THE HORIZONTAL ORGANIZATION MIT Course 16.852J/ESD.61.J – Fall 2002

1. THE HORIZONTAL ORGANIZATION MIT Course 16.852J/ESD.61.J – Fall 2002 Dr. Joe H. Mize October 23, 2002

2. REFERENCES Portions of this presentation were adapted from the following: Ostroff, Frank, The Horizontal Organization (New York, Oxford University Press, 1999) Hammer, Michael, Beyond Reengineering (New York, HarperBusiness, 1996) Hammer, Michael, “Process Management and the Future of Six Sigma”, MIT Sloan Management Review (42:2, Winter 2002) Majchrzak, Ann and Qianwei Wang, “Breaking the Functional Mindset in Process Organizations”, Harvard Business Review (Sept – Oct 1996) Galbraith, Jay, Designing Organizations (San Francisco, Jossey-Bass, 2002)

3. ORGANIZATIONAL STRUCTURE • Comprises the organizational components (units), their relationships and hierarchy • Portrays where formal authority and power are located • Provides a “home” and identity for employees

4. FUNDAMENTAL QUESTIONS REGARDING ORGANIZATIONAL STRUCTURE • Who goes where? • What do they do? • What are the positions and how are they grouped? • What is the reporting sequence? • What is each person, and each unit, responsible for? • How does authority/accountability flow?

5. DEPARTMENTALIZATION Definition: The grouping of employees Bases for departmentalization • by function or specialty • by product line • by customer/market segment • by geographical area • by work flow process • combination

6. Functional Organization Structure President Finance Legal HR Corporate Develoment Public Relations Product Marketing Customer Support Research & Development Production Operations Distribution Receiving & Storage Quality Assurance

7. Product Oriented OrganizationStructure President Finance HR CD Cabinets Disk Boxes Accounting Accounting Production Production Marketing Marketing

8. Geographic Oriented OrganizationStructure President HR Finance Western Division Southeas Division International Europe Accounting Accounting Production Production South America Marketing Marketing Asia

9. Process Organization Structure(Horizontal Organization) General Manageer New Product Development Process Order Fullfillment Process Customer Acquisition and Maintenance New Product Teams Product Teams Customer Teams

10. VERTICAL (FUNCTIONAL) ORGANIZATION MODEL Inherent Shortcomings • Internal focus on functional goals rather than outward-looking concentration on winning customers and delivering value • Loss of important information as transactions travel up and down the multiple levels and across the functional departments • Fragmentation of performance objectives brought about by a multitude of distinct and fragmented goals • Added expense involved in coordinating the overly fragmented work and departments • Stifling of creativity and initiative of workers at lower levels • Slow responsiveness to changes in the external environment and to customer issue

11. LEGACY OF THE INDUSTRIAL REVOLUTION • A foundation of the I.R. was “specialization of labor” • Business processes were decomposed into narrower and narrower tasks • Efforts were focused on improving the performance of those individual tasks • Organizational units (functional departments) also reflected this narrow specialization • Tasks – and the organizations based on them – formed the basic building blocks of 20th century enterprises • We lost sight of the totality of the business processes

12. TASKS vs. PROCESSES • Same as “Parts vs. Whole” • A task is a defined unit of work, usually performed by one person or small group • A process is a related group of tasks that together create an outcome of value to a customer • Only when all the tasks are performed together as a wholistic process is value created • When rewards are based on task performance, the total process performance will usually be sub-optima

13. MAJOR (CORE) BUSINESS PROCESSES Core Processes • end-to-end work, information and material flows • extends across a business (and even beyond the business boundaries) and drives the achievement of fundamental performance objectives to an organization’s strategy • usually no more than 4 to 10 in a typical organization

14. TYPICAL MAJOR (CORE) BUSINESS PROCESSES Order Acquisition Process – transforms a sales potential into a firm order in hand Order Fulfillment Process – transforms an order into delivered goods, a satisfied customer, and the paid bill Product Development Process – transforms a customer need and/or an advanced concept into a manufacturable design that satisfies the value proposition New Business Development Process – transforms technological and conceptual advancements into new businesses Customer Support Process – transforms customer concerns and needs into value-adding solutions Major processes are divided into sub-processes, which are then describable in terms of basic tasks or activities

15. FUNDAMENTAL PRINCIPLES FOR ORGANIZING HORIZONTALLY • Organize around cross-functional core processes, not tasks or functions • Map processes, eliminate waste • Re-deploy personnel and resources • Install “process owners” who have responsibility for an entire core process • Make teams, not individuals, the basis of organizational design and performance • Empower individuals and teams to make decisions directly related to their activities in the work flow; provide essential training and education • Ensure cross-trained work teams • Retain down-sized functional units as “centers of excellence” for expertise and career-path “homes” for professionals • Measure for end-of-process performance objectives (which are driven by the value proposition)

16. COMMON CHARACTERISTICS OF HORIZONTALLY STRUCTURED ORGANIZATIONS • Core processes group employees according to the sets and scope of multiple skills needed to meet performance objectives • Teams constitute the fundamental units of the organization and are largely self-supervised • Process owners are responsible for leading and managing the entire core processes • The primary focus is external rather than internal, emphasizing the delivery of the value proposition to customers Value Proposition Definition The set of benefits an enterprise offers at a price attractive to customers and consistent with its financial goals

17. ADVANTAGES OF CORE PROCESS GROUPING • Eliminates the numerous handoffs that occur in functionally organized companies • Facilitates a tight alignment with what the customer wants • Highly compatible with the “lean paradigm” • Fewer levels of hierarchy, reduced “overhead” effort • Facilitates agility, rapid re-configuration, as external environment changes • Performance measures and incentives/rewards can be tied more directly to tangible, measurable work progress • Enhances morale

18. HORIZONTAL (PROCESS-ORIENTED) ORGANIZATIONS Question: “Do they really work?” Answer: “Yes, provided . . .” See HBR article by Majchrzak and Wong

19. PROCESS-COMPLETE DEPARTMENTS Definition: Departments that are able to perform all the cross-functional steps or tasks required to meet customers’ needs • product design • manufacturing • supply chain • support tasks • interfaces with customers

20. Sample size: 86 31 were “process-complete” 55 were functionally organized Primary Measured Variable: Cycle Time Result: Process-complete departments had shorter cycle times only if their managers had taken steps to cultivate a collective sense of responsibility Result: Those process-complete departments which had not taken such steps had longer cycle times than the functionally organized departments

21. MEANS OF FOSTERING COLLECTIVE RESPONSIBILITY • Structure jobs with overlapping responsibilities • Arrange work areas so that people can see each other’s work • Base incentives/rewards on group performance • Design procedures so that employees with different jobs are better able to collaborate

22. Restructuring by process can lead to faster cycle times, greater customer satisfaction, and lower costs, but only if the organization has a collaborative culture If companies are not willing to change their culture, they may be better off leaving functional departments intact GENERAL CONCLUSIONS Process oriented organizations are superior to functional organizations for many situations “One size does not fit all” in organizational focus. There are still many situations in which the classical vertical organization is superior CONCLUSIONS FROM STUDY