September 19, 2022
Summary. The characteristics that help an organization succeed have changed over the past century. While a highly structured, top-down management style used to be companies’ preferred approach to organization, the internet has made this structure (and the layers of hierarchy that developed over decades) irrelevant. In this article, the author discusses how a successful organization today moves from mass markets to markets of one, routinely replaces core competencies, shifts to team-based structures, and manages from the outside in, among other features.
Organizations succeed over time only when they adapt to the speed and character of external change. Every aspect of an organization — from how it operates and is structured to how it is led — must match the current yet ever-shifting context in which it exists.
As the world changes at a faster pace than ever before, companies must change more rapidly as well. Yet the practices, structures, and behaviors at many large companies are not designed for such responsiveness. A century ago companies implemented such approaches because control, consistency, and predictability were top concerns; core competencies were cherished foundations to build on; and leaders viewed the world from inside the organization looking out.
To thrive today, however, companies must be able to detect external changes from the outside in and have a built-in fluidity so they can continually adapt. They need to focus on individual customers, make their core competencies dynamic, and rely on teams instead of a hierarchy — all by using the power of data and algorithms.
As we look back on a century of Harvard Business Review, we should also take time to look ahead — and recognize what the next iteration of a successful organization looks like.
Where the Organization Has Been
Since its founding, HBR has sought answers to fundamental questions such as these: What’s the best way to organize a business? What is the right structure, and how should day-to-day decisions be made?
About a century ago Henry Ford had a world-changing answer to these questions. He built a business around top-down management and assembly line mass production. By standardizing his automobiles and the steps taken to manufacture them, he lowered the cost per unit across the entire end-to-end value chain. That innovation, combined with his decision to raise workers’ pay to $5 per day, was adopted by other companies. This change drove industrial activity — making it possible for millions more people to own and enjoy everything from cars to Coca-Cola — and raised living standards around the world. Even as Ford’s company grew, though, its structure remained the same: a hierarchy in which business decisions were made in the C-suite and functions reported up to the president and chief executive.
What Makes a Successful Organization, According to HBR Readers
An organization that not only delivers on customers’ …
Alfred P. Sloan, Jr., CEO of Ford’s major competitor, General Motors (GM), decided to pursue a new strategy by offering different makes and models of cars for every budget in a range of styles and colors. GM used consumer research to segment the market, but it always kept the focus on markets large enough to ensure the manufacturing would be cost-effective. To manage multiple products and brands, Sloan realized that GM needed a different organizational structure too — one with divisions that each had a top leader responsible for profit and loss (P&L).
After World War II, large companies became even larger as they extended their sales and production and built networks of suppliers (what we now call “ecosystems”) in countries and even on continents other than their own. Many multinational corporations adopted a P&L organization structure to maintain control of their sprawling businesses.
In the 1950s, as industrial manufacturer General Electric (GE) prepared to adopt a P&L structure, it consulted with leading management thinker Peter Drucker, who pointed out that executives would need training to make the new system work. That led GE to create a 16-week course on how to be a general manager, birthing its now-famous training center in Crotonville, New York. Soon after, Harvard Business School created an Advanced Management Program course (which I taught for 30 years), and consulting firms created product lines around leadership training.
Companies continued to expand in size, breadth, and hierarchical levels, yet they also needed to coordinate across their existing structures. A host of companies — including TRW, Bechtel, Citibank, and Texas Instruments — began to use a matrix arrangement in which reporting relationships and accountability were shared across product, functional, and geographic structures.
In the 1990s, of course, the internet changed everything. Marc Andreessen co-created a browser that made the web useful for commercial purposes, coders began developing software and then algorithms to make decisions more quickly than humans can, and computer processing capacity became increasingly cheaper and more powerful.
Jeff Bezos saw the internet growing at 2,300% per annum, left his job at investment firm DE Shaw, and founded an online bookstore called Amazon, which has since morphed into not just the “everything store” but also the leading provider of web services to a host of other companies.
Where the Organization Is Now
Bezos discovered early what every twenty-first-century leader should now know: We have entered an age of discontinuity in which breaks in the external world are deeper and more frequent, rendering prevailing organizational structures and practices ineffective, if not harmful. Successful organizations exploit those changes, as Amazon has since its inception, and take advantage of what’s new.
Current realities make it imperative that companies shift in several ways:
1. From mass market to markets of one.
Bezos recognized that an online retailer could offer far more choices than a local shop could, along with the convenience of delivery right to the customer’s home — all at a lower cost. This kind of affordable personalization and service was a new value proposition. What’s more, each transaction provided Amazon with data that its algorithmic engine could analyze to ensure that future offerings were better tailored to each consumer’s preferences, needs, and desires, or what I call “markets of one.”
Businesses that use technology to predict and personalize what a vast number of individuals want at low incremental cost can scale up and increase cash gross margins. Companies that don’t make this shift will find it hard to compete.
2. From building on core competencies to routinely replacing them.
The conventional wisdom has been that companies should use their core competencies to sustain a competitive advantage. But in an age of discontinuity, this approach doesn’t work for long.
Leaders of every company today must ask these questions: Given changing external realities, is this core competence becoming less important or irrelevant? Do we still need to expend resources to support it, or are there new competencies we need to build and shift resources toward?
Right now, for example, if you don’t have a core competence in using algorithms, you will need to acquire or develop this capacity. Amazon eclipsed many retailers that were too slow to adapt, but now we see brick-and-mortar competitors such as Walmart building their data analytics and e-commerce capabilities.
Recruiting the right people and deploying them in ways that allow them to apply their expertise and energy are core competencies themselves and critical in the age of discontinuity. In an escalating war for talent, businesses that are the most skilled in acquiring and developing these competencies will have a distinct competitive advantage.
3. From hierarchical layers to a team-based structure.
Nearly every company needs to reduce the hierarchical layers that have accumulated in their organizations over time and channel more work to teams.
The benefits of doing so are manifold. When teams include people who are on the front lines, the information flow is both faster and more accurate; with this increased speed comes greater flexibility to respond to customer and market changes. The improved flow of information also creates transparency that removes a lot of organizational politics and encourages collaboration.
Fidelity Investments, the financial services firm, recently restructured its personal investing group in a team format. Each team has a clear mission and much autonomy in how to accomplish it. The roughly 5,000-person organization now has just three layers below the president and operates at lower cost and with shorter cycle times for innovation. The control function that managerial layers used to perform is now done through software that generates detailed metrics. Reports are produced 24/7 and highlight any red flags in the data.
4. From inside-out to outside-in management.
To keep a company competitive over the long term, leaders must know what is happening far beyond their own industry, geography, and existing customers.
Societal issues around sustainability, racial justice, and geopolitics affect many aspects of business, from strategy to the ability to hire the best talent. Today, for example, it is impossible to ignore the tricky issues raised by China’s intermixing of business and the Chinese Communist Party, which has a presence in every major Chinese company.
Business leaders need a wide lens and a routine for detecting early-warning signals of external changes. Some leaders set aside 10 minutes in every team meeting to discuss any new dynamics people are observing, sometimes prompted by a newspaper article or an outside event. When leaders repeatedly ask, “What’s new?” — as Jack Welch used to do when he was CEO of GE — they can help the organization develop an awareness of subtle shifts that might indicate where things are heading. The goal of such vigilance is to get the organization ready for change so it’s poised to drop what won’t work in the near future and jump on new opportunities.
The Path Ahead
Amazon is not alone in its adaptation to the age of discontinuity, but it continues to lead the charge, always reinvesting in its future.
Others must choose: Adapt or die. Some may be getting a late start in developing technologically driven personalization, dynamic core competencies, flatter and team-based hierarchies, and an outside-in focus. In many industries and geographies, however, there is still ample opportunity to build the structures and processes that take advantage of the new external realities. As companies start on that task, they should recognize that the best way to organize and manage a business is always changing — and that the answers to fundamental questions may be very different 100 years from now than they are today.
- Ram Charan advises the CEOs and boards of some of the world’s biggest corporations and serves on seven boards. He is the author or coauthor of 33 books, such as Talent, Strategy, Risk: How Investors and Boards Are Redefining TSR and Talent Wins: The New Playbook for Putting People First (both from Harvard Business Review Press), and four of which are best sellers.