Many major organisations still have at their core a functional organisation design which has its origins in the ‘scientific management’ principles developed by FW Taylor in the early 20th century. Whilst businesses have evolved various approaches to improve cross-functional or ‘end-to-end’ capability (such as matrix management) the underlying framework for most organisations remains functionally-based.
This approach has undoubtedly been successful, with a predominantly functional focus enabling organisations to build and continuously improve specialist capability in its constituent functions. However, the adaptations employed to combine functional excellence into successful market-facing capability are increasingly under pressure. The key drivers for this are outlined below;
1. The volatile and complex business environment
The volatile, uncertain, complex and ambiguous (VUCA) environment and its impact on business is now often cited as a key strategic consideration. Organisations now regularly operate in this ‘new normal’ paradigm in which the capability to forecast upcoming opportunities and threats and prepare for them is limited. Instead innovation, adaptability and partnering have become critical capabilities. These capabilities can often only be created by cross-disciplinary, cross-functional groups within the organisation.
For example, increased financial volatility causing exchange rate swings can significantly distort the economics of a supply chain and threaten profitability. Addressing this challenge may require a combination of legal/regulatory, supply chain, commercial and finance expertise. The imperative to drive a fast response (in order to manage enterprise profitability) consequently places a huge emphasis on building and activating such teams rapidly.
It is interesting to note that organisations are often able to form cross-enterprise teams to drive a rapid, short-term response when faced with a major crisis, but when the dust settles the familiar challenges of cross-functional working re-emerge in daily operations. This suggests that the learnings from these scenarios are not assimilated into the culture and ways of working of the organisation.
2. The impact of technology
Technology has already significantly contributed to the productivity and performance level of individual functions. For example, over the last 20 years ERP systems have enabled more advanced and informed management especially in the finance function but also for example in supply chain management and planning. Over the medium to long-term these technology solutions have had the effect of ‘levelling the playing field’ by capturing and building best practice into systems which in principle can be procured and deployed by any business thus benefitting from best in class ways of working.
Emerging technologies such as artificial intelligence, advanced analytics and the use of Big Data can be expected to further accelerate this effect. Technological solutions which are at least as good as, if not better than those offered by best-in-class functional capability will be readily available. This raises the possibility that the currency of functional excellence in its own right (which may have been hard-won through long-term investment and development) may be devalued by readily-available technological solutions.
In this scenario, the organisation’s ability to integrate and create value from this capability (rather than conceive and build it) is likely to become the key competitive asset. Cross-functional working is a key enabler for this new competitive asset. Businesses that, for example, can rapidly make enterprise-level, optimised decisions based on the vast volumes of new customer data available (eg from the Internet of Things or Big Data) will have a key advantage over those that have access to these technologies but are not able to integrate them into the culture, ways of working and governance of the enterprise.
3. Building sustainable competitive advantage through End-to-End Capability
By its nature, a largely functional organisation design is not well-suited to addressing the complex nature of real-world markets and customers. It is clear that a combination of functional contributions are required to create the overall offering valued by the market.
Recent studies by Leinwand and Mainardi[1] on organisation design across major companies have explored this topic. They found that this ability to work seamlessly across functional boundaries was a major contributor to building a differentiated capability that consistently delivers superior market performance. This resonates when taken alongside the observations made in (1) and (2) above – the market increasingly demands flexible and holistic solutions and simply having the functionally-excellent components available is not sufficient if they are not well-integrated into the customer offering.
Leinwand and Meinardi cite several organisations who have mastered this capability (including Apple & IKEA) and how they apply this cross-functional capability to create customer value. A key benefit of this approach is that the unique and specific combination of structure, process, culture and tools is not easily copied and hence provides an important source of sustainable competitive advantage which not only recognises the importance of functional excellence but designs strong integration into the enterprise ways of working.
4. The emerging nature of teams
The size and diversity of teams has increased over the last 10 years. Technology has greatly enabled virtual working and is now commonplace in most organisations. Global businesses routinely form virtual teams with members from diverse geographical locations in addition to different business units or functions in order to leverage the insight, knowledge and capability required to address the challenge at hand. These teams are also able to engage key specialists around the organisation with the specific and deep capabilities required.
Whilst this ability to bring together key capabilities offers significant benefits, the inherent characteristics of these cross-functional teams also create challenges for effective collaborative working. These challenges have been studied extensively[2] and whilst tools and approaches to practically support such teams have been proposed, they are not routinely used.
Summary
A variety of factors are combining to create an increasing demand for deep and sustained cross-functional collaboration in organisations. This is often not fully supported by organisation design or culture and this presents a key challenge to businesses to evolve ways of working which simultaneously build world-class functional capability but critically can routinely integrate this into customer offerings to create sustainable competitive advantage.
[1] Leinwand & Mainardi, Strategy That Works (HBR Press, 2016)
[2] For example, Gratton & Erickson – Harvard Business Review, November 2007