M AY 2 0 11                                                                                                  Don Kilpatric...
2    Stifling structures: European retailer1    Well-defined organizational             needed to become a meaningful    s...
3on lower costs. The stores therefore     In our experience, such separatedhad fewer floor employees per            approa...
4    Unscalable processes: European biotech company2    Business processes are another            process. This move, in t...
5     Unprepared people: Technology manufacturer3     Growth naturally creates new                       base, for example...
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Preparing your organization for growth


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Preparing your organization for growth

  1. 1. M AY 2 0 11 Don Kilpatricko r g a n i z a t i o n p r a c t i c ePreparing your organizationfor growth Martin Dewhurst, Suzanne Heywood, and Kirk Rieckhoff Companies that address their organizational weaknesses as they implement growth strategies give themselves an advantage. Most senior managers pay close make it impossible to meet them. attention to the strategic side of Likewise, key employees may lack growth—the “wheres,” “whens,” and the skills needed to cope with the “hows.” Yet many underestimate the additional complexity that growth importance of organizational factors brings. By reviewing the experi- in translating a growth strategy into ences of three organizations that reality. This oversight can dampen a faced the stresses imposed by new company’s growth plans: growth initiatives, this article seeks organizational processes and to illustrate such “pain points” and structures that are well suited to suggests some approaches for today’s challenges may well buckle coping with them. under the strain of new demands or
  2. 2. 2 Stifling structures: European retailer1 Well-defined organizational needed to become a meaningful structures establish the roles and growth platform. The executives norms that enable large companies were concerned, for example, that to get things done. Therefore, when the company’s existing team of growth plans call for doing things store designers would have that are entirely new—say, difficulty making the new format’s expanding into new geographies or essential trade-offs, such as adding products—it’s well worth the working with unfamiliar, lower-cost leadership’s time to examine flooring and lighting products. existing organizational structures to Likewise, the executives were see if they’re flexible enough to concerned that the existing supply support the new initiatives. chain would not cope easily with Sometimes they won’t be. larger products, items with a short shelf life (such as adult fashion A European retailer, for example, clothing), or the demands of new decided to expand beyond its base suppliers. of small-format stores in urban areas by including a number of So the company launched the large- large-format stores in suburban format stores as a separate ones. To serve suburban customers, business unit, with its leader the new stores would require a new reporting to the CEO. The new mix of products, including adult stores’ management team was clothing, larger housewares (such as independent of the parent company furniture), and additional electrical and included mostly newcomers appliances. The new stores would who would not seek to replicate its also offer lower prices than the old culture or processes. Still, the ones. All this meant that the new retailer also set the goal of bringing stores would have special supply the new business unit back into the chain requirements and that the original structure once the first six stores’ managers would need to new stores were up and running focus more intently on price and and the new retail concept was cost than had been customary for firmly established. the retailer. The new stores’ managers As the company’s senior executives developed their own local planned the new stores, they began distribution centers and store questioning whether to operate designs, at a significantly lower cost them as part of the existing per square meter than the organizational structure or at arm’s company’s other stores had length. Although launching them achieved. They also found new within the existing structure would suppliers; modified some existing be simpler, the executives systems, such as IT; and created a concluded that doing so would deny different overall customer the new stores the unique resources experience that was more focused
  3. 3. 3on lower costs. The stores therefore In our experience, such separatedhad fewer floor employees per approaches work best when asquare meter, for example, and company can develop a convincinglarger shelves that needed to be business case that existingrefilled less frequently. structures and processes will make it very difficult to launch a newKeeping the new stores separate undertaking. This can be true when,helped get them up and running for example, the new model isquickly but also made some inconsistent with the old one (asprocesses at the corporate level with the European retailer) or couldmore complex than they might have cannibalize it—say, if a high-techbeen. The IT systems supporting the firm introduces a new generation ofnew stores, for example, handled a technology. Companies need tonumber of processes differently, decide how much, and when, localincluding store-level profit-and-loss customization should trump globalstatements. It was therefore difficult standards and the benefits of scale,to consolidate sales figures, cost of taking into consideration factorsgoods sold, or wages across both such as the product or servicetypes of stores. being created, market conditions, internal culture, and the skills of theNonetheless, in just two years, six of managers involved. In some cases,the new-format stores were firmly the necessary customization can beestablished and meeting their as minor as enabling people to workfinancial targets. At this point, as in a local language; in others, asplanned, the parent company large as creating a whole newintegrated all of the stores—large business unit with differentand small—into a single business suppliers and customers.1unit. Because the new stores werepast the start-up phase, executives Deliberately making thesedetermined that the benefits of using approaches temporary, as thecommon systems and processes European retailer did, is critical. Inoutweighed those of maintaining an our experience, two to three years isentrepreneurial subculture. usually enough time for newTherefore, many of the larger stores’ operations to gain sufficientmodified processes, such as the maturity to hold their own within theamended financial and supply chain organization. It is also crucial forsystems, were replaced by those the companies to reintegrate theseparent company used. The only innovative pockets before theyremaining operational difference reach substantial scale, or they willwas the local distribution centers simply create an additional layer ofbecause the company’s overall complexity that makes the companyproduct mix was easier to handle as a whole harder to manage andthrough them even in the longer could inhibit its next growth spurt.term.
  4. 4. 4 Unscalable processes: European biotech company2 Business processes are another process. This move, in turn, meant area that companies often overlook, rethinking the scientists’ governance to their detriment, when they are processes—determining, for growing. It’s important for a example, who would attend, lead, company to determine which and set the agenda for meetings. processes will come under particular Scientists would now have to stress when it grows. The case of a prepare and distribute briefs in a European biotech company standardized format ahead of each illustrates the dangers of not meeting and break into subgroups to addressing potential problems early. make decisions on related research projects. The company established Before the company began an clear decision rights and decision- ambitious growth strategy, it used a making protocols, including formal small group of ten key scientists to stage-gate mechanisms to make decisions about its product determine, for example, if products portfolio. The group’s culture of were ready to enter large-scale collegiality, informality, and communal clinical trials. It also worked to decision making worked quite well, ensure that there were clear, strong and each scientist actively helped to links between portfolio decisions shape and refine every project. and the way scientists and other Quarterly reviews of the research resources were assigned to projects. portfolio took one or two days. Getting the large—and frustrated— But as the company grew and the group of scientists to accept these volume and diversity of its projects changes was much harder than it increased, the number of scientists would have been had the company involved in portfolio management addressed the issues before it grew. also had to expand. The meetings This was particularly true because grew in length, and no clear the changes involved culture and decisions were made. By the time mind-sets, not simply different the company had 40 scientists documents or meeting formats. The involved, the process had become scientists had, for example, enjoyed unmanageable. The scientists—and receiving and giving input on the full business leaders—were intensely set of research projects and initially frustrated, the collegial culture was found it difficult to accept more disintegrating, and there was no defined responsibilities and a sense agreement about which projects of exclusion from important should proceed or what level of discussions.2 It took two years to resources they required. The implement these changes, and not scientists became defensive and all of the scientists were comfortable territorial, and the company was with them. Within nine months, saddled with a bloated, expensive, however, most of them saw that the and slow-moving set of projects. projects with the greatest scientific interest were getting more resources, Fixing these problems required which boosted morale and corporate formalizing the portfolio review results.3
  5. 5. 5 Unprepared people: Technology manufacturer3 Growth naturally creates new base, for example, found itself interactions and processes, limited by the surge in complexity expected and unexpected, and associated with operating under often at a fast pace. To manage several different national regulatory them, the employees who face the regimes. The company’s cautious greatest complexity—for example, legal department rejected deviations those in functions or businesses from home country procedures. As that will see increased activity— a result, the department tended must have “ambidextrous” to add new legal constraints in each capabilities. These enable people to new jurisdiction but was unwilling take initiative beyond the confines of to remove constraints that didn’t their jobs, to cooperate and build apply to it. The expansion plans linkages across the organization, stagnated until senior executives and to complete many tasks in realized that the company’s legal parallel. department needed new leaders who felt comfortable assessing and Companies sometimes forget to mitigating the risks in these new, think about these capabilities in the ambiguous environments. The units immediately involved in growth company responded by hiring new and very often don’t do so beyond lawyers—a few in the home country, them. A manufacturer of cutting- as well as new legal leaders in the edge technology products that was markets where they were seeking to seeking to expand from its domestic expand. The specific organizational done within organizations: simplifying processes, reducing duplications of challenges companies face as they accountability, and building capabilities. For grow will differ according to their more, see Julian Birkinshaw and Suzanne growth strategies. By managing Heywood, “Putting organizational complexity in its place,” mckinseyquarterly.com, May organizational complexity early, 2010; as well as Julian Birkinshaw and however, any company can improve Christina Gibson, “Building ambidexterity the odds that its growth plans will into an organization,” MIT Sloan Management Review, Summer 2004, Volume 45, Number succeed—while making it less 4, pp. 47–55. difficult than ever to get things done. 1 The outcomes will vary markedly. For Martin Dewhurst is a director in more on how companies can approach these decisions, see Giancarlo Ghislanzoni, McKinsey’s London office, where Risto Penitten, and David Turnbull, “The Suzanne Heywood is a principal; multilocal challenge: Managing cross- Kirk Rieckhoff is an associate border functions,” mckinseyquarterly.com, March 2008. principal in the Washington, DC, office. 2 For more on managing culture change, see Carolyn Aiken and Scott Keller, “The irrational side of change management,” Copyright © 2011 McKinsey Company. mckinseyquarterly.com, April 2009. 3 More broadly, we know from our research All rights reserved. We welcome your and client work that only a few steps are comments on this article. Please send them really critical to making it easy to get things to quarterly_comments@mckinsey.com.