The Horizontal Organization

THE HORIZONTAL ORGANIZATION

MIT Course 16.852J/ESD.61.J Fall 2002

Dr. Joe H. Mize October 23, 2002

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The Horizontal Organization

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)

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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

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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?

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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

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Functional Organization Structure

President Finance HR Legal Corporate Develoment

Public Relations
Customer Support Production Operations Receiving & Storage Quality Assurance

Product Marketing
Research & Development Distribution

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Product Oriented Organization Structure

President Finance CD Cabinets Accounting HR Disk Boxes Accounting

Production
Marketing

Production
Marketing

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Geographic Oriented Organization Structure

President Finance
Western Division

HR
Southeas Division International Europe

Accounting Production Marketing

Accounting Production

South America

Marketing
Asia

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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

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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

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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

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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

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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 organizations strategy usually no more than 4 to 10 in a typical organization

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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

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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 careerpath homes for professionals

Measure for end-of-process performance objectives (which are driven by the value proposition)

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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 selfsupervised 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

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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

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HORIZONTAL (PROCESS-ORIENTED) ORGANIZATIONS

Question: Do they really work? Answer: Yes, provided . . . See HBR article by Majchrzak and Wong

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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

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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

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MEANS OF FOSTERING COLLECTIVE RESPONSIBILITY

Structure jobs with overlapping responsibilities

Arrange work areas so that people can see each others work Base incentives/rewards on group performance Design procedures so that employees with different jobs are better able to

collaborate

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CONCLUSIONS FROM STUDY

1. Restructuring by process can lead to faster cycle times, greater customer satisfaction, and lower costs, but only if the organization has a collaborative culture

2.

If companies are not willing to change their culture, they may be better off

leaving functional departments intact

GENERAL CONCLUSIONS
1.
2.

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

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