Monday, May 23, 2011

Preparing your organization for growth

Companies that address their organizational weaknesses as they implement growth strategies give themselves an advantage.

McKinsey Quarterly
MAY 2011 • Martin Dewhurst, Suzanne Heywood, and Kirk Rieckhoff

preparing organizations for growth article, inappropriate corporate structures, Organization
Most senior managers … underestimate the importance of organizational factors in translating a growth strategy into reality. This oversight can dampen a company’s growth plans: organizational processes and structures that are well suited to today’s challenges may well buckle under the strain of new demands or make it impossible to meet them. Likewise, key employees may lack the skills needed to cope with the additional complexity that growth brings. By reviewing the experiences of three organizations that faced the stresses imposed by new growth initiatives, this article seeks to illustrate such “pain points” and suggests some approaches for coping with them.
1. Stifling structures
Well-defined organizational structures establish the roles and norms that enable large companies to get things done. Therefore, when growth plans call for doing things that are entirely new … it’s well worth the leadership’s time to examine existing organizational structures to see if they’re flexible enough to support the new initiatives. …
A European retailer, for example, decided to expand beyond its base of small-format stores in urban areas by including a number of large-format stores in suburban ones. …[The] new stores would require a new mix of products, ... The new stores would also offer lower prices than the old ones. All this meant that the new stores would have special supply chain requirements and that the stores’ managers would need to focus more intently on price and cost than had been customary for the retailer.
As the company’s senior executives planned the new stores, they began questioning whether to operate them as part of the existing organizational structure or at arm’s length. Although launching them within the existing structure would be simpler, the executives concluded that doing so would deny the new stores the unique resources needed to become a meaningful growth platform. …
So the company launched the large-format stores as a separate business unit, with its leader reporting to the CEO. The new stores’ management team was independent of the parent company and included mostly newcomers who would not seek to replicate its culture or processes. …
The new stores’ managers developed their own local distribution centers and store designs, at a significantly lower cost per square meter than the company’s other stores had achieved. They also found new suppliers; modified some existing systems, such as IT; and created a different overall customer experience that was more focused on lower costs. …
Keeping the new stores separate helped get them up and running quickly but also made some processes at the corporate level more complex than they might have been. The IT systems supporting the new stores, for example, handled a number of processes differently, including store-level profit-and-loss statements. It was therefore difficult to consolidate sales figures, cost of goods sold, or wages across both types of stores.
Nonetheless, in just two years, six of the new-format stores were firmly established and meeting their financial targets. At this point, as planned, the parent company integrated all of the stores—large and small—into a single business unit. …
In our experience, such separated approaches work best when a company can develop a convincing business case that existing structures and processes will make it very difficult to launch a new undertaking. … In some cases, the necessary customization can be as minor as enabling people to work in a local language; in others, as large as creating a whole new business unit with different suppliers and customers.1
Deliberately making these approaches temporary, as the European retailer did, is critical. In our experience, two to three years is usually enough time for new operations to gain sufficient maturity to hold their own within the organization. It is also crucial for companies to reintegrate these innovative pockets before they reach substantial scale, or they will simply create an additional layer of complexity that makes the company as a whole harder to manage and could inhibit its next growth spurt.
2. Unscalable processes
… It’s important for a company to determine which processes will come under particular stress when it grows. The case of a European biotech company illustrates the dangers of not addressing potential problems early.
Before the company began an ambitious growth strategy, it used a small group of ten key scientists to make decisions about its product portfolio. The group’s culture of collegiality, informality, and communal decision making worked quite well, and each scientist actively helped to shape and refine every project. Quarterly reviews of the research portfolio took one or two days.
But as the company grew and the volume and diversity of its projects increased, the number of scientists involved in portfolio management also had to expand. … By the time the company had 40 scientists involved, the process had become unmanageable. … The scientists became defensive and territorial, and the company was saddled with a bloated, expensive, and slow-moving set of projects.
Fixing these problems required formalizing the portfolio review process. This move, in turn, meant rethinking the scientists’ governance processes—determining, for example, who would attend, lead, and set the agenda for meetings. …
Getting the large—and frustrated—group of scientists to accept these changes was much harder than it would have been had the company addressed the issues before it grew. This was particularly true because the changes involved culture and mind-sets, not simply different documents or meeting formats. The scientists had, for example, enjoyed receiving and giving input on the full set of research projects and initially found it difficult to accept more defined responsibilities and a sense of exclusion from important discussions.2 It took two years to implement these changes, and not all of the scientists were comfortable with them. Within nine months, however, most of them saw that the projects with the greatest scientific interest were getting more resources, which boosted morale and corporate results.3
3. Unprepared people
Growth naturally creates new interactions and processes, expected and unexpected, and often at a fast pace. To manage them, the employees who face the greatest complexity—for example, those in functions or businesses that will see increased activity—must have “ambidextrous” capabilities. …
… A manufacturer of cutting-edge technology products that was seeking to expand from its domestic base, for example, found itself limited by the surge in complexity associated with operating under several different national regulatory regimes. The company’s cautious legal department rejected deviations from home country procedures. … The expansion plans stagnated until senior executives realized that the company’s legal department needed new leaders who felt comfortable assessing and mitigating the risks in these new, ambiguous environments. …
The specific organizational challenges companies face as they grow will differ according to their growth strategies. By managing organizational complexity early, however, any company can improve the odds that its growth plans will succeed—while making it less difficult than ever to get things done.

About the Authors
Martin Dewhurst is a director in McKinsey’s London office, where Suzanne Heywood is a principal; Kirk Rieckhoff is an associate principal in the Washington, DC, office.
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