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BeyondFunctions

printed from:

Published:February 26, 2013 /Spring 2013 / Issue 70

(originally published by Booz & Company)

STRATEGY & LEADERSHIP

Beyond

sponsored
by

Functions
Conventional organizational structures may be
obsolete. How about a model based on
capabilities instead?
by Paul Leinwand and Cesare Mainardi

Note:Thisarticle
wasoriginally
publishedby
Booz&
Company.
Theprevailing
functionalmodel
inmost
companiesdates

Illustration by Keith Negley

backtothe
1850s.Someofthefirstprivatesector
functionarieswererailroadtelegraphoperators
whomanagedschedules.Soonafter,foodand
toolcompaniescreatedsalesforcesinsteadof
dependingonoutsidewholesalersas
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intermediaries.Thencamefinancedepartments,
followedbyinhouseresearchanddevelopment
labs,whichtooktheplaceofR&Dcontractors
includingtheoriginallabsofThomasEdisonand
AlexanderGrahamBell.Byplacingtheir
specialistsatheadquarters,dividedinto
corporatefunctionaldepartments,large
companiescouldmakebetteruseoftheir
peoplesexpertise,givethemcareertracks,and
harnessthepowerofscaletobuildsuperior
capabilities.Duringthedecadesthatfollowed,as
companiesgrewsteadily,thecorporatestaff(as
itwasoriginallycalled)grewaccordingly.
Bynow,thefunctionalmodelhasbecomethe
conceptualcoreofnearlyallorganizational
structures,publicandprivate.Itissoingrained
inthedailyactivitiesofmostcompaniesthatitis
rarelyquestioned.Evenwhenfunctionsareseen
assharedservices,whichwouldplacethem
relativelylowontheorgchartinmany
companies,theyaretypicallythemost
permanentpartsoftheenterprise.Businessunits
comeandgowiththeproductlifecycle,but
finance,HR,marketing,legal,andR&Dlast
forever.Eveninmatrixorganizations,the
functionsmaintainquiteabitofpower,
managingcareertracksandahugeportionof
discretionaryinvestments.
Thevalueoffunctionsisundeniablenocompany
coulddowithoutthem.Butthebusinessand
organizationalmodelsthatgovernfunctionsneed
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updating.Themostimportantbusinesspractices
andcollaborationsnolongerfallneatlyinto
groupingsdesignedmanydecadesago.
Perhapsthemostobvioussymptomofdistress
fromthefunctionalmodelisthewidespread
problemofincoherence.Mostfunctionalteams
aregoodatmanythings,butgreatatnothing.
Theyoftenstruggletomeettheneedsofalltheir
constituents,jugglinganendless(andsometimes
conflicting)listofdemandsfromlineunitsthey
nevermanagetobuildthetypeofadvantageor
differentiationthatisrequiredforlongterm
success.Theunderlyingproblemisnotalackof
desiretofocus,alackoffunctionalability,oran
inadequatebudget.Thefunctionalorganization
simplynolongerservescompaniesaseffectively
asitoncedid,inthreeimportantways.
First,theexpertiseneededtodifferentiatea
companyandwininthemarketplaceismuch
morecomplexthanitwasinthepast.Ifa
companywantstobebetterthananyother,at
somethingrelevanttoitscustomers,itmustbe
moreefficient,technicallyproficient,andcreative
initsspecializationthaniteverwasbefore.
Walmartsucceedsnotbecauseofgenericsupply
chainexpertise,butthankstoveryspecific
logistics,inventoryprocesses,buyingstandards,
andlabormodelsthatitcreatedforitself.
Amazonsucceedsnotbecauseitspeopleapply
broadmarketingexpertise,butbecauseitexcels
atmarketingcapabilitiesthatitdeveloped.Ithas
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itsownapproachtothemanagementofuser
generatedcontent,theindepthtrackingof
consumerbuyingbehavior,andtheinnovationof
newfeaturesbasedontheresultinginsights.
Althoughthesetwocompaniescompeteandhave
evenhiredeachothersexpertsattimes,they
needdistinctlydifferentformsofspecialized
expertise.
Second,creatingmeaningfuldifferentiation
requirescapabilitiesthatarealmostalwayscross
functional.Forexample,buildingacompetitive
globalbrandrequiresmorethanamarketingskill
set.Itrequiresaplethoraofcompetencies,
includingmanagingdigitalmediaandtracking
consumerinsights(bothofwhichinvolveIT),
relationshipbuilding(whichrequiresgood
customerserviceandinterfacedesign),
ethnographicinsightandemployeeengagement
(enlistingtalentandHR),highlytargetedproduct
designanddevelopment(engagingR&D),and
more.
RealworldexamplesincludeHoneywellsability
tolaunchbreakthroughtechnologyproducts
tailoredtomarketneedsaroundtheworld,
drawingonitscapabilitiesinmarketinsights,
engineering,researchanddevelopment,and
customerserviceandInditexsfashionforward
butlowcostretailmodel,encompassing
marketing,IT,manufacturing,andsourcing.
SomeclothessoldinInditexsZarastoresare
madeinitsownfactories,andothersare
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outsourcedtogarmentshopsoverseas.Thechain
canthusofferallitswaresatalowercostthan
competitorscan,whilebeingmoreresponsiveto
consumertasteanddemand.Ikeasstylishbut
utilitarianfurniture,similarly,combines
functionalexpertiseindesign,sourcing,
manufacturing,pricing,packaging,logistics,the
customerexperienceinitsretailstores,andcost
managementallofthesereinforcetheothers.
Thislevelofcollaborationisunfamiliartomany
functionalstaffmembersevenincross
functionalteams,theydontusuallyget
opportunitiesforthecontinual,ingrained
collaborationthatisneededtobuild
differentiatingcapabilities.
Third,functionshaveanaturaltendencyto
becomeisolatedorganizationalsilos,focusingon
theirownexcellenceandperformanceinsteadof
thecompanysstrategy.Thespecialistsnatural
imperativetobeexcellentineverythingtheydo
leadstoincoherence.Manyfunctionshave
devotedasignificantpartoftheirbudgetsover
theyearstoinitiativesandtechnologiesthat
makethemworldclass,butthathaveverylittle
todowiththetruedriversofthecompanys
success.
Althoughalltheseproblemscanbeaddressedin
smallways,noneofthemcanbefullyresolved
underthecurrentfunctionalmodel.Inthat
context,itseemsincreasinglylikelythatthe
functionalmodelisobsolete.Butifso,what
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mightreplaceit?
Themostcommonsolutionusedtodayisthe
crossfunctionalteam.Manycompaniestryto
managecomplexitybyassemblingcommitteesof
peoplefromtherelevantprofessionalgroupsto
solveparticularproblems.Unfortunately,many
crossfunctionalteamsfallfarshortofdelivering
effectiveandefficientsolutions.Theyrarelyhave
thetimetheyneedtoresolvethedifferentwaysof
thinkingthatpeoplebringfromtheirprofessional
specializations.Whentheteammembersfirst
cometogethertoworkonacommonproblem,
theyoftenmisunderstandoneanother.The
teamsarealsolimitedbytheirconflicting
functionalprioritiesandsometimesbyalackof
clearaccountability.Manyoftheseteamsare
temporarytheywilldissolveoncetheprojectis
over,andtheirmembersmaynotworktogether
again.Theythereforehavelittleincentiveto
overcomethesehurdles.
Permanentcrossfunctionalteamstendtofare
better.Agrowingnumberofinnovationgroups
bringtogetherdisparatefunctionalskills
(typicallyR&D,marketing,IT,andresearch)to
facilitatethelaunchofnewproductsorservices.
FritoLay,forexample,setupaunitlikethisin
theearly1980smerchandising,IT,andsupply
chainexecutivesworkedtogethertodevelopthe
companyscelebrateddirectstoredelivery
capability,enabledbyhandhelddevicesthat
FritoLaydevelopeditself.Similarly,intheearly
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2000s,PfizerConsumerHealthcare(sincesoldto
Johnson&Johnson)setupcommunitiesof
practicethatincludedlawyers,health
professionals,andmarketingexpertswhocould
helpspreadkeyideasandbestpracticestobrand
andproductgroupsaroundtheworld.
Thesepermanentcrossfunctionalteamsvaryin
thedegreeofstructuralchangetheyrequire.
Somearerelativelyinformal,whereasothers
involvemajorshiftstotheorganizational
structure.Somemayevenhaverepresentationon
theircompanysexecutiveteam.Theirleadersare
officerswithtitlesthatrepresentcrossfunctional
capabilities:chiefriskofficer,chiefinnovation
officer,chiefgrowthofficer,andsoon.
Astheygaininmaturityandintheirlevelof
contributiontotheircompanies,thesegroups
mayevolveintoastillmorerobustorganizational
construct:anoverarchingorganizational
structure,suchasacenterofexcellence,basedon
distinctivecapabilities.Themembersofthese
capabilitiesteamswouldbeassignedcompletely
totheseunits,reportingtothemratherthan
throughafunctionalhierarchy,andspending
theirentireworkweeks,andpossiblytheirentire
career,withinacrossfunctionalcontext.For
example,afoodcompanymighthaveasingle
largegroupoverseeingitsremarkable
distributioncapabilityprofessionalswhowere
formerlypartofmarketing,sales,IT(for
analytics),supplychain,sourcing,andlegal
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organizationswouldallreporttothesamepartof
thehierarchy,allworkingtogethertomaintain
andimprovetheirproductspresenceonretail
shelves.
Thisapproachwouldlinkthespecialistsofthe
enterprisemoredirectlytothecapabilitiesthat
directlysupportthecompanyscorestrategies,
liftingthemtoanewlevelofaccountabilityand
rewardabovethestatustheywouldhavehadin
functionslikesupplychain,finance,or
marketing.Insteadofprovidingservices,they
wouldbepartofateamresponsibleforoneofthe
organizationscorestrengths.Inother
companies,newseniorrolesarecomingtothe
fore,suchaschiefinnovationofficer,chiefrisk
officer,andchiefcustomerofficer.Theseleaders
overseepeoplefrommultiplefunctionalgroups,
suchassupplychain,marketing,finance,and
R&D,withtheideaofdevelopingcapabilities
systems.Forexample,manycompanies,
particularlythosewithcomplexorhighly
engineeredproducts,arerethinkingtheproduct
managersrole.Thestrongformmodelgives
responsibilityfortoplinegrowthandother
financialoutcomestooneperson,whoalsohas
crossfunctionaldecisionmakingauthority(see
ProductManagementGetsStronger,byBarry
Jaruzelski,RichardHolman,andIan
MacDonald,s+b,Spring2013).
Inconstructslikethese,theoriginal,more
specializedfunctionsmaytakeonmoreofarole
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inpeopledevelopment,servingasaprofessional
supportcommunityandtrainingand
developmentbaseforparticularbranchesof
expertise.Wherevertheysitintheorganization,
specialistswouldbeabletodrawonthissupport
theywouldstillbetrackedandrewardedfortheir
functionalskills,buttheywouldalsohave
opportunitiestocrossoverintobroaderroles.
Thisisanalogoustothewaythatsymphony
orchestrasoperateconductorsareresponsible
forthewholework,butifasoloistneedshelp,he
orshewillturntomastersoftheparticular
instrumentforguidance.
Differentcompanieswillfinddifferentpaths,but
everycompanywillhavereasontoreconsiderthe
functionalorganizationasaprimarywayof
managingspecializedexpertise.Themost
importantfactorsharedbyallthesealternatives
isthecapabilitiesimperative:Companiesneedto
beclearaboutwhattheycandobetterthan
anyoneelse,howthisbenefitstheminthe
market,andhowtheyneedtobuildandimprove
theircapabilitiestofillthegaps.Withthisclarity,
leaderscanassembletherightexpertiseinthe
rightcombination.Thiswillgivefunctional
leadersandstaffthesupporttheyneedtobetruly
fitforpurpose,tomatchtheirownworktothe
overallbusinessstrategyoftheenterprise.
Themostfarsightedfunctionalleadersarenot
justwaitingforthesechangestoaffectthem.
Theyaretakingthefirststepinthetransitionby
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helpingevaluatethecurrentstateoftheir
companyscapabilitiessystem,andsuggesting
waystobringitclosertoitspotential.Thisispart
ofthefunctionalleadersnewmandateasa
strategicpartnerfortheenterprise:deliveringnot
whatindividualconstituentsdemand,butwhat
theenterpriseneeds.
ReprintNo.00161
Author Proles:
Paul Leinwandis a partner with Booz & Company based in
Chicago, and coauthor (with Cesare Mainardi) of The Essential
Advantage: How to Win with a Capabilities-Driven Strategy
(Harvard Business Review Press, 2011).
Cesare Mainardi is the chief executive ofcer of Booz &
Company.
Another version of this article appeared on the HBR blog
network.

Resources
Deniz Caglar, Jaya Pandrangi, and John Plansky, Is Your
Company Fit for Growth? s+b, Summer 2011: A better way to
deploy resources, and the original source for the three types of
capabilities.
A.G. Laey and Ram Charan, The Game-Changer: How You Can
Drive Revenue and Prot Growth with Innovation (Crown
Business, 2008): Inside look at the relationship between
innovation and (among other things) functional leadership at
Procter & Gamble and other companies.
Booz & Company Supply Chain Capabilities Proler: Allows
supply chain leaders and managers to diagnose their prociency
and opportunities for leverage in light of their companys
strategy.
Fit for Growth SM is a concept developed by Booz & Company to
help companies in a variety of industries become more
strategically and organizationally effective while focusing
investment more coherently. For more information on this
service offering, see strategyand.pwc.com/tforgrowth.
For more thought leadership on this topic, see the s+b website
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