Learning from Big Companies

We recently completed a study for the CEO of a very well known, global sports-apparel brand company. He wanted to challenge his team, as part of the strategic talent review process, to think about whether or not the company’s organizational architecture was suited to its growth plan to double in size. The CEO was interested in learning from smart moves as well as the mistakes that other companies had made in going from large to very large. He wanted his executive team to examine some of those lessons learned and spend a day puzzling through what those insights might mean for their business over the next 3-5 years.

The pressure on large companies in today’s equity markets is enormous, with expectations they will continue to produce outsized returns as PE ratios climb daily. The growth imperative has never been more important.

But the success that drives a company to $15B or $20B in revenues often lays traps for future growth. Our sports-apparel CEO had the right idea in challenging his team to think about the organization and ask: are we fit for growth, given our strategies going forward?

We examined a decade of organization initiatives inside five large, well-known companies and discovered some interesting insights and questions.

At a glance, the study revealed these themes:

  • There is no common pattern for a ‘best organization design’ regardless of size, strategy, or industry
  • Most companies make organizational changes in response to performance gaps by looking in the rear view mirror
  • Most do not proactively think ahead about organization
  • The organizational barriers to profitable growth are foreseeable and can be managed

The Five Insights: Organizational Fitness

Let’s look at each of the five as they played out in our study companies. Remember, most of these lessons were learned by looking backward.

#1: Balance Center-Led and Business Unit Decision Authority (horizontal health)

The contrast between two of our study companies is useful here. Royal Dutch Philips is a $20B diversified consumer electronics, healthcare, and lighting products company. Once one of the most innovative in its segments, the company lost its way in recent years. A new CEO was quickly able to help his team see they were victims of too much emphasis on global business units. A decade of centralizing global product and brand management in Amsterdam had largely denigrated the field-based commercial organizations around the world into order-takers, while the global business units migrated further away from customers and consumers.

CEO Frans van Houten began an aggressive change process in 2011 to move power back to the regional business units. He installed heavy-weight market leaders in key growth markets (much as GE has done) to bring management attention to market development, commercial capability, and relationships with government entities. He reset collaborative P&L metrics and business review processes, shared by the region leaders and the global product leaders, to form tight “business handshakes,” that he regards as the center of a granular set of growth strategies. In three years the progress is impressive, especially in the healthcare sector.

PepsiCo is a $65B food and beverage giant, with a dozen global brands, operating in 190 countries. The company grew through brilliant marketing, brand acquisitions, innovation and a decentralized geographic set of business units that helped create an entrepreneurial culture out in the markets. The strategy worked until growth slowed in both developed and developing markets. As senior leadership peeled back the organizational onion, a clear case for change emerged in 2013. Its decentralized model had sub-optimized its many valuable brand and innovation assets around the world. Too many local R&D and brand building initiatives (across its three major categories) produced inadequate returns on its worldwide spend. Global category and brand leaders influenced a small portion of those resources, and few of the ideas that were developed in-market were scalable. Senior leadership has begun a journey to reset decision authority – notably in the opposite direction from Philips.

Both PepsiCo and Philips are following a similar road map that argues for a balance of center-led leadership with empowered business units. The important lesson: don’t let the discussion around governance degenerate into a debate over centralized vs. decentralized organization. Today, large companies need the benefits of both.

 

#2: Shed the Layers (vertical health)

PepsiCo is also a case study in the vertical health of the organization: getting to the right number of layers.

A deep dive into layering revealed something that everyone inside this successful company knew, but few paid much attention to: that four layers of organizational infrastructure and three layers of P&L centers had produced a slow-moving, complex, and costly operating model. Nearly every function from marketing to human resources and finance was replicated at each level:

  • Enterprise functions and infrastructure
  • Geographic Zones (consolidated P&L, plus infrastructure)
  • Regional Clusters (P&L, plus infrastructure)
  • Country and Market Units (P&L, and some infrastructure)

Businesses that could afford more staff support were all too willing to load them in, while those that operated on tighter margins were often under-served, leading to a very inconsistent approach to talent development and other key enablers.

A cross-company design team came back to the CEO and President with two simple ideas:

a)      Designate one “anchor layer” for business units and redesign the other layers to serve that anchor operating layer

b)      Concentrate all infrastructure in a single, value-added layer of support functions (to the extent practical)

The idea quickly gained traction with the executive committee, who sponsored the ongoing design work in 2013. The effect was to dramatically narrow the role of geographic zones into span-breaking units, with little or no functional infrastructure. Functional infrastructure would be elevated to the enterprise level, or pushed down into the regional, anchor operating-unit level. Country P&Ls would be replaced with simpler, sales-oriented measures. Duplication of functional staff would be removed from the country level, especially financial analysts who were not longer needed to massage the once complex P&L reporting process.

The Anchor Layer Construct at PepsiCo Can Remove Layers of Infrastructure and P&L Complexity.


#3: Kill Old P&L Units (Before they Kill Your Company)

Microsoft delivered enormous wins to shareholders for decades before losing momentum to smaller agile companies as well as the likes of Apple and Google. Insiders say its own divisional organization model played a major role in many of its misses. Eight product divisions, with very high degrees of autonomy, were the center of its operating model for more than a decade. By 2010 there were increasing degrees of overlapping customer needs across divisions, and at the same time, gaps in responsibility for new consumer concepts, cloud computing, and other new spaces. In effect, the divisions had become such a powerful lens onto the market that nearly all management conversations focused on those silos, and no one owned the white spaces in between.

In contrast, Apple maintained a largely functional organization, proudly touting its “single P&L” for the entire business. While the Apple organization seemed unruly for a company of its size, it was able to quickly shift resources into development teams around consumer spaces without the burden of entrenched product divisions.

Microsoft missed a number of critical opportunities and only in 2013 did it finally begin to disassemble its product divisions, replacing them with a more agile functional model, focused on smart cross-functional teams of technology and marketing people who would go after new innovation opportunities. A major culture change is underway, and the company remains strong, but it will take years to recover the time lost to an outmoded set of product divisions that no longer aligned with the markets served.

#4: Build Capabilities for the Future

Organizational capability is a litmus test for fitness. How will we choose to compete? Capabilities can be specific to a given business segment (e.g. integrated software platform development in McKesson’s healthcare technology businesses), but the enterprise needs to consider capabilities as well. For example, at Covidien, M&A and portfolio management are key; Covidien has been applauded for its ability to acquire small businesses that quickly accrete value, while shedding low-growth, low-margin units.

P&G is a leader in capability building. A.G. Lafley spent his first three years as P&G’s CEO implementing his predecessor’s vision of a truly global architecture for a diversified CPG giant. The skillfully tuned “balanced matrix” that he led, a blend of powerful market-development units in the field and global category/brand and support organizations in the center, delivered superior results well into the great recession of 2008. Lafley is back after a short stint of retirement, and has dug quickly back into organizational fitness, something for which his failed successor showed little interest. In early 2014, after much dialogue with leadership around the company, he announced that he was going to tighten the focus of the business on brand building. He chose to remove some of the complexity, to shift some of the operating authority out of the markets and back to the global brand teams, while moving more of the global teams out of Cincinnati and out into local market spaces.

Organizational fitness is not a once-and-done kind of thing, especially in a global operating model.

#5: Establish Homes for New Business Models

Healthcare payers, like Aetna, are in the middle of disruption that could very well see the demise of their B-to-B business models, as company-sponsored health plans are gradually replaced by direct-to-consumer coverage. John Deere faces no such threat, but what it is doing organizationally with an exciting new growth opportunity could be instructive for the healthcare payers. Both Aetna and Deere are owners of commercially useful big data; for Deere this represents a significant new source of growth.

Deere owns massive amounts of data in the cloud that capture crop yields of many millions of farmed acres, sorted in various combinations of seed, chemicals, moisture, and weather activity across varied soil types in North America and parts of Europe. The data represent something more than a new offering. They are the basis of a new business model. Farm customers are not the target; Monsanto and the other big agriculture chemical and services companies will pay for access to these data to build much more compelling value stories for their customers. This is a very different business from manufacturing machinery.

After a few false starts, Deere got it right. An outsider from Microsoft and a handful of tech and marketing leaders are now housed in an incubator business unit, completely separated from the “iron-bending” business. Following Clayton Christenson’s insights on the innovator’s dilemma they have created an organizational environment where this new business has all of the resources it needs to grow, free of the ROI and profit requirements that work for the core, but that would kill a start-up.

Organizational Fitness for Growth – Where to Begin

Before driving an enterprise change initiative CEOs and their teams need to be clear about what problem they’re trying to solve. Here are some thought-starter questions that get to the typical tensions within large, global companies.

a)      Agility

  • How easily can we shift resources and investments to growth hot spots?
  • Can we respond to market changes quickly, staying close to the customer?
  • Can we move winning ideas quickly across geographies, brands, and divisions?

b)      Leverage and scale

  • How well do we prioritize investments for the greater good of the company?
  • Can we consistently repeat winning initiatives?
  • Are functions built to be best in class where it makes sense and best in cost elsewhere, with the least duplication of effort?

c)       Inter-dependence

  • Do global and local teams share accountability for growth?
  • Can we energize people around a common agenda without centralizing decisions and controls?
  • Are executive committee members focused on enterprise leadership, or only on the delivering against their own business plans?

The apparel company CEO, who commissioned our study, was pleased with the outcome of the organizational fitness review with his team. Among the five insights, at least three were genuine concerns for their business, and tangible follow-up plans were set to work through the issues as part of their executional planning.

The success of large companies can lay organizational traps for future growth. It makes sense to take the time to challenge past assumptions, to examine the health of the organization against growth plans for the future. Organizational fitness is an extension of the growth strategy of the company.

Greg Kesler and Amy Kates