* professor of business policy, at insead, boulevard de...

"The Changing Role of Top Management (Part 2):Beyond Framing Structure

to Building Processes"

by

Sumantra GHOSHAL*and

Christopher A. BARTLETT**

94/20/SM

* Professor of Business Policy, at INSEAD, Boulevard de Constance, Fontainebleau, 77305Cedex, France.

** Visiting Professor of Strategy and Management, at INSEAD, Boulevard de Constance,Fontainebleau, 77305 Cedex, France. Professor of Business Administration, at HarvardUniversity, Soldiers' Field, Boston MA 02163, USA.

Printed at INSEAD, Fontainebleau, France

Revised 10 May, 19941

THE CHANGING ROLE OF TOP MANAGEMENT (Part 2):

Bevond Framine Structure to Buildin g Processes

Sumantra GhoshalINSEAD

Boulevard de Constance77305 Fontainebleau

France

Tel: 33-1-60-72-40-00

Christopher A. BartlettHarvard Business School

Soldier's FieldBoston, Mass 02169

U.S.A.

Tel: 617-495-6308

Draft for circulation. Please do not quote or cite without written permission from the authors. Cornments and

suggestions are welcome.

Reyised 10 May. 19942

THE CHANGING ROLE OF TOP MANAGEMENT (Part 21:

Bevond Framin2 Structure to Building Processes

It was the creation of the divisionalized organization structure that defined the birth of the

modern corporation and triggered what we have described in an earlier article as the strategy-

structure-systems doctrine of corporate management. This organizational approach not only

enabled companies to manage their increasingly diverse product-market portfolios, it also

institutionalized their diversification strategies. At the same time, this structural form also

shaped the information, planning and control systems that allowed corporate level managers to

keep informed about businesses of which they had less and less personal knowledge, and to

give them an overview over operations from which they were separated by physical distance

and layers of hierarchy.

Because of this anchoring role of structure within the strategy-structure-systems doctrine, a

generation of managers emerged during the 1960s, 1970s and 1980s deeply convinced that

their control over the design of their companies' structural configuration was the most

powerful tool they had to shape the direction and drive the efforts of their organizations. The

creation of a new international division typically triggered an explosion in export sales, for

example, while a restructuring into strategic business units allowed tighter management of

under-performing businesses. Successive waves of refinement, reinforcement and realignment

of the basic multidivisional model only confirmed their faith in the power of the structural tool.

No company reflected this faith better than General Electric, probably the most widely

recognized role model of best-in-class organization design and strategic management in the

post-War era. GE was a textbook example of a company in which an aggressive strategy of

diversification had been driven, directed and supported by the development of an increasingly

elaborate organizational structure. By the late 1960s, successive generations of corporate

leadership had divided the company into 10 groups, under which were 46 divisions which, in

turn, were broken into 190 departments. It was a structure that had facilitated GE's

diversidication into 23 of the 26 businesses defined by the two-digit SIC classification of

industries. During the 1970s, CEO Reginald Jones had overlaid this already complex structure

with 43 strategic business units, added a new level of sector management, and introduced

several cross-business integrative mechanisms which he called arenas.

Yet by the time Jack Welch assumed the job of CEO in 1981, problems were showing up in

GE's carefully configured structure. Its elaborate hierarchy, which had grown to nine levels of

management from the CEO to the front line supervisor, was not only expensive to maintain, it

was also slow to react. And the tangle of reports, plans, policies and practices required to

Revised 10 May. 19943

move information around and reach decisions in this organizational superstructure created a

bureaucratie jungle that choked off energy and initiative among employees. As Welch

commented:

We had constructed over the years, a management apparatus that was right for itstime, the toast of the business schools. Divisions, strategic business units, groups,sectors; ail were designed to make meticulous, calculated decisions, and movethem smoothly forward and upward. This system produced highly polished work.It was right for the 1970s, a growing handicap in the 1980s, and it would havebeen a ticket to the boneyard in the 1990s.

Bevond Structure to Process

The problems that Welch identified at GE have since been recognized by top level executives

around the globe. In many companies, the last decade has been spent delayering, downsizing

and destaffing the bloated and overly complex structures built over the previous twenty or

thirty years. But as they began to reshape their greatly simplified organizations, most top level

managers were much less confident about finding a new structural solution to the emerging

challenges they faced. As they experimented with new approaches to framing organizational

action, many began to shift their attention from their company's structural configuration to the

processes underlying the formai distribution of assets and responsibilities.

In some companies, the corporate leaders began to focus their attention on building integrative

strategic processes designed to contribute more directly to the company's value added. Under

pressure of intense competition, they moved to implement major corporate programs built

around agendas such as Total Quality Management, Time to Market, or Customer Focused

Operations. What distinguished top management's approach to these initiatives from its earlier

preoccupation with structure was that they were implemented as company-wide programs that

required intensive cross-unit cooperation. From a structural mentality of allocating assets and

resources to support formally defined roles and responsibilities, the focus shifted to linking the

assets and resources more effectively by building better interpersonal and interunit

relationships.

Inevitably, this new fascination with integrative processes gave birth to a series of management

fads, most of which initially built on the latest successful strategic process to be introduced.

The problem was that these major corporate-wide initiatives were often introduced in rapid

succession totally disregarding the potential and real conflict in their objectives while

simultaneously underestimating the susbtantial adjustment they implied for inter-departmental

relations and cross-divisional coordination. As a result, those deep in the organizations often


began to view the new cross-unit strategic initiative as the latest manifestation of "flavor of the

month" management, and adopted a strategy of minimal compliance until the urgency passed.

Perhaps the most radical manifestation of the new process orientation was reflected in the

back-to-basics proposai to reengineer companies' most important processes from the bottom

up. The concept of process reengineering was immensely appealing to a new generation of

managers that had become frustrated with the Byzantine complexity their predecessors had

built through their devotion to structural hierarchy. Shaped by an ail-or-nothing philosophy

that the old structures had to be obliterated and rebuilt around scores of outcome-oriented

processes such as servicing customers, paying accounts, or processing ban applications, this

revolutionary approach appeared to provide just the radical solutions many managers were

seeking.

But despite its promise, massive process-reengineering has experienced severe difficulties and

limitations. Individual micro-level process improvements were often unconnected and

consequently resulted in only limited bottom line impact. More seriously, in adopting its

aggressive zero-based obliteration-oriented approach, some companies found that along with

the targeted "enshrined inefficiencies" they also destroyed institutionalized knowledge and

relationships that provided the company with enormous value. And, finally, the focus on

rebuilding micro processes stone by stone from the bottom up often prevented managers from

focusing on how these stones fit together to form a wall of interdependent activities, let alone

envision how the wall might become part of the cathedral of company purpose they were

striving to achieve.

Yet despite the difficulties some companies have experienced as they strove to implement a

sertes of strategic processes and the frustrations others have faced by focusing at the more

micro level of process reengineering, there is clearly a strong shift in the way top level

managers are both viewing and dealing with their organizations. The powerful but blunt

instrument of structure is being supplemented and increasingly overshadowed by the more

flexible and human tool of process design and management. The challenge has been to identify

the key processes around which to focus the organization's attention, then to find the

appropriate means of developing and managing them - a top management task in which

structural change may play a contributing rather than dominant role.

In our recent research in twenty European, American and Japanese companies in a variety of

different businesses, we observed several that appeared to be following a somewhat different

approach. Although, the top management of these organizations had also shifted their

attention from reconfiguring structural forms to building more cross-boundary processes, they


were neither caught in the cycle of designing and implementing a countinuing sertes of

"strategic processes" nor focussed at the micro level of process reengineering. These

companies were taking a much broader approach and focusing on changing behaviors and

developing relationships around what we saw as three ongoing macro-processes at the heart of

their organization to provide the foundation for their competitiveness. First, they were

embedding an entrepreneurial process to develop the externally-focused, opportunity-seeking

ability of their companies to create new businesses. Second, they were institutionalizing a

capability building process to develop new resources, skills and competencies and to link and

leverage them across organizational units to function as an integrated company. Finally, they

were also driving an ongoing renewal process aimed at developing their internai ability to

continuously revitalize and regenerate their strategies, organizations and people so as to create

an enduring institution.

Embeddine the Entrepreneurial Process:

Creatine and Exuloitine Opportunities

Perhaps the most widespread and serious casualty in the growth of bureaucratic structures

over the last few decades has been a graduai erosion and eventual total eclipse of managerial

entrepreneurship - the externally-focused, opportunity-seeking attitude that led employees of

large corporations to mn their operations as if they owned them. As several companies began

to experiment with new ways to ignite the extinguished spark of creativity and risk-taking, it

was an article of faith that the solution would be found in a new structural form. Under the

banner of "corporate venturing", some tried to replicate internally the initiative and drive of a

venture capital operation, while others followed the seductive arguments of management gurus

and consultants who were offering entrepreneurial solutions in the form of "skunk works" or

"intrapreneurship" units. But despite the fact what many such experiments resulted in some

initial successes, in very few cases did they provide the broad-based long-term solution

companies were seeking.

And yet, in our studies we observed some companies like 3M, Canon and ISS that seemed to

have maintained their entrepreneurial engine, even as the grew into large corporations, and

others such as ABB, GE and Komatsu where management was succeeding in rebuilding an

entrepreneurial process at the core of the organization rather than isolating it at the periphery.

3M was a classic example. How was it that this $15 billion diversified industrial giant whose

core business was in abrasives and adhesives, had been able to become one of the world's most

innovative corporations, developing a portfolio of over 100 technologies and leveraging them

into a portfolio of some 60,000 products?


In examining the organization and management of 3M and the other companies that had

succeeded in developing and sustaining an entrepreneurial process, we saw top management

creating and protecting a fimdamentally different management process than the one that

dominated the classic hierarchic structure. In doing so, they replaced a model based on

holding managers responsible through a relationship based on authority and top down control,

with an approach focused more on genuine commitment to front-line entrepreneurship and the

creation of a process of upward initiative. Key to creating this front-fine initiated, upwardly

directed entrepreneurial process were three key top management practices that seemed to be

common to most of the companies that had been able to build and sustain such a capability:

• They have built their organizations on a logic of disaggregation to protect a micro-level focus on external opportunities.

• They embedded a high level of organizational discipline as the foundation ofindividual autonomy and empowerment.

• Instead of focusing on the abstractions of large organizational units or broadstrategic initiatives, they bet on people encouraging their ideas and supporting theirproposais.

The logic of disiteereeation

The traditional divisionalized company is built on a logic of successive aggregation whereby

smaller operating units are "rolled up" into progressively larger groupings to facilitate

administrative coordination and control. In contrast, the top management in 3M, Canon and

ABB have followed an organizing logic of disaggregation, treating each micro-unit or project

as a distinct unit and as the fondamental building block of the company. The point is not that

these companies do not have larger organizational entities, for they ail do, but rather how the

smaller units are treated in the overall management process.

The departments and divisions of 3M are not administrative superstructures imposed on

businesses to facilitate control, but merely organizational forms required to manage particularly

successful and growing innovations. Instead of cascading assets, resources and responsibilities

down the hierarchy in steps determined by spans of control, 3M's top management has always

viewed its departments and divisions as growing from the bottom up as the logical

administrative confirmation of a successful entrepreneurial initiative. Each of the company's

3900 profit centers is treated as a separate entity so as to protect the spirit of entrepreneurship

and the clarity of personal responsibility that flourishes in such small units. Under its "grow


and divide" philosophy, the most successful projects grow into departments which might

enventually become divisions, which in turn, fond a new portfolio of projects.

One can observe the same organizing logic in ABB where Percy Barnevik has broken down

this $30 billion behemoth into 1400 small companies, each a legal entity with its own balance

sheet and profit and loss statement, and an average of 200 employees per company. Similarly,

in Canon President Ryuzaburo Kaku has separated the company's numerous production and

marketing units as separate companies to highlight the contribution of each and to prevent a

loss of accountability in the obscurity of size and complexity.

This reverseal of the structural model's classic top down devolution of power has an enormous

impact on managerial behavior in each of these companies and provides the basis for the front

fine driven entrepreneurial process they so vigorously cultivate and nurture. By creating, as the

basic corporate unit, entities that depend on a narrowly defined product, market or business,

such a model forces management to identify and exploit the kind of opportunities that would

be overlooked or deemed uninteresting in larger organizational aggregations. Equally

important, by developing focused micro-units in which no one can bide and each individual's

effort is vital, this organization creates an environment that makes individual members feel as if

their ideas can be heard and that their efforts will have an impact.

Embeddin2 discipline

Having created an organizational context that values and promotes individual initiative, the

next major concern shared by top managers in companies that have build durable

entrepreneurial processes has been to ensure that the actions of those deeper in the

organization are guided by a set of values, norms and practices that provide them with a sense

of focus and discipline. ABB's chief executive, Percy Barnevik is fond of reminding his

organization of the apparent paradox that it is only when a Company has developed a strong

serise of discipline and control that its top management can commit itself to the kind of radical

decentralization ABB had undertaken.

In 3M, the entrepreneurial freedom created in its project teams, departments and divisions is

tempered by a clear set of corporate-wide expectations and management practices designed to

bring rigor and discipline to the front fine initiatives. Such is the role of 3M's well know

objective to produce 25% of sales from products introduced within the past five years. Like all

its management standards and challenges, 3M's top management has applied this one

symmetrically across all organizational units ("We recognize some of our business as

established, but none as mature") and reinforced it consistently over Lime. Indeed, in the face


of some observers questioning if a $14 billion company could continue to apply such a growth

company standard, CEO "Desi" DeSimone has argued that the increasing pace of technological

change and pressure to bring products to market faster requires him to increase the challenge

to 30% of sales from products introduced in the past four years.

The individual initiative that is stimulated deep in the organization is also shaped by a well

defined technical framework and rigorous financial screening that are designed to ensure the

quality of the process. To minimize technical risk, a specialized corporate staff conduct

regular technical audits designed to monitor the project selection process within divisions, and

to provide division management with independent feedback and recommendations on their

technological portfolio. An even more powerful source of discipline lies in the company's well

established incremental project funding process, known internally as the "make a little, sell a

little" approach. The implied commitment to "let a thousand flowers bloom" by funding even

those prdjects that initially appear of limited scope is offset by an understanding that the next

round of funding would be conditional on the achievement of tough interim targets.

Thus, in companies like 3M, the free-wheeling independence of the highly autonomous front

line units never degenerate into unfocussed activity or organizational anarchy. Inside top

management's protective and nurturing velvet glove rests an iron first that creates an

environment of high standards and high expectations. It is an over-arching discipline that give

the creative bottom up process its rigor and drive.

BettinE on People

However, the disaggregated organization and the embedded management discipline only

provide the framework for the most vital element of the entrepreneurial process, the motivated

individual organization member. In the end, a sustainable entrepreneurial process can only be

created in an environment in which top management exhibits faith in the individual members of

the organization, and back their rhetoric with tangible support for individual ideas and

initiatives.

In 3M, respect for the individual is an article of faith so basic to the organization that it has

been codified as one of the company's three core values. Like many of 3M's strongest beliefs,

it had first been articulated by William L. McKnight, the company's legendry leader from 1929

to 1966, and its spiritual godfather ever since. McKnight believed fervently in the delegation

of responsibility to those with direct knowledge of the market, the operation or the technology

- then backing that responsibility with the authority to act. It was a philosophy that led him to

Revised 10 Mav. 19949

defend the freedom of those in the front fines to learn by making mistakes - one of the many

McKnight philosophies still widely quoted and broadly practiced within 3M:

Mistakes will be made, but if a perron is essentially right, the mistakes he or shemakes are not as serious in the long mn as the mistakes management will make if itis dictatorial and undertakes to tell those under its authority how they must do theirjob.

This philosophy became institutionalized in an officially sanctioned 3M organizational tradition

know as "bootlegging" whereby any employee could spend up to 15% of tris or her time

pursuing ideas they believed to be of value even if those ideas did not fit the official objectives

or priorities. Through this process, technologiste continued to stumble on literally hundreds of

new products and technologies, while top management repeated the much-quoted 3M mantra

"you can only stumble when you're in motion".

Beyond supporting front fine initiatives with assets and resources, what distinguishes

companies that are most successful in institutionalizing risk taking is the way they manage

failure. Betting on people involves risks, and as McKnight acknowledged "mistakes will be

made". While 3M's culture of discipline has done a lot to minimize its organizational risk, it

has required additional top management action to manage the aspect of personal risk. Their

most important task has been to ensure that those involved in what 3M referred to as "well

intentioned failures" were supported in their efforts to move on to a new personal challenge.

At the same time, they have consistently celebrated such efforts by repeating stories of how

unsuccessful projects have led to subsequent innovations that have had enormous value to the

company. One favorite story in recent years has concerned a scientist who developed an

extraordinary weak adhesive while conducting experiments designed to yield exactly the

opposite properties. Management delights in revealing that it was this "failed" adhesive that

eventually became the basis for the company's phenomenonly successful Post-It Note product

line, suggesting that even the most disastrous individual initiative can yield eventual pay off in

the broader company context.

Manaeine the Capability Building Process

Inteeratine to Leverare Assets and Expertise

While the creation of an entrepreneurial process provide companies with a powerful means of

harnessing slack resources and creating more responsive market linkages, by itself it is not

powerful enough to ensure a company's long term competitiveness. Large companies have to

do more than try to match their smaller more nimble competitors; they have to learn how to

use their size and scope for competitive advantage. Their main advantage over small

Revised 10 May. 19942.0

entrepreneurial companies lies in their potential ability to link their diverse assets and resources

into unique capabilities and to leverage these capabilities in pursuit of new opportunities.

Yet most traditionally structured hierarchies have tended to fragment the organization's scarce

resources and capabilities. Indeed, in their efforts to solve the entrepreneurial problem by

creating fully accountable, self contained SBUs, many structurally-oirented executives have

exacerbated this problem by focusing managers so tightly on their own business agenda that

they have become unaware of and often uninterested in the developments and achievements of

even the most closely related SBUs. As a result, structural compartmentalization has inhibited

cross-unit learning and prevented the company from identifying and building on its valuable

competences and capabilities.

In an era when specialized knowledge and expertise are becoming an increasingly vital source

of competitive advantage, such internai constraints represent a serious strategic impediment.

Unable to identify, build and leverage the desired portfolio of competences and capabilities

internally, the classic structural response in most companies has been to seek needed resources

from external sources, giving rise to a boom in outsourcing and strategic alliance formation.

While many such arrangements have been strategically logical and organizationally sound, a

large number of companies have been riding this faddish management wave as a quick and easy

way to compensate for their organizational failure to develop the required capabilities

internally.

Yet while many companies have attempted to compensate for the breakdown in their internai

competence building ability with such externalized solutions, we observed the top management

in several of the companies we studied tackling the more difficult problem of identifying the

specialized resources, expertise and knowledge they had to control, and building the processes

necessary to develop and diffuse the required capabilities. A classic example was provided by

Kao, the Tokyo-based company that had developed and leveraged capabilities as diverse as its

ability to make microfine powders to its data based retail link, not only to expand its traditional

soap and detergent operations but also to expand into a variety of new businesses. Nikki

Business ranked Kao third on its list of Japan's most creative companies, an evaluation

supported by the company's ability to develop a concentrated laundry detergent that expanded

their market share from 33 to 48 percent, to challenge and beat P&G in disposable diapers, a

category the US giant created, to develop their cosmetics line into Japan's largest selling brand,

and to establish their floppy disks as the number two brand in North America. Kao had been

able to overlay the entrepreneurial process at the core of the company with a mutually

supportive integrative process its chairman, Dr. Yoshio Maruta described as "biological self-


control", an ability of the organization to respond to problems as quickly and as automatically

as the body responds to pain.

Kao is not an isolated example: we observed the saine ability to overlay a process of

company-wide integration of capabilities on a bed-rock of individual entrepreneurship in

several other companies we studied. Despite a nationally-organized partnership structure,

Andersen Consulting has increasingly developed specific end-user industry expertise in its

different national practices and has fuelled its worldwide growth by linIcing and leveraging

those specific skills and knowledge across geographic markets. Similarly, Canon has built on

the optical knowledge housed in its traditional camera business by linking it with the

electronics expertise the company developed in making calculators to make a spectacularly

successful entry in the office copier business.

As we reviewed the roles and tasks of top management in these companies that have

contributed in institutionalizing such in integrative capability-building process, the following

appeared to be of central importance.

• As opposed to the notion of a few "core competencies" developed and managedcentrally, they have built distributed resources and competencies by encouragingeach operating unit to respond to their own specific needs and opportunities.

• They have built mechanisms and processes to link and bundle these distributedcompetencies to build broad capabilities which they have then leveraged throughexisting and new businesses.

• They have created a set of collaborative values and norms to facilitate the sharingof resources, knowledge and best practices on a company-wide basis.

Building Distributed Competencies

Few management concepts have generated as much excitement or diffused as rapidly around

the world as that of conceiving and managing a company as a bundle of "core competencies".

Frustrated by the fragmentation and compartmentalization of their resources, skills and

knowledge by the "tyranny of the strategic business units", top management has found in the

powerful imagery of this concept a way to articulate the need for a large company to leverage

the strengths of its complimentary resources to build competitive advantage over malter, less

diverse and more fragmented riyals.

Yet, in actual implementation if not in intent, the desire to create and exploit core

competencies has often translated into a process of reestablishing top-down corporate control.

The word "core" has implied that the competencies must be built and managed at the corporate


level to counteract the possessiveness of divisions or SBUs, and that their exploitation across

the businesses must also be driven by corporate management rather than being left to the

aribtrariness of business unit managers' local priorities and preferences. In many companies,

this notion has been championed by headquarters-level functional groups which have found in

the core competence concept a solution to the problem of their increasing marginalization, and

have used it as much for winning political power battles as for revitalizing the company's

strategic agenda. As a result, exercises designed to identify and exploit core competencies

have often become pretexts for recentralizing both resources and decision-making authority,

with the operating units being relegated to the role of implementers of the corporate strategy.

Such an approach to managing competencies by building a functionally oriented "centralized

hub" organization not only kilts front-fine entrepreneurship but also tends to decouple the

efforts to build distinctive strengths from the realities of a company's actual business

opportunities. Driven largely by the experiences and aspirations of corporate managers, they

tend to focus a company's resources either on the success requirements of the past or on a very

distant and dreamlike future, divorced from the ground-realities of on-going competitive

battles in the company's existing operations.

In contrast, companies like Kao, Canon and Andersen Consulting are able to build, defend and

exploit competencies by conceiving the task as one of complimenting rather than usurping

front-fine entrepreneurship. They entrust the operating units not only with the.task of creating

local opportunities, but also with the challenge of building the specific assets, skills and

systems needed to pursue those opportunities. Instead of defining competencies in such broad

terms as "microelectronics capability" or "managing dealer relationships", these small units

define the competencies at the saine micro-level as they define their opportunities. For

example, having positioned Sofina as a skin care product based on scientific research and

proven fiinctionality, rather than as a cosmetic with emotional appeal based on packaging and

image, the Sofina team built a marketing strategy in which on-site skin analysis in major

departmental stores replaced expensive advertising as the main thrust for brand building. This

strategy required the development of specific skin-test technologies, the building of testing

skills among Kao's shop representatives, and a system for quick and convenient tests that

would, at the saine time, emphasize the scientific attributes of different Sofina products. The

success of Sofina was due largely to the operating team's ability to build these specific

technologies, skills and systems and to link them together to build a competency that

differentiated their brand from those of competitors in a tangible and demonstratable manner.

Similarly, in Canon - a company that has become perhaps the most widely cited example of

core competency management - President Ryuzaburo Kaku has consistently believed in the


efficacy of a decentralized organization not only for better decision-making but also for

hastening the development of new competencies. Instead of identifying a few broad corporate-

wide competencies, the company has built hundreds of focused competencies in its different

product development, manufacturing and marketing companies: more than 80% of Canon's

patentable inventions have originated in these small product development companies,

productivity improvements in the specialized manufacturing companies has averaged 30%

annually over six years, and the highly autonomous sales companies have built a brand image

and a distribution network that has given Canon access to potential customers form global

corporations to individual consumers worldwide.

At the saure time, there are certain kinds of competencies that may be more effectively

developed outside the scope of any existing business. For example, the ability to provide high

quality conFulting services to help independent, small retailers improve their own profitability

has been a key anchor of Kao's overall marketing strengths within Japan. This competence

supports the entire range of Kao's products and has, therefore, not been developed in any one

of them. But even this vital resource has not been managed as a centralized, corporate-level

responsibility. Instead, the company has created nine separate service companies - one for

about 5000 retailers - and each of these companies has been allowed to build its own

consulting capability based on the specific characteristics and needs of its local clientele.

From focused competencies to broad capabilities

Having built such focused competencies within the front fine units, these companies have

overlaid the decentralized organization with a network of cross-unit coordination mechanisms

to ensure that the resources and skills are linked to build broader capabilities and that those

capabilities are leveraged across the entire company. The refusai to centralize the

competencies has not meant a local-for-local fragmentation: instead, these companies have

combined local initiative and corporate integration by building a network organization of

distributed but specialized competencies linked through intensive, cross-unit flows of

resources, knowledge and people.

Just as "biological self-control" of people is built on both their anatomy and their physiology,

such spontaneous integration of distributed competencies in large organizations also requires

an infrastructure of assets and tools together with the mechanisms of face-to-face interactions

that motivate and enable the effective use of those assets and tools. In Kao, information

technology is a key element of the infrastructure and the company's own extensive value added

networks (Kao VANs) provide the anchors for operational integration. Fully integrated

information systems link the company's marketing, production and research units, controlling

Revised 10 Mav, 199414

the flows of materials, products and ideas from the stage of new product development, to

production planning involving over 1500 types of raw materials, to distribution of over 550

types of final products to about 300,000 retail stores. As one example of several seperate but

interconnected systems, Kao's logistics information system (LIS) links the corporate

headquarters, ail the factories, the independent wholesellers and the logistics centers through a

network that includes a sales planning system, an inventory control system, and an on-line

supply system, thus providing a key platform for cross-fonction] coordinations across the

make-to-market chain.

These extensive IT networks provide the tools for the front-line managers in Kao to carry

much of the burden of day-to-day operational coordination and integration. But, these IT

networks are not seen as a replacement for face-to-face meetings. Indeed the company has

one of the most extensive systems of intra-fiinctional, inter-fimtional and inter-business

meetings to facilitate exchange of ideas and joint development of new initiatives and projects.

Top management, marketeers and research scientists meet at regular conferences. "Open

space" meetings are offered every week by different units, and people from any part of the

company can participate in such meetings. Within the R&D organization, the life blood of

Kao's innovations, monthly conferences are hosted, in turn, by different laboratories, to bring

junior researchers together. Researchers can nominate themselves to attend any of these

meetings if they feel that the discussions can help their own work, or if they wish to talk

separately with someone in the host laboratory. Similarly, any researcher in the host laboratory

is free to invite anyone he wishes to meet from any of Kao's several laboratories spread around

the world. It is through the collaborative work triggered by such meetings that Kao developed

many of its breakthrough innovations, such as a special emulsifier developed jointly by three

different laboratories which later proved to be crucial for Sofina's success.

In other compaties we observed, top management has adopted other means to build similar

cross-unit linkages aimed at integrating their distributed competencies. In ABB, for example,

global business area managers play a key rote in identifying and transferring scarce expertise

and best practices across the company's 1300 operating companies, typically by creating teams

of fiinctional specialists drawn from units engaged in similar activities. In 3M, top

management has developed and nurtured numerous internai channels and forums through

which the company's large technology community can interact. In Canon, President Kaku has

built a network of cross-unit coordination mechanisms around three primary fonctions - the

Canon Development System (CDS), the Canon Production System (CPS) and the Canon

Marketing System (CMS). The CDS, for example, is coordinated by a committee of the

company's technical leaders who pull together large cross-ffinctional and multi-unit teams


around specific development projects, while Edlowing the competencies themselves to reside

and be developed in the company's small units.

BuildinE Norms for Collaboration

Beyond antonomy and physiology - an infrastructure for sharing and the processes and

mechanisms for doing so - biological self-control also requires a psychology - a mindset of

collaboration among managers that is shaped by the norms and values of a company. Creating

this organizational psychology is the third task and perhaps the most important personal

responsibility of top management in building and strengthening their companies' ability to link

and leverage distributed competencies.

Such norms of open sharing and collaboration have been embedded in Kao through President

Maruta's overarching commitment to make the organization "an educational institution in

which everyone is a potential teacher". A firm believer in the Buddhist values of absolute

equality of human beings based on open, free and equal access of everyone to ail information,

Maruta has shaped Kao as a "paperweight organization": a flat structure, with a small handle

of a few senior people in the middle, in which information is shared horizontally and not

fittered vertically. The slogan of the R&D department is "learning through corporation", a

molto that is operationalized in weekly "open space" meetings that solicit inputs from people

from all over the organization on current research project and priorities. Terminals installed

throughout the company ensure that all employees can, if they wish, retrieve any information of

interest relevant to any part or activity of the company. As emphasized by Dr. Maruta, "they

can even check up on the President's expense account".

These values of sharing and collaboration are embedded in Kao not only through continuous

articulation and emphasis by the top management team but also through their own behaviors

and actions. For example, Dr. Maruta and his top level colleagues share the 10th floor of

Kao's headoffice building, together with a pool of secretaries. A large part of this floor is open

space, with conference tables, overhead projectors and lounging chairs spread around. This is

known as "Decision Space", where all discussions with and among the top management takes

place. Anyone passing, including the chairman, can sit clown and join in any discussion, on any

topic, and they frequently do. The Executive Vice-President in charge of a particular business

or a specific territory can, therefore, be engaged in a debate on a topic that he has no format

responsibility for. The same layout and norm are duplicated in the other floors, in the

laboratories, and in workshops. Workplaces look like large rooms: there are no partitions,

only tables and chairs for spontaneous or planned discussions in which everyone has free

access and can contribute as equals.


In 3M, similar norms of sharing can be found in institutionalized values like "while products

can belong to individual divisions, the knowledge that created them belongs to the company".

In Canon, President Kaku employs a variety of analogies to communicate images of

collaborative work among the company's different divisions, affiliates and subsidiaries. For

example, in describing his goal of transforming Canon from a premier Japanese company to a

premier global company, he represents the challenge as one of preparing those who had only

climbed Mt. Fuji for the task of scaling Mt. Everest. The imagery of a well-equipped, tightly-

roped climbing team is vividly different from a straggling group of day hikers in sandals, and

reflects the level of cooperation, sharing and mutual support Kaku believes to be necessary for

reaching the company's ambitious objective.

Driving the Renewal Process:

Overcoming Failure of Success

The failure of success is a widespread phenomenon in every walk of life and the corporate

world is no exception. Success breeds momentum and, therefore, inertia. Yesterday's winning

formulae ossify into today's conventional wisdom which, with continuing success, risk

becoming tomorrows sacred cows. Such beliefs, often tacit and invisible, become

unquestionable, thus preventing adjustment to new environmental realities and strategic

demands. They create "routines", the company's way of doing things, that become inseparable

part of the organizational fabric. Eventually, the taken-for-granted nature of these routines

create a context in which no entrepreunarial initiative can florish. And as the recent decline of

so many once mighty organizations has demonstrated, nothing stagnates as spectacularly as

institutions with spectacular pasts.

At the root of this seemingly inevitable process of organizational sclerosis has been the vaunted

divisionalized structure which divides the organization into tightly focused sub groups, and the

information processing mechanisms that support them with highly processed and tightly

targeted analyses that reinforces the constraining effect of the structure. The whole structure

is set up so that front fine units generate data that can be formatted and abstracted at the

division or group level to convert it into more usable information that, in turn, can be leveraged

by the businesses. Next, corporate staff groups consolidate and analyze the refined

information from multiple sources to develop reports aimed at providing more generalized

knowledge, primarily for top management use. And it is these top level executives who

selectively institutionalize this knowledge in the received wisdom that then become part of the

company's accepted norms, perspectives and beliefs.


What most companies have lacked, however, is the antithesis of this sequential and incremental

knowledge building process that is necessary for strategic renewal. They have no process

through which institutionalized wisdom can be challenged, existing knowledge bases can be

overtuned, and the sources of the data can be reconfigured. In the absence of this challenge,

these compaties have gradually immobilized by unchallenged verities that have become

embedded as "the company way", and have become ecame constrained by outmoded

knowledge and expertise that are out of touch with their rapidly changing realities.

To overcome this pervasive failure of success, top management must also develop a renewal

process. It must establish mechanisms through which internalized wisdoms and established

ways of thinking and working are continuously challenged. While the entrepreneurial and

capability building processes largely defend and advance current strategies, the renewal process

continuously questions those strategies and the assumptions underlying them and inspires the

creation of new competencies to prepare the ground for the very different competitive baffles

the company is likely to confront in the future.

In the course of our study, we saw a handful of companies that seemed to have mastered this

difficult challenge, but none better than Intel, a company that has continually renewed itself to

stay on top of one of the most technologically dynamic and competitively intense industries in

the world. From its origins as a memory company designing chips it evolved to a

microprocessor company manufacturing components and is now seeing itself as a company at

the center of the computer industry selling integrated systems and providing solutions in boxes.

Not only lias Intel managed a product life cycle that has required it to continually obsolete its

own products, it has done so while pursuing a strategy that has required its dominant R&D

capability to be overlaid with a top class manufacturing expertise, which in turn, has had to

make way for a highly sophisticated expertise in marketing. Only by managing this constant

renewal of its products, strategies and capabilities has Intel been able to survive and prosper.

It is a capability we saw reflected in several other compaties we studied. Corning's evolution

from manufacturer of light bulb envelopes to innovator of optical fibers, 3M's constant ability

to extend the life cycle of seemingly mature products and technologies, and Canon's growth

from cameras and calculators to copiers and computers are all examples of a similar ability of

some companies to continuously renew themselves. In these companies that have managed not

only to continuously innovate new products but also to enter broad new businesses, build new

capabilities and fimdamentally reshape their strategies and organizations, we found top

management playing three vital roles in driving this renewal process:

They establish ongoing rationalization and revitalization as symbiotic and mutuallyreinforcing activities

Revised 101vlav, 199418

• They have the courage to make hard choices, including reversai of past strategiccommitments and personnel choices

• They legitimize internai challenge, acting personally as the source of disturbance andimbalance

Simultaneous rationalization and revitalization

The renewal process is built on two symbiotic components. It consists, on the one hand, of an

ongoing pressure for rationalization and restructuring of existing businesses to achieve

continuous improvement of operational performance. This rationalization component focuses

on resource use - the effectiveness with which existing assets are deployed - and strives for

continuous productivity growth. This part of the renewal process aims to refine existing

operations incrementally to achieve ever-improving current results. Rigorous benchmarking

against best-in-class competitors provides the score-card on concrete operational measures

such as value added per employee, contributions per unit of fixed and working capital, time to

market for new products, and customer satisfaction to surface performance gaps and focus

organizational energy on closing those gaps.

The other part of renewal is revitalization - the creation of new competencies and new

businesses, the challenging and changing of existing rides of the game, and the leap-frogging of

competition through quantum leaps. Driven by dreams and the power of ideas, it focuses on

"business not as usual" to create breakthroughs that would take the company tô the next stages

of its ambition. Revitalization may involve fast paced small bets to take the company into new

business domains - as Canon is trying in the field of semiconductors - or big "bet the company"

moves to transform industries as AT&T is trying to achieve in what it describes as the

"infocom" business being created from the convergence of the computer, communication,

consumer electronics and a variety of other industries.

As with entrepreneurship and integration, rationalization and revitalization are also often

viewed in mutually exclusive terms. Some managers complain of the unsatiable appetite of the

stock market for short-term results which forces them to focus on rationalization rather than

revitalization. Others justify poor operating performance as the evidence of long term

investments. The renewal process, in contrast, emphasizes the essential symbiosis between the

present and the future: there is no long-term success without short-term performance just as

short-term results mean little unless they contribute to building the long-term ambition.

Rationalization provides the resources needed for revitalization - not just money and people,

but also legitimacy and credibility - while revitalization creates the hope and the energy needed

for rationalization.


During the 1981-82 global recession when demand softened and Japanese competitors dropped

the prices of the newly introduced 64K DRAMs by 75%, every semiconductor company in the

United States resorted to massive lay-offs. In contrast, Grove adopted the "125% solution" in

Intel, requiring all salaried employees including the chairman to work an additional 10 hours a

week without extra compensation. The extra time was focused on accelerating development of

the next generation of microprocessors and improving process technology. As the crisis

subsided, Grove initiated a massive restructuring and delayering exercise that tripled managers'

span of control, timing the change to coincide with surging growth that created opportunities

for redeployment.

The point is not that Intel has not laid off employees, for it has, but that top management has

followed the counter intuitive logic that tends to view downturns as a way to reallocate

resources to pursue growth and upturns as an occasion for trimming organizational fat.

Through this process, the company has not only reduced the pain of rationalization but has also

preserved the trust and credibility that sudden cuts in businesses and employment typically

engender. At the saine time, the same process has also allowed the company to better preserve

and use the skills and capabilities of its people despite a volatile market and in improving the

quality and speed of its growth initiatives.

Symbiotic management of rationalization and revitalization requires an unusually high level of

organizational flexibility. This flexibility has been built by Grove through a variety of human

resource practices. Levels change in the company all the time - people move upwards,

sideways or downwards. Careers advance not by moving up the organization but by

individuals fulfilling corporate needs. Single job positions are often filled by two people - what

the company calls the "two in a box" approach - to ensure some organizational continuity

despite such continuous movement of individuals. All workers are multi-skilled while

managers are provided continuous opportunity for broadening and updating their knowledge

so as to be "responsible for their own employability".

Makin2 hard choices

Perhaps the single biggest enemy of renewal is the pervasive unwillingness of top management

in large companies to make hard choices. While the radical actions of a few exceptions like

Jack Welch and Percy Barnevik receive a lot of attention in the business media, an

overwhelming majority of managers find it difficult to marshall the courage necessary to

commit or decommit from strategic choices that represent significant departures from

"business as usual". Their rhetoric to the contrary, most find it more comfortable to adopt

what one CEO described as the "peanut buttering process of resource allocation": distributing


available fonds and people across ail the proposais that bubble up through the organization, in

the process diffusing the focus necessary for renewal.

The need to make hard choices does not imply either a heroic role of top management as the

company's key strategist nor does it prevent the creation of options that is vital for strategic

flexibility in an era of discontinuous change. At the root of Intel's ability to generate new

strategic opportunities lies a very explicit top management approach of "buying options"

coupled with an equally strong belief in "making commitments". The freedom given to front-

line champions to challenge existing approaches and pursue alternative ideas allowed Intel to

develop both MOS and bipolar memory, to substitute a competing architecture for an

ambitious but impractical design for the vital 16-bit microprocessor, and to hedge the huge bet

on its CISC design by developing products with the alternative RISC technology. At the same

time, the existence of multiple options was never confiised with indecision. Top management

of Intel has a long history of making tough choices and backing them with substantial

resources, dating back to the earliest days when Gordon Moore committed the company to an

erasable programmable memory device for which there was no obvious applications. As

described by Andy Grove, each round of escalating competition and changing technology leads

to a fork in the road where management must once again make the choices that "bet the

company". The cost of failure to make a fion commitment is, as Grove puts it, "to hit the

divider on the road".

But, perhaps even harder than making new commitments is the challenge of decommitting

from earlier choices. One of the reasons an existing management has rarely been able to lead a

renewal process is because of their unwillingness and inability to change the strategies,

organizations and people they have themselves put in place.

The foundation of Intel's success in the microprocessor business since the later part of the

1980's lay in its willingness to exit the memory business that Robert Noyce, Gordon Moore

and Andy Grove had started when they founded the company. Memory chips were central

both to Intel's externat identity and to its employees' emotional bonds to the organization. Yet,

by 1985, the competitive bloodbath that was raging in memory devices made it increasingly

clear that the company could not win in both the memory and the microprocessor businesses.

In a meeting with co-founder Moore, Grove posed the question "what would a new

management do if we were replaced?". This reality check forced them to accept the difficult

truth of the need to exit the DRAM market. Walking ceremoniously out of the room and back

in again to symbolize the change in role, Grove announced, "Let's do it then".


Lesitimizine Internai Challenge

While the top management is often in the position where the final choices about change must

be formally made or legitimized, the ideas about the commitments and decomrnitments must

arise from within the organization from people in direct contact with the businesses who are

able to discern the early signais of new opportunities and impending decay. To ensure that the

proposais for rationalization and revitalization continue to be generated within the

organization, top management must create an environment of continuous internai challenging

of the status-quo, develop diversity of perspectives to ensure a rich variety of views in the

internai debates, and must personally legitimize such challenge and debate by creating

disturbances, imbalances and flux through their own words and actions.

The climate of internai challenge is embodied in Intel in a process that is politely described as

"constructive confrontation". Key decisions are typically taken in open meetings to which ail

people likely to be influenced by the outcomes are invited to participate. During the meeting,

everyone is encouraged to debate the pros and cons of a subject aggressively, and to openly

advocate their personal views and preferences. At the same time, such a process of challenge

does not look the company into decision paralysis because of an equally strong norm: "agree

or disagree, but commit". Once a subject has been discussed, firm decisions must be taken and

ail participants must fully commit to those decisions, even if the decisions do not conform to

their personal preferences.

To ensure variety and richness in this process of "constructive confrontation", top management

at Intel has continuously created and legitimized a diversity of functional perspectives by

supporting their development and giving them access to the company's core decision

processes. By the early 1980s, Grove was referring to semiconductor chips as "high tech jelly

beans" and emphasizing the need for "straight-laced crew-cut manufacturing types" to

counterbalance the dominance of "wild-eyed, bushy-haired boy geniuses in the labs". And even

in the early days, he did not let the engineers overrule the lowly sales managers, as clearly

demonstrated by the company's decision to start a second 16-bit microprocessor project in

1976 when the sales staff forcefully argued that the revolutionary new technology being

developed by the engineers was too risky and would take too long. In the end, their opinion

proved correct and the sales-sponsored project gave birth to the 8086, the first generation of

Intel's fabulously successful sertes of microprocessors.

The wellspring of this culture of constructive confrontation lies in the personal behaviors and

actions of Intel's top management: people put their faith not in what others say but in what

others do. The ambition that drives the renewal process had been embedded by Gordon


Moore in his technological vision that has corne to be referred to in the industry as the

"Moore's Law": every three years, a new generation of chips has to be developed with four

times the capacity of its predecessor. Continuous commitment to this belief in discontinuous

change has created a norm of stretch and of anti-incrementalism in all aspects of the company's

work. Even more powerful in shaping the context of challenge has been Grove's day-to-day

actions. As described by a long-term Intel executive.

He (Grove) is going to push you till he's sure you know what you are doing, and inthe scuffing, he gauges you. Irritating though this can be, you've got to respect hiskeen mind and the tramendous knowledge of business and management. Iris directapproach has encouraged everybody to open his mouth and be contentious, even ifthe CEG is in the room.

From Structurine Tasks to Shanine Behaviors

In many ways, this shift in focus from structural architect to process builder has been a

comfortable and even obvious change for the top management in many of the companies we

studied. Most of them have for long been disillusioned with the classical hierarchical

organizations they had built, and many had begun to question their ability to bring about

change simply through structural redesign. Furthermore, the proposed prescriptions of

building processes to create entrepreneurship, competences and renewal are neither new nor

unpalatable, since there are few senior managers who have not mounted an -effort focused on

one or the other of these initiatives over the past decade.

The main problem has been, however, that these actions tend to have been taken in piecemeal

fashion, as ad-hoc organizational responses to changing strategic imperatives. Facing slowing

economic growth and increasingly sophisticated customer demands, for example, companies

have attempted to decentralize resources and authority to capture the creative energy and

entrepreneurship of front-line managers. But prescriptions of creating and managing chaos

have ignored the need for clarity of strategy and the discipline of centralized financial control

to channel bottom-up energy into a coherent corporate direction. And companies that have

attempted such radical decentralization without a centrally managed strategic framework have

soon lost their focus and their ability to leverage resources effectively and have been forced to

retreat to the known devil of their old ways.

Observing the ever increasing pace of globalization of markets and the rising cost, complexity

and convergence of technologies, senior managers in many other companies have recognized

the need to consolidate and integrate their diverse organizational capabilities. But, presented

typically with examples of high-tech and highly centralized Japanese companies, they have


often confused capabilities with technologies, and integration with centralization. And in

another group of companies, faced with the rapid enhancement of the skills and resources of

once distant competitors and the changing norms and expectations in the various countries in

which they operated, senior managers have realized the limits of incremental improvements and

the need for dramatic change. Yet guided by prescriptions of creating dream-like long-term

ambitions, they have allowed short-term performance to slip, thereby abandoning the long-term

too because of increasing resource scarcity.

In contrast to such fragmented and often mutually contradictory prescriptions, we have

presented broad descriptions of the three core processes that companies must develop to

respond to their technological, competitive and market demands. These processes are

facilitated by certain organizational attributes and demand certain specific actions on the part

of the top tnanagement that we have described in this article. But, beyond those organizational

attributes and personal actions, they demand that those at the apex of large companies

fundamentally change how they think about their organizations.

The multidivisional model created and institutionalized a mentality that defined the task of

building and managing the organization in essentially engineering terms. Structuring an

organization was like building a factory: breaking up the activities into sub-parts; designing

special shops for each sub-part with an eye on the most efficient layout; and building a control

room to manage the flow of activities through those shops. Even in challenging the

multidivisional structure, the underlying image of organizing as an engineering task has

remained intact in currently popular concepts like creating strategic fit, and reengineering

organizational processes.

The purpose-process-people doctrine of management is based on the very different view that

the organizing task is one of shaping the behaviors of people and enabling them to take

personal initiative, to cooperate, and to learn. Thus, the entrepreneurial process is built on the

premise that individuals can take personal initiative and it also creates the context and the

mechanisms necessary to elicit and encourage such behavior. Similarly, the capability building

process both assumes and shapes collaborative behavior, and the renewal process is designed

to capitalize on the human motivation to leam while creating the resources and tools that help

them do so. In essence, the shift from structure to process is a shift from a focus on organizing

activities to a focus on shaping behaviors.

As a result, the kind of organization we have described is highly dependent on the quality and

capabilities of its people. This is an unavoidable consequence of eliminating the dehumanizing

consequences of the strategy-structure-systems doctrine, and it represent perhaps the greatest


challenge for top management in the years to corne: how to develop the kind of people their

companies would need, and how to deploy them in the very different way of managing we have

described in this and the earlier article. This challenge - the transition from being the managers

of systems to becoming the developers of people - will be the topic of the third and last article

in this sertes.

* professor of business policy, at insead, boulevard de...

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