Author: Team 8

Strategy 2

January 2006

Reorganisation: Report to the CEO

GROUP 8

Angela Albiston

Belinda Wrigley

Lee Bonham

Sharad Bairathi

A reorganisation is a fundamental change in the design of an organisation, carried out to improve performance through exploiting synergies between work groups in areas considered as key. The organisation structure defines how an organisation is formally grouped and where the linkages are so that it delivers benefits from synergies through consolidation, combination or co-specialisation across certain dimensions of the value chain. Any reorganization should result in the corporation doing things in a way that maximises its benefits.

A dynamic model of reorganisation:

Formal structure and processes facilitate the movement of information in various ways; Grouping, linking and systems and processes:

1)Grouping involves the aggregation of work functions, positions and individuals into work units. As illustrated above, grouping can take place based on Market, Function and Product [1]dimensions depending on the strategic emphasis of the organisation. Grouping eases the flow of information within the boundaries of the group but makes it more difficult to share information outside the group. The diagram shows an example where there is a maximum gain on the Product axis: the synergies gained on Product axis is at the opportunity cost of synergies lost on the other two axes. Hence the organisation’s emphasis is on the axis which maximises the desired synergies aligned with its overall strategy.

2)Linking describes both formal and informal relationships among groups separated by structural boundaries. Formal linking can be achieved through the implementation of cross-unit groups, integrators and planning teams. This allows the movement of information among otherwise disparate groups. Informal linkages are social networks and working relationships which maintain interaction between groups. Thus the synergies lost in the grouping can be achieved to some extent by linking.

3)Systems and processes are designed with grouping and linkages in mind to support the movement of information among groups. These devices can range from information, control, and reward systems to formal processes and meetings.

Thus each combination of groupings, linkages, processes and systems produces different pay offs in an organisation as no organisation design is perfect. Therefore the optimal organisational design at a point in time is that which maximises the overall synergies through both the formal groupings and informal linkages to support the organisation’s strategic goal.

The success of the reorganisation can be measured by evaluating the net benefits of the reorganisation programme, where the net benefits = benefits derived from the new organisation structure, less the costs of the transition programme. Therefore the key challenges that any CEO who is reorganising should address are:

  • How to minimise transition cost
  • How to track and measure the benefits
  • When to reorganise again based on measurements undertaken

1Minimising the transition cost

Any benefits of a reorganisation can be more than cancelled by the negative effects of a poor implementation programme. For example, experience of a lengthy restructuring programme at British Airways undertaken from 1998 demonstrated how a prolonged period of uncertainty lasting over two years resulted in a loss of internal competency. An initial desire to avoid a wide reaching redundancy plan caused a freeze in job movements and restrictions on career opportunities, resulting in negative self selection as the most competent employees left for better opportunities elsewhere. A specific example was that all but one of thirty management trainees in an annual intake left the company just one year after completing their three years of training. Marks and Spencer also suffered from a prolonged period of restructuring which demoralised employees on the shopfloor, having a direct impact on customer service and the firm’s financial performance.

In order to minimise such costs of the reorganisation it is crucial that the company has the capability to execute the change rapidly and efficiently as any delays or difficulties in the implementation could dramatically increase the transition costs of the project. Such costs include those which are easily identifiable and measurable and those less so. Identifiable costs include: Redundancy costs; legal and consulting fees necessary to implement the reorganisation; the costs of the internal reorganisation project team; the costs of any infrastructure or system investments needed; communications costs; any costs of refurbishing offices if new layouts are planned; retraining and reskilling costs of displaced employees.

However, it is also important to understand potential sources of additional, more intangible, costs:

  • The productivity of the workforce will be impacted due to reduced motivation caused by the uncertainty and disruption. Where downsizing occurs this will affect the whole workforce, including the ‘survivors’[2]; those remaining following any redundancy announcements. Studies have shown that morale is impacted through feelings of guilt and uncertainly, and that this can seriously impact social networks and the resulting learning capacity of the organisation with far-reaching implications.[3]
  • The project will be a distraction to senior management which may result in a loss of focus on the day to day business activities and emerging threats.
  • There will be opportunity costs of investing employee time elsewhere, including missing market opportunities, which is very difficult to quantify.
  • Changes in reporting lines and accountability could temporarily blur communications lines and create confusion within the organisation. This could slow down decision-making and also impact customer and external stakeholder relationships.

We recommend that the reorganisation is carefully planned, with a programmatic approach adhered to, including clear timeframes, targets and accountabilities. Clear, open communication is also vital to minimise the effects of the uncertainty for employees. Progress must be monitored at all stages with possible performance indicators including:

  • Staff productivity measures; revenue per employee at the highest level, and more specific, activity-based measures at a departmental level.
  • Management time; detailed assessment of all management time used, including that of those only indirectly involved in the project.
  • Use of employee surveys, or spot surveys, to assess employee morale
  • Staff retention; monthly monitoring of voluntary redundancies. Where replacements are needed, recruitment fees and retraining must be included in the project costs.

Execution is key to ensuring the success of the project, and as such the organisation must ensure it has the capabilities to implement such a change. These may be available internally in larger organisations with a change culture, but if not they should be sourced externally through consultants. Whilst this is costly, the potential downsides of a poor implementation are too large to avoid this investment.

2tracking and measurement of the benefits of reorganisation

Measuring and tracking of key activities and outcomes is essential to ensure that the reorganisation delivers the benefits that it is designed to achieve and ensure ongoing efforts can be appropriately focused. Unfortunately financial results are not a good measure of benefits because they are effectively the final outcome of a long causal process, only part of which the organisation has direct control over. The movement from the point at which a decision is made to change the organisation’s structure to when the full benefits are reflected in the financial reports could take a number of years.

Identifying the appropriate measures at any given time is difficult and these may change as the focus of the organisation changes. An example of a company that has used comprehensive measures to improve performance is Nestle Purina Petcare Co., a unit of Switzerland-based Nestle S.A. It used performance measurement to help the company focus its efforts on customer service and has gone from the bottom third of the American Customer Satisfaction Index ranking of companies in its industry to No. 1. It ranks among the best in its market sector in processes such as order entry and accounts payable. Retailer Wal-Mart has named the company "Vendor of the Year" for three consecutive years. It evaluates its performance based on about 100 key measures that focus on customers, products and services, marketing, and other factors.

There is a set of consistent externally facing performance measures need to be tracked, irrespective of the organisation’s current internal focus, designed to assess which of the total potential benefits available have been captured for any of the three organisational focus options. This will ensure the organisation retains an external view throughout the change process. There should also be differing internally focused measures with varying importance weightings to track progress in improving activity execution. Sometimes a short term loss, or ‘investment’, has to be taken in order to realise greater longer term gains.

Immediately after the organisation change, and through the medium term, the internal measures need to focus on how well the new organisational structure is being imbedded and starting to deliver the desired effects in the new area of focus. The external measures will reflect the impact of the change, but with the expected causal lags. The internal measures will drill down to an appropriate level of granularity to measure improvements in activities in the new focus area and their immediate impacts. For example, if their focus area is product, then the number of potential new product ideas going for testing per month might be a key measure.

In the medium to longer term, as the organisation becomes proficient in the new focus areas’ activities, an increasing proportion of the potential benefits will be captured and reflected in improvements in the external measures. For example, if the key external measure of the ‘product’ focus’s potential benefits is new product speed to market ranking, and the organisation’s ranking in the industry has gone from 5th to 2nd, then it indicates that the focus in product is capturing the benefits.

Once the key focus area is on track to deliver the benefits, then ‘linking’ to the other focus options can be strengthened and monitored more closely to ensure the organisation is minimising the opportunity costs of not grouping on those areas. Some of the more detailed focus area measures can be dropped to accommodate the linking area measures.

3Knowing when to reorganise

The third issue to consider is the need for ongoing modification, improvement and re-organisation. If we assume that the initial re-organisation is designed to generate synergies through consolidation, combination or co-specialisation across certain dimensions of the value chain, then there will be opportunity costs where the new organisation fails to deliver synergies in other dimensions. In this situation it would be wise to understand and monitor these opportunity costs so that you can respond appropriately.

For example, you may have re-organised around the marketplace dimension by grouping into a geographic structure so that your company can serve the needs of individual customers very well. However, in moving to this organisational structure you may have reduced the synergies that might have existed across the functional and product dimensions. As noted in the previous section it is very helpful to track the benefits and the opportunity costs inherent in this new organisational model and to keep monitoring them on an ongoing basis. As the new organisation becomes established, two trends may emerge:

  • The opportunity costs may increase, as linkages in parts of the business that are not organisationally aligned become weaker
  • The external environment may change so that there is an increasing benefit in aligning in a different dimension.

In situations like this there are two strategies that can be helpful. The first, which should always be considered, is to put in place additional linkages across the groups that are not organisationally aligned (ie the different functional areas and the different product groups in our example) so that some synergies can be maintained. These linkages can take several forms. They may consist of committees, expertise centres, conferences, cross-division working parties and so on which are formal linkage structures. Or they may be more informal structures such knowledge sharing portals, ad-hoc visits etc.

These approaches can help pool knowledge and allocate resources in effective ways – they represent what is known as combination and co-specialisation synergies. The corporate structure of Hewlett Packard in the period 2002 to 2005 was organised around product groups (Printers, PCs, Enterprise Systems and Services). But at the same time HP put in place a number of cross divisional structures that allowed it to get synergies across these product divisions. For example, the HP corporate technology office ran a forum for the Chief Technology Officers of each Division so that they could share ideas and trends. At a more formal level there were a number of shared services centres – for example the Facilities and Location Services team - that worked across the whole company to provide services to all.

The second strategy that could be considered is the one of initiating a new reorganisation process. Give the difficulty of achieving benefits, as already discussed, this should not be considered lightly. A new reorganisation should only be started when it is clear that the net benefits of change outweigh the costs of change. The net benefits of change comprise the new synergy benefits which will be realised by organising in a new way, less the synergy benefits which are likely to be lost by moving away from the current organisational alignment.

Hewlett Packard (HP) is one example of a firm which chose to re-organise several times to achieve new synergies. Starting with a decentralised model in the 1970s, HP found that by 1980 it was being inefficient by producing a “hodgepodge of computer products that were really not related well to each other”. This led HP to centralise its organisation so that it could lower the costs of development and ensure that its systems worked well with each other. But by 1990 this resulted in an expanding bureaucracy and slow product development. This in turn led to a wave of decentralisation which had the goal of speeding up decision making and reducing the time to market.

During each change, potential benefits were seen to outweigh the costs and the lost synergies. But in each case the change brought about problems that needed to be rectified by later reorganisations. The need for later re-organisations might have been diminished if HP had put in place measurements (as recommended above) and additional measures to counterbalance the full swing in the cycle.

In more recent years HP implemented a matrix approach in parts of its business to try to get synergies across the both the product dimensions and the customer dimensions. But this in turn led to new challenges as lines of authority and control became blurred. Our conclusions from this are that there is no ideal organisational structure that can suit every environment.

In summary we recommend that firms need to:

  • Chose the best organisation to suit their environment so that they maximise the opportunities for synergy
  • Keep a note of the costs and benefits as they go through the re-organisation process and speed up implementation of change
  • Put in place linkages so that parts of the organisation that are not organisationally aligned can achieve some integration benefits
  • Keep monitoring the benefits of their organisational alignment and look-out for the growth in opportunity costs
  • Be open to further reorganisations as the external environment and internal situation changes.

As the moto says, “Change is a fact of life”

Strategy 2Page 1 of 10Date of Copy: 28/01/19

[1] Organisation Theory and Design by Richard L Daft

[2] O’Neill and Lenn; Voices of Survivors; Words that downsizing CEOs should hear.

[3] S. Fisher and M. White; Downsizing in a learning organisation: Are there hidden costs?