2.1. The Traditional (Vertical) View of an Organization

Many managers don't understand their businesses. Given the recent "back to basics" and "stick to the knitting" trend, they may understand their products and services. They may even understand their customers and their competition. However, they often don't understand, at a sufficient level of detail, how their businesses get products developed, made, sold, and distributed. We believe that the primary reason for this lack of understanding is that most managers (and nonmanagers) have a fundamentally flawed view of their organizations.

When we ask a manager to draw a picture of his or her business (be it an en tire company, a business unit, or a department), we typically get something that looks like the traditional organization chart shown in Figure 2.1. While it may have more tiers of boxes and different labels, the picture inevitably shows the vertical reporting relationships of a series of functions.

As a picture of a business, what's missing from Figure 2.1? First of all, it doesn't show the customers. Second, we can't see the products and services we provide to the customers. Third, we get no sense of the work flow through which we develop, produce, and deliver the product or service. Thus, Figure 2.1 doesn't show what we do, whom we do it for, or how we do it. Other than that, it's a great picture of a business. But, you may say, an organization chart isn't supposed to show those things. Fine. Where's the picture of the business that does show those things?

In small or new organizations, this vertical view is not a major problem because everybody in the organization knows each other and needs to understand other functions. However, as time passes and the organization becomes more complex as the environment changes and technology becomes more complicated, this view of the organization becomes a liability.

Figure 2.1. Traditional (Vertical) View of an Organization.

The danger lies in the fact that when managers see their organizations vertically and functionally (as in Figure 2.1), they tend to manage them vertically and functionally. More often than not, a manager of several units manages those units on a one-to-one basis. Goals are established for each function independently. Meetings between functions are limited to activity reports.

In this environment, subordinate managers tend to perceive other functions as enemies, rather than as partners in the battle against the competition. "Silos" (tall, thick, windowless structures, like those in Figure 2.2) are built around departments. These silos usually prevent interdepartmental issues from being resolved between peers at low and middle levels. A cross-functional issue around scheduling or accuracy, for example, is escalated to the top of a silo. The manager at that level addresses it with the manager at the top of the other silo. Both managers then communicate the resolution down to the level at which the work gets done.

Figure 2.2. The "Silo" Phenomenon.

The silo culture forces managers to resolve lower-level issues, taking their time away from higher-priority customer and competitor concerns. Individual contributors, who could be resolving these issues, take less responsibility for results and perceive themselves as mere implementers and information providers. This scenario is not even the worst case. Often, function heads are so at odds that cross-functional issues don't get addressed at all. In this environment, one often hears of things "falling between the cracks" or "disappearing into a black hole."

As each function strives to meet its goals, it optimizes (gets better and better at "making its numbers"). However, this functional optimization often contributes to the suboptimization of the organization as a whole. For example, marketing/sales can achieve its goals and become a corporate hero by selling lots of products. If those products can't be designed or delivered on schedule or at a profit, that's research and development's, manufacturing's, or distribution's problem; sales did its job. Research and development can look good by designing technically sophisticated products. If they can't be sold, that's sales' problem. If they can't be made at a profit, that's manufacturing's problem. Finally, manufacturing can be a star if it meets its yield and scrap goals. If the proliferation of finished goods sends inventory costs through the roof, that's the concern of distribution, or marketing, or perhaps finance. In each of these situations, a department excels against traditional measures and, in so doing, hurts the organization as a whole.

When the manager of functions A, B, and C goes to the manager of subfunction B to determine why B failed to produce on time, the response tends to be: "It's those so-and-so's in A." An interview with the former CEO of General Motors in the August 24, 1987, issue of Forbes illustrates this phenomenon. Forbes begins with a question:

"Couldn't you just call in the boss of Fisher Body and say, 'If I get one more complaint about your division, you and the top three guys are finished'?"

Without quite intending to, Roger Smith's answer says a lot about what went wrong with the corporate behemoth and why it responded so slowly. The sickness is called passing the buck.

"Okay, we could do that, and it's the way we used to do it. But he [the Fisher man] says, 'Wait a minute. I did my job. My job was to fabricate a steel door, and I made a steel door, and I shipped it to GMAD. And it's GMAD's fault.' So you go over to the GMAD guy and say: 'Listen, one more lousy door and you're fired.' He says, 'Wait a minute, I took what Fisher gave me and the car division's specs and I put them together, so it's not my fault.'"

"So, you get the Chevrolet guy, and you say, 'One more lousy door, and..."Wait a minute,' he says. 'All I got is what GMAD made.' So pretty soon you're back to the Fisher guy, and all you are doing is running around in great big circles."

Roger Smith's frustration illustrates how difficult it is for an organization with this strong "silo" orientation to effectively and efficiently respond to change.

In the good old days of a seller's market, it didn't matter. A company could introduce products at its own pace, meet only its own internal quality goals, and set prices that guaranteed adequate margins. There were no serious consequences to the evolution of functional silos like those illustrated in the examples. Those days are over. Today's reality requires most organizations to compete in a buyer's market. We need a different way to look at, think about, and manage organizations.