Aligning Organization Structure for Digital Transformation
I remember, five years back, before I went for my MBA, nobody was talking about digital transformation. There were start-ups, the smartphone market was booming, interesting apps were coming up, there was analytics, there was even digital marketing — but still nobody was talking about digital transformation.
So what has changed? — A lot.
Let me take my example first:
- I used to take a bus to the office every day in 2012/13. Now I take an Uber.
- Every day while returning from office I used to buy vegetables/fruits, and on the weekend we used to get groceries from supermarkets. Now I order everything from Grofers or Big Basket.
- These days, I rarely visit shopping malls to buy clothes. It’s mostly Myntra.
- I don’t use Tata Sky anymore. It’s Netflix, Hotstar, and SonyLIV.
- Today, when my cook doesn’t turn up, I don’t go to the same nearby restaurant every time. I order from Swiggy.
It’s not just individuals like me who have changed, the digital ecosystem has had a profound impact on the competitive landscape across industries.
E.g. Walmart had a comfortable cost leadership competitive advantage but was forced to adapt to the changing market dynamics with Amazon offering convenience apart from cost and range.
In the automobile sector, a host of companies are expanding into mobility space from just being a car manufacturer, either to hedge their risks or to support the business during a cyclical downturn or to tap the emerging opportunities. The media and entertainment companies have realized that greater returns could be achieved by focusing on personalizing the content and developing more intelligent partnerships. Professional services firms are repositioning themselves with new services in the digital world and are increasingly partnering with start-ups.
As digital becomes more and more ubiquitous and new sources of competitive advantage (like insights from data, personalized customer experience, etc.) emerge, from org structure perspective organizations will have to figure out — How the org structure will support emerging sources of competitive advantage?
Many organizations in the past, have started a completely separate digital business unit, sometimes even with a separate P/L, to counter digital challenges. But increasingly organizations are realizing the importance of fusing the digital and physical experiences to provide a sustainable and unique value proposition to their customers. Organization separation, if at all, seems to be an interim step in most cases.
Disney realized that “ creating a more immersive, more seamless and more personal experience for Disney guests “ will be one of its major sources of competitive advantage. It created an entrepreneurial unit — Next Generation Experience — which employed more than 1000 people from different functions like IT, Imagineering, theme park operations, marketing, etc. to gather real-time data on guest behavior, analyze those data, manage labor efficiency and build products which enhance guest experience across every touch-point.
From whatever I have read or seen, it seems to me that the existing sources of competitive advantage will very rarely become irrelevant in the digital world, and hence most organizations will not have to reorganize completely. As organizations zero in on their digital+physical mash-up approach, from an org design perspective, it becomes important to first build a digital unit and then to design an effective linking mechanism to drive collaboration between digital and other business functions. GE did it by building its global software center (and later on GE Digital), creating cross-function project teams, and aligning the performance of the newly formed digital unit on driving the revenue in the existing businesses. Walmart, which started its digital journey with WalmartLabs, reorganized again recently to combine its stores and online buying teams as part of its omnichannel push.
Organizations could adopt different approaches to setting up their digital unit depending on their core competencies and current digital maturity. A top driven approach could involve a team of corporate-based digital experts doing most of the heavy lifting by managing internal and external digital initiatives and partnerships, and building digital capability. At the other end of the spectrum, organizations could leave it to the businesses or the functions to define and implement their digital agenda, with corporate providing only the broad guidelines. This decision will determine where the digital team resides within the overall structure :
An org structure redesign is not just about creating the roles and reporting relationships, it also involves designing decision rights and processes, defining governance forums, influencing how people interact and collaborate, determining how information and knowledge is managed, as well as re-calibrating the unwritten rules and expectations. In fact, in many situations, organizations undergoing digital transformation may only need minor changes in the formal structure but may require significant changes in informal structure i.e. how people interact and collaborate, information flows and unwritten rules, etc. E.g. successful digital organizations are good at rapidly prototyping and testing new ideas. Organizations will have to ensure that the informal structure enables such capabilities.
Typically successful digital companies have the following traits which can act as design principles for organization structure redesign for companies looking to adapt to the digital world:
Another key aspect of the org design is to align the structure according to the skills & motivations of the person leading the transformation. Whether it is CMO, CDO, or a CEO, the digital transformation leaders will have to challenge not only the mix of businesses but also the people around them. Therefore the organization must be designed keeping in mind the skills and attitude of the role-holder who will lead the transformation.
E.g. a very hands-on and detail-oriented CDO would like a lot of controls and direct reporting. Similarly, a CEO might prefer just reviewing the performance of key initiatives, and hence the roles leading those initiatives should have greater accountability and also should be staffed accordingly. These decisions will determine if new units have to be created, the governance structures required, the impact on existing roles, and the new roles which have to be created.
Getting your org structure perfectly right the first time is difficult, particularly when everything outside seems to be always changing. Hence there is a need to adopt an iterative approach with a focus on continuous improvement, just like we do during agile projects. But too many and continuous internal changes can often create chaos and throw employees off-balance. A strategic approach with enough time and effort spent on getting the core of structure right brings calm within the organization and goes a long way in ensuring a successful digital transformation.
References :
- HBR: Building a Software Start-Up Inside GE
- HBR: Digital Physical Mash-ups
- HBR: Do you have a well-designed organization?
- Strategy+business: 10 principles of organization design
- HBR: Increasing returns and the new world of business
Originally published at https://www.linkedin.com.
