CHAPTER ELEVEN

ORGANIZING FOR COHERENCE

Most businesspeople have been through endless reorganizations. Each reorganization has its rationale, but rarely does it have anything to do with strategy. Some are intended to orient the business geographically; others to centralize activity toward headquarters; many to take out costs; still others to provide more autonomy to local business units. But few reorganizations are driven by the company’s strategy. In fact, like cost, the topic of organization is usually seen as quite distinct from strategy.

What if, instead, you restructured your organizational hierarchy to support your way to play and to make the most of your capabilities system? Moreover, what if you deliberately set up informal conversations at every level to reinforce that new structure and to bring people on board? And what if your talent and recruitment policies and practices were explicitly built around finding and developing people with the knowledge to make your capabilities—and the businesses they fostered—world-class? If you could figure out how to do all this, you would reinforce your capabilities-driven company in powerful ways. Your company would, in effect, be living coherence every day.

You may already have an image in mind of what a capabilities-driven company looks like organizationally. If the image resembles ours, it’s easy to describe. The company’s people, from the top leadership on down, understand how their jobs fit with the overall strategic priorities. They take pride in the contribution they make to the company’s capabilities system. A clear idea of the way to play, and the reasons it will succeed, is embedded in most everyday decisions and actions. People are confident that as part of a company with the right to win, they will be rewarded—collectively and individually. This in turn generates a prevailing mind-set that is optimistic, focused, and realistic about both the risks and the rewards of the company’s strategy.

To foster this kind of company, you have several issues to think about:

1. How do you design an operating model and organizational structure that reinforces coherence and helps you build your capabilities system?

2. What must be done in the “informal” organization—the conversations you set in motion outside hierarchical boundaries—to foster coherence?

3. How do you need to change the way you manage talent: recruiting and developing people?

Let’s look at each of these issues in turn.

Designing Coherent Structures

One of the first things the Pfizer Consumer Healthcare (PCH) division did when it pursued its claim-based way to play and capabilities system in the early 2000s was to reorganize around its capabilities. As you may recall from chapter 1, the business embraced six mutually reinforcing capabilities: new over-the-counter product launch and commercialization, claims-based marketing, effective retail execution, the ability to influence regulatory management and government policy, focused portfolio management of selected brands, and pharmaceutical-like innovation.

Unlike many reorganizations, this one “took.” One reason for this was the reorganization’s close link to the capabilities system; another was its freewheeling, experimental nature. Pfizer’s leaders set up three different types of organizational mechanisms for their different capabilities. The first was a new type of portfolio management group; the second was a formal adaptation of informal networks; and the third was a new executive position to fill a gap in capability development.

In the area of portfolio management, PCH established a few specialized global teams to oversee its heavy-hitter, blockbuster “golden brands” (as they called them), such as Listerine, Nicorette, and Zyrtec. These were not add-ons; they were fully accountable for the success of their products. The golden brand teams were given their own budgeting authority, decision rights, and worldwide responsibility for profit and losses.

The rest of the products were managed by regional teams, which oversaw their strategies and controlled their marketing and operations. The regions—which oversaw the strategies for all the other PCH brands—could not opt out of what the golden brand teams decided. There was also deliberate crossover: each golden brand team included one representative from each regional organization and a chair who came from one of the regions.

The result was a structure that fed cooperation. The regional organizations remained accountable for the performance of the division as a whole, but they provided support to help supercharge the global brand teams. They had incentive to do this; bonuses were based in part on the contribution each person made to the capabilities-driven strategy.

The golden brand team idea was itself an example of PCH’s willingness to experiment with organizational forms. It came from the smoking-cessation product Nicorette, which had been acquired a few years before. At its former company, Pharmacia, the Nicorette global marketing team had a long-standing practice of rapidly shifting spending in opportunistic ways. For instance, when someone famous died of lung cancer or a city banned smoking in public restaurants, Nicorette ads would suddenly appear in that locale. After the acquisition, when they saw how effective this team was, the PCH leaders “ring-fenced” it: letting the Nicorette marketers continue to operate with as few constraints as possible and observing them at work. Once they realized the value of this model, they rolled it out for all the golden brands.

For another capability, regulatory management, PCH set up a series of “communities of practice”: formal working groups assigned to tap into the power of informal networks. The division leaders identified fifteen countries as key markets and, for each of them, named a group that included lawyers, health professionals, and a few representatives from the broader organization. These communities of practice could now help disseminate key practices and ideas from one country to another, relying heavily on respect, communication, and information, and bringing all of their professional insight and local knowledge to bear in managing regulatory issues.

A third structure was the designation of a vice president for global innovation. PCH needed a separate position to oversee pharmaceutical-like innovation, because the capability was so important, and because it was a new capability for this division. This vice president was responsible for green-lighting new projects, with a clear mandate to ensure that the company paid continual attention to the fit between R&D investment and the firm’s overall way to play. This in turn enabled more risky ventures that paid off: for example, a campaign for portable, convenient health care.

All of these structures were new to Pfizer, and they made a tangible contribution to the success of the business.¹ At the same time, they were different from the matrix, network, or “czar” structures at most other companies, because they were organized directly around capabilities. When coherence is embedded in a hierarchical design, a great deal of frustration and wasted effort is avoided. For the first time at PCH, people did not have to choose between their functional priorities and their role in advancing the company’s way to play. There were far fewer trade-offs between global and regional priorities, or between innovation and marketing; these mechanisms provided systematic ways to keep the management of capabilities at the center of everyone’s attention, and to make that focus explicit.

Two factors in the PCH redesign made the greatest difference. The first was the spirit of relatively loose experimentation in designing structures that supported capabilities. The second was an emphasis on direct accountability. In most cases, to support capabilities systems and deliver high-quality performance, you need teams of people who can think on their feet, make decisions rapidly, and deliver results. Your goal in organization design, therefore, is to set up structures that promote accountability, independence, and cross-boundary connection. Or as strategy writer Ken Favaro (coauthor of The Three Tensions) puts it, “The business unit structure should reflect the enterprise-wide strategy, not the other way around.”² To keep everyone on course, rely on the innate coherence of the enterprise and the connection it gives people to your capabilities system and strategic priorities.

Coherence represents a great frontier in organization design. Already, a number of companies are experimenting with this. For example, as we saw in chapter 6, Ahlstrom divided its product lines into two basic clusters and set up different capabilities systems for these two groups, supporting them with a new organizational structure that focused the functional teams on enabling these capabilities. Some companies have set up accountable business units, with capability building and maintenance as part of their mandate. Others have put in place a “capabilities czar,” someone with the responsibility for ensuring that the necessary investments are made and the right people are communicating. Other companies have initiated internal campaigns, in which the capability is given a name, top-level support, and perhaps a certification program for people who contribute their talents. Like PCH, some companies apply several of these approaches, each to a different capability.

Another model that could be useful for building capabilities is the nine company-wide cross-functional teams (CFTs) that Renault-Nissan CEO Carlos Ghosn set up in the early 2000s to provide a formal structure for implementing change. As Ghosn noted in an interview, the teams were deliberately set up to include “people from different geographies and different functions and different generations working together.”³ Each team was given accountability for a problem or a gap in capabilities at Renault-Nissan (such as product complexity, organizational structure, or business development) and came up with a plan to fix it within three months.⁴ Today, the CFTs still exist across the organization, challenging the status quo and illuminating opportunities.

“In my experience,” said Ghosn, explaining the importance of the CFTs and direct accountability, “executives in a company rarely reach across boundaries. Typically, engineers prefer solving problems with other engineers; salespeople like to work with fellow salespeople, and Americans feel more comfortable with other Americans. The trouble is that people working in the functional or regional teams tend not to ask themselves as many hard questions as they should.”⁵

When you rethink your structures, any of these ideas (or others) might seem appropriate, but one principle should remain constant: make sure people are connected directly to outcomes related to your most relevant long-term distinctive capabilities, in addition to (or in place of) more short-term financial accountability. To accomplish this, you need to ensure that one feature is always present: measurable, recognizable outcomes that establish the progress people are making in developing and using the capabilities linked to your way to play.

For example, a team accountable for a capability involving innovation might track the financial returns linked to innovation investment, the yield curve, the freshness of the pipeline, the success rate, and the relationship of the innovation pipeline to the company’s way to play.⁶ These measures are all more meaningful than the typical figure of new-product sales.

You might argue that a structure already exists for building capabilities: the established functional organizations. These, after all, were created with the idea that professional specialists had specific know-how, to provide capabilities that contributed to a company’s success. But as they have evolved in most companies, individual functions are almost never aligned to the kinds of capabilities systems that are needed for success. They are highly invested in functional excellence, as opposed to differentiating between distinctive capabilities and table stakes. Forcing them into the role of capabilities steward could lead to greater incoherence, especially if the tension between functional excellence and capabilities-oriented excellence is not recognized or managed.

Most organizations have a long way to go to build a truly capabilities-driven company, but we do see early signs of interest in a closer fit between organization and strategy. Some traditional functions may evolve this way; for example, research and development teams may be reorganized around the capabilities they support, rather than around their technological disciplines. Sales and marketing teams may meld together to drive demand in more coherent ways. This process may be accelerated as organizations grow tired of handoffs and infighting, and focus more on delivering value to customers. We even occasionally hear talk about replacing the traditional functions of a business—information technology, human resources, operations, and so on—with new departments, crossing traditional functions and product lines, directly responsible for building, maintaining, and deploying one of the distinctive capabilities within a system.

Conversations for Coherence

One critical part of developing coherence is setting a climate in which people are naturally moved to talk informally across boundaries: to coordinate mutual efforts, share information, and make sure that they are not working at cross-purposes. Thus, a major part of your initiative will concern fostering better conversations among your people. You can tap into what Jon Katzenbach, coauthor of Leading Outside the Lines, calls the “informal organization”: the web of person-to-person connections through which people exchange knowledge and express commitment and pride.⁷ These conversations are often seen as mere corridor talk, but they provide high-leverage ways to draw forth and develop the behaviors and attitudes of a coherent company.

To tap the informal organization, don’t rely on highly orchestrated presentations or staff meetings. Instead, bring people together in unstructured conversations to talk through the issues raised by the changes you are making. These conversations might cover how the company expects to distinguish itself, whether the way to play makes sense, and how it fits with the jobs held by people in the room. Dialogues like this are helpful as long as they engage people and do not force or impose on them. These informal situations require light facilitation and a few ground rules (such as discouraging people from interrupting one another) to help everyone feel comfortable in the room.

Because their roles—and in some cases, their functions or business units—are at stake, people find it worthwhile to talk. Design the invitations so people from different functions and businesses meet. Capabilities are inherently cross-functional and cross-organizational, and these sessions will help people establish new working relationships across internal boundaries.

As part of its strategy initiative in the mid-2000s, Pfizer Consumer Healthcare conducted a series of such informal conversations among its top 150 managers. In each session, participants talked through the way to play that had been chosen, the capabilities they needed, and the processes that might change. To give the conversations a starting point and focus, while sparking attendees’ imagination, Pfizer commissioned three elaborate, poster-sized illustrations and hung them on the meeting room walls. The first image was analogous to the current state of incoherence in the company (and the industry): a group of horse-drawn carriages, all moving in separate directions, represented the various PCH businesses. They were blocked by a roaring river that separated them from their chosen customers; those that dared try to cross were swept down the falls. The second image showed the state that PCH intended to be in soon: a group of better-maintained carriages, with healthier-looking horses, and a few automobiles. The six basic capabilities were portrayed, too, as pylons being placed across the rapids—and a few vehicles were beginning to cross. The third image was rendered as a blueprint, showing the bridge that PCH was building with its full-fledged capabilities system.

The 150 managers from that first conversation were, in turn, tasked with the mission of cascading these messages still further down the organization through similar informal efforts. To keep the messages consistent, they brought copies of the posters with them. The new approach was also summed up on a notebook-sized folding card that listed the products and services involved (labeled “aggressive and moderate growth brands”) and that translated each of the capabilities into management imperatives (e.g., “Become the partner of choice for Rx-to-OTC switches”). Thereafter, both in the organized sessions and in the corridors and lunchrooms, one could hear the way to play and capabilities-based imperatives discussed and debated.

The most effective leaders we know conduct open discussion in just this way, modeling colloquy and coherence in their own behavior. They also look for informal champions of the new strategy, who understand its value and are interested in talking about the way to play, the new capabilities, and the changes they are making. They can be given more opportunities to step forward as pragmatic optimists, communicating across functions to help bring capabilities to life. The real value starts to accrue when people talk about this on their own accord. Setting up these conversations is like seeding a cloud to create the rain needed for a fertile organizational climate. An ongoing dialogue encourages people to live coherence every day.⁸

You will find this kind of network easier to maintain in a relatively coherent organization, where the structures, incentives, and informal networks are all aligned around the established way to play. People grow more used to communicating informally; they understand one another more easily, and the overall climate is less dysfunctional. Moreover, constant informal communication plays a critical role in building and maintaining capabilities, as people learn from one another. The interplay between coherence and personal connection is still not fully understood, but we believe that the experience of the next few years will make it clear how valuable they are to one another.

The Talent Opportunity

Consider all the decisions that a CEO has to make about people. Who is best suited for the organization? Which leadership characteristics and skills are best recruited, and which are best developed? How do we recruit and retain the right people and prepare them to lead?

One of the key roles for corporate headquarters is managing talent policies for the overall organization. This may be where the CEO and top management team have the greatest impact on the company in the long term; designing and implementing an innovative talent system is one of the most important things a leader can do to reinforce coherence.⁹

To implement an innovative talent system, you may need to change some deeply held views about human nature and the workplace. Many corporate leaders hold an image of a person’s talent as aligned with their professional role or functional discipline: a finance manager will be oriented toward cutting costs while a marketer thinks of growth. But a coherent company, where many people work together across functions and businesses, requires people who fit well with that company’s way to play. Individuals who would thrive working for an experience provider might feel stifled working for a consolidator, and vice versa.

Thus, you need a clear sense of the kind of people who fit into each part of your company: how forthright, deliberative, experimental, open to outsiders, fast-paced, risk-averse, respectful, or community-oriented they should be. What skills will they bring to make this capability succeed as part of a system—and do they understand how important that aspect of their job is? People who join your company should have the feeling that they were chosen and developed in line with its priorities—that they had earned a right to win in their jobs, just as the company had earned a right to win in the marketplace.

Brilliant individuals who don’t represent a good fit for you will probably be worth more at another company, just as a business unit might be more profitable elsewhere if it doesn’t fit your way to play. David Ulrich of the University of Michigan has something like this in mind when he writes about building “leadership brands”: the type of leader who fits a retail chain might not be the right type of leader for a technology company.¹⁰

Fortunately, increased coherence makes it easier for companies to attract and retain high-quality talent. Applicants who fit are attracted because they know that their career prospects will be enhanced. Consider a public relations professional trying to decide between two offers. The first company, a small producer of packaged food, has told her that it wants a world-class PR department. But public relations is not relevant to that company’s way to play; it will (and should) remain a table-stakes capability. There are only three PR professionals on staff, and they are scattered around the world; it’s not enough to build a career path. The other offer comes from an innovative energy company whose way to play depends on R&D and establishing close relations with government and university research labs. It has a PR staff of seventy-five people that is recognized as one of the most influential teams in its profession. The applicant will have an opportunity to be mentored by some of those individuals and to carve out a future preparing messages about energy in emerging markets around the world. Which offer would you advise her to take?

In fact, given the realities of its capabilities system, the packaged-food company might be well advised to outsource the PR function altogether. Attracting and retaining talent will be tough for it, and without talent, the function may not even qualify as table stakes.

Research scientists know that going to work for Procter & Gamble, Pfizer, or 3M will improve their prospects. They will be working right at the heart of the company’s capabilities system. They will be surrounded by other elite, skilled people who came to the company for the same reason. The company will be inclined to invest in their ideas and to give them chances to work on interesting projects. And they will have many opportunities to learn from each other and contribute.

Coherent companies also tend to place more emphasis on the support for talent—mentors, a clear development path, and recognition of the role people play in the company’s capabilities system. Researchers such as Boris Groysberg of Harvard Business School have shown that the value of a star performer dramatically increases when he or she is supported by a network of other people—and, we would argue, by the formal and informal factors that help a network of people mesh well together, including the capabilities system itself.¹¹ Ken Favaro notes, “Your capabilities system is even more valuable than recruiting great people; it can make your people great.”¹² In short, it’s not just the individuals who differentiate a company; it’s the company that differentiates the individuals, when it asks them to exercise their talent in a distinctive way.

In the next chapter, we’ll look at that same capabilities system from a somewhat different perspective. We’ll consider the view of the leader who has been responsible for initiating and overseeing this journey.