The balancing of scale and market responsiveness demands may be illustrated with reference to a large insurance company. The company faced a complex set of internal and market-based organizational trade-offs in its core business property and casualty insurance. Lagging market growth, increased price sensitivity, new forms of product distribution, new information technology, and escalating competition were all placing enormous pressures on the company’s traditional mode of operation. Top management realized that fundamental changes in organization were needed in both its home office and in its field network if the company was to remain competitive and meet aggressive new growth and profit goals. In responding to these pressures, the company found itself facing a familiar dilemma. On the one hand, it was vital that its organizational structure become more responsive to local market demand, particularly in terms of regional product pricing and agent deployment. This need pointed to decentralization as the logical method for restructuring operations, with the field divided into smaller sales and marketing regions and more responsibility assigned to local management.

On the other hand, however, management was determined to reduce the costs of transaction processing. Meeting this need for administrative streamlining appeared to require that field offices around the country be reorganized into larger regional centers to exploit fully the scale economies offered by improvements in automated processing capacity.

Initially, these strategic requirements seemed to set large centers against locally responsive marketing and sales units. Yet, by carefully analyzing and “rewiring” its structure, the company was able to resolve the apparent conflict cost-effectively and efficiently. Here is the approach it pursued. The company’s field operations consisted of essentially self-sufficient regional centers; each center included all functional departments under its umbrella, ranging from sales, claims, and underwriting to operations and personnel. Two of these functions dominated field operations: customer interaction through sales and marketing and transaction processing. Originally, the field organization was designed around exploiting administrative scale in the processing function and balancing the need to locate sales and marketing functions to serve the customer base effectively. The underlying basis for the organizational design was the need to coordinate sales and processing functions because of the high volume of transactions and interactions between them.

A layer of management between the home office and the regional centers coordinated programs and enforced company policies. In line with its new strategic objectives (greater market responsiveness and increased productivity), the company instituted major organizational changes. First, the layer of management between the home office and regional centers was eliminated to improve communications and to facilitate more market-responsive decision making. Second, to achieve scale economies and contain costs, the reporting relationships of the processing centers were shifted from the regional level directly to the home office. New information technology allowed the company to “unhook” processing centers from sales functions and still remain adequately integrated. As a result, the number of regions of independent sale organizations was no longer tied to the number of processing centers.

The number of processing centers was reduced as information-technology innovations allowed additional processing capacity, whereas the number of marketing and sales regions was increased as market requirements demanded, allowing the entire sales organization to move closer to its local client base. The needs for both market responsiveness and scale economies in processing was fully satisfied.

Organize for Strategic Effectiveness. To organize for strategic effectiveness, it is important to recognize that the ultimate goal of a business organization is competitive advantage, and the drive for competitive advantage must be expressed in economic terms and pursued through the use of economic tools. Only by placing organizational decisions in an economic context can the value of alternative forms of structure, incentive, and management process be determined. It is only in the light of these assessments that the steps needed to strike the proper balance between scale and market responsiveness can be taken. Needless complexity, excessive layers of management, and nonessential integration of channels must all be eliminated. The design phase is easy when compared to the difficulties of execution (i.e., implementing organizational change). It requires strong leadership, consistent signals and actions, and strategically driven incentive programs.

Managing a Market-Responsive Organization Designing and managing a market-responsive organization requires overturning old assumptions. First, the linearity from strategy to structure and on to systems, staff, etc., cannot be reasoned. The process is instead iterative: a team is formed to meet a strategic need; it sizes up the situation, develops a specific strategy, and reorganizes itself as necessary. What’s more, the structure is temporary. The organization needs to be ready to change its configuration quickly to respond to new needs and circumstances.

Second, the organization’s purpose is not to control from the top; it is to empower a group of people to get a job done. Management occurs through training, incentives, and strongly articulated goals, strategies, and standards. Market-responsive organizations are found most often in businesses that are driven by product development and customer service electronics and software companies, for example and are often smaller, younger organizations where traditional boundaries are weaker. Some large-scale models include parts of Honda and Panasonic, 3M, and also, in some ways, GE, which has developed extraordinary flexibility in recent years in reshaping its organization and pushing authority down to frontline managers.

Market-responsive organizations have obvious drawbacks: they lack tight controls, they are ill-suited to exploit scale or to accomplish massive tasks, and they depend on capable and motivated people at the working level. However, companies that cannot use the full market-responsive model can appropriate aspects of it new product development teams, for instance. Some large companies, such as IBM, Microsoft, and Dow Chemical, with the need for both innovation and coordination of resources among markets, product lines, and technologies, often use the concept in modified form. They frequently change the focus of resources and control by reshuffling product groups shifting power among parts of the organization or by using ad hoc teams. Experience suggests that people are quite willing and able to change as long as they have a clear understanding of what’s expected of them, know why it is important to change, and have latitude in designing the new organization. Five key elements that companies should carefully consider in seeking strategic effectiveness are discussed below:

1. Forge a clear link between strategy and skills Acompany’s strategy, which should embody the value it proposes to deliver to its customers, determines the skills it needs. Many companies, however, are not sufficiently clear or rigorous about this linkage. Because Frank Perdue promises to deliver more tender chickens, his organization must excel at the breeding and logistics skills necessary to deliver them. Because Volvo promises to deliver more reliable, tougher, and safer cars, it must be skilled in designing and manufacturing them. Because Domino’s Pizza says it will deliver fresh pizza hot to your door within 30 minutes, each of its 5,000 outlets needs to be skilled at making a good pizza quickly and at customer order processing and delivery. Strategy drives skills, but if this linkage is missed, a company may end up doing some things right but not the right things right.

2. Be specific and selective about core skills Managers often describe the core skills their companies need in terms that are too general. Saying that you need to be first rate at customer service or marketing is not good enough. For example, the employees of a department store committed to being better at customer service will not know what to do differently because the term customer service doesn’t paint a specific enough picture of the behavior desired of them. In fact, a department store needs to be good in at least three different types of customer services: with hard goods such as refrigerators or furniture, customer service must have a high component of product and technical knowledge; with fine apparel, what counts is expertise in fashion counseling; with basics and sundries, the need is for friendly, efficient self-service. Each of these service goals translates into a different set of day-to-day behaviors expected of employees. Unless these behaviors are precisely defined, even willing employees won’t change their behavior very much because they won’t know how.

3. Clarify the implications for pivotal jobs Consider the department store again. The definition of different types of customer services drives through to the identification of several specific jobs whose performance determines whether customers think the store is good at customer service: the product salesperson for refrigerators, the fashion counselor for fine apparel, and the cashier for sundries. Pushing the skill definition to these specific jobs, which may be called pivotal jobs, allows the company to describe in specific terms what the holders of these jobs should do or not do, which kind of people to hire, which kind of training and coaching to give them, which rewards motivate them, and which kind of information they need. For example, at Nordstrom, the excellent Seattle-based fashion specialty retailer, the pivotal job is the frontline sales associate. Because Nordstrom is clear about the type of person it wants for this job someone interested in a career, not just a summer position it looks more for a service orientation than prior experience.

It pays better than the industry average and offers incentives that allow top sales associates to make over $80,000 a year. Nordstrom stresses customer service above all else. The company philosophy is to offer the customer, in this order, “the best service, selection, quality, and value.” This clarity about priorities helps sales associates determine appropriate service behavior. So does the excellent product and service training they receive. And so does the customer information system that provides sales associates with up-to-date sales and service records on their customers. Nordstrom recognizes that its business success depends on the success of pivotal jobholders in delivering value to customers, and the company has geared its entire organization to support these frontline associates.

4. Provide leadership from the top The key ingredients that have been found workable in this task include

• Appeal to the pride of the organization. Most people want to do a superior job, especially for a company that expresses its mission with an idea bigger than just making money. Providing them with a single noble purpose be it “quality, service, cleanliness, value” or “innovation” will unleash energy but keep it focused.

• Clarify the importance and value of building core skills. Provide the organization with a good economic understanding of the value as well as a clear picture of the consequences of not paying attention to core skills.

• Be willing to do the tough things that break bottlenecks and establish credibility for the belief that “this change is for real.” Usually, the toughest things involve replacing people who are change blockers, committing key managers to the skill-building effort, and spending money on it.

• Treat the program to build skills as something special, not as business as usual. Reflect this in the leader’s own time allocation, in the questions he or she asks subordinates, in the special assignments he or she gives people, in the choice of the special measurements he or she looks at, and so on.

• Over-communicate to superiors, subordinates, customers, and especially to pivotal jobholders. Talk and write incessantly about the skill-building program about the skills the company is trying to build and about why they are critical; about early wins, heroes, and lessons learned from failures; about milestones achieved.

5. Empower the organization to learn Organizations, like individuals, learn best by doing. Building new core skills is preeminently a learning process. Sketch out for employees the boundaries of their playing field by defining the strategy, the skills the company is trying to build, the pivotal job behaviors required, and the convictions they must hold about what is right. But within these boundaries, give them a lot of room to run to try things, succeed, fail and to learn for themselves exactly what works and what doesn’t. They will figure out for themselves details that could never be prescribed from above. To illustrate the point, take, for example, the 10,000 route salespeople of Frito- Lay. Michael Jordan, the company’s president, says that these people with their “store to door service” control the destiny of Frito-Lay. Wayne Calloway, PepsiCo’s former president and past CEO of Frito-Lay, describes this pivotal job as follows: “Our sales people are entrepreneurs of the first order. Over 100,000 times a day they encounter customers who are making buying decisions on the spot. How in the world could an old-fashioned sort of management deal with those kinds of conditions? Our approach is to find good people and to give them as much responsibility as possible because they’re closest to the customer, they know what’s going on.”