The 21st-Century Organization

Big corporations must make sweeping organizational changes to get the best from their professionals.

A company that aims to streamline its line-management structures should create an effective enterprise-wide governance mechanism for decisions that cross them, such as the choices involved in managing shared IT costs. These mechanisms are typically created by defining and clarifying the decision-making authority of each member of the senior leadership team and establishing enterprise-wide governance committees as required. It may also be necessary to take important support functions, which demand focused management, out of the line structure, so that specialized professionals (rather than line managers, who are often, at best, gifted amateurs) can run these functions as shared utilities.

Finally, to promote the creation of enterprise-wide formal networks, parallel structures and parallel roles should be established across the whole extent of the company. Defining the role of the comptroller or the country manager consistently throughout it, for example, helps the people in those roles to interact and collaborate.

Manage Dynamically

Once the newly simplified vertical structure allows line managers to limit their attention to meeting the near-term earnings expectations of the company, it has the luxury of focusing other professionals on the long-term creation of wealth. The advantages of such a separation are obvious. As one executive we know put it, you don’t want people who are engaged in hand-to-hand combat to design a long-term weapons program.

Ongoing multiyear tasks such as launching new products, building new businesses, or fundamentally redesigning a company’s technology platform usually call for small groups of full-time, focused professionals with the freedom “to wander in the woods,” discovering new, winning value propositions by trial and error and deductive tinkering. Few down-the-line managers, who must live day to day in an intensely competitive marketplace, have the time or resources for such a discovery process.

Not that companies should forgo discipline while undertaking such a project. In fact, the portfolio-of-initiatives approach to strategy enables them to “plan on being lucky” by using the staged-investment processes of venture capital and principal investing firms, as well as the R&D processes of leading industrial corporations. (Lowell L. Bryan, “Just-in-time Strategy for a Turbulent World,” The McKinsey Quarterly, 2002 Special Edition: Risk and Resilience, pp. 16–27. The primary stages of such an investment process are diagnosing the problem or opportunity, designing a solution, creating the prototype, and scaling it up, with natural stopping points, midcourse corrections, or both at the end of each stage.) Companies that take this approach devote a fixed part of their budgets (say, 2 to 4 percent of all spending) and some of their best talent to finding and developing longer-term strategic initiatives. Each major one usually has a senior manager as its sponsor to ensure that resources are well invested. Once an initiative is ready to be scaled up — when revenues and cost projections become clear enough to appear in the budget — it can be placed in the line structure.

Of course, at the enterprise level, companies must manage their short- and long-term earnings in a way that integrates their spending on strategic initiatives with the overall budget, so they will need to adopt a systemic, effective way of making the necessary trade-offs. What we call dynamic management can help: a combination of disciplined processes, decision-making protocols, rolling budgets, and calendar-management procedures makes it possible for companies to manage the portfolio of initiatives as part of an integrated senior-management approach to running the entire enterprise. Dynamic management forces companies to make resource allocation trade-offs, explicitly, at the top of the house rather than allowing them to be made, implicitly, by down-the-line managers struggling to make their budgets. This change further simplifies the line managers’ role.

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