Industryweek 5973 13

Making The Modern Model

Sept. 21, 1998
Structuring corporations for competitive advantage.

Each day that David Brown, CEO of Newport Technology Inc., Raleigh, N.C., goes to work, he pounds another nail into the coffin of the old industrial corporation. Brown is not alone. Everyone is carrying a hammer these days. The U.S. operating unit of a British contract manufacturer, Newport Technology designs and builds switch parts for communications giants such as Northern Telecom Ltd. and L.M. Ericsson Telephone AB.

Brown's engineers walk the halls of the telecom moguls, helping to design their premier products. "We're taking their family jewels and bringing them into our lab and our factory," Brown says. "It's got to be very nerve-racking for them." In turn, representatives from these multibillion-dollar corporations study Brown's manufacturing process and gain access to a range of company data and documents.

The alternative is worse. Companies that insist on retaining a vertically integrated organization when low-cost producers abound increasingly find themselves with high overhead, dwindling cash, and moribund capacity for operations and distribution. That's a nail in the coffin.

There are plenty of nails. It's not that the organization of the business environment is changing -- it has already changed. "If you are doing business today the same way you did business five or 10 years ago, then you're not doing business well," says Michael Fradette, a Boston-based manufacturing-practice partner with Deloitte & Touche LLP.

The structure of the old industrial corporation has been sustained over the years by predictability -- create a business plan and make a product. Leadership and hierarchies defended the status quo into which they had invested, whether profit margins or aging products, and frequently ignored or responded too slowly to signs of market turbulence.

The New Manufacturing stems from many factors and takes many organizational forms. Expanding markets, new competitors, a proliferation of products, instant communications, and a fierce focus on asset values have made the old industrial corporation into the Erie Canal of modern business. Today's best competitors leverage operations, technology, and knowledge throughout the enterprise, using a multiplicity of corporate structures for competitive advantage.

How To Organize

For companies still adapting to the new manufacturing structures, the question is, what's the best way to organize? Indeed, the list of approaches to business organization is long: hierarchies, matrix organizations, networks, joint ventures and partnerships, Asian structures such as keiretsu and chaebol, conglomerates, and consortiums, to name a few. "There is no silver bullet when it comes to creating a corporate structure," says Daniel Duncan, president of Management Structure & Systems Inc., Louisville-based consultants.

"There is no one way to organize, and the best advice I give to people is that they should relax and stop searching."

Companies also should be aware that, in some respects, after 50,000 years of human existence there is not much new about the ways humans organize. Thus, the breathless imperatives of corporate-structure consultants must be tempered by the long view: The Egyptians were talking about decentralization in 2600 BC; China in 1 AD created organizations around processes; and organizations structured as networks of hubs and spokes were utilized by the railroads eight decades ago. Henry Ford, by selling off various Ford Motor Co. interests in mines and rubber plantations, began eliminating the vertical integration of his company. He replaced it with suppliers and alliances, although they had different names.

At the same time, not everything about the old-line industrial model is obsolete. While insular bureaucracies have little place in successful operations now, hierarchical structure still makes sense for most large-scale manufacturers. Most companies recognize that some structural order and accountability are required to ensure institutional effectiveness.

"Some amount of hierarchy is absolutely necessary for companies to succeed," insists L.J. Bourgeois III, professor of business administration at the University of Virginia, Charlottesville. "And if only for legal reasons, there's got to be a boss."

Companies bent on competing in a global environment continue to search out the best ways to organize their business activities to increase shareholder value, to remain flexible as markets shift, and to get closer to their customers. Although Duncan's point is astute -- that no single approach to structure can solve all strategic issues -- both he and other veteran observers say that most corporate structure is poorly organized.

"All too often a company's structure is decided by a few cronies in a smoke-filled room or by the CEO on the back of his airline ticket after he's had a drink," Duncan says. "First decide what you're trying to do. The structure to accomplish that will follow."

Organizational Lessons

Some companies have learned such lessons well. In building shareholder value and strengthening its core competencies, Tenneco Inc. has completely altered its structure in the last decade -- flatter, more responsive, and focused on premier products. Moreover, Tenneco looks nothing like the troubled organization that ended the 1980s with red ink and low-growth prospects. With six core businesses, Tenneco lost about $2 billion in 1991, $1 billion of which was attributable to Case Corp., a failing farm-machinery company.

"We had a weak balance sheet and a drain from Case," says Dana Mead, chairman and CEO. "There were no new technological silver bullets. These were basic industries. There was nothing to bail us out -- there was no Viagra in our portfolio." Tenneco since has been reorganized to gain value through increased performance.

Tenneco sold or spun off four of its moribund manufacturers, including Case, a chemical company, a natural-gas-pipeline company, and its Newport News Shipbuilding facility. Tenneco kept its automotive-parts and packaging-industry companies and acquired a number of firms that complement them. A small corporate office of some 70 people replaced a bureaucracy many times its size.

Mead's vision clearly has benefited Tenneco shareholders, but it's not the only way to organize. General Electric Co., which could be seen as a musty throwback to corporate pasts, defies most conventional wisdom by successfully operating an array of completely unrelated business units. GE Capital and NBC have virtually nothing in common and provide no economies of scale. The difference between GE's behemoth and the conglomerates of the past is an organizational structure that encourages flexibility. Chairman and CEO John F. Welch Jr. dismantled GE's bureaucracy, shedding nearly 250 profit centers and creating 13 global enterprises that report directly to his office.

As a result, this conglomerate acts surprisingly fleet of foot, with 2,500 joint ventures around the world and an autonomous bent that allows such groups as GE Capital to operate as two dozen small, flat businesses. And those units that lag frequently are eliminated.

"Jack Welch has had a lot of success and he has invested a lot in his people," explains Noel M. Tichy, professor of organizational behavior and human-resource management at the University of Michigan, Ann Arbor. "He has tried very hard to create a boundaryless organization, but his challenge is to make sure that there is coordination."

Other Models

A more popular model that many companies use is the matrix organization, especially as they extend their reach globally. By integrating technical expertise and product lines in each location along with support functions, even large companies can create small, entrepreneurial entities capable of rapid, localized response.

Perhaps the quintessential matrix organization is Zurich, Switzerland-based ABB Group, whose "glocal" vision extends to a multiplicity of small units around the world. This framework has been relatively successful for the company, allowing both control from the corporation and flexibility for the local unit.

The problem with matrix organizations, of course, is their redundancy. The same operations, functions, and processes frequently are replicated dozens or hundreds of times, depending on the company's size. Management guru Peter F. Drucker has said repeatedly that the matrix structure should be abandoned -- more appropriately, avoided -- by companies faced with strong competition. Even ABB, with its strong international presence and aggressive management, recently has hit some rough spots. "Everyone used to write about ABB and the success of their model," notes Tichy. "But now they're struggling."

For the most part, corporations that succeed in the New Manufacturing will organize in ways that help give them leverage in unpredictable environments. The best companies recognize that, in an age of mass customization, the "you can have any color as long as it is black" scenario is dead. Instead, they employ all parts of their organization, from the supply chain to post-product use, in the search for value and competitive advantage.

Moreover, linkages are key. Companies are joining forces to leverage assets and market share as never before. Each day, headlines shout the latest global merger or acquisition. In addition to the focus on North American or European combinations, many firms also are partnering with foreign companies to gain footholds in emerging markets. Asia, especially, is appealing at a time when assets are devalued.

Equally important has been the rush to establish manufacturing, supply-chain, and customer-service alliances.

Not long ago, major manufacturers such as Hewlett-Packard Co., Texas Instruments Inc., and IBM Corp. defended their hidebound structures as the best way to maintain control over corporate goals and specific product-management objectives. Now, these companies and their competitors increasingly are divesting themselves of brick-and-mortar manufacturing operations that require heavy investment and distract them from their principal goals.

"Contract manufacturing is growing in its importance to industry," says Newport Technologies' Brown. "The nature of our business is now alliances with large manufacturers who have learned to focus on their core competencies, as well as smaller companies that will never have their own manufacturing presence."

Alliance Reliance

Alliances are not without their worries. Recent research indicates that about 55% of all joint ventures with five-year terms lasted just over three years. Different goals, cultures, and personal management styles created insurmountable problems.

"Managers of the future have to learn to work in a variety of organizational models," says Larraine D. Segil, an author and consultant on alliances. "Companies are going to look like many things simultaneously. They may have elements of hierarchies, alliances, a matrix, and a consortium all at the same time. To be successful, people must learn to adapt to a broad set of circumstances."

Today's alliance leader may be Corning Inc., Corning, N.Y., which since the 1930s has built more than 1,000 partnerships to implement its corporate vision. The company recently jettisoned its consumer-products division and is concentrating on communications, environmental products, and advanced materials.

"When you look at Corning today, I think two things stand out. One is strength. The other is change," Roger Ackerman, chairman and CEO of Corning, told shareholders in April. ". . . We are focusing on attractive global markets where our leadership in materials and process technology can give us sustained competitive advantage -- and superior growth in earnings over time."

Companies don't have to be huge to benefit from alliances. In fact, alliances probably give the greatest advantages to small and medium-sized firms that have identified their goals, Segil says. Alliances can help almost any business that can link its mission and customers. Hurco Cos. Inc., a $100-million machine-tool manufacturer, actually bends no metal itself. The Indianapolis-based firm has formed alliances for its manufacturing, its distribution, and much of its R&D. The company has built alliances with plants in Taiwan, Spain, the Czech Republic, and Poland to develop and manufacture its components.

"Several years ago, we looked at where the global market was headed, and we decided to figure out what our competencies were," says CEO Brian McLaughlin. "We realized that someone else could be responsible under our direction for development and production, while we focused on the competition and on the needs of customers and the technical requirements."

Core Competence

Organizing around core competencies lets companies focus more adroitly on the most important aspects of their corporate mission. When done successfully, companies gain competitive advantage over firms that have retained control over most aspects of their business.

Often, companies confuse this business strategy with outsourcing because the two are frequently deployed together. While outsourcing unburdens companies from those aspects of their business that are not critical or that others might perform more effectively, core competencies focus a company's organization on strengths to maintain leadership in critical areas and to pursue new corporate goals. Organizing in this fashion is likely to involve a process orientation and a loosely networked environment.

Parts manufacturer Siemens Automotive Corp., New York, builds on its core competencies -- and the power of corporate parent Siemens AG -- to stay competitive. Its leaders meet regularly in "synergy councils" with other parts of Siemens to determine market strategies and to utilize each other's knowledge base and expertise.

"There is an advantage in being small enough to make fast decisions based on your area of expertise, but large enough to take advantage of Siemens' strength," says George Perry, president and CEO of Siemens Automotive.

Boeing Co., Seattle, like many others, often has been drawn by the lure of new ventures, but many were outside its areas of core competency. Although some efforts were successful, others were unproductive or brought little value to Boeing. The company has since learned its lesson and keeps its new growth focused on those areas to which it can add value. Boeing Enterprises, a new company organization, in July introduced a business jet and also offers training to airlines.

"We had a less-than-glorious history in the past," explains Larry Clarkson, president of Boeing Enterprises, about business strategies that included such odd ventures as the manufacture of rail cars. "We are not trying to be a conglomerate and buy things. We're sticking to what we know."

Who Needs A CEO?

Companies grapple with their structures all the time in a continuing effort to improve operations and performance.

Royal Dutch/Shell Group no longer has a CEO, but manages its vast global enterprise through a 13-member directorate. One large private corporation for many years had no real structure at all -- its CEO operated from a small island, and its officers were scattered in the U.S., Asia, and Europe.

Asian companies have experimented the least with structural changes, but their models of close, long-term business relationships clearly have been the impetus for recent American and European efforts to build more integrated enterprise networks --yet without incorporating the anticompetitive, corrupt, and inflexible legacy associated with such structures as the Japanese keiretsu.

Finally, the human organism increasingly is offered as a model of business organization, as companies create "learning organizations" that attempt to mimic the way the brain and individual cells handle information.

The best companies are betting that an effective combination of organizational structures -- some old and others more experimental -- will help them build competitive leverage. About the only structure that will not work in the future is the industrial model of the past.

Says Tichy: "It's politically correct for companies to say they won't put up with the old hierarchy, but in reality some of the dinosaurs haven't died yet." They will. The global business environment is getting hotter all the time.

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