Growth
Boost flexibility and prepare your company for expansion - To meet this challenge it is key to establish a decentralized structure, writes Burkhard Schwenker.
Our analyses, studies, and surveys show that a company is ideally prepared when it is not only able to grow, but also ready to grow. It takes a positive attitude about growth coupled with the right opportunities to create the necessary dynamics within a company. Corporate management faces the challenges of developing and unleashing an entrepreneurial drive within the company that is oriented to the market’s needs.
In these efforts, people play a decisive role. Our interviews revealed that managers believe individuals are responsible for 42 percent of the most critical “drive” in growth processes. By comparison, the significance of process competency (30 percent) or the structure of business systems (28 percent) was rated lower than one might originally have thought.
In this context, decentralized structures are currently experiencing a renaissance as an organizational approach because they encourage entrepreneurial activities, and they support a contemporary, direct, and motivation-enhancing understanding of leadership. However, decentralized structures do present managers with a dilemma. How can decreasing transaction costs, bigger companies, effects of scale, and the other cost advantages of centralization be combined with the demands of setting up operations in a decentralized, market-responsive manner?
Our analyses, studies, and surveys show that a company is ideally prepared when it is not only able to grow, but also ready to grow. It takes a positive attitude about growth coupled with the right opportunities to create the necessary dynamics within a company. Corporate management faces the challenges of developing and unleashing an entrepreneurial drive within the company that is oriented to the market’s needs.
In these efforts, people play a decisive role. Our interviews revealed that managers believe individuals are responsible for 42 percent of the most critical “drive” in growth processes. By comparison, the significance of process competency (30 percent) or the structure of business systems (28 percent) was rated lower than one might originally have thought.
In this context, decentralized structures are currently experiencing a renaissance as an organizational approach because they encourage entrepreneurial activities, and they support a contemporary, direct, and motivation-enhancing understanding of leadership. However, decentralized structures do present managers with a dilemma. How can decreasing transaction costs, bigger companies, effects of scale, and the other cost advantages of centralization be combined with the demands of setting up operations in a decentralized, market-responsive manner?
Burkhard Schwenker
Distributed Knowledge
The solution lies in the ability to integrate both a high degree of flexibility and a distinctive level of customer orientation. In regard to the organizational form, it means decentralization along with a strong, centralized backbone. Nowadays, both fit together perfectly - almost.
The most critical advantage of a decentralized organization is thorough and distributed knowledge about the market. Everything that needs to be known about where direct customer contact is and where branding and pricing strategies are implemented as an operative measure - that is where the ideal balance needs to be found, between overall aspects such as market strength and cost-factor optimization on the one hand and required local adaptation on the other.
The real entrepreneurial types can find their calling in small, effective business units; they get to make marketrelated decisions quickly, motivate employees, and expand competencies - all as they see fit.
However, decentralization should not necessarily be pursued at any price. Each management team needs to optimize its cost position in order to beat the competition. Therefore, the team’s mission is to combine the advantages of a decentralized organization with the cost-related and scale-related gains of centralized structures.
Achieving this winning combination is a matter of endowing the multi-branched structure with a load-carrying backbone. Structural support for a decentralized organization includes effective auditing systems, as well as overlapping management and service units.
The solution lies in the ability to integrate both a high degree of flexibility and a distinctive level of customer orientation. In regard to the organizational form, it means decentralization along with a strong, centralized backbone. Nowadays, both fit together perfectly - almost.
The most critical advantage of a decentralized organization is thorough and distributed knowledge about the market. Everything that needs to be known about where direct customer contact is and where branding and pricing strategies are implemented as an operative measure - that is where the ideal balance needs to be found, between overall aspects such as market strength and cost-factor optimization on the one hand and required local adaptation on the other.
The real entrepreneurial types can find their calling in small, effective business units; they get to make marketrelated decisions quickly, motivate employees, and expand competencies - all as they see fit.
However, decentralization should not necessarily be pursued at any price. Each management team needs to optimize its cost position in order to beat the competition. Therefore, the team’s mission is to combine the advantages of a decentralized organization with the cost-related and scale-related gains of centralized structures.
Achieving this winning combination is a matter of endowing the multi-branched structure with a load-carrying backbone. Structural support for a decentralized organization includes effective auditing systems, as well as overlapping management and service units.
Look what else we've got...
Trust-based culture
Infomation and communications technologies are now able to pull together knowledge that needs to be organizationally subdivided and branched out in such a manner to optimally meet market requirements. Information technology systems can provide all of the relevant data in real time anywhere around the globe. Flexible enterprise resource planning programs enable managers to retrieve any combination of performance indicators on short notice. Intelligent, Web-based benchmarking systems fundamentally improve an organization’s learning curve. High-performance knowledge management systems ensure that institutional knowledge can be transferred anywhere within the company. And finally, IT allows administrative tasks to be provided at almost any location in a bundled and functional manner.
Corporate service centers are required to successfully balance decentralization and cost efficiency. They concentrate administrative and other valuable services from across the company and provide these to the decentralized units. They are cost-efficient because they sustainably realize effects of scale, and, in particular, they are a prerequisite for future corporate optimization measures.
A decisive criterion for a decentralized organization is a trust-based culture. This notion is not new, yet many attempts to implement trust-based management have failed. We know why: A trust-based culture can only take hold if an organization as a whole works toward such a culture. There must be a consistent management model with defined and binding decision-making processes, target agreements, and a system of checks and balances.
The future belongs to decentralized organizations because they will be able to tap more growth opportunities. Models of decentralization need to be further developed to be sector- and company-specific. This development can be done by management with consultation. The right balance between decentralization and maximizing the benefits of scale is no simple matter. It demands that every function, every management process, every link in the value chain formulate a customized strategy for each company and market - a strategy that is to be implemented in both a centralized and decentralized manner. This topic is definitely worth discussing in depth because the right answer is the basis for profitable growth.
Burkhard Schwenker is CEO of Roland Berger Strategy Consultants.
Infomation and communications technologies are now able to pull together knowledge that needs to be organizationally subdivided and branched out in such a manner to optimally meet market requirements. Information technology systems can provide all of the relevant data in real time anywhere around the globe. Flexible enterprise resource planning programs enable managers to retrieve any combination of performance indicators on short notice. Intelligent, Web-based benchmarking systems fundamentally improve an organization’s learning curve. High-performance knowledge management systems ensure that institutional knowledge can be transferred anywhere within the company. And finally, IT allows administrative tasks to be provided at almost any location in a bundled and functional manner.
Corporate service centers are required to successfully balance decentralization and cost efficiency. They concentrate administrative and other valuable services from across the company and provide these to the decentralized units. They are cost-efficient because they sustainably realize effects of scale, and, in particular, they are a prerequisite for future corporate optimization measures.
A decisive criterion for a decentralized organization is a trust-based culture. This notion is not new, yet many attempts to implement trust-based management have failed. We know why: A trust-based culture can only take hold if an organization as a whole works toward such a culture. There must be a consistent management model with defined and binding decision-making processes, target agreements, and a system of checks and balances.
The future belongs to decentralized organizations because they will be able to tap more growth opportunities. Models of decentralization need to be further developed to be sector- and company-specific. This development can be done by management with consultation. The right balance between decentralization and maximizing the benefits of scale is no simple matter. It demands that every function, every management process, every link in the value chain formulate a customized strategy for each company and market - a strategy that is to be implemented in both a centralized and decentralized manner. This topic is definitely worth discussing in depth because the right answer is the basis for profitable growth.
Burkhard Schwenker is CEO of Roland Berger Strategy Consultants.
The full version of this article has been published in our executive magazine "think:act" and can be downloaded here. (PDF, 53 KB)
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