ihe organization of the future: strategic imperative s and...

Poised on the eve of the next century, we are witnessing a profoundtransformation in the very nature of our business organization. Historic forceshave converged to fundamentally reshape thescope, strategies, and structures of

large, multi-business enterprises.

Ihe Organization of the Future:

Strategic Imperativesand Core Competencies

for the 21st CenturyDAVID A. NADLER MICHAEL L. TUSHMAN

Poised on the eve of the next century, weare witnessing a profound transformation

in the very nature of our business organiza-tions. Historic forces have converged to fun-damentally reshape the scope, strategies, andstructures of large, multi-business enterprises.

Driven by new competitive demands andfueled by an abundance of capital, companieshave massively rearranged their portfolios,adding and discarding businesses to sharpentheir strategic focus. Those discreet and dra-matic portfolio plays, characterized by thehigh-profile mergers and acquisitions of thepast three years, have provided a constant flowof front page news. But beyond the headlineslies a more subtle story, one with greater long-term significance than the acquisitive appetitesof auto makers and telecom giants. Headinginto the new century, the most important busi-ness development is the pursuit of competitiveadvantage in an uncertain world through newapproaches to organization design.

These new approaches should lead thoseof us concerned with the theory and practiceof organizational design to reconsider those

ideas still grounded in the post-War, pre-Intemet world that lasted through the 1980s.As this remarkable decade draws to a close,it's appropriate to reflect on the state of orga-nization design and to distill those timelessideas that will guide us in designing the effec-tive organization of the future.

Our purpose here is first to present ourperspectives on the most relevant lessons oforganization design. We'll then examine thechallenges of the new environment and theirimplications for tomorrow's organizations.Next, we'll identify six new strategic impera-tives that flow from this reshaped environ-ment. We'll conclude by proposing a set oforganizational challenges that encompass themost critical design issues for the organizationof the future.

A PERSPECTIVE ONORGANIZATION DESIGNWhat we think of today as "organizationdesign" began to evolve in the aftermath of

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David A. Nadler is the Chairman and CEOof the Delta Consulting Group Inc., a man-agement consulting firm which provides ser-vices related to the management of strategiclevel organizational change to major corpo-rations and other institutions. In his personalconsulting work, he works primarily in theareas of large-scale organization change,executive leadership, organization design,and senior team development. He has spe-cialized in consulting at the CEO level ofmajor corporations.

Prior to working at Delta, Nadler was anAssociate Professor at the Graduate Schoolof Business, Columbia University. Prior tothat he worked as an Assistant Study Direc-tor at the Survey Research Center, Universityof Michigan.

Nadler has worked with the most seniorlevels of management over long periods oftime on planned organizational changes in thefinancial services, information technology,and manufacturing sectors. His clients includeCorning, Xerox and Lucent Technologies.

Nadler has written numerous articlesand book chapters, and he has authoredand/or edited fourteen books, includingFeedback and Organization Development,Organizational Assessment, Managing Orga-nizational Behavior, and OrganizationalArchitecture.

Nadler holds a BA in InternationalAffairs from George Washington University,an MBA from the Harvard Business School,and an MA and Ph.D. in Psychology from theUniversity of Michigan.

World War II. Building on the research of the1920s and 1930s and the experience of the1940s, the notion of the "organization asmachine" gave way to a more subtle perspec-tive on the social and technical aspects of theorganization. Much of our contemporarythinking can be traced to the landmark workOrganization and Environment by Lawrenceand Lorsch, (1969), which introduced severalprofound ideas. The first was "contingencytheory"—the notion that organizations aremost effective when their design characteris-tics match their environment. The secondmajor idea flowed from the first; if two unitsof the same organization operate in differentenvironments, each should take on differentcharacteristics. That creates a dual demandfor both "differentiation" and "integration,"or the capacity to link different units withinthe same organization.

The twin principles of "integration anddifferentiation" are more relevant than ever,given the complexity of modern organiza-tions. The new challenge is to effectively man-age dramatically different businesses thatoverlap or even compete against one anotherwithin a single, strategically focused enter-prise. What's more, there will be a growingneed for integration patterns—joint ventures,alliances, etc.—that extend beyond traditionalcorporate boundaries.

We believe there are four core lessons oforganization design that will retain their rele-vance in the coming decade:

IThe environment drives the strategicarchitecture of the enterprise, either

through anticipation of, or reaction to, majorchanges in the marketplace. Every industryevolves through cycles of incremental changepunctuated by turbulent periods of disequi-librium that call for radical or discontinuouschange. The organization's capacity to under-stand its environment and to make the rightkinds of strategic changes at the appropriatepoint in the cycle will determine its competi-tive strength.

2Strategy drives organizational architec-ture, a term that describes the variety of

46 ORGANIZATIONAL DYNAMICS

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ways in which the enterprise structures, coor-dinates, and manages the work of its peoplein pursuit of strategic objectives. Over theyears, we have described this concept as theCongruence Model of Organizational Behav-ior (Fig. 1). This model views the organizationas an open system that transforms input fromthe external environment into output of vari-ous types. The organization, consisting of theformal and informal arrangements, the peo-ple, and the core work, is driven by an articu-lated strategy. The more closely each compo-nent of the organization is aligned with theothers—and with the strategy—the moreeffective the overall performance. Conse-quently, effective organizations design pat-terns of formal and informal structures andprocesses best suited to their strategic objec-tives.

relationship between strategy andA!)organization design is reciprocal. How anenterprise is organized will influence its focusand time horizons, either encouraging orrestricting its people's ability to develop cre-ative strategies.

4The basic dilemma of organizationaldesign remains unchanged. This raises

several questions: How do we design andmanage both differentiation and integration?How do we group people, processes, andoperating units in ways appropriate to theirunique compehtive environments and strate-gic requirements, while maintaining their linkto the larger organization? How do weencourage both divergence and cohesion?The key to effective design requires an appre-ciation of the underlying duality of this chal-lenge.

Assuming these are the relevant lessonsthat should continue to guide us, our task inthe remainder of this paper is to address threekey issues:

IWhat are the key characteristics of thechanging business environment? What are

the critical changes that will drive new think-ing in strategic and organizational architec-ture?

Michael Tushman is the Paul R. Lawrence,MBA Class of 1942 Professor of BusinessAdministration at Harvard University. Heholds degrees from Northwestern University(B.S.E.E.), Cornell University (M.S.) and theSloan School of Management at M.I.T.(Ph.D.). Tushman was on the faculty of theGraduate School of Business, Columbia Uni-versity, from 1976 to 1998; he was PhilipHettleman Professor of Business from 1989to 1998. He has also been a visiting profes-sor at MIT (1982, 1996) and INSEAD (1995-1998).

Tushman is internationally recognizedfor his work on the relations between techno-logical change, executive leadership andorganization adaptation, and for his work onmanaging R&D laboratories. He has pub-lished numerous articles, several of whichhave won awards. His books include WinningThrough Innovation: A Practical Guide toLeading Organizational Renewal andChange (with C. O'Reilly), Harvard BusinessSchool Press, 1997; Navigating Change:How CEOs. Top Teams, and Boards SteerTransformation (with D. Hambrick and D.Nadler, 1998), Harvard Business SchoolPress; and Competing by Design: A Blueprintfor Organizational Architectures (with D.Nadler), Oxford University Press, 1998.

Tushman teaches courses on managingorganizations, managing innovation andmanaging international competitiveness.

Tushman is an active consultant. Hisclients include: Hewlett-Packard, GKN, Hoff-man-LaRoche, Novartis, World Bank, Gen-

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FIGURE 1

Informal

2What are the strategic imperatives thatflow from the environmental changes

we've identified?

3What orgarrizational challenges will be cre-ated by the new strategic imperatives?

How will effective organizations translatestrategic imperatives into new organizationalarchitectures and new leadership priorities?

To answer these questions, we begin byconsidering the historic trends that havealready begun to reshape the competitiveenvironment.

THE NEW BUSINESS ENVIRONMENTIn many ways, today's business environmenthas changed qualitatively since the late 1980s.The end of the Cold War radically altered thevery nature of global politics and economics.In just a few short years, the triumph of capi-talism has spawned a variety of trends withprofound consequences: the opetung of mar-kets, true global competition, widespread


industry deregulation, and an abundance ofaccessible capital. We have experienced boththe benefits and perils of a truly global econ-omy, with both Wall Street and Main Streetfeeling the pangs of economic dislocation halfa world away.

At the same time, we have fully enteredthe Information Age. Startling breakthroughsin information technology have irreversiblyaltered the ability to conduct business uncon-strained by the traditional limitations of timeor space. Today, it's almost impossible toimagine a world devoid of intranets, e-mail,and laptops. With stunning speed, the Inter-net is profoundly changing the way we work,shop, do business, and communicate.

In less than ten years, the changeswrought by new information technologyhave been phenomenal.

As a consequence, we have truly enteredthe Post-Industrial economy. We are rapidlyshifting from an economy based on manufac-turing and commodities to one that places thegreatest value on information, services, sup-port, and distribution. That shift, in turn,

places an unprecedented premium on"knowledge workers/' a new class of affluent,educated, and mobile people who view them-selves as free agents in a seller's market.

Beyond the realm of information technol-ogy, the accelerated pace of technologicalchange in virtually every industry has createdentirely new businesses, wiped out others,and produced a pervasive demand for con-tinuous innovation. New product, process,and distribution technologies provide power-ful levers for creating competitive value. Morecompanies are learning the importance ofdestructive technologies—innovations thathold the potential to make a product line, oreven an entire business segment, virtuallyobsolete.

Another major trend has been the frag-mentation of consumer and business markets.There's a growing appreciation that superfi-cially similar groups of customers may havevery different preferences in terms of whatthey want to buy and how they want to buyit. Now, new technology makes it easier,faster, and cheaper to identify and serve tar-geted micromarkets in ways that were physi-cally impossible or prohibitively expensive inthe past. Moreover, the trend feeds on itself, abusiness' ability to serve sub-markets fuelscustomers' appetites for more and more spe-cialized offerings.

IMPLICATIONS OFENVIRONMENTAL CHANGEWe all know that change has become aninherent part of business. What's more signif-icant is the rapidly accelerating velocity ofchange. More specifically, the lifespan ofproduct, process, and distribution technolo-gies has contracted with breathtaking speed.

The critical issue is time. The rapidlyincreasing velocity of change warps organiza-tional time and space, bending the very shapeof the enterprise. It's not just simply a matterof doing the same things, only faster; it's morelike the difference between checkers andthree-dimensional chess. The massivedemands imposed by time compression will

force organizations to:• Compete and innovate simultaneously

in multiple venues and in overlapping timeframes; and

• Find creative ways to design andimplement new organizational architecturesin half the time required by current processeswithout sacrificing the benefits traditionallyassociated with deliberate planning andappropriate participation.

Together, these changes in the businessenvironment challenge our fundamentalassumptions of organizational design. Histor-ically, the purpose of organizational struc-tures was to institutionalize stability; in theorganization of the future, the goal of designwill be to institutionalize change. In thatsense, we stand in the midst of a profoundshift in the design and purpose of organiza-tional design.

THE NEW STRATEGIC IMPERATIVESWe believe that the changing environmentwe've just described creates six strategicimperatives for the organization of the future.It will be required to: increase strategic clockspeed; focus portfolios, with various businessmodels; abbreviate strategic life cycles; create"go-to-market" flexibility; enhance competi-tive innovation; and manage intra-enterprisecannibalism. We will describe each in turn.

*! Increase Strategic Clock Speed. From aJ. strategic standpoint, speed is quicklybecoming a critical success factor. In a strate-gic context, speed involves an organizationalcapacity to understand, anticipate, andrespond appropriately to those externalchanges that fundamentally alter the rules ofengagement and the sources of value in agiven industry or business segment. Exam-ples abound: the deregulation of telecommu-nications and other utilities, the emergence ofnew technologies such as v^ r̂eless communi-cation, the development of e-commerce, andthe rise of "category killer" outlets in con-sumer segments such as home improvement(The Home Depot) and toys (Toys' R Us). Vir-

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tually every industry has seen vast changes inthe way it designs, produces, or reaches themarket with its offerings.

Timing is everything. During periods ofradical, discontinuous change, the firstmovers enjoy significant advantages. Thosewho perceive the early signs of discontinuityin the environment and then rapidly fashionan appropriate new strategy are infinitelymore successful than those who miss thewarning signs or delay their response. Thosewho move slowly find must react to competi-tors; those who wait too long find themselvesstruggling for survival.

f^ Focus Portfolios, with Various Business^ Models. Over the past 40 years, there'sbeen significant change in the underlyingstrategies that defined our large and complexbusiness enterprises. Through the mid-1960s,the classical form or organizational architec-ture consisted of companies with a singledominant business design that was largelyduplicated down through the pyramid ofdivisions and operating companies. Theseshared designs allowed for tight linkages anda sense of consistency.

The mid-1960s saw the rise of the con-glomerate. Driven by a thirst for growth, afundamental belief that "bigger is better," anda desire to offset the cyclical downturns inspecific industries, companies diversifiedtheir portfolios in unprecedented ways.Within each corporation, there might bedozens of companies with wholly unrelatedstrategies and entirely different businessdesigns. The holding company modelinvolved only the most minimal linkagesacross the enterprise, with each businessoperating essentially as an independent agentin pursuit of financial goals dictated fromabove.

Now we're witnessing the emergence ofthe new "strategic enterprise." The changingmarketplace no longer rewards unfocusedgrowth and gross market share. Instead, com-panies are reshaping their portfolios in thepursuit of strategic focus, concentrating onthose businesses where they can create sus-tainable value by applying their core compe-


tencies to provide competitive advantage.They are spinning off or selling businessesthat either dilute focus, in terms of resourcesand managerial energy, or whose potentialvalue carmot be leveraged within the largerenterprise. In effect, companies are breakingup and reassembling the traditional valuechain.

This sharpened focus is leading compa-nies to seek new ways to compete within agiven competitive space, operating simulta-neously in mature, emerging, and future seg-ments of the same markets. Consequently,we're going to see more and more variationsin business design within a single enterprise.In this context, we use the term "businessdesign" as defined by Slywotzky and Morri-son as encompassing four dimensions: whichcustomers to pursue, how to capture value(i.e., profit), how to maintain a unique valueproposition, and what scope of activities topursue.

For example, consider the case of LucentTechnologies, a spinoff created by AT&T in1995 from four of its businesses and much ofBell Labs. As part of AT&T, those businesseswere locked in a strategic dilemma created byderegulation: In order to realize their fullvalue, they would have to do business withAT&T's widening array of direct competitors.That created major conflicts for everyoneconcerned. Once Lucent became indepen-dent from AT&T, its value as a manufacturerand supplier of telecommunications equip-ment and systems skyrocketed; its profitsmore than quadrupled between 1995 and1998, and its stock price rose from $13.50 ashare in 1996 to nearly $120, adjusted forsplits.

But it wasn't long before Lucent realizedthat it, too, would have to reshape its businessdesign. Just a few years after the spinoff,Lucent exited the consumer business, whereit lacked the front-end linkages—sales, distri-bution, customer base—to sufficiently lever-age its back-end technology and productionstrengths. Instead, Lucent chose to focusexclusively on business communications. Inearly 1999, it acquired Ascend Communica-tions Inc., a move that represented a $20 bil-

lion bet on data networking—a businessinvolving substantially different technologythan Lucent's traditional circuit switching.Now, the challenge for Lucent is figuring outhow to manage these two different—and, insome ways, directly competing—businessdesigns.

O Abbreviated Strategic Life Cycles. EachLJ industry progresses through a fairly pre-dictable life cycle. There may be huge differ-ences in the duration of that cycle dependingupon the industry segment, but the pattern ofcycles is consistent. Understanding thosecycles is essential for leaders. Different stagesin the cycle of industry evolution—the well-known "S-curve"—demand different strate-gies at various points along the curve.

But waves of change in industry leader-ship suggest that firms must engage in bothincremental and discontinuous technicalchange, as well as architectural innova-tion—taking the same product and taking itto different markets. Thus in photolithogra-phy for disk drives, leading firms wereunable to take known technologies andmove to new customers. Dynamic capabili-ties seem to be rooted in shaping streams ofdifferent types of innovation in a givenproduct class.

The consequences of the sweeping andrapid changes in the environment discussedearlier have had the effect of substantiallyshortening those evolutionary cycles forevery industry. In the past, companies largeand small, including AT&T, General Motors,and even IBM, could get along for a decade,and sometimes longer, without any funda-mental changes in strategy. Those days aregone. Rather than thinking in terms ofdecades, the pace of change in the environ-ment will require the organization of thefuture to significantly change its underlyingstrategy on a regular basis of between 18months and five years, depending upon theindustry. Indeed, it's not uncommon to hearexecutives, as they talk about strategic cycles,talk in terms of "Web years," signifying a com-pressed timeframe of three months ratherthan twelve.

4Create "Go-to-Market" Flexibility. Thefragmentation of markets, one of the sig-

nificant changes in the environment, hasenormous strategic implications for organiza-tions. In order to reach each market segmentin the most effective way, companies havebegun focusing more intensely than everbefore on the rising demand for "go-to-mar-ket" variability. Various market segmentsoffer uddely divergent demands for the samecore product or service in terms of pricingoptions, sales and service support, speed ofdelivery, customization, and so forth. Today,no organization can succeed with a "one sizefits air approach to the marketplace.

The most highly publicized changes, ofcourse, have involved the Internet and theemergence of so-called "e-commerce"; bysome accounts, sales of goods over the Inter-net rose from being barely measurable in 1996to more than $4 billion during the 1998 Christ-mas season. Waves of change in distributionchannels are coming faster all the time. It wasonly a few years ago that independent book-sellers were wilting under the pressure of thebook superstores, such as Barnes & Noble andBorders. Then, practically overnight, Ama-zon.com reshaped the industry, putting theleading competitors on the defensive andforcing them to follow the upstart onto theWeb, despite their enormous investments inbrick-and-mortar outlets.

Implicit in the notion of "go-to-market"variability is the potential it creates for con-flicting internal priorities. Consider the autoindustry. By some estimates, we are quicklyapproaching the point when more than halfof all new car buyers in the US start out bysearching the Internet for information, com-paring models, options, prices, and financingalternatives before they ever set foot in ashowroom. What many shoppers are lookingfor is a vehicle's factory invoice price, theessential number that equips them to bargainknowledgeably with the local dealer. That'snot good news for the dealer; but at this point,the auto companies have no choice but tocater to the demands of sophisticated cus-tomers for more and better information. Atthe same time, reeling from assaults by Car-

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Max and other high-volume used-car chains,the auto companies have to think seriouslyabout starting their own used-car outlets—anhistoric shift in distribution that would put afurther squeeze on profits of their own fran-chised dealerships.

[• Enhance Competitive Innovation. It hasi^ practically become an article of faith thatinnovation provides a crihcal source of com-petitive advantage. But the accepted defini-tion of "innovation" is too narrow; we wouldargue that the scope of innovation must beexpanded to include the full range of an orga-nization's capabilities.

Innovation traditionally focused on prod-ucts and processes. More recently, distribu-tion has attracted attention as an area wheresignificant innovation can lead to dramaticgains. But the combination of product, pro-cess, and distribution still fails to capture thefull potential for organizational innovation.

We believe the successful organization ofthe future will also develop exceptional skillsto innovate in two other areas: strategy devel-opment and organization design. If the mostcritical characteristic of the new business envi-ronment is the accelerating pace of change,then the ability to quickly and creativelydevelop and implement new strategies andthe organization designs required to makethem work will become a major source ofcompetitive differentiation.

6Manage Intra-enterprise Cannibalism.What we call "purposeful cannibalism"—

the need to develop and support new strate-gies, product lines, and distribution channelsthat might eventually dry up existing revenuestreams—is not a new idea. Visionary busi-ness leaders have done it for years. But twoelements of intra-enterprise cannibalism arenew.

The first change is that cannibalism hasbeen rare. Business historians praise TomWatson Jr. for his foresight in developing theIBM 360, which held the potential to wipe outmany of the company's best-selling productlines. His willingness to put a major revenuestream at risk was remarkable in large part


because it was so uncommon. In the success-ful organization of the future, the idea of can-nibalism will become routine, an acceptedpart of each company's strategy.

The other change relates, once again, tospeed. In the future, it won't suffice to makeone big bet each decade. The pace of innova-tion and the abbreviated strategic cycles willforce companies to place multiple bets on anongoing basis, acknowledging that a newproduct may be well on its way to obsoles-cence by the time it reaches the market.

Lucent Technologies' $20 billion acquisi-tion of Ascend, which we mentioned earlier,involved more than a strategy of multiple betson alternative technologies. There's a goodchance that the newly acquired data net-working strategy based on packet switchingmay actually displace the circuit switchingtechnology that now provides the bulk ofLucent's profits. And before long, it's entirelypossible that Lucent will have to invest inalternative packet switching strategies as newtechnologies come along and require newbusiness designs.

ORGANIZATIONAL CHALLENGES

The six strategic imperatives described abovecreate a compelling need for some new andunconventional organizational architectures.As we said earlier, organizational architecturethroughout much of this century was gener-ally viewed as a way to institutionalize andmanage stability. But today, the challenge isto design organizational architectures that areflexible and adaptive, that enable the organi-zation to perform effectively in the face ofuncertainty—not just day-to-day, but in thebroader context of profound discontinuouschange.

In our view, the new strategic impera-tives create a corresponding set of challengesfor the organization of the future; to succeed,organizations will be forced to become profi-cient in eight core competencies.

•1 Increase Organizational Clock Speed. TheX strategic imperative of timely anticipation

and speedy response to change will requirethe design of organizations with the capacityto do everything faster. The ability to config-ure the organization in ways that ensure aconstant and acute awareness of impendingchanges in the marketplace will become anessential capability that will separate the lead-ers from the laggards.

Beyond that, organizations will have tofind creative ways to achieve unprecedentedspeed in all their operating and support pro-cesses. They'll want to significantly reducetheir time to market and time to volume.The/ll want to accelerate decision-making upand down the line. They'll need to substan-tially cut the time it takes to design andimplement strategic and organizationalchanges. Enlightened leaders already under-stand that speed doesn't mean operating thesame way as in the past, only faster; theyknow that radical improvements in speedinvolve doing things differently. In order toincrease strategic clock speed, organizationswill face three challenges.

First, senior leaders will need a muchdeeper understanding of the quickening cycletimes in their industries. They will have toalter their assumptions about large-scalechange, both in terms of the frequency andspeed of major change initiatives. Once upona time, CEOs were expected to be the stew-ards of stability. Through the 1980s, a CEOmight expect to lead one or, in extreme cases,two episodes of radical change. Today, and inthe coming decades, leaders of complex orga-nizations should enter their jobs with theexpectation that they might well be requiredto reinvent their organizations three, four, oreven more times over the course of theirtenure. That will require a fundamentally dif-ferent attitude about the role of the CEO as anagent of change.

Second, successful enterprises will needto develop sensitive organizational anten-nae—the roles, structures, and processes thatwill significantly enhance their ability todetect the early warning signs of value migra-tion. In particular, they will have to keep closewatch on minor players and industry outliers,the frequent sources of major innovation.

They are the ones to monitor most carefully;they are the ones most likely to employ newtechnologies and distribution patterns to nul-lify the dominant conventional businessdesigns.

Finally, companies will need to redesigntheir organizational architectures in ways thatencourage the "capacity to act" in response toindications of environmental change. In toomany organizations, managers lack clearaccountabilities, support from above, ade-quate resources, and sufficient information;faced with major opportunities or challenges,they freeze in their tracks. The growingdemand for speed in every facet of the busi-ness will require organizations to fashion theformal structures, processes, and roles as wellas the informal operating environment neces-sary to encourage managers throughout theenterprise to act swiftly and independently.

r\ Design Structural Divergence. The^changing environment is requiring enter-prises to employ a variety of business designsas they develop multiple ways to achievevalue within a defined competitive space. Theorganizational challenge will be to master theart of designed divergence—the ability to cre-ate, support and link, where necessary, awide variety of related businesses that usedramatically different architectures to pursuevarying and sometimes conflicting strategies.

In recent years, we have argued the casefor ambidextrous management—the ability tomaintain superior performance in establishedbusinesses while managing innovation in tar-geted areas. The organization of the futurewill have to be more than just ambidextrous;in a sense, it will have to become polydex-trous. Rather than operating, in essence, inboth the present and the future, polydextrousleadership will also require an ability to coor-dinate businesses that are both complemen-tary and competitive in the current market-place (Fig.2). That will require a fundamentalrethinking of the form and purpose of orga-nizational architecture. The framework wehave developed over the past 20 years, theCongruence Model, is generally synonymouswith consistency. It implies that effective

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FIGURE 2

* single General Manageeand Executive Team

* Single, Overarching Vision* MuHiple Competing Strategies

Variation(Discontinuous orArchitecturalInnovation)

Multiple CongruentRelations Between:StrategyCritical TasksFormal OrganizationsPeopleCulture

organizations maintain a consistent architec-ture, with minor variations, throughout theenterprise. We now believe that the organiza-tion of the future will seek congruence at theenterprise level, providing an effective frame-work that successfully melds a broad array ofdifferent architectures at the business unitlevel and beyond. Rather than seeking blan-ket consistency, leaders will come to perceiveinternal architectural divergence as a power-ful source of evolutionary strength.

The most critical issue will be to figure outthe appropriate linkages across a broad rangeof very different businesses. The challengeinvolves an inherent balancing act: minimiz-ing linkages in order to maximize the focus ofindependent business units while, at thesame time, capitalizing on potential sources ofleverage to create value from the joint owner-ship and management of multiple businesses.In other words, leaders will have to learn


when it's best to encourage autonomy anddifferentiation, and how to create valuethrough the selective use of linking structuresand integrative processes.

In reality, the choices are somewhat lim-ited. Businesses can be linked on the backend, through common technology architec-tures. They can be linked in the middlethrough infrastructure—manufacturing pro-cesses, supply chains, etc. And they can belinked on the front end, through shared cus-tomer relationships, distribution channels,sales and service operations, and so on (Fig.3). The more points of linkage, the more dif-fused the focus. So the issue is to start with aclean slate, to weigh the marginal costs andbenefits of each potential linkage, and toarrive at the correct scope and intensity oflinkage at each point in the value chain. Com-ing Inc., for example, has come to the conclu-sion that its various businesses—photonic

devices for telecommunications, stepperlenses for photolithography (for creatingchips), ceramic substrates for catalytic con-verters—offer no leverage on the front end,minima! leverage in the middle, and consid-erable leverage on the back end, where com-mon technologies provide innovations withapplications across its businesses.

Q Promote Organizational Modularity. Theingrowing prevalence of abbreviated strate-gic life cycles will require ever-faster develop-ment and implementation of appropriateorganizational designs. That requirementclearly calls for both product and processinnovation in the domain of organizationaldesign. The implications may be far-reaching,indeed.

In recent decades, we have rejected thenotion of "off-the-rack" organization designs.We have steadfastly argued in favor of "cus-tom designs." Our thinking was based on twofundamental beliefs; first, that each designshould be suited to the unique demands ofthe organization—its environment, its strat-

egy, its people and its culture; and second,that the very process of designing the appro-priate structures, processes, systems, androles held inherent long-term value for theorganization and the individuals who tookpart in the process.

As valuable as it has been, it may well betime to rethink that approach. The transform-ing requirements of speed might well dictatesituations in which there is simply notenough time to engage in a conventionalorganization design process. We may beapproaching a time when theorists and prac-titioners ought to develop a set of design prin-ciples that will allow organizations to quicklyselect an appropriate architecture for a givenstrategy.

Many organizations will no longer beable to afford the luxury of spending six ornine months creating and implementing anew design; few companies will be able towait that long to address the imminentchanges in their environment. So the notionof starting each design process with a blankslate will soon become obsolete. The chal-

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lenge will be to devise a streamlined process,employing modular design, that still retainssome of the important benefits—the learning,insight, team-building and ownership—thatwe attempt to create through the customizeddesign approach.

A Structure Hybrid Distribution Channels.M The strategic imperative for go-to-market

variability will require organizations todevelop different kinds of structures that willenable them to simultaneously manage dif-ferent channels of distribution in order toserve highly fragmented markets. XeroxCorp.'s early 1999 restructuring—its third inless than a decade—illustrates the kind ofnew, creative designs that will be required bythe organization of the future.

For years, Xerox basically sold a range ofgeneric products through a sales force thatcalled on companies, buiit relationships, andhelped customers to learn about the featuresand benefits of those products. But changes inthe environment battered the business designthat had served Xerox so well. Early in the

1990s, Xerox reorganized into business unitsthat focused on selling particular products tocorresponding segments of the office marketBut after just a few years, that design, and itslater refinements, failed to keep pace with thecontinued fragmentation of the market. Thedigital office, the proliferation of small busi-nesses and home offices, the demand for newways to purchase and service equipment, theunique document requirements of specificindustries—they all served to fragment themarket for office equipment and solutions.

In many cases, companies were no longersatisfied with just "the box," a freestandingcopier sitting in a side office. As the digitaloffice became a reality, more customersdemanded a networked, multi-functionmachine to help them solve production, dis-tribution, and archiving problems; otherswanted the software and systems design tomake the whole set-up work seamlessly. Andin extreme cases, they wanted Xerox not onlyto supply the system, but to design and oper-ate it as well. At the other end of the spectrumwas the so-called SOHO market (Small

FIGURE 4

Strategic ImperativesIncrease strategic clock speed

Focus portfolios with variousbusiness models

Abbreviate strategic iife cycies

• Create "go-to-market" flexlbiiity

Enhance competitive innovation

Manage Intra-enterprisecannibalism

rganizational Challenges

increase organ izationai ciock speed

Design structural divergence

Promote organizational modularity

Structure hybrid distribution channels

• Design asymmetrical research anddevelopment

• Construct conflict management processes

Maintain organizational coherenceDevelop executive teams


FIGURE 5

SolutionDevelopment

&Acquisition

ProductAcquisition

&Deveiopment

Customers

Customersseeking

soiutions andIndustryspecific

applications

Customersseeking highquality/good

vaiue documentproducts

Customersseeking

soiutions and/ordocumentproducts

Office/Home Office), whose customers wereprimarily interested in products that wereinexpensive, high quality, easily installed andoperated, and quickly ordered, often byphone or over the Internet. And in the middlewas still a substantial conventional market,businesses that were happy to keep dealingwith the traditional sales force.

Early in 1999, Xerox reconfigured thefront end of the organization to focus on cus-tomer segments (Eig. 4). These segments rec-ognized the geographic distinctions marketsin varying stages of economic developmentand the specific needs of customers in variousindustries. Facing these customer segmentswere an array of targeted operations andbusiness groups. General Markets Opera-tions, for example, was aimed at the lowerend of the market, and consequently requiredthe structures, processes, culture, and clockspeed needed to meet the demands of thesmall customer. On the other hand. Industryand Solutions Operations focused on solu-tions rather than products, and was furthersegmented by industry on the principle thatsystems solutions in financial services and

Pharmaceuticals, for example, must be uniqueand custom-tailored.

The Xerox organization design leveragesthe back end of the value chain, the commontechnologies. It involves an uncommonlycomplex design on the front end, however,one that recognizes that Xerox must provideimmense variety in the ways it goes to marketif it is to compete successfully in a market-place characterized by the fragmentation ofsub-markets.

["Design metrical Research and Develop-4_7menl. The strategic imperative of compet-itive innovation will require the organizationof the future to design the structures and pro-cesses that guide research and developmentin some new and creative ways.

Today, different companies design theirR&D processes in different configurations,but in the end, there tends to be a single inno-vation model patterned around the basicbusiness model. That model is entirely incon-sistent with the notion of design divergence.Within the same enterprise, businesses andoperations with very different strategies will

57

require dramatically different innovationstreams, or processes for turning ideas intomarketable products. Organizations thatinsist on applying a single innovation processsymmetrically across the enterprise willinevitably run into trouble.

The problem is that competing simulta-neously in both the present and the futurerequires a range of R&D processes, structures,priorities, and behavior. In a mature business,the emphasis in innovation is on the rightsolution—the absolutely right solution. Themarketplace will accept nothing less. Particu-larly if you're among the market leaders, youcan follow a highly structured process withstrictly enforced priorities, deadlines andresource allocations.

The picture is entirely different in emerg-ing markets. There, the priorities are speedand flexibility. If you can be first to market, aroughly right solution is better than none; inthe extra time it might take to find the abso-lutely perfect solution, the market could wellpass you by. And in those early stages ofproduct life cycle, the customer calls the shots;R&D operations need the fiexibility torespond swiftly to unexpected opportunitiesand challenges.

Consequently, companies whose strategyrequires a range of business designs cannotemployee symmetrical innovation processesand hope to succeed. There will still be valuein a core R&D function; allocating all R&D tothe business units eliminates an importantpotential source of leverage. But the processesby which R&D operates in relation to eachbusiness unit—goal setfing, funding mecha-nisms, confiict resolution, etc.—need to becustomized and asymmetrical.

6Construct Conflict Management Pro-cesses. In the past, as we've mentioned, an

important role of organization design was topreserve consistancy, stability, and perhapseven a degree of harmony within the organi-zation. But as we look to the future, organiza-tions that use design to impose an artificialsense of stability in the face of sweeping envi-ronmental change will become their ownworst enemy.


Instead, effective leaders will actually useorganizafion design to import the conflict andcompetition of the marketplace into the verystructure of their companies. But as the pro-Uferafion of internally competitive strategiesbecomes commonplace, what are the impiica-tions for organizations and their leaders?

In short, conflict management willbecome an essenfial organizational capability.Today, an extremely short list of companies—Intel usually tops the list—have establishedreputations for their ability to creatively man-age internal conflict. What is a rare talenttoday will become a standard requirementbefore long. The successful organizafion ofthe future will need to develop the processes,cultures, and behavior capable of accommo-dating and resolving conflict in ways thatbenefit the customer and strengthen thevalue proposition.

So far, we've been describing organiza-fional challenges that directly correspondwith the new strategic impera fives. There aretwo additional organizational challenges thatapply to the full range of strategic impera-fives: the changing nature of organizationalcoherence, and the magnified role of execu-tive teams. Both address the issue of how tomanage the organization of the future as itchanges to address the growing demands ofspeed, variable business design, abbreviatedstrategic cycles, greater go-to-market variabil-ity, compefitive innovation and intra-enter-prise cannibalism.

ryOrganizational Coherence. In recent/ years, we've witnessed a growing recogni-tion that values, culture, and shared goals arereplacing formal structures as the glue thatholds organizations together. That trend willrapidly accelerate as the result of the strategicand organizafional changes we've discussedhere.

As business units and operafing compa-nies become increasingly autonomous, to thepoint of becoming outright compefitors withone another, the very nature of organiza-fional coherence will undergo a radical trans-formafion. Job titles, formal structures, andbureaucratic procedures will have less and

less importance to people whose primary loy-alty will be to their own business group and,even more narrowly, to their own profes-sional discipline. Organizational coherence atthe enterprise level will become increasinglydifficult to maintain, and will rest almostenfirely on a common goal and a small num-ber of shared values—not the formal rhetori-cal flourishes that are the organization'sespoused values, but those few values thattruly embody the way people think of them-selves and their enterprise.

In that context, the nofions of "brand"and idenfity will assume growing importancewithin the enterprise. The dominant culturalnorms—the H-P Way, the feistiness of SunMicrosystems, the insistence on winning atLucent Technologies, Intel's creafive confiict,or Microsoft's self-image as the best and thebrightest—these will be the understood,though not always explicit, values that willhold divergent enterprises together. The so-called "soft stuff" will, over fime, become theessential stuff.

8Executive Teams. Where will the leader-ship come from to generate this intangible

coherence while managing the tangible hard-ware of the enterprise? The answer will lie inthe execufive team.

Consider the degree of complexity we'reenvisioning for the organizafion of the future.In a sense, what we're talking about is thecapacity to manage paradoxes. Large organi-zations will have to be managed as if theywere small; they'll have to be both global andlocal; they'll need to promote both internalconfiict and overall coherence. It's virtuallyimpossible to imagine how a single person, inthe form of the CEO, could possess the stag-gering combinafion of leadership skills, man-agerial talent, and technical knowledgerequired to meet these assorted strategic andorganizational challenges. It's absurd to

expect that of one person.Instead, it will fall more and more to the

executive team to become the key mechanismfor managing the organization of the future.That does not diminish the role of the CEO; tothe contrary, the effecfive CEO will have tobecome a deft leader of the execufive team, amajor job in itself. It will require the combinedefforts of the CEO and the executive team,working together, to truly understand andanficipate the changes in the environment. Itwill be up to them to make the critical strate-gic decision. It will require their combinedefforts to understand the fiming and guide theimplementafion of the constant refinementand tuning the complex organization willdemand—redesigning the structure to addfocus here or to provide more leverage there.

These sophisticated tasks will require thecombined intellect of senior people who sharea commitment to the common good of theenterprise. Indeed, the enormity of the chal-lenge suggests that senior leadership willneed to be expanded for certain types ofwork, drawing upon the skills, knowledgeand insights of people who haven't tradifion-ally been viewed as members of the senior-level inner circle. One of the challenges fortop leaders will be to determine when, how,and in what situations to make the top teammore inclusive rather than less.

What is clear is that the organizafion ofthe future, in order to succeed, will becomeless dependent on the independent acfions ofdisaggregated individuals. To succeed, orga-nizations will have to develop a competencyin the design and leadership of execufiveteams, a collective skill that will be just asimportant as the ability to design innovafivestrategies and orgaiuzafional architectures.

I j To order reprints, call 800-644-2464 (ref. number110501). For photocopy permission, see page 2.

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SELECTED BIBLIOGRAPHY

The authors Nadler and Tushman have writ-ten "Informafion Processing as an Integrat-ing Concept in Organizafion Design" for theAcademy of Management Review (3,1978, 613-24) and the book Competing by Design: ThePower of Organizational Architecture (OxfordUniversity Press, 1998). Nadler, with J. L.Spencer, authored Executive Teams (Jossey-Bass Publishers, 1998) and acted as editor(with M. S. Gerstein and R. B. Shaw) of Orga-nizational Architecture: Designs for ChangingOrganizations (Jossey-Bass, 1992) and, with R.A. Shaw and A. E. Walton, DiscontinuousChange (Jossey-Bass, 1995). Also fied to thetopic is the book authored by Nadler enfitledChampions of Change (Jossey-Bass, 1998).

Tushman, with C. A. O'Reilly, authoredWinning Through Innovation (Harvard Busi-ness School Press, 1997) and, with E.Romanelli, the article "Organizational Evolu-tion: A Metamorphosis Model of Conver-

gence and Reorientafion," Research in Organi-zatioml Behavior (vol. 7, JAI Press, 1985). Tush-man, along with David Nadler and DonalHambrick, recently published Navigatingdiange: Haw CEO's, Top Teams & Boards StearTransformation (Harvard Business SchoolPress, 1998).

Other books and arficles related to thetopic include R. N. Foster's book Innovation:The Attacker's Advantage (Summit Books,1986); J. Galbraith's Designing Complex Organi-zations (Addison-Wesley, 1973); P. Lawrenceand J. Lorsch's book Organization and Environ-ment (Harvard University Press, 1967); D.McGregor's The Human Side of Enterprise(McGraw-HiU, 1960); A. J. Slywotzky and D. J.Morrison's book The Project Zone (Time Books,1997); the article by A. E. Walton "GenerativeStrategy," from Discontinuous Change; and thebook by N. Noriha & S. Goshal, The Differenti-ated Network {Jossey-Bass, 1997).


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