The Evolution Of (Progressive) Scalable Organizational Structures
We are working hard to develop our very own online Corporate Rebels Academy, as mentioned in a previous post. The focus of this post will be on understanding the designs of progressive organizations—especially the large ones that organize without middle-managers. Think Buurtzorg and Haier.
Although all in this unique group find their own way to organize, there are parallels. In an earlier post, I described the evolution of strategy in traditional organizations and in large progressive organizations.
This post is similar, but this time we look not at strategy but at the evolution of their structures. We think of structure as the hardware of the organization—the building blocks of which it is made.
The evolution of organizational structure
Below is content I have been creating on this topic for the online course. I invite your feedback. Let us start with an overview of structural evolution over recent decades.
With the industrial revolution came the rise of managerial hierarchy. Alfred Dupont Chandler describes this in The Emergence of Managerial Capitalism. "The first managerial hierarchies appeared during the 1850s and 1860s to coordinate the movements of trains and flow of goods over the new railroad networks, and messages over the new telegraph system.
In industries that integrated mass production and mass distribution – those with significant scale economies in production and specialized requirements in distribution – the most important entrepreneurial act of the founders of an enterprise was the creation of an administrative organization. It was essential first to recruit a team to supervise the process of production, then to build a national and very often international sales network, and finally set up a corporate office of middle and top managers to integrate and coordinate the two."
In these formal hierarchies members of the organization can be divided into three main building blocks:
- A small group of leaders at the top with most authority,
- A large group of front-line employees at the bottom without any authority,
- And, a group of middle managers in between with the authority to assign tasks, assess performance, and ensure control and compliance through oversight, rules and sanctions.
The results? All in these formal hierarchies competed for promotion, and compensation was tightly correlated with position in the hierarchy. The three building blocks (top management, middle management, and front-line workers) of which these traditional organizations were built has not changed much since their start decades ago.
The shapes of these three organization building blocks did, however, evolve notably, starting with the traditional pyramid shape around the 1860's. As we saw with the evolution of strategy, the members of the top team set direction from the top of the pyramid. They told subordinates what to do, how to do it and with whom.
Top management was primarily focused on maximizing shareholder value. The role of the next level—middle-managers assigned by this top group—was to ensure compliance to the execution of a pre-determined strategy. Resources and rewards were distributed at headquarters by these middle managers who exerted control, ensured compliance, and held subordinates accountable.
As the pyramids grew, they were divided into departments, divisions, or other corporate units. These units were typically organized around things like products, services, industries, and/or geographic location. By World War II, growth by diversification not only increased the size and complexity of the firm but also fueled the rise of the traditional multi-divisional firm, often in the shape of the so-called matrix organization.
Separate divisions (e.g. R&D, supply chain, manufacturing, marketing, finance, etc.) were formed and given their own responsibilities. They often created other silos for control and coordination. To overcome the challenge of collaboration between silos, they introduced cross-functional teams and other mechanisms across the divisions.
This often led to a matrix of accountabilities for function, product, customers, and geographic areas (hence, the matrix organization), and entailed complex and time-consuming decision processes. And although matrix organizations are divided into divisions, they are still based on traditional hierarchies and controlled via strong corporate oversight.
Hub & Spoke
Around the 1970s, as customer demands intensified and diversified, businesses started to adopt so-called hub & spoke organizations to better meet those demands. Larger businesses were broken up into smaller ones focused on a product, market segment, or geographic location. Each was responsible for its own profitability.
Thus the organization was no longer one big pyramid or matrix, but a collection of independent businesses. The smaller units were often called ‘strategic business units’ or simply SBUs. They had leaders hired as professional managers who were there to command and control. And although the SBUs were managed as separately, they were still responsible to the same holding company in a hub & spoke manner.
Typically, the hub (headquarters) took care of shared resources. It was surrounded by spokes (each being an SBU) that sent resources and profits to headquarters. The advantage was that authority was delegated more easily, and performance could be directly measured along each spoke. But, as these spokes were independent, they often did not connect much with each other, and might act in isolation. This often led to a lack of synergy. As such, the whole could be worth less than the sum of its parts.
Moreover, the holding company and its parts were still organized via a traditional hierarchy with strong corporate oversight. The top management layer decided which SBU to invest in or divest. In fact, the top management layer managed the portfolio of holding companies by setting goals (mostly financial), and other performance KPIs. Headquarters was primarily focused on financial performance, and top-down control.
More recently, around the 2000s, we saw the flipping of the pyramid into the so-called inverted pyramid. This shape abandoned traditional top-down management, and the idea that only a small number of people (in top management) could make important decisions. The new logic argued that organizations needed to put front-line workers at the top of the pyramid.
The theory was that this shape of organization was more flexible and ‘agile,’ as front-line workers were closest to the fire. Therefore, they should also make most of the decisions. It argued that superiors and other leaders should no longer ‘command-and-control' subordinates, but empower, support, and serve them.
It was hoped the flipping of the pyramid would foster innovation and entrepreneurship throughout the entire organization. But it still used the three traditional building blocks—top-management, middle-management and the front-line.
Organizational structure in progressive organizations
Progressive firms, however, do not believe that the pyramid, matrix, hub & spoke, or even the inverted pyramid are the right shapes for handling the ever-changing environment. They depart from the traditional three building blocks and organize with just two, completely removing the middle management layer.
The shape of progressive firms is an interconnected network made up of a small top management layer and a group of thousands of small, independent units (individuals or teams). All members of the organization act as intrapreneurs within the larger organization network, each being personally accountable for their choices and successes/failures. These entrepreneurial members are often part of autonomous teams that act like small businesses that can rapidly respond to customer needs or other market opportunities.
All members of the organization are connected via a digital platform. This ensures they are highly interconnected, and encourages cross-unit collaboration. The platforms also provide teams with the resources needed to serve their customers best. In this way, these digital platforms replace the traditional role of middle management.
This does not mean the simple divisionalization of businesses under different umbrellas. It means sharing authority and responsibility across thousands of small and independent building blocks, while still being able to group them horizontally so the organization can share resources and leverage its size.
With this unique organizational design in place, progressive firms combine two apparently conflicting characteristics: the power of large organizations and the responsiveness of small ones. These characteristics were traditionally seen as conflicts. But progressive firms combine them in an incredibly synergistic way—creating a win-win for all.