value insights

Creating Market-Responsive Organizations- Valutrics

As markets and technologies change more and more rapidly, organizations must
respond quickly and frequently to strategic moves if they are to sustain competi-
tive advantage. Although corporations have learned to make changes in strategy
quickly, their organizations may lack parallel market responsiveness. One major
reason for this failure is the conflict between scale economics, which is geared to
the expansion and aggregation of resources, and the economics of vertical inte-
gration, which links differentiated functions and resources for maximum effi-
ciency in responding to market changes.
The opposing pressures fueling this conflict are both subtle and complex. On
one side of the equation are all the forces contributing to the need to reap maxi-
mum scale advantage. On the other side of the equation, the accelerated pace of
change—environmental, competitive, and technological—drives corporations
toward increased flexibility, high levels of internal integration, and smaller oper-
ating units.
Although scale advantage has traditionally held high ground, evidence is
mounting that highly integrated organizations can increase productive capacity
through the efficient coordination of functions and resources while remaining highly adaptive and market sensitive. Such organizations respond to the strategic
need for change more quickly, smoothly, and successfully than centralized, large-
unit organizations oriented toward scale aggregation.3
Management has basically three options for resolving the conflict between
scale and integration. First, a company can choose to centralize its functions in
order to achieve scale at the expense of market responsiveness. Second, it can
opt for market responsiveness over scale; that is, it can emphasize small, inde-
pendent units. Third, it can adopt another, more difficult approach, exploiting
the strengths associated with both large and small organizational units to
achieve benefits of scale and market responsiveness simultaneously. The key
to sustainable competitive advantage lies in successful pursuit of the third
Exploiting the benefits of both large and small organizational structures
involves creating market-responsive units within a framework of shared resources.
Such units can combine the strengths of a small company (lean, entrepreneurial
management; sharp focus on the business; immediacy of the relationship with the
customer; dedication to growth; and action-oriented viewpoint) with those of the
large company (extensive financial information and resources; availability of mul-
tiple technologies; recognition as an established business; people with diverse
skills to draw on; and an intimate knowledge of markets and functions). The creation of such units demands that planners determine, as precisely as
possible, in what form and to what degree resources must be integrated to ensure
the level of market responsiveness dictated by their business strategy. This
process can be successful only when it is undertaken in the context of a rigorous
analytical framework that links strategy to organization.

To create a market-responsive organization, management can use a three-phase
process: (a) determine corporate strategic boundaries, (b) balance the demands of
scale and market responsiveness, and (c) organize for strategic effectiveness.
Determine Corporate Strategic Boundaries. How successfully a corporation
aligns its structure with its strategic objectives depends on its success in making
a number of key decisions: determining the stage of the value-added process at
which it will compete, identifying those activities in which it has a competitive
edge, selecting the functions it should execute internally, and developing a plan
of action for integrating those functions most productively. These decisions
determine how resources should be allocated and how external and internal
boundaries should be drawn. They define the company’s business—its products,
services, customers, and markets—and determine both long- and short-term
strategic potential. How well the company exploits its assets and the degree to
which each division’s performance supports strategic objectives determine how
close it will come to achieving that potential.
How strategic boundary setting reflects the trade-offs between scale and inte-
gration becomes clearer when one considers the case of an assembler facing a typ-
ical make-or-buy decision for components. As long as the components
manufacturer is able to produce common components for several customers, the
assembler among them, the components manufacturer enjoys scale advantage. As
the products ordered by the assembler become more specialized in response to
market demands or increased competitive pressures, however, the benefits the
components manufacturer gains from scale begin to decline. At the same time, the
cost of integrating operations with those of the assembler increases as technical
specifications become more complex and as manufacturing operations become
more interdependent. To continue their relationship and sustain their respective
advantages, the components manufacturer and the assembler are required to
make additional investments: the components manufacturer in capital equipment
outlays and product design; the assembler in negotiating terms, research and
development planning, quality control, and related areas. As a result, a substan-
tial “disruption cost” is incurred if the components manufacturer and the assem-
bler decide to end their business relationship. Both parties attempt to guard
against this potential loss through longer-term contracts, whether explicit or
implicit. As interdependence increases, prices and contract negotiations become
cumbersome and unresponsive. At some point, the economies of scale may
decline enough and the integration costs climb high enough that the assembler
finds it more cost effective to produce components internally—to bring that par-
ticular function inside the assembler’s corporate boundaries.

Balance the Demands of Scale and Market Responsiveness. 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 casu-
alty 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 oper-
ation. 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 prod-
uct 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 manage-
ment. 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 improve-
ments in automated processing capacity.

Organize for Strategic Effectiveness. To organize for strategic effectiveness, it
is important to recognize that the ultimate goal of a business organization is com-
petitive 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.4It 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 leader-
ship, consistent signals and actions, and strategically driven incentive programs.
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 reor-
ganizes 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 train-
ing, 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 tra-
ditional boundaries are weaker. Some large-scale models include parts of Honda
and Panasonic, 3M, and also, in some ways, GE, which has developed extraordi-
nary flexibility in recent years in reshaping its organization and pushing author-
ity down to frontline managers.

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