Organizing for the New Economy.

The changing role of management

in the early 1970s, during a job interview, I asked the CEO of a major company about his organization. He took out an organization chart and outlined the various areas of functional responsibility and levels of authority, the hierarchy of the company. Then he added, "Of course, that is not the way that it works." He then proceeded to draw a number of dotted lines across the various functional divisions and levels of authority, explaining that these were the lines of communication which really governed day-to-day operations. He was astute enough to recognize that while organization charts are necessary to define responsibility and accountability, they cannot be allowed to define channels of communication and even the responsibility for taking action. Otherwise, the company would be so slow and cumbersome in making decisions and taking action that it would be almost totally ineffective.

What was true thirty years ago is even truer today. While we must still have organization charts to define the ultimate accountability, three inter-related developments have intervened to push the conventional organization chart into the background and change the role of management. These developments have been the increasing volatility of the environment in which a company does business, the increased speed of business and the advent of information and communications technology.

The volatility and unpredictability of the business environment emerged in the 1970s. A series of blunders in economic policy by the Nixon administration, natural forces and the politically-motivated OPEC oil embargo unleashed a wave of inflation upsetting the competitive balance in many industries. This led to a severe recession with a recovery compounded by liberalized trade, globalization and the rapid advent of new technologies. The traditional "smokestack" industries have been eclipsed by knowledge industries.

The increase in the speed of business has arisen because of the need to respond to this volatility by adapting products and services to changing market needs. Further, advances in information technology provide almost instant feedback on performance and market developments making quick response necessary.

The advent of information and communications technology has made possible the extensive automation of a wide range of clerical and production functions. It has also made possible the rapid dissemination of data through an organization, which has pre-empted one of middle management's traditional functions -- the gathering, analysis and selective dissemination of information.

Companies have adapted to these changes in a number of ways. Starting in the 1970s, the first of these, triggered by volatile economic conditions, was "empowerment." This change saw decision-making authority move downward to the level that understood the situation best and could cope quickly.

The second change, primarily a response to the need for speed, was the creation of multifunctional teams. Initially, teams were used in the area of product development in which multifunctional groups produced dramatic reductions in the lead times necessary to bring forth new products. However, the concept has also been successfully applied to operating processes such as order generation and material handling. In the latter, the process integrates previously separate functions such as purchasing and manufacturing. Teams are essentially self-managing and leadership in the decision-making process is based on expertise in the issue on hand, rather than on rank. This has changed the organization from its traditional vertical structure to a horizontal one, thus flattening the organizational triangle.

Advances in information technology have had their most visible effect on the automation of clerical and production functions. This technology, however, has also made it possible for corporations to focus their activities in the area of their core competence, hence outsourcing supply and service functions. This has concentrated both management attention and resources where they can be the most productive.

However, this does not mean that the traditional hierarchical structure with its top down command structure is totally obsolete. It is still necessary to cope with routine functions although it cannot be expected to be able to deal with strategic issues. Corporations are managed by a combination of centralized and decentralized practices.

Perhaps the best way to understand the differences between the traditional and new organizations is to use an analogy from sports drawn up by Noel Tichy of the University of Michigan, in which he contrasts American football with rugby. Football is a "set" game that mirrors traditional management thinking. It has a hierarchy with the quarterback calling the play. After the ball is snapped, each player follows a predetermined course of action in accordance with the playbook (budget). Once the play is finished (end of accounting period) and the results measured (profit or loss), the situation is re-evaluated and a new play is called. The strategy is therefore periodic, the measurement of short-term results and the course of action, once decided upon, inflexible. The strategic decisions are made at the top and each player is a specialist in some function with a well-defined but limited role.

Conversely, rugby is a "flow" game. It requires tremendous communication, continuous adjustment to a changing environment, and problem solving without a hierarchy. The game therefore requires flexibility and the individual is empowered to take whatever action is necessary to move the ball downfield. Each rugby player is a generalist who must be able to perform all functions and must therefore have a sense of the strategy of the game and knowledge of the capabilities of his teammates.

The differences between the games extend to the roles of management. In football, the head coach has total control, usually to the extent of calling the plays from the sidelines. This is the traditional command-and-control structure. In rugby, the role of the coach is one of educator, motivator and facilitator, and he has little control once the play has started.

The ever-perceptive Peter Drucker considers that the model for the new industrial organization can also be found in symphony orchestras and hospitals. Neither of these has a rigid hierarchy and their leaders are educators, motivators and coordinators. Each operates effectively based upon the employees' understanding of their respective roles and where they fit into the whole.

Not surprisingly, many traditional managers have found it difficult to surrender the control inherent in the centralized structure. While there are a large number of organizational arrangements that can meet the need for flexibility and speed, these must all have three essential elements:

1. The company must have a coherent strategy that is understood in its underlying logic and intent by all of its management. This serves to co-ordinate the action in a decentralized management situation and serves as a basis of reference for understanding priorities in making day-to-day decisions. The instant availability of information provided by modem technology creates the risk that managers will tend to respond by way of short-term expedients unless they have the broader perspective provided by the capability of thinking strategically. It is therefore important that companies give priority to developing strategic thinking skills in their management.

2. The organization must make available the information necessary to do the job. This is often difficult for the traditional manager who has been exercising control by the selective dissemination of information and doling out information on a need-to-know basis.

3. Horizontal communication and consultation, along with the authority to make relevant decisions, must be encouraged if not formalized. Often, this should extend beyond the walls of the company by having production personnel visit customers so that they understand their requirements and create a channel of communication capable of ironing out problems without drawing them to the attention of more senior management.

It has been difficult for many managers to recognize the characteristics of the new organization because the changes in conditions that make them necessary have been evolutionary. Thus, there has not been any crisis that has forced a rethinking of the way things are done. Consequently, the limitations of traditional management practices have resulted in stagnation or slow erosion of competitive position. But the need to adapt is essential to survival, as the dinosaurs found out. Are you still playing football when your competitors are playing rugby?

Ray Sautari ([e-mail]) is the author of Business Strategy and Security Analysis (1996, Irwin Publishing, Burr Ridge, ILL) and currently coaches CEOs on strategy formulation.