailing jello to the wall.

Response:
Culture is that unwritten set of rules that governs our required behavior in the work that we do together. The culture cycle can be understood as a reinforcing system, recursive through four descriptive stages.

  • Beliefs and assumptions, the way we see the world.
  • Those beliefs and assumptions, typically unwritten, drive specific behaviors (for better or worse).
  • Driven behaviors, or cultural behaviors are tested by the consequences of reality.
  • Those behaviors that survive the test of consequences become our customs and rituals. Those customs and rituals reinforce our beliefs and assumptions, the way we see the world. The cycle begins again.

Every company (or social group) has a culture. That culture may be intentional or it just happens, but every company has one, and has the one they deserve. Culture is critical because it impacts the social structure, the way it operates and its impact on each individual. Culture determines the way you enter a group (company), how an individual is selected for the group. Induction includes the customs and rituals of orientation. Culture determines how roles are defined, assigned, formed, re-formed.

Culture determines any system of merit, performance management and review, individual development, career path, coaching and mentoring. Movement in the organization is impacted by systems of promotion based on accountability and authority. Compensation is designed, crafted and executed according to the way we see the world, the company and its business model in the competitive platform on which the company plays.

All of these elements are critical to a person’s understanding and self-perception. And most people in modern nation states exist inside a cultural system that impacts self-definition, not only the way a person sees the world (beliefs and assumptions), but the way they see themselves. Psychological healthy people are a product of psychologically healthy organizations.

The Accountability Chart

From the Ask Tom mailbag –

Question:
For the past few years, I considered my company as a level V company. Your posts the past couple of weeks have made me question that position? I think I have organized the company, at least on paper as level V, but in reality, I may be wrong?

Response:
Most CEOs suffer from optimism. Optimism is required to forge a company against the odds, most startups fail in the first five years. And, those rose colored glasses cover the sins of organizational structure. We like to think our organizations are perfect renditions, we find the best in our people, sometimes ignoring deficiencies, both in structure and people.

An effective organization requires competence in leadership and management. Competence is a combination of Elliott’s four absolutes

  • Capability
  • Skill
  • Interest, passion
  • Required behaviors

Any element on the list can be a dealbreaker. We understand skills, interest and passion, we even understand required behaviors. It’s capability that often eludes us. I can train skills, I cannot train capability. Capability is born and revealed, naturally matures and is relatively predictable.

Your Organization on Paper
Elliott defined three versions of the org chart for his description of a Management Accountability Hierarchy (MAH), an accountability chart.

  • Manifest – the way we draw the org chart
  • Extant – the way the org chart really works
  • Requisite – the way the org chart should look using timespan and requisite principles

The org/accountability chart is an easy way to step through your optimistic thinking, to ground it in reality. An effective organization takes both a requisite structure, appropriately defined roles and competence in each role. Simple, right?

It is only the requisite accountability chart that considers the level of work required in each organizational function. With the level of work accurately identified, the managerial layers fall into place. And, that’s the structure part.

But, even a requisite structure will fail if not fielded with competent players in the right roles. A level V structure will fail lead by a CEO with capability at level III.

To the Next Level

From the Ask Tom mailbag –

Question:
As I talk with other CEO friends, they keep talking about taking their company to the next level or that they want to scale their companies larger. It sounds like they know what they are talking about. But do they? They are my friends, and I don’t want to disparage, but in many cases, I have my doubts.

Response:
No organization can ever grow larger than the CEO. If it does, the wheels will get wobbly and the organization will falter. The same is true as levels of work are built inside the organization. No level of work can exceed the capability of the manager. If it does, the wheels will get wobbly and the organization will falter. It doesn’t matter if the company is S-I, S-II, S-III, S-IV or S-V. Faltering can happen at any level.

Most who say they want to take their company, or department, or team to the next level has no clue what that means. Timespan and levels of work create the only framework that clearly identifies what that means.

Scalability doesn’t happen until S-IV, where multiple system integration occurs. Listen carefully to your friends, but judge not what they say, only judge what they do (or are capable of doing).

How Many Levels?

From the Ask Tom mailbag –

Question:
You recently described an organization as having five levels. You also said that some organizations don’t need five levels. I am trying to figure out how many levels our company needs?

Response:
Your question is similar to the manager’s span of control issue. The consultant’s answer, “it depends.” The number of levels in an organization depends on the complexity of the decisions and problems faced by the company’s mission. That’s why it is important to occasionally sit down and revisit the mission. We think of mission as “what the company does,” but it also includes which markets, geography of those markets, market segments, governing rules and regulations, availability of labor, incorporation of technology, availability of capital. All of these elements play in to the complexity of the organization.

The initial mission always exists in the individual eyes of the founder. In the beginning, that mission may be modest, simply to prove the concept is viable (minimum viability). With early success, the mission can grow, be redefined as the organization learns more about the environment it created. And we think, with more levels, the more success we see. That is not altogether true. You can have a successful organization at any level, with an appropriate number of managerial levels, even an organization with just one.

S-I (One level of work) – This is the sole practitioner, an individual technical contributor, whose mission is to solve a narrow market problem requiring only one mind, usually supported by technology. Successful sole practitioners could be an artist, writer, even a computer coder developing a single application to solve a market problem. A good living can be had by the savvy sole practitioner, though it is rare to reach any large scale by yourself. (Timespan 1 day – 3 months).

S-II (Two levels of work) – This is the sole practitioner who gathers surrounding assistance. There is too much work for one and that additional work is necessary to solve the problem. At this organizational level that additional work requires coordination for quantity output, at a given quality spec, according to a deadline time schedule (QQT). There is no system yet, because the quantity or complexity of work does not require it. This could be a entrepreneur with a small team. It could also be that the organization requires a system, but does not possess the internal capacity to develop that system. Many successful S-II organizations simply purchase their system from someone else, as a franchise or a license from a larger organization (who has a system for sale). (Timespan 3 months – 12 months).

S-III (Three levels of work) – But even a small franchisee, with one or two stores, who wants to increase to three or four stores, eventually requires an internal system. At three to four stores, an additional level of work appears. It is interesting that one of the larger franchisors, Chick-fil-a only allows one store per franchise. This may be an unconscious realization that the capability of their franchisees is limited to S-II. The hallmark of an S-III organization is a single serial system (single critical path). This is often an artisan craftsman, a subcontractor on a larger project. (Timespan 1 – 2 years).

S-IV (Four levels of work) – Consists of multiple parallel systems that have to be integrated together. S-III as a single serial system is limited in its growth. For an S-III company to scale, it requires the coordination of multiple systems. From its core production system, the S-IV organization also has to coordinate material purchasing, equipment procurement and maintenance, personnel recruiting and training, marketing campaigns, sales efforts, legal review, project management, quality control, sustaining engineering, R&D, human resources and accounting.

S-V (Five levels of work) – This is the enterprise in the marketplace. And, the marketplace is not just about customers. Marketplace includes regulation, labor, finance, technology, competition, logistics, supply chain. This is still within the Small to Medium Enterprise (SME) but also extends to larger organizations.

An organization can be successful at any level, it is governed by the level of their mission.

Possibility for Creativity

“When I look at my company,” Susan said, “many times I see the stifling of creativity and innovation, often in the same sentence extolling the virtues that are being trampled.”

“How so?” I asked.

“We have some initiative suggested by a consultant, process improvement,” she said. “We spend a couple of off-site days banging our collective heads together to come up with ideas to make things more efficient. We chew up a couple pads of flip-chart paper, posted on the wall, everyone high-fiving.”

“And?” I asked, looking for the other shoe to drop.

“And two weeks later, nothing has changed. We are still doing things the same way, suffering the same consequences.”

“Do you personally believe creativity and innovation are important,” I pressed.

“Of course,” Susan replied. “We had some great ideas, it’s just that nothing seems to happen.”

“Sometimes, ideas are not enough, intentions are not enough, even first steps are not enough,” I replied. “Sometimes, it’s the context in which these ideas sit. It is the surrounding conditions that serve to resist new momentum, change. We are seldom wanting for creative and innovative ideas, it is creating the conditions for those ideas to flourish. Sometimes, it is difficult to create the conditions for those ideas to even be possible.”