Rethinking organizational design

Academy of Management Executive, 1994 Vol. 8 No. 4 Rethinking organizational design Robert W. Keidel Executive Overview Organizational design has be...
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Academy of Management Executive, 1994 Vol. 8 No. 4

Rethinking organizational design Robert W. Keidel Executive Overview

Organizational design has become a never-never land of proliierating metaphors and methods. Managers are understandably confused by the welter of advice that comes at them by way of competing writers, consultants, and trainers. Much of the clutter can be eliminated by grouping design approaches into one of three categories: (1) restructuring (organizational unit solutions): (2) reengineering (organizational process solutions}: or (3) rethinking (organizational cognition). Restructuring is typically concerned only with shareholder well-being: reengineering addresses the needs of both shareholder and customer; rethinking responds to the claims of shareholders, customers, and employees. Rethinking offers the best long-term prospects because it clarifies organizational complexity without trivializing it. Organization is conceptualized as a balance of hierarchical control, individual autonomy, and spontaneous cooperation. Situational guidelines, and recommendations for redesign in the face of financial pressures, are presented. Corporate managers are being bombarded by one salvo after another of organizational design "solutions." The latter include (in alphabetical order): Delayering Downsizing Process innovation Process management Process redesign Reengineering Restructuring Rightsizing Indeed, one consulting client sarcastically likened the subject of organizational design to a Rorschach test—ten inkblots that, as he put it, "could mean anything to anyone—it's all subjective interpretation." The premise of this article is that organizational design initiatives often fail to achieve their objectives because they trivialize the concept. Especially problematic is restructuring—which includes downsizing, rightsizing, and delayering—because its only intent is to increase shareholder well-being. By contrast, reengineering—a covering label for process management, process innovation, and process redesign—considers both shareholder and customer concerns; however, it tends to ignore organizational effects on employees. A third approach, rethinking, explicitly addresses all three perspectives. Consequently, it offers special promise as a long-term methodology.

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Restructuring amounts to manipulating units represented by the organization chart; reengineering involves revising organizational processes; and rethinking is concerned with the way in which organizational issues and decisions are patterned. More precisely, restructuring is a reduction in any one or a mix of the following: (1) overall organizational size, as defined by the number of employees; (2) number of organizational units; (3) size of organizational units; and (4) number of hierarchical levels. According to Edward Bowman and Harbir Singh, organizafionai restructuring "is intended to increase the efficiency and effectiveness of management teams through significant changes in organizational structure, often accompanied by downsizing."' I I

Reengineering is a reconfiguration of work to better serve customers (and as a consequence, to benefit shareholders). In the words of bestselling authors Michael Hammer and James Champy, reengineering entails the "radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service, and speed. "^ ' ]

Restructuring typically means reconfiguring organizational units, often large ones.

Rethinking is an attempt to probe beneath organizational structures (restructuring) and processes (reengineering) in order to understand the link between the way managers think and the way they design organizations. Rethinking seeks to identify the logic that connects cognitive patterns and organizational patterns. Summary contrasts among restructuring, reengineering, and rethinking are presented in Table 1. Restructuring This is the most rudimentary category of understanding organizational design. Design equals structure equals organization chart—administrative groupings and reporting relations; therefore, redesign amounts to little more than altering boxes and lines. Such a perspective is what Henry Mintzberg may have had in mind when he disparagingly referred to "a management whose knowledge consists of black symbols on white paper. "^ Restructuring typically means reconfiguring organizational units, often large ones. For example, whole divisions or business units may be combined, disaggregated, or spun off. Or business functions—such as engineering, operations, information systems, and distribution—may be melded together, folded into business units, or precipitated out. Restructuring—which almost always implies job loss—is often called rightsizing or downsizing; the former term is usually no more than a euphemism for the latter, which itself is a euphemism for layoffs. Another form of restructuring is delayering. which means reducing the number of layers, or hierarchical levels, in the organization—that is, the "distance" between the top manager (chief executive officer/president) and those at the bottom, or operating level. Restructuring approaches, especially when fhey are layoff-driven, are numerical exercises grounded in economics. The rationale may be survival: a company is in extremis, and its continued existence is at risk. Or the impetus may be the need for increased growth and/or profitability.^ In any case, the chief beneficiaries are shareholders because the overriding performance criterion is efficiency. Customers may or may not be better served. In certain instances (especially when delayering takes place), customer service may improve as a 13

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Table 1 Three Approaches to Organizational Design Restructuring (Org. Units)

Reengineering {Org. Processes)

Rethinking (Org. Cognition)

METAPHORS

Downsizing FUghtsizing Delayering

Process management Process innovation Process redesign

Framing Patterning Learning

TARGET

Organizational units & hierarchical levels

Business functions & work systems

Individual, group, & organizational mindsets

NATURE

Numerical

Technical

Conceptual

RATIONALE

Survival or repositioning

Tactical competitiveness

Strategic advantage

BENEFICIARIES

Shareholders

Shareholders & customers

Shareholders, customers, & employees

PERFORMANCE CRITERIA

Efficiency

Efficiency & Customer satisfaction

Efficiency, Customer satisfaction, & Employee development

ORGANIZATIONAL VARIABLES ADDRESSED

Control

Control & Autonomy

Control, Autonomy, & Cooperation

METHOD

Computing ratios

Flow-charting work processes (interdependencies)

Modeling organization as a balance of multiple perspectives

UPSIDE

Reduced costs

Simpler, faster work processes

Richer planning,

Organizational anxiety

Organizational frustration

DOWNSIDE

Organizational trauma

decisionmaking, & innovation capabilities

result of a new, less cumbersome and hierarchical process. At other times, however, those who remain in the recharted organization wind up on overload, and customer service is likely to deteriorate. For example, many small companies have complained of inferior service from major accounting firms after the latter had merged and subsequently cut staff.^ The primary technique used in restructuring is simple arithmetic: the computation of ratios. Several ratios may come into play—such as headcount to sales volume, corporate staff to operating employees, and managerial "span of control" (that is, the number of people reporting to a given individual). Benchmarking exercises have sometimes led to dramatic restructuring programs, as firms discover that their productivity (however defined) is out of line with that of competitors. For example, earlier this year Digital Equipment Corp. CEO Robert Palmer justified massive job cuts by contrasting DEC's revenue per employee with more favorable ratios at Hewlett-Packard and IBM.® The upside of restructuring is, paradoxically, cost reduction—which may 14

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translate into an economically viable future. Clearly, bulging bureaucracies cannot weather global competition, and many such organizations have had no alternative than to take draconian measures. Thus between spring 1991 and spring 1994, twenty-seven corporations announced job reductions that totaled more than 630,000—an average of over 23,000.^ For more than a few of these firms, survival was (is) at stake. One company on the list is Sears, Roebuck—which announced cutbacks of 50,000 employees. Sears' retrenchment is a sensible antidote to prior excesses that included diversification across real estate {Coldwell Banker), insurance (Allstate), and financial investments (Dean Witter). Restructuring's downside, however, tends to be severe. To begin with, there is no guarantee that such measures will work. A study by Kim Cameron of 150 companies that had downsized found that 75 percent of this number ended up in worse shape. ^ (Of course, one never knows whether such firms might have become even more distressed had no restructuring taken place.) Moreover, restructuring may lead to organizational (rauma, a psychiatric condition defined by Webster's as "a painful emotional experience, or shock, often producing a lasting psychic effect and, sometimes, a neurosis." Even when restructuring appears to succeed, the real question may be, "for how long?" How can those who survive a seismic layoff, much less a succession of jolts, not feel both guilty that their own hides were spared and anxious that they might be next on the hit list? And how can one expect much in the way of discretionary energy—in the form of imagination, commitment, and teamwork (as opposed to simply "doing time")—for the sake of an organization that can no longer be trusted? Reengineering Reengineering, under whatever label, is the current vogue. Michael Hammer and James Champy's book, fleengineering the Corporation, remained on The New York Times bestseller list from June until December, 1993, and then reappeared for several weeks in 1994. Whereas restructuring is concerned with moving, shrinking, or eliminating organizational units ("boxes"), reengineering has to do with changing the way work is carried out. The argument for reengineering, at its most basic, goes as follows. Too many corporations (and other organizations) historically have been organized vertically, by functions—research and development (R&D), manufacturing, marketing, finance, and so on. As a consequence, employees' mindsets have become defined by their particular function—or "silo" or "chimney" or "stovepipe," as some have put it.

f?eengineering has fo do with changing the way work is carried out.

Customers could care less, however, about internal organizational design. All that matters to them is composite output — in terms of quality, cost, and time. The challenge, therefore, is to improve on current competitiveness by reorganizing into work processes that make the most sense from the customer's point of view. This change is typically described as moving to a horizontal flow of tasks that cuts across the various functions. The new arrangement, ideally, is a work system comprised of a set of business processes—each with a definable beginning and ending—such as new product development, customer acquisition, and order fulfillment. Reengineering tends to be tactical, rather than strategic, because (1) it focuses on operational processes, as opposed to organizational purposes (which include 15

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the choice of product/market domain); (2) its improvement time frame is relatively near-term; and (3) this activity tends not to consider human development as a source of continuous competitive advantage. Yet unlike classical industrial engineering, which also concerned itself with workflow, reengineering explicitly identifies customers (along with shareholders) as beneficiaries, and imaginatively uses information technology to streamline and simplify organization.^ Proponents of reengineering advocate starting with a "blank sheet of paper." In other words, assume that nothing presently exists. What is the best way to arrange work in order to delight the customer? Determining this pattern requires flow-charting the entire work process.

Indeed, the term reengineering, as applied to organizations, is unfortunate; if is mechanistic and utterly devoid of human content.

Much of reengineering comes down to recasting what organizational theorists call task interdependencies.^^ In pooled interdependence, organizational parts (individuals or units, such as salespersons and sales forces) are relatively independent of each other; each provides a discrete contribution to the whole. In sequential interdependence, the parts interact in series, as in an assembly line; each renders a cumulative contribution to the whole. In reciprocai interdependence, the parts interact in a back-and-forth manner and make joint contributions to the whole. To oversimplify somewhat, the reengineering challenge often amounts to decreasing sequential interdependence (by minimizing the need for "hand-offs" between different functions or departments), and increasing both pooled interdependence (by decentralizing authority) and reciprocal interdependence (by organizing in a way that brings resources together not sequentially, but simultaneously—as exemplified by "simultaneous engineering" in the automobile industry). The upside to organizational reengineering is obvious. The work systems of many corporations are dysfunctional remnants of a less complicated, less dynamic, less competitive day and age. Moreover, all organizations tend to bureaucratize over time—as routines become entrenched, turf becomes delineated and defended, and politics takes precedence over performance. In short, the interests of organizational parts assert themselves over the interests of the whole. Reengineering can change a firm's work orientation and, in so doing, produce quantifiable results. AT&T designed a new, autonomous business telephone systems (PBX) sales force that, among other things, reduced the number of project handoffs between the time of a sale and final installation from twelve to three, increased customer readiness to repurchase from 53 percent to 82 percent, and increased invoices paid within thirty days of installation from 31 percent to 71 percent.'^ Although reengineering's time frame is typically less than long term, there are compelling examples of extended performance improvements. Over a three-year period. Union Carbide reduced fixed costs by $400 million. ^^ And from the early 1980s to the early 1990s, Taco Bell raised its restaurant peak capacity from $400 per hour to $1,500 per hour—while simultaneously reducing prices.'^ But reengineering has a serious downside: its tendency to arouse organizational anxiety, defined by Webster's as "a state of being uneasy, apprehensive, or

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worried about what may happen. . . ." At best, reengineering offers (some) employees the prospect of hope and increased influence over their future. At worst, reengineering verges on restructuring, and anxiety is replaced by trauma. Indeed, the term leengineering, as applied to organizations, is unfortunate; it is mechanistic and utterly devoid of human content. Michael Hammer has estimated that some 50 to 70 percent of all reengineering initiatives fail to achieve their objectives. Ironically, Hammer's observations about what it takes for reengineering to work also provide clues as to why such initiatives often fail. Hammer talks about the need to "break some glass," and he has been quoted as saying that to succeed at reengineering, a manager must be, among other things, "a leg breaker."'^ Where, then, are the positives for most people? To the extent that reengineering is a top-down proposition (as Hammer advocates), then where are the opportunities for employees to influence decisions that affect them? It is quite possible that, as far as downside is concerned, restructuring and reengineering differ only in degree, not in kind. Rethinking

Organizational design may be a mirror image of our cognitions. Therefore, to redesign the organization, we need to redesign the way we think. The increasing use of such expressions as "intellectual capital," "core competencies," and "organizational learning" suggests just such an approach to organizational design and change, an approach that is qualitatively unlike the previous two categories. Our organizational arrangements are a projection of our mental patterns, whether or not we know it. Fred Kofman and Peter Senge contrast organizational cognition and organizational processes as follows: . . . many companies are trying to "reengineer" themselves away from stovepipe structures and toward horizontal business processes that cut across traditional functions and power hierarchies. While potentially significant, such changes often prove difficult to implement and those that are implemented only "reap the low-hanging fruit." The target of "re-cognition" or rethinking is neither organizational units nor organizational processes. It is individual and collective mindsets, or ways oi making sense of the world.

The reason is that the walls that exist in the physical world are reflections of our mental walls. The separation between the different functions is not just geographic, it lives in the way we think. Redesigns that "throw down the walls" between different functions may have little enduring effect unless they also change the fragmentary mental models that created the walls in the first place.'^ The target of "re-cognition" or rethinking is neither organizational units nor organizational processes. It is individual and collective mindsets, or ways of making sense of the world.'^ Organizational cognition is conceptual, not numerical or technical, and it is a concern rarely pursued for immediate or even moderate-term ends. Rather, cognition is seen as the source of strategic advantage. Organizational rethinking, as used in this article, means conceptualizing design in a manner that incorporates organizational identity, or characfer—who we are, and what we stand for; organizational purpose, or constituencies—for whose benefit we exist; and organizational methods, or capabilities—how we satisfy customers/consumers. 17

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To "rethink" organizational design is to consider the following kinds of questions when making a design/change decision: • Is the proposed action true to our essential character? Does it fit the kind of organization that we are (want to be)? • What impact will this action have on our various constituencies? How are the latter likely to respond? • Will this action exploit, and hopefully enhance, our distinctive capabilities? In what ways? Most basically, rethinking relates design decisions to a systematic mental model. One such model is triangular: organizations can be understood as a balance of hierarchical control, individual/unit autonomy, and spontaneous cooperation, as depicted by Exhibit 1.'^ The challenge is threefold. Every organization and unit within it must prioritize control, autonomy, and cooperation so that necessary tradeoffs are made; integrate these variables because all three are essential and interdependent; and focus on whichever variable(s) require attention at any given time, regardless of their priority.

COOPERATION

CONTROL

AUTONOMY

Exhibit 1. Organizational Design as Balance

This triad applies to all system levels—from the "micro" (pair of individuals or small group) to the "macro" (corporation, industry, sector, and beyond)—and capsulizes a wide range of tradeoffs. ^^ Consider, for example, organizational constituencies. Shareholders have a control charter: boards of directors that represent them are legally authorized and expected to control or "direct" their organizations to ensure that shareholders' interests are safeguarded. Customers exercise the most autonomy because, at least in a free marketplace, they can either take a company's products/services or leave them. Employees, to be effective, must cooperate—with each other, with management, and with the aims of the enterprise as a whole. These constituencies are also complementary. Over time, shareholder needs will be met only if customer needs are met; the latter, in tum, will be served only if employees are motivated to do so. Consequently, satisfied employees imply satisfied customers, who in turn imply satisfied shareholders. With my assistance, a large retail food company created what it called the "performance food chain" (Exhibit 2) to demonstrate the process that had to occur in order for the firm to achieve its financial targets. This graphic depicts a 18

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$ FINANCIAL PERFORMANCE

CUSTOMER SATISFACTION

Exhibit 2. Performance Food Chain

triangle within a triangle. Organization was conceptualized as a balance of formal structure (control), individual competence (autonomy), and teamwork (cooperation). An effective organization produces customer satisfaction, which in turn results in the desired financial performance (which leads to further investment in the organization). This image became a staple that unified a series of managerial teambuilding seminars across the company. In fact the food chain idea embodied three key properties of a cognitive approach to organizational design and change: it was sensible, communicable, and portable. This representation was sensible because it revealed logical connections that everyone could grasp and verify as important. It was communicable in large part because it was a picture, with familiar icons, that laid bare a complex set of dynamics. Finally, it was portable because its value was not dependent on any particular organizational 19

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setting or change program; managers could take the visual with them, wherever they might go within (and outside) the firm. The upside of organizational rethinking is more sophisticated planning and decision-making—and innovation—capability. The downside is the difficulty and frustration that accompany "thinking about thinking." Our egos and self-images are closely aligned with the way we perceive and interpret reality. Any criticism of established patterns is bound to provoke discomfort.'^ Even more significant is the difficulty that many individuals have in "juggling more than two variables," as one manager put it. Yet the consequences of not doing so may be severe. The Three Approaches in Perspective An obvious advantage of restructuring is its clear economic impact. Such action produces explicit and immediate results—financial savings that go right to the bottom line. The presumed payoff from reengineering is also easy to comprehend—although this process does not produce the direct hit that restructuring does. Effects are explicit but deferred. A major problem with rethinking is the complex causal chain involved; positive impact is implicit and deferred.

The upside of organizational rethinking is more sophisticated planning and decision-making—and innovation—capability. The downside is the diiiiculty and frustration that accompany "thinking about thinking."

Moreover, with rethinking—as David Garvin has pointed out with respect to learning—an overlapping, three-step process is involved; cognitive change produces behavioral change, which then leads to performance improvement.^° Indeed, for rethinking to "take," an organization may have to create what Fred Kofman and Peter Senge call a practice field —an offline setting in which people can play with ideas, confront otherwise-taboo topics, and generally open up their minds.^' Organizational rethinking would make little sense, of course, if it did not promise value at least commensurate with its difficulty. The potential leverage is significant, as suggested by Exhibit 3. The rationale for this leverage is what systems theory calls the law of requisite variety: an organization must be able to match whatever variety (complexity) its environment confronts it with. Or in sports terms, if your opponent can score in three different ways, you had better be able to defend against all three. Organizational issues are overwhelmingly triadic, as Ian Mitroff and Harold Linstone imply by their advocacy of "unbounded systems thinking"—that is, conceptualizing simultaneously through three lenses: fechnicai (control), personal (autonomy), and organizational (cooperation).^^ Organizations that can respond effectively to such challenges will have a "cognitive edge" over those that cannot.^^ Rethinking is a broader category than reengineering; conceptually it includes reengineering, just as the latter includes restructuring. To recap, restructuring is based on one variable: shareholders [ = efficiency = control]; reengineering is based on two variables: shareholders -I- customers [ = customer satisfaction = autonomy]. Rethinking adds a third variable: employees [= employee development = cooperation]. Philosophically and practically, cooperation has been in relatively short supply in the West.^"* The hierarchical, functional bureaucracies that Hammer and Champy criticize require little in the way of spontaneous cooperation because behavioral patterns are prescribed at the top. What these organizations really need from the majority of their employees is compliance within narrow charters.

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departments, and roles. And that is precisely what people have given, in return for the implied promise of a permanent job. But although Hammer and Champy advocate "cross-divisional teams," their model of decision making remains authoritarian, and largely ignores the organizational context in which reengineering projects take place. >

Rethinking (Org Cognition) Reengineering (Org Processes) Restructuring (Org Units) •

Change Boxes-andLines

Perfor mance ^^^^ ^^^^^^

• Elliciency

Change Work System • Etticiency • Ciistnmer satisiaction

Change Patterns ol Understanding • Efiiciency • Customer satisiaction • Employee development

Exhibit 3. Altemative Leverage Points

Context has to do first with integrating the entire set of business processes that are being redesigned, and matching the latter with organizational resources. Second, context includes corporate policies, plans, and practices that impinge on process redesign—especially those that relate to senior managers' behavior. Third and perhaps most essential, context refers to the organization's emotional tenor—present and future. As an increasing number of managers are learning the hard way, eliminate 20 percent of your workforce, and you have permanently scarred much of the remaining 80 percent. This dynamic may help to explain why reengineering so often fails. Situational Guidelines Even though the three design options can be considered "nested" (with restructuring a subset of reengineering, and the latter a subset of rethinking), each has its time and place. Business Week's John Byrne acknowledges that "downsizing [restructuring] is . . . not a strategy, and it is not a panacea for poor management. . . . But the idea that downsizing can't sometimes be an effective way for bloated, uncompetitive companies to cut costs is pure nonsense."^^ Similarly, reengineering may be a sine qua non for historically bureaucratic, inflexible firms to recapture competitiveness—irrespective of the fallout for certain employees. Restructuring makes the most sense when a firm has little choice but to reduce costs quickly; that is, to "cut its losses." Under such conditions, employee commitment may be irrelevant: if the company goes under, no employees will remain. Abstractly, reengineering occupies a middle ground between restructuring and rethinking—and may actually approximate either of these 21

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extremes. But based on widely reported failure rates, reengineering in practice more often resembles restructuring than rethinking. Rethinking requires slack time for learning about and "playing with" individual and organizational cognitive patterns. Many privately-held firms are prime candidates because they need not impress Wall Street with a strong next quarter or even next year. Public corporations require enough financial cushion—and discipline—so that the long term is not sacrificed for the short term. The best candidates for rethinking, whether private or public, are firms that are financially and culturally able to defer their return on investment.^^ The best candidates for rethinking, whether private or public, are firms that are financially and culturally able to defer their retum on investment.

Realistically, every company can expect to encounter pressures, at various times, for all three forms of organizational design. Just as no firm can remain "excellent" indefinitely, so should no corporation expect to be forever exempt from the need to cut staff, or to reconfigure operations. But a long-term perspective that encompasses both restructuring and reengineering should explicitly build in a concern for human development. For today's employees will almost certainly play a crucial role in determining the corporate tomorrow.^' Thomas Davenport presents a hopeful perspective on reengineering (and perhaps, restructuring) that explicitly addresses employees and the need for discretionary teamwork: "firms should strive to use reengineering not to eliminate jobs, but to increase the desirability of their products and services in the marketplace. This is the only way to employ the reengineering concept and preserve employee morale and loyalty, and to successfully enlist employee ideas for better processes."^ To expand on Davenport's point, the logic for organizations to care about employees is threefold. First, human development is intrinsically right. As Norwegian social scientist P.G. Herbst observed nearly twenty years ago, ultimately "the product of work is people."^^ Second, a humanistic orientation is instrumentally sensible from the corporation's standpoint. Strategic advantage clearly depends on capable, committed, empowered employees in all areas, at all levels. Finally, productive employment is essential to the economic health of society as a whole: the more people out of work, the fewer consumers able to buy new products and services; hence, even more people out of work. And so on. Nine Redesign Recommendations Granted, the individual must take responsibility for his or her working future. Government clearly also has a role—in providing reeducation and retraining support, if nothing else. An enormous void remains, however, that business can and should address. Here are nine recommendations for redesign—whether the spin is restructuring, reengineering, or otherwise. The first three suggestions have to do with minimizing negatives; the second three, with maximizing positives; and the third three, with challenging the way in which redesign is comprehended. 1. Consider all cost-reduction alternatives. There are other costs than people costs (such as those associated with buildings, machines, and materials). But even within the human realm, cutting staff is not the only possible action. In late 1993, Volkswagen AG reduced its workweek to four days and thereby saved 30,000 jobs. Companies such as Honeywell Home & Building Control

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(HBC) and Hewlett-Packard have pared expenses by reconfiguring tasks and organizations—and reassigning people—with virtually no loss of jobs. Indeed Hewlett-Packard, by combining organizational change with voluntary early retirement and severance packages, reassigned some five percent of its workforce between 1990 and 1994.^°

Whenever major staif reductions are absolutely necessary, the smart organizational move is to downsize first, and only afterwards to mount a systematic developmental effort.

Other firms such as New United Motor Manufacturing (NUMMI)—the Fremont, California-based joint venture between General Motors and Toyota—have used slack production periods as an opportunity to train workers and carry out maintenance.^' Harman International Industries, Inc., a California-based consumer electronics firm, has initiated a program that it calls "Off-Line Employment," or "O16" for short.^^ Workers who would otherwise be laid off during a downturn are put to work on ancillary but productive tasks (such as making parts that had previously been purchased from outside vendors) until market conditions improve, and they can return to their regular jobs. 2. Front-end-load any sizable layoffs. Whenever major staff reductions are absolutely necessary, the smart organizational move is to downsize first, and only afterwards to mount a systematic development effort. This sequence is consistent with a psychological principle called force Held theory: reduce the negatives (restraining forces) in a situation before significantly increasing the positives (driving forces); otherwise, the contradiction between the two forces will confuse people and undermine change. Such a tack appears to be what IBM chief executive Louis Gerstner had in mind in July 1993, when he announced plans to cut 35,000 jobs in one fell swoop, rather than drag out the layoff process: "we have got to get behind us this Chinese water torture we've been going through quarter after quarter."^^ 3. Spread the pain. When pay cuts are the order of the day, the negative impact is generally more palatable if misery is spread throughout the company—and everyone knows this. Consider the experience of a firm that, because of financial difficulties, imposed a 10-week, 15 percent pay cut on two of its facilities.^^ In the first plant, managers announced the decision but did not explain why it was necessary. In the second plant, managers discussed the reasons for the reduction, indicated that everyone was taking a pay hit, and suggested that such action was an alternative to layoffs. In the first plant, thefts by employees increased by a factor of three; in the second plant, thefts barely rose at all and then fell back to their historical level. Nucor Corporation has a "Share the Pain" program in which percentage pay cuts actually increase with hierarchical standing. According to CEO Ken Iverson, "management should take the biggest drop in pay because they have the most responsibility."^^ In Japan, such a pattern is widespread. Thus when Fujitsu Ltd. struggled in 1992, executives lost more than one-third of their compensation. 36 4. Leverage human development. So much for managing the minuses. Robust strategies lie elsewhere. The essential question is, are employees resources or constraints? Those familiar with the pharmaceutical industry know that the quickest route to an impressive bottom line is to gut R&D staff. The full impact of such action will not become visible until a firm's patent protection has expired. At that point, of course, the company itself may expire. This is negafive leverage. The intelligent tack in any industry is to "overinvest" in human R&D. 3M, for example, has long had an informal policy that permits scientists and 23

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engineers to spend 15 percent of their paid time on business-related research projects of their own choosing. Hence paradoxically, a stream of serendipitous successes like Post-it™ notes is almost predictable. Applied Manufacturing and Engineering Technology (AMET), an Austin, Texas-based division of Applied Materials, Inc., has instituted a similar practice for all its employees. AMET, which makes machines that produce computer chips, expects managers and workers alike to devote 20 percent of their time to improving existing products and work processes. People are literally encouraged to invent their way out of current jobs—with the promise that they will be rewarded with better jobs.^^ 5. Create—and reward—shared wins. Most corporations have abundant opportunities for linking micro pay to macro performance. Profit-sharing can make a difference—as Chrysler demonstrated dramatically in early 1994 by paying 81,000 workers bonuses that averaged $4,300. Scanlon plans, Rucker plans, and other "gainsharing" programs have also proven useful. So has the practice of extending stock options to everyone in the corporation—as has been done at Du Pont, Merck, PepsiCo, Pfizer, Silicon Graphics, and Tandem Computers. Overall, however, American firms have barely scratched the surface. Wyatt Co., a consulting firm, surveyed 531 companies in order to learn about the effects of organizational restructuring.^^ Among its most significant findings: pay freezes and diminished pay increases were of only marginal value. These measures, while instituted by more than 50 percent of the firms surveyed, were deemed "very effective" by only 20 percent. Far more useful, according to respondents, was the practice of connecting employees' pay to corporate goals. Yet fewer than one-third of the firms polled had done so. 6. Let everyone know what the score is. Although it continues to reduce staff in certain areas, AT&T is exploring other ways to economize than by knocking and chopping heads. In particular, AT&T is sharing the big picture more widely than ever before. That firm is moving away from an adversarial, "line-of-scrimmage" labor relations posture that encourages the unions to dig in for job security. Instead, AT&T is involving labor officials in joint corporate planning and is giving union members the opportunity to compete for jobs with offshore sites. Thus an AT&T unit in Atlanta, by devising high-quality, low-cost production methods, won back communications refurbishing work that had been carried out in Matamoros, Mexico.^^

Restructuring or reengineering for indeed, rethinking) can easily degenerate into a fetish, or fix, that is regarded as an all-purpose soiution.

Perhaps the most impressive example of information sharing in all of American industry is Springfield ReManufacturing Corporation (SRC) under president Jack Stack. SRC, which rebuilds truck engines, practices what it calls "open-book management"—a policy in which virtually all information about performance is visible to all. Everyone in that firm receives a weekly income statement, has been trained in analyzing this information, and can see how his or her performance contributed to or detracted from the company's performance. 7. Beware of fetishes. Restructuring or reengineering (or indeed, rethinking) can easily degenerate into a fetish, or fix, that is regarded as an all-purpose solution. Techniques (the how) may overshadow the nature of design/change

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(the what) and its purpose (the why). Eric Trist, the father of sociotechnical systems theory, noted (in 1983) exactly this tendency with respect to an analytical procedure that he and Fred Emery had developed: "the nine-step model, which has become something of a fetish with a number of practitioners, was never intended as a universally applicable methodology. . . ."*° To guard against such regression, it is useful to address three questions: (1) what is the roof organizational issue or concern or problem? (2) what are plausible alternative approaches, and their respective strengths and weaknesses? and (3} what are the long-term consequences, in addition to short-term results, of taking a given path? 8. Identify and integrate multiple perspectives. Any non-trivial organizational design initiative will affect shareholders and customers and employees—even if the focus is only one or two of these parties. Managers who can appreciate all three points of view will likely outperform others who cannot because they will anticipate, and be able to resolve, more difficulties. Such managers will resemble savvy trial lawyers and negotiators who grasp, and imaginatively synthesize, not only conflicting interests but the "game" as a whole. 9. Take time out to reflect. A busyness ethic pervades American business. We are action-driven, perpetually in motion. Managers are praised, not for being deep thinkers but for being quick studies—as in quick on the draw wild west style. The good news is a constitutional resistance to paralysis by analysis. The bad news is a tendency to pull the trigger before aiming the gun. If there is truth to the Pareto principle—that 20 percent of all activities produces 80 percent of the value added—then most corporations would benefit from increasing the time they devote to reflection. An index of the current state is how readily a manager or professional (or other employee) can afford to be seen reading or discussing a business-related book or article during "working hours." In my experience, the typical answer is "hardly at all." The Power of Mental Models The quality of organizational design will always be a function of the way in which issues, options, and implications are framed. The frames we use express our underlying mental models. The model elaborated in this article calls for balancing three perspectives—shareholders', customers', and employees'—that mirror, respectively, three organizational variables: control, autonomy, and cooperation. My approach is unusual among organizational design discourses in the attention that it pays to employees/cooperation. But there is mounting evidence that such attention pays off. Financially successful firms as disparate as large/high-tech Motorola and small/low-tech Marsh Furniture Co. have demonstrated the multiplier effect of human commitment. Under the leadership of George Fisher (now Kodak's chairman), a struggling Motorola rejected conventional slash-and-burn alternatives and instead transformed itself into a wireless communications world beater. Entrepreneur David Marsh, who founded the 45-person, Houston-based company that bears his name, also chose the high road. His philosophy for managing people is simple yet profound: "what you do because you love it is your best investment in yourself, and your best chance at success.""*' It is a sentiment that more corporations ought to embrace. 25

Academy of Management Executive

Endnotes

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Thanks to John Eldred. George Lutzow, Hugh O'Neill. Tom Zilrides, and the anonymous reviewers for their useful comments on earlier drafts of this article. ' Edward H. Bowman and Harbir Singh, "Corporate Restructuring: Reconfiguring the Firm," Strategic Management Journal, 14, Summer 1993, 6. Bowman and Singh distinguish two other forms of restructuring, portfolio and financial that are conceptually distinct, yet interactive. Portfolio and financial restructuring are beyond the scope of this article; although, like organizational restructuring, their overriding concern is shareholder well-being. ^ Michael Hammer and James Champy. fieengineering ihe Coipoiation: A Manifesto /or Business Revolution {New York, NY: HarperBusiness, 1993), 32. ^ Henry Mint2berg, Mintzberg on Management (New York, NY: Free Press, 1989). 354. * The line between organizafionaJ restructuring and poitfoHo restructuring is often difficult to draw. Challenging economic times force most companies to determine rigorously, and sometimes ruthlessly, in which businesses they will and will not complete. The most famous portfolio approach is the Boston Consulting Group's two-dimensional grid, market growth x relative market share, which defines four categories: dogs, cash cows, question maiks, and stars. See John S, Hammond and Gerald B, Allan, Note on the Boston Consulting Group Concept oi Competitive Analysis and Corporate Strategy (Boston, MA: Harvard Business School, 1975). ^ Lee Berton. "Big Accounting Firms, Striving to Cut Costs, Irritate Small Clients," The Wall Stteet hurnai. April 21, 1994. Al, A8. ^ John R. Wilke. "Digital Plans At Least 20,000 More Job Cuts." The Wall Street JournaL May 6, 1994. A3. ' Robert Rosenstein. "Where Did All The People Go?" Forbes, April 25, 1994. 242-243. * Kim S. Cameron, cited in Richard A. Melcher. "How Goliaths Can Act Like Davids," Business Week/Enterprise 1993, 193, ^ Modern industrial engineering (IE) may effectively exploit available information technology, but IE still appears to regard customer needs as of only secondary importance. The current Handbook of Industrial Engineering contains 2,780 pages, yet its index references only 21 pages ior all customer-related categories [Gavriel Salvendy (Ed.), Handbook of Industrial Engineering, 2nd Ed. (New York, NY: Wiley-Interscience, 1992)1. '" The three forms of interdependence are discussed at length in lames D, Thompson. Organizations in Action (New York, NY: McGraw-Hill. 1967). " Gene Hall. Jim Rcsenthal and Judy Wade, "How To Make Reengineering Really Work," Harvard Business Review. November-December 1993, 119-131. '^ Thomas A. Stewart, "Reengineering: The Hot New Managing Tool," fortune, August 23, 1993, 41-48. '^ Hammer and Champy. op, cit., 177. '* Hammer, quoted in Stewart, op. cit., 42.

'^ Fred Kofman and Peter M. Senge, "Communities of Commitment; The Heart of Learning Organizations," Organizationai Dynamics, Autumn 1993, 8. '^ There are numerous ways to characterize individual/organizational thinking; several approaches that differ from Ihe methodology elaborated in this article are nonetheless compatible with it. To wit: Elliott Jaques [Requisite Organization (Arlington, VA: Cason Hall, 1989)] uses time-span; that is, individuals' temporal horizons, to capture differences in thinking capacity; his range is from one day to fifty years. Others focus on causaiify and distinguish between linear and nonlinear causal processes. See, for example, Magoroh Maruyama, "The Second Cybernetics: Deviation-Amplifying Mutual Causal Processes," American Scientist, 51, 1963, 164-179; Karl Weick, The Social Psychology of Organizing, 2nd Ed. (Reading, MA: Addison-Wesley, 1979); and Peter Senge. The Fifth Discipline: The Art & Practice ol The Learning Organization (New York, NY: Doubleday, 1990). A third, often implicit approach to understanding cognition is to gauge the sophistication of metaphors that are commonly applied. Useful discussions of metaphor include George Lakoff and Mark Johnson, Metaphors We Live By (Chicago, IL: University of Chicago Press, 1980); Peter K, Manning, "Metaphors of the Field: Varieties of Organizational Discourse," Adminisfrafive Science Quarferly, 25(1), 1979, 102-119; Gareth Morgan, Images of Organization (Beverly Hilts, CA: Sage, 1986); and Gareth Morgan, Imoginization: The Art of Creative Management (Newbury Park, CA: Sage. 1993). A fourth, catchall category may be loosely called creative probJem soivjng. It is exemplified by such concepts as synectics [W,J,J, Gordon, Synecfics (New York. NY: Harper & Row. 1961)]; lateraJ thinicing [Edward de Bono, Lateral Thinking (New York, NY: Harper & Row, 1970)1; excursions [George M. Prince, The Practice of Creativity (New York, NY: Collier Books, 1970)]; and concepfuai blocJtbusfing [James L. Adams. Conceptual Blockbusting (Reading, MA: Addison-Wesley. 1974)1, " For earlier treatments of the control/autonomy/cooperation triad, see Robert W. Keidel. Corporate Players: Designs /or Worting and Winning Together (New York, NY: Wiley, 1988); Robert W, Keidel, "Triangular Design: A New Organizational Geometry," Academy of Management Executive, November 1990, 21-37; and Robert W, Keidel. A Concept of Organizational Design (Washington, DC: The World Bank. Organization & Management Series, Occasional Paper #1. May 1993). Similar frameworks are William E, Smith's triadic concept of power, as described in "Planning for the Electricity Sector in Colombia," in Marvin E. Weisbord, ef al.. Discovering Common Ground (San Francisco. CA: Berrett-Koehler. 1992), 171-186; and Kenneth R. Slocum/SENCORP's triad of business management responsibiiities, as outlined in The SENCORP Management Model, Strategic Management Society, 13th

Keidel

Annual Conlerence (Chicago. September 13, 1993). '^ The control/autonomy/cooperation triad is seU-simiiat, to use a term from hactal geometry; in other words, this triad expresses the same dynamics at multiple system levels. [For a technical discussion of fractal geometry, see Benoit B. Mandelbrot, The Fractal Chaiactei of Nature (New York, NY: W.H. Freeman, 1983): Mandelbrot's work has been popularized in James Gleick, Chaos: Making a New Science {New York, NY: Viking, 1987).] Robert W. Keidel's Seeing OrganizafionaJ Patterns; A New Theory and Language of Organizational Design (San Francisco, CA: Berrett-Koehler. forthcoming) contains a theoretical appendix of more than two-hundred triads (primarily from the management/organizational literatures) that parallel control, autonomy, and cooperation. '^ The frustration that accompanies organizational rethinking is not unlike that often associated with total quality management (TQM), which also calls for a systemic (multi-perspective) reappreciation of organizational purposes. See, for example, Robert M, Grant, Rami Shani, and R. Krishnan, "TQM's Challenge to Management Theory and Practice," Sloan Management Review, Winter 1994, 25-35. ^ David A. Garvin, "Building a Learning Organization," Harvard Business Review. July-August 1993, 78-91. Koiman and Senge, op. cit., 22. ^ Ian I. Mitroff and Harold A. Linstone, The Unbounded Mind: Breaking (he Chains of Traditional Business Thinking (New York, NY: Oxford University Press, 1993). " Fifteen years ago, Richard Walton (in "Work Innovations in the United States," Harvard Business Review, July-August 1979, 88-98) argued that quality of worklife programs with joint human and productivity objectives seem to do better on both counts than those with single objectives. The logic here is similar, although with respect lo three objectives (constituencies). " Michael Schrage, in Shared Minds: The New Technologies of Collaboration (New York, NY: Random House, 1990, 44) argues that "The Western tradition of intellectual thought doesn't embrace collaboration as a vital creative behavior. You don't find collaboration as part oi Aristotelian or Platonic thought (which Is ironic, given the role of dialogue in creating enlightenment). Nor is collaboration a part of the Judeo-Christian ethic of community. Adam Smith talked about the 'division of labor,' not collaboration, Marx heralded the 'labor theory ol value,' yet left the collaborative processes that yield this value virtually unexamined. Similarly, the nascent sciences of human thought and behavior give collaboration short shrift. Pavlov, John B. Watson, B.F, Skinner, and the behaviorist school scarcely touch collaboration as a social process. Freud brilliantly explored and described the inner beyonds of the human psyche, but not in the context of the way people create shared understandings." " John A. Byrne, "There Is an Upside to Downsizing." Business Week. May 9, 1994. 69. " A troubling aspect of this line of argument

is the "rich get richer" syndrome. Those organizations most in need of serious rethinking may be least able (and least likely) to move in that direction. Hence, the gap between healthy and non-healthy may only widen. This dynamic, of course, plays out at all societal levels. As Gary Becker has pointed out in "Why the Third World Should Stress the Three R's" (Business WeeJc, May 2. 1994, 16), many third world nations are stunting their future by depriving poor children of elementary education. " At issue here is long-term trust and cooperation. A parallel exists with the human interaction pattern called fif-/or-fa(, as articulated by Robert Axelrod in The Evolution of Cooperation (New York, NY: Basic Books, 1984), Axelrod shows that tit-for-tat —starting out coUaboratively and thereafter responding in kind—is highly effective in encouraging and sustaining cooperative behavior. By analogy, an organization's "cooperating" with employees in the present improves the probability that employees will reciprocate in the future, Thomas H. Davenport, Review of fieengineering (he Corporation, SJoan Management Review, Fall 1993, 103. Davenport is the author of Process Innovation: Reengineering Work through Information Technology (Boston, MA: Harvard Business School Press, 1993). " Phillip G. Herbst, "The Product of Work is People," Epilogue in Louis E. Davis and Albert B. Cherns (Eds.), The Quality of Working Life. Volume One: Problems. Prospects, and the State of the Art (New York, NY: Free Press, 1975). *' Ronald Henkoff, "Getting Beyond Downsizing," Fortune, January 10, 1994, 58-60, 62, 64. ^' Jeffrey Pfeffer, Competitive Advantage Through PeopJe (Boston, MA: Harvard Business School Press, 1994). '^ Robert Kuttner, "Talking Marriage and Thinking One-Night Stand," Business Week. October 18, 1993, 16. ^ Louis V. Gerstner, Jr., quoted in Michael Miller and Laurie Hays, "IBM Posts $8.4 Billion 2nd-Period Loss, Halves Dividend, Plans 35,000 lob Cuts," The Wall Street hurnai July 28, 1993, A3. ^ The following account is taken from Jerald Greenberg in Security; cited in Boardroom Reports, May 15, 1991, 2. ^* Ken Iverson, quoted in "Face-to-Face," Inc., April 1986, 44. * Roberl Neff, "What Do Japanese CEOs Really Make?" Business Week. April 26, 1993, 60-61. " Personal communication with Steven C. Taylor, Austin Corporate Relations Manager. AMET, November 16. 1993. ^ Best Practices in Corporate Restructuring: Wyatt's 1393 Survey of Corporate Restructuring (Chicago, IL: The Wyatt Company, 1993). ^ Personal communication with Burke Stinson, AT&T Corporate Media Relations Manager, January 21, 1994, *° Eric L. Trist, Afterword, in Calvin Pava. Managing New Office Technology: An Organizational Strategy (New York, NY: Free Press, 1983), 173. *' David Marsh, quoted in Toni Mack. "Idealist Makes Good," Forbes, December 6, 1993. 102.

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Academy of Management Executive

About the Author

Robert W. Keidel is principal of Robert Keidel Associates, a Wyncote, PA-based consulting firm. He has been a senior fellow at the Wharton School, University of Pennsylvania, and a program consultant at the National Center for Productivity and Ouality of Working Life, A former naval line officer, corporate project manager, and business school professor, he consults, leads seminars, and speaks on organizational cognition, design, and change. Keidel received his B.A. from Williams College, and his M.B.A. and Ph.D, from Wharion. He has authored numerous articles and three books: Game Plans: Sports Strategies for Business (Dutlon. 1985; Berkley, 1986): Corporate Players: Designs for Working and Winning Together (Wiley. 1988); and Seeing Organizational Patterns: A New Theory and Language of Organizational Design (Berrett-Koehler, forthcoming)—from which portions of this article are adapted.

Executive Commentary Sherry M. Bell Detroit Edison To me, the title of this article implies that some serious reflection has already been done by management on the original design of an organization, but I have come to question this seemingly basic assumption. As an organizational design consultant for 15 years, I have not seen much evidence of organizations taking a thoughtful approach to design, much less a redesign that requires critical reflection. In my estimation, restructuring and re-engineering are actually quick fixes for yesterday's organizations and problems. In most cases they could appropriately be labeled "rearrangement." They require intense, immediate, and visible action from people who can "make things happen." Rethinking, or just plain thinking, on the other hand, is the method needed for the organization of tomorrow. Keidel and those of us who think like him are frequently ignored by managers who are mired in behavior associated with maintaining established patterns of business. Trivializing the concept of thinking seems easy for most organization leaders because the results of thinking do not seem to compare with the quick and seemingly more tangible outcomes of the restructuring and re-engineering methods of change. Thinking takes more time, or so it seems. It also requires an entirely different set of skills and behavior different from those that went into creating and operating most of today's large organizations. Keidel does not underestimate management by suggesting that restructuring and re-engineering are frequently done in an unthinking manner. We do not have to think very much about how to do more of the things that we have been doing for so many years. My experience has been that these two methods are used for two reasons. First, managers are more familiar and comfortable with them. Second, managers don't see the contradiction in their efforts to change people or their environments without actually changing the way they themselves think and conduct business. Creating off-line practice fields for rethinking issues is an excellent way to shake managers up and point out the entrenched paradigms underlying their previous efforts at redesign. However, few leaders seem willing to risk taking the chance that the results of such initiatives are likely to be something unfamiliar and unmanageable for them. Rather than belabor the point about real thinking, I'll end with a prediction about the impact of design strategies on organizations. Organizations where managers engage in rethinking organization design will have the best prospects for survival because they 28

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