Article Analysis 4

CHAPTER 3

Fundamentals of

Organizational

Management

How do you eat an elephant? Answer: One bite at a time. How do you manage a company? Answer: One level of focus at

a time. The business of managing an entire company is extremely broad

and deep. It consists of addressing a wide range of critical issues, from the very large (What business should we be in?) to the very small (How should we categorize this particular item of cost?). Although these two questions pertain to dramatically different levels of detail and focus, both are valid questions within the broad spectrum of issues that comprise the world of organizational management.

In this chapter, we cover that spectrum and examine how com- panies are managed, from top to bottom. We begin by defining orga- nizational management. We’ll also review some of the historical perspectives and classic models that have gotten us to this stage in our collective understanding of organizational management. Finally, we’ll look at some of the key principles and practices, from the high- est-level strategic aspects to some of the ways costs are managed on a day-to-day basis.

As always, we focus our attention on issues that are most ger- mane to projects and project management. As you read on, though, please keep in mind that this chapter will not necessarily be loaded with specific, direct references to ties between the worlds of organi- zational management and project management. In fact, organiza- tional management may strike you as a knowledge area that is a considerable distance from cultivating the ability to manage projects in an effective manner.

It most definitely is not. Possessing a general understanding of organizational manage-

ment principles and practices is one of the most valuable compo-

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nents that project managers can have in their overall repository of business knowledge. The perspective and insights that a good working knowledge of organizational management provides will greatly enhance your ability to make sound project decisions. Understanding the principles and practices for your particular company is an absolute necessity, if you wish to function as an effective, business-savvy project manager within it. This chapter provides you with the structure and context needed to help you develop that understanding. Additionally, many of the principles embodied in organizational management are critical precursors in understanding topics such as portfolio management, which we will be exploring in Chapters 5 through 7.

WHAT IS ORGANIZATIONAL MANAGEMENT?

As the twentieth century unfolded, managers of companies slowly came to the realization that they did not necessarily have to be at the mercy of unpredictable forces within the complex and sometimes mysterious world of business. With this realization came the search for ways to manage their businesses so that success or failure was not dictated entirely by unforeseen events. As they came to understand that some of these events were actually predictable and quantifiable, managers began to use this information to their advantage. They also came to understand the essence of what we now appreciate as some of the basic principles of organizational management.

For some time, experts have emphasized that a preferred sequence of actions is associated with the practice of sound organiza- tional management. First, managers need to understand their com- pany’s purpose and motivation for being in business. Once this understanding has been achieved, managers are able to develop mean- ingful objectives related to that motivation. Next, they must design and develop structures and methodologies needed to direct the company’s activities towards these objectives. Finally, they must effectively implement and maintain those structures and methodologies.

While the above sequence of actions is unfolding, a parallel path normally is pursued, related to the development of a number of inter- mediate goals and plans needed to satisfy the company’s objectives. In fact, level-by-level planning is what makes organizational manage- ment actionable.

Typically, the strategic planning process begins at the top, with the development of the company’s mission statement. Supporting goals and plans then are developed one level at a time. Figure 3.1 rep- resents the classic view of this process and illustrates how goals and plans are vertically segmented in many companies.

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Before we examine the detail behind this process, let’s take a short detour down memory lane, and take a look at how we reached our current understanding of organizational management.

HISTORICAL PERSPECTIVES

Throughout the twentieth century, countless researchers and man- agement theorists have shaped our current understanding of organi- zational management. Among the more notable contributors are Frederick Taylor, Alfred Chandler, Michael Porter, and most recently, Gary Hamel and C.K. Prahalad.

Frederick Taylor

Although Frederick Taylor’s influence dates back to the early twenti- eth century, some of the fundamental principles of scientific manage- ment he developed are as popular (and relevant) as ever in today’s business environment. Prior to Taylor’s emergence as an expert in management research, the belief was widely held that the manage- ment of a company was largely a soft, fuzzy, and unpredictable effort. The prevailing opinion was that some businesspeople were naturally talented managers, and others were not.

However, Taylor proposed the idea that every business activity could be broken down into measurable components, and each com- ponent could be reworked to achieve maximum efficiency. These

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FIGURE 3.1

Hierarchy of plans and goals.

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molded components could then be combined into larger elements called business processes. The result was the notion that an entire business could be managed using measurable, manageable, and effi- cient subprocesses. Taylor’s work was to become the driving concept behind several later works, such as those of W. Edwards Deming, the widely recognized guru of quality management.

Alfred Chandler

In the early 1960s, a noted researcher and management theorist, Alfred Chandler, promoted a straightforward yet powerful concept that structure follows strategy. According to Chandler, a company must focus attention on defining its strategy (Who are we, and what are we trying to do?) before it makes any effort toward devel- oping its structure (How do we do it, and do it well?). If a strategy is not developed first, the structure is likely to be ineffective, if not useless. Conversely, Chandler asserted that if a company has taken the necessary time to develop a comprehensive, meaningful corporate strategy, the corresponding structure will follow with relative ease.

It’s worth pointing out, however, that companies can sometimes have difficulty distinguishing strategy from structure, which can lead to problems. Take, for example, the practice of decentralization, which was a hot management trend in the 1970s. Decentralization was hailed as a brilliant corporate strategy by many at that time. In fact, the true strategy—at least the one that was often being attempted— was widespread product diversification. In reality, decentralization is a structural response to the desired strategy of product diversification. This is backward, according to Chandler and his opinion was often supported by reality. In far too many situations, widespread product diversification was not an appropriate strategy, and companies suf- fered; however, decentralization took the blame as a “poor strategy.” This misclassification of strategy versus structure created a confusion that plagued some companies for years. Chandler’s is a simple, but powerful lesson: Be sure you know what you want to do before trying to figure out how to set out to do it!

Michael Porter

A professor of strategic management at the Harvard Business School, Michael Porter is considered the guru of modern-day American busi- ness strategy. In one of his most notable works, Competitive Strategy, Porter provided a framework for guiding corporations through the process of developing an overall business strategy.

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Although there is much more to Porter’s framework, one of the key points that emerges from his model is the assertion that several elements are required for a company to be able to develop an effec- tive competitive strategy:

• A company must clearly define itself in terms of its basis for competing, and its standards for measuring its success.

• Once it has defined itself, the company must develop a thorough understanding of its internal strengths and weaknesses.

• The company must then evaluate its strengths and weak- nesses—with specific focus on its position relative to external competitive forces.

• Finally, the company must develop policies and methods that managers can use to communicate all of this information to all areas within the company.

Clearly, the power of Porter’s work (still very vital in today’s view of organizational management) comes from his recognition of the dual importance of strategic and tactical elements in defining a com- pany’s overall competitive strategy.

Gary Hamel and C.K. Prahalad

As the twentieth century drew to a close, further refinements in the views surrounding organizational management have come from Gary Hamel and C.K. Prahalad. These two strategy professors are probably best-known for their early 1990s Harvard Business Review articles, which identified and expounded on the concepts and principles of strategic intent and core competence. Many corporations have woven these principles into their organizational management fabric.

With respect to strategic intent, Hamel and Prahalad suggest that companies need more than just a model that defines the com- pany’s strategy. They also must define their desired leadership posi- tion within an industry—with a clear focus on the time frame required to reach that leadership position. Together, a well-defined leadership position and a time frame are combined to form what Hamel and Prahalad contend are a necessary component in a com- pany’s long-term success: strategic intent. Strategic intent adds value by providing a focal point for a company’s stated strategies.

Perhaps one of the most illustrative and well-known examples of strategic intent came in the early 1960s, when President John F. Kennedy defined the United States’ leadership position in the highly competitive “space race.” Kennedy declared that the United States would be the first country to send a man to the moon and safely

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return him to earth. Additionally, he identified the time frame, specif- ically stating that this goal would be achieved by the end of the decade.

Why is the concept of strategic intent so important today? As much as anything, because of the message it communicates through- out the company. And the message of strategic intent is really this: The company has long-term goals that it intends to maintain, even if the business environment changes along the way.

According to Hamel and Prahalad, one of the key elements in the successful achievement of strategic intent in the face of a rapidly changing business environment is flexibility. Companies must main- tain some amount of agility by engaging more in short-term planning. This approach leaves the company ample opportunity to periodically reevaluate its position and seize new opportunities as they become apparent.

This particular concept is huge, and it has enormous implica- tions to us as managers of project efforts. It reinforces some of the concepts discussed in Chapter 1, such as the need to manage a proj- ect to a business objective, rather than to stationary, predetermined cost and schedule goals. And it reinforces Doug DeCarlo’s contention that periodic reevaluation of the project position is warranted, driven by the notion that the answers to his Four Business Questions may change throughout the life of a project.

Finally, say Hamel and Prahalad, for strategic intent to take hold, it also must be communicated to all members of the company in a way that promotes their buy-in and enthusiastic support. The desired outcome is understanding and internalization, ultimately resulting in a sense of commitment in achieving strategic intent that becomes pervasive throughout the company.

Although their article on strategic intent pertains to overall com- pany strategy, it has helped provide the foundation for today’s emerg- ing view of projects, and the growing sentiment that project management should be viewed more as an entrepreneurial, business- based discipline, and less as an exercise in the application of technol- ogy or logistics.

SOUND ORGANIZATIONAL MANAGEMENT THROUGH SOUND ORGANIZATIONAL PLANNING

Obviously, excellence in organizational management doesn’t just hap- pen—it comes about through careful planning. As Figure 3.1 suggests, once a company has identified its mission, a series of plans and goals must be developed to support that mission. This process is referred to as organizational planning.

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Organizational planning is ordinarily performed by different groups at different levels within the company. Although there are cer- tainly variations, Figure 3.1 serves as a good general model for the organizational planning process. As the model illustrates, planning is carried out at three levels of detail and focus: the strategic level, where upper management sets the direction of the company; the operational level, where the company’s supervisory staff conducts the day-to-day business; and the tactical level, a kind of middle- ground, where mid-managers create goals and plans that are intended to link the company’s strategy to its day-to-day operations.

Figure 3.2 reveals the elements that comprise each level. Let’s take a closer look at some of these elements.

ELEMENTS OF STRATEGIC PLANNING

There is no single, “correct” methodology for coordinating and devel- oping an overall strategic plan for a company. No matter what methodology is used, however, the objectives of any strategic plan- ning initiative are generally the same, and these include:

• Identify corporate goals and objectives • Identify high-level strategies for achieving goals and objectives • Assess the industry and the marketplace within which the com-

pany functions • Assess the general economic environment (macroeconomics) • Benchmark against the competition (“external” metrics, such as

financial strength)

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FIGURE 3.2

Elements of organizational planning.

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• Determine how the company should orient itself toward the market and the competition

• Identify and track performance against high-level (corporate- wide) metrics

A company may use any of a number of specific techniques to formulate its overall strategic plan. The next sections detail some of the more common techniques.

Grand Strategy

A company’s grand strategy is the highest level of a company’s strate- gic positioning. In some circumstances, the choice of a grand strategy may be a purposeful decision made by upper management. But it also may be forced upon a company, as a result of the company’s financial strength, competitive position, future growth potential, or even the general economy. Grand strategies tend to fall into three general cat- egories.

Growth

A growth strategy is characterized by expansion. In some cases, the expansion may be internal, focused on making the existing company bigger from within. This could include activities such as developing new products, expanding existing product lines, or increasing sales of existing products. A second growth strategy, best described as inter- nal/external, might be one of diversification. Here, a company acquires businesses that are related to a company’s core business. Finally, a company might choose to pursue a growth strategy that is entirely external, in which it tries to acquire businesses that take the company into totally new areas.

Stability

Companies that pursue a stability strategy are those that wish to remain at their current size, or grow in a slow, controlled fashion. Company executives often pursue a strategy of stability after under- going a tumultuous period of either rapid growth or forced decline. The objective in either case is to provide a period during which the company as a whole can adapt to the changes and reach of some sort of normalized state.

Retrenchment

A strategy of retrenchment ordinarily is precipitated by a forced decline in a company’s overall position. Typical causes for retrench- ment may include a reduction in the product demand, a general slow-

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down in the economy, or difficulties that may have been precipitated by management issues. The pursuit of a retrenchment strategy often includes budgetary reductions, workforce reductions, or in severe cases, liquidation of some of the company’s existing assets or business units. A common term for retrenchment is downsizing.

Obviously, the grand strategy that a company pursues has a profound impact on the strategic planning processes that follow. Also, it is not uncommon for companies that do business interna- tionally to have separate grand strategies for their domestic and global operations.

Global Strategy

Companies that conduct business internationally need to define their global strategy—a high level approach for how they will conduct busi- ness within and across national borders. The development of a global strategy can be tricky, because companies find themselves trying to satisfy a number of different objectives, such as:

• Promote synergistic relationships across organizations • Pursue the company’s overall goals in a unified manner • Recognize geographically localized market influences • Appropriately adapt to cultural influences • Exploit large-scale business practices, such as economies of

scale • Seek to gain operational efficiencies, such as product standardi-

zation

At the core of trying to address all these objectives at once is the age-old decision of centralization versus decentralization. This deci- sion could pertain to a large array of considerations related to prod- ucts, services, operations, and in some cases, even management structures. Although many ways exist to configure a global strategy, three common variations are presented here.

Globalization

Companies that pursue a globalization strategy either assume—or are interested in promoting the idea—that a single global market exists for their products or services. In other words, no matter where in the world you are, the demand for your company’s “standard” products will be virtually identical. For example, Kentucky Fried Chicken and McDonald’s assume that people everywhere want to eat the same drumsticks and burgers. This approach can have tremen- dous value to a company, because it opens up vast opportunities for

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economies of scale. Key advantages of pursuing a globalization strat- egy may include standardization in product design and manufacture, leveraging of large-scale relationships with suppliers and materials, and interchangeability of operational components and personnel.

Multidomestic

Companies that pursue a multidomestic strategy either believe—or grow to recognize—that competitive environment is a localized phe- nomenon. Although the company is present in several different coun- tries, subordinate strategies such as choice of product offerings, product design features, and approaches to marketing and advertising work best if they are adapted to the specific needs of each country or region.

Many companies reject the idea of a single global market. They have found that the French do not drink orange juice for breakfast, that laundry detergent is used to wash dishes in parts of Mexico, and that people in the Middle East pre- fer toothpaste that tastes spicy. Procter & Gamble stan- dardized diaper design across European markets, but discovered that Italian mothers preferred diapers that cov- ered the baby’s navel. This design feature was so important to the successful sale of diapers in Italy that the company eventually incorporated it specifically for the Italian mar- ket. Baskin-Robbins introduced a green-tea flavored ice cream in Japan, and Haagen-Dazs developed new flavor called dulce de leche primarily for sale in Argentina.

Transnational

Companies that pursue a transnational strategy attempt to reap the benefits of worldwide coordination that come from a globalization strategy, without forsaking the need for geographically localized flex- ibility that comes with a multidomestic strategy. A transnational strategy is primarily one of coordination, and—at times—compro- mise. It’s really a balancing act between the quest to achieve a global efficiency and the pressure to meet local demands.

One company that effectively uses a transnational strategy is Caterpillar Inc., a heavy equipment manufacturer. Caterpillar achieves global efficiencies by designing its products to use many identical components and by central- izing manufacturing of components in a few large-scale facilities. However, assembly plants located in each of Caterpillar’s major markets add certain product features, tailored to meet local needs.

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PRIMARY COMPETITIVE STRATEGY

Once a grand strategy and global strategy have been defined, compa- nies turn their attention to the identification of their primary com- petitive strategy. A primary competitive strategy answers the question: What basic orientation will we assume with respect to the way we compete?

The concept of primary competitive strategy can be effectively illustrated by exploring a framework developed by Michael Treacy and Frederik Wiersema, in their book entitled The Discipline of Market Leaders.

The Treacy and Wiersema Framework for Competitive Strategy

A very popular framework for articulating competitive strategy emerged in the late 1990s. Introduced by Michael Treacy and Frederik Wiersema, this framework identifies three basic competitive strategies that a company could choose to pursue:

Product Leadership

The strategy of product leadership refers to a company’s ability to offer products or services that are perceived by customers as superior and unique, relative to those of their competitors. This customer perception ordinarily is created through product differentiation, making this strat- egy similar in many regards to Porter’s differentiation strategy.

Operational Excellence

The strategy of operational excellence refers to a company’s ability to achieve low product cost through productivity and efficiency improvements, elimination of waste, and tight cost control. Once again, the strategy captures the essence of Porter’s low-cost leader- ship strategy.

Customer Intimacy

The strategy of customer intimacy refers to a company’s ability to provide a wide range of solutions aimed at specialized customer needs. The strategy normally is achieved by offering an extensive array of products or services which collectively provide total, unique, tailored solutions. Customers are willing to pay more, confident in the knowledge that the company will have the ability to solve their spe- cific problem or satisfy their unique need. This strategy is a useful addition to Porter’s two-dimensional framework.

It may be interesting, if not valuable, to imagine Porter’s focus strategy overlaid onto Treacy and Wiersema’s customer intimacy

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strategy. Specifically, I’m referring to the notion that perhaps another (unofficial) variation may exist, in which a company might assume a strategy of customer intimacy, but focus that strategy in specific seg- ments of the consumer market.

SITUATION ANALYSIS

The development of a grand strategy, a global strategy, and to a cer- tain extent a competitive strategy, really addresses questions such as: Who are we?, What business are we in?, and What is our framework for competing? These strategic considerations are largely proactive and directional in nature. They are really about the what of strategic planning, and they do not address the how. This is where situation analysis comes in. In effect, situation analysis forms a threshold, or linkage, between strategic planning and tactical planning (Fig. 3.2).

Often referred to as a SWOT analysis, situation analysis includes an examination of the Strengths, Weaknesses, Opportunities, and Threats that can affect a company’s ability to achieve its strategic goals. No tremendous amount of mystery enshrouds the definition of these terms:

• Strengths. Positive, existing characteristics of a company, which it can rely on or exploit to achieve its strategic goals.

• Weaknesses. Unfavorable, existing characteristics of a company, which may inhibit or restrict its ability to achieve its strategic goals.

• Opportunities. Currently untapped areas that, if exploited, would enhance a company’s ability to meet or exceed its strate- gic goals.

• Threats. Specific circumstances or conditions that may impede, preclude, or make it very difficult for a company to achieve its strategic goals.

Strengths and weaknesses tend to focus on factors that are inter- nal to the company. Therefore, these elements of the SWOT analysis will be of much greater value when we discuss tactical planning tech- niques. Opportunities and threats are much more germane to our current discussion on strategic planning, because they traditionally focus more on factors external to the company. Table 3.1 offers some examples of various categories that could be used when performing a SWOT analysis.

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ELEMENTS OF TACTICAL PLANNING

Tactical planning is the logical “how-to” extension of strategic planning. Largely structural in nature, it serves as a bridge between the high-level goals of a company and its business operations. Often formulated by those in the mid- to upper management ranks, tacti- cal plans typically focus on the major activities or actions that the company (or major divisions within the company) must perform to fulfill the goals identified in the strategic plan. As was the case with strategic planning, no single recipe for success exists when it comes to developing tactical plans, but a number of typical elements are included.

Core Competence

In concept, core competence, core business, and core products are fairly straightforward principles. All the terms describe the same phe- nomenon: something that a company is good at. Although it may be best visualized as a threshold between tactical planning and opera- tional planning (see Fig. 3.2), the concept of core competence actually translates into a singular mission: Determine what you are good at, and exploit it as much as possible. To many of us, this seems intu- itively obvious, yet companies often are lured away from what they do best and begin to explore what often amounts to uncharted territory.

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TABLE 3.1

Some Common Areas of Focus in a SWOT Analysis

Strengths or Weaknesses Opportunities Threats

Senior management Market size potential Slow economy capability

Patent position Unfulfilled customer needs Rapid shift in technology

Research capability Emerging markets Shift in consumer preferences

Product quality Rapidly expanding markets Capability of competitors

Customer satisfaction Void left by competitor New government regulations

Marketing expertise Relaxed government Scarcity of resources regulation

Brand recognition/ Technology immaturity Supplier problems reputation

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But what really is core competence? In a well-known Harvard Business Review article from the early 1990s, Hamel and Prahalad suggest that core competences are “complex harmonizations of indi- vidual technologies and production skills.” Other less eloquent defini- tions have been offered for core competence; once again, though, all revolve around the simple notion that a core competence is an activ- ity or set of activities that a company performs very well.

Experts suggest that, for a company’s core competences to have maximum value, they should possess the following five characteristics:

1. They should provide the company with an opportunity to gain access to a wide variety of products and markets.

2. They should be capable of contributing—in a demonstrative way—to the benefits of end products, as perceived by customers (they are able to impact what customers care about).

3. They should make a company unique in comparison to competitors. 4. They should be difficult for competitors to imitate. 5. They are reasonably stable and sustainable.

Two common variants on this principle, core business and core products, are easy to understand. Core business is a collection of core competences directed at a particular segment of the product and/or consumer market. Core products, it follows, are outputs that stem from core competence, core business, or both.

Perhaps the most progressive and contemporary concepts related to organizational management theory comes from the same Hamel and Prahalad article identified above. Their view on core competence actu- ally suggests that organizational managers should view their company not as a grouping of businesses, but as a portfolio of core competences. The authors further state that, to be successful, companies must be able to continually adjust to changes, such as technology advance- ments, new markets, and changes in customer preferences.

This is somewhat at odds with the Porter (and Treacy/ Wiersema) philosophy of choosing a single competitive strategy and running with it. Ironically, those companies that are most successful are able to find a harmonious marriage between the two philosophies.

Similar to our discussion about the relationship between struc- tural design and project management, a strong connection also exists between the core competence concept and the project management function. The key issue here has much to do with the general accept- ance of project management, buoyed by its widespread recognition as an important (if not critical), value-added competency.

Once again, in my observations, a pattern has emerged. In com- panies where project management has been embraced in part by

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being recognized as a core competency, the formal application of sound, valuable project management methodologies has ramped up relatively quickly. These companies have reaped the business bene- fits associated with such a transformation. This is not always the case, however.

One example of this can be seen in one particular major U.S. corporation. This company appeared to be serious about embracing project management. In fact, they were actually near the leading edge of what is now commonly recognized as a kind of project manage- ment boom, forming a project management office of substantial pro- portion in the mid-1980s. However, as the twenty-first century approached (some 15 years later), the company had not yet come to formally refer to project management as a “core competence.” Instead, they continued to refer to it as an “enabling skill set.”

Although this may seem like an exercise in semantics, the real- ity is that their reluctance to identify project management as a core competency sent a strong message rippling throughout the entire company: Project management is OK, but no big deal. The pervasive feeling, in fact, was that “doing project management” (again a reveal- ing choice of wording) was more or less a discretionary activity—and something just about anyone could do. As a result, the overall value of the project management discipline had imposed limitations, and life for the company’s full-time, professional project managers—who had to deal with largely nonsupportive team members—remained an uphill battle on a day-to-day basis.

COMPETITIVE ADVANTAGE

Once a company has defined what its competitive strategy will be, a very logical question becomes: How could we go about achieving an advantage with respect to our competitors? Certainly, the tactics required to establish competitive advantage are many and varied. But one thing is certain: The tactics must be directly aligned with com- petitive strategy.

Table 3.2 identifies some initiatives that a company could pur- sue in the quest to establish competitive advantage. You will undoubt- edly recognize elements of the competitive strategies discussed earlier in this chapter.

STRUCTURAL DESIGN

As Figure 3.2 suggests, tactical planning is anchored by two basic ele- ments: (1) core competence (What do we do well?); and (2) compet- itive advantage (How do we apply that competence to optimize our

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leverage in the marketplace?). Just as situation analysis links strate- gic planning to tactical planning, structural design links tactical plan- ning to operational planning.

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TABLE 3.2

Tactics for Establishing a Competitive Advantage

Tactic Rationale Example

Reduce product pricing Selling more units at a FedEx automated much of via lower operating costs lower cost can maintain its customer service

or even increase profits, operation by offering while also increasing online parcel tracking. market share.

Make it difficult for others Use of expertise or Microsoft has established to duplicate or “follow” technology that is not easily a huge competitive

mimicked will reduce the advantage through the number of competitors. patenting of its software.

Create high switchover Customer attrition can be Verizon Wireless offers costs (called buyer reduced by making it difficult “deals” on two-year lock-in) for customers to leave contracts, but makes it

the company. extremely costly to abandon them.

Introduce new products Introducing new products FedEx created a profitable or services or services often generates niche in the late 1970s by

a period of time were these introducing an “overnight products or services delivery” service. are unique.

Differentiate existing Whether real or perceived, Kentucky Fried Chicken products or services establishing a favorable and Coca-Cola offer

differentiation in products “recipes” that customers or services will attract cannot find in similar customers. products.

Improve product quality or Customers naturally favor For many years Kodak develop enhancements products or services that dominated the film

are better than the industry, thanks to their competition’s. exceptionally high product

quality.

Establish business Combining the products Credit card companies alliances or services of businesses have aligned themselves

results in lower cost and with airlines and hotels greater convenience for through frequent flyer customers. programs.

Supplier leveraging Companies that purchase Wal-Mart is well known for large quantities of materials using its size to intimidate can leverage that to create suppliers into agreeing to a pricing advantage. price reductions.

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Structural design refers to the way that a company chooses to organize itself, as the process of organizing leads to the design and development of a formalized organizational structure. The purpose of a formalized organizational structure is to define job duties and effectively deploy human resources. This is done by addressing three things:

• Defining the formal tasks assigned to individuals and depart- ments throughout the company

• Defining formal reporting relationships, including lines of authority, the number of the vertical “layers” within the com- pany, decision-making responsibilities, and the span of control for each management level

• Designing methods and processes that ensure efficient coordina- tion across workgroups

Companies must have a structural design that supports the com- pany’s overall strategic goals as well as its competitive positioning. Using the Treacy and Wiersema framework, for example, companies wishing to pursue a product leadership strategy are likely to have a structural design that is quite different from a company wishing to pursue an operational excellence strategy. Both of these designs look different from a company pursuing a strategy of customer intimacy.

For example, a company that has adopted a product leadership strategy must strive to develop a working environment that allows for—if not promotes—ongoing experimentation and learning. This type of organization values creativity and innovation, suggesting an organizational structure that is very flexible and characterized by effi- cient horizontal coordination.

However, if operational excellence is the company’s primary competitive strategy, managers would be well served by an organiza- tion that is rigid, predictable, and efficient by design. In this environ- ment, standardized procedures are valued over creativity. A strong sense of centralized authority is present, in which employees execute routine tasks under close supervision.

As you may have guessed, the organizational design of a com- pany that pursues a strategy of customer intimacy is likely to be a combination of the preceding two structures. For these companies, some flexibility is needed to support an environment typified by unique customer solutions; however, the overall organization must be managed in a coordinated and efficient manner as well.

The implications related to the connection between a company’s structural design and project management are enormous. However, the connection does not have all that much to do with the company’s

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primary competitive strategy, as we discussed. It has much more to do with how the project management function is positioned within the company, and the message that any given position communicates to the company.

Specifically, I am referring to three different ways that project management is positioned on a given company’s organizational chart and the related impact of those positionings. Let’s take a look at these three variations.

Vertical Positioning

Companies that choose to position the manager of project manage- ment to report directly to a company CEO or senior VP send a very different message than those that choose to position that same man- ager as a first-line supervisor buried somewhere within one of the company’s technical departments. And it’s important to clarify that the issue here is not one of status, per se, as much as the message implied or perceived regarding the business-critical importance sen- ior management places on the project management function. Lower- positioned project management groups often can have a harder time gaining cross-functional acceptance and respect.

Organizational Positioning

A reasonably strong relationship also appears to exist between the type of organizational unit that the project management function is associated with, and the perception of what project management actually is and what it can do for the company. This is certainly not an absolute phenomenon, but it holds true in a surprising number of circumstances.

Companies that perceive the project management function as having strategic and/or business value will often position the project management work group within an organization with a title such as Administration or Finance, for example. This kind of positioning allows for a more seamless integration of project management person- nel with some of the higher-level business functions, such as strategic planning, budget preparation, and portfolio management.

Conversely, companies that continue to view project manage- ment as a technically focused, logistically based extension of the con- struction trades of years gone by will tend to connect the project management group with a technical organization, such as Engineering or Information Technology (IT). I have encountered many situations in which a Project Management Office (PMO) exists within a company’s IT organization, but is not invited to participate

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anywhere else. To me, this is quite sad, and it represents a significant lost opportunity for the companies that choose to operate that way.

Centralized versus Decentralized

The centralized versus decentralized phenomenon also is tied to per- ceptions of project management value. Companies that believe that project management has potential long-term value often form a cen- tralized project management group, incorporating (at least) a few key staff functions, such as process development experts. These compa- nies recognize a simple fact: Without such a dedicated group, no one is paying attention to the care and feeding of the project management discipline; that is, no one is charged with advancing the state-of-the- art of the craft within the company.

In many other companies, project management personnel are dis- persed across the entire company. Very often, these people are “owned” by a non–project management department, and are charged with leading projects in addition to performing their so-called “real job” (this is actually a commonly used phrase!). This decentralized struc- ture often is seen in companies where project management is viewed as an enabling skill set, not as a free-standing, value-added function that can contribute to the company’s business success. This is sad.

ELEMENTS OF OPERATIONAL PLANNING

The term operations refers to the conduct of day-to-day business. Operational plans are generally developed at lower levels within a company, and specify those activities required to achieve operational goals and support tactical planning outputs. The process of opera- tional planning includes activities such as:

• Determining the functions that should be performed within dif- ferent departments

• Establishing policies in support of strategic and tactical initia- tives

• Establishing work processes, procedures, and controls • Addressing issues of employee development and employee satis-

faction • Identifying and tracking against local (departmental) standards

of performance

Although specific operational planning approaches may vary from company to company, many utilize the following techniques in the development of operational plans.

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Functional Design

Within the context of the organizational structure identified as part of tactical planning, individual operating units (let’s call them depart- ments) must be designed and organized so that the functions that they perform: (1) support the company’s strategic goals, and (2) are properly coordinated with the functions performed by other depart- ments within the company.

For example, let’s consider a company that has adopted the strategy of product leadership, in which new, differentiated products constantly are being developed. In a company such as this, technical departments (such as engineering) would seek to acquire employees who are more oriented to a research and development environment and outfit them with the tools, equipment, and facilities needed to perform functions such as conducting experiments and building pro- totype models. The human resources department of this company would develop strategies to facilitate frequent and continual interde- partmental movement. The marketing department would prepare themselves for activities such as test marketing studies, aggressive advertising campaigns, and product trials. Meanwhile, the finance department would adopt methods to secure increased financing, deal with large asset investments, and develop processes for authorizing the building of new research or production facilities.

A company that has adopted a strategy of operational excellence would take quite a different approach to functional design. In this case, the engineering department might consist of a core group of engineers, supported by outsourced engineering services on an as- needed basis. The human resources department would adopt strate- gies for retaining and developing a stable workforce. The marketing department would promote brand loyalty throughout their customer base and focus on developing efficient product distribution methods. Finally, the finance department would stress the importance of—and adherence to—the practice of approving only those projects having the highest net present value.

Internal Process Design

One of the most basic elements of conducting day-to-day business is the process. Simple term—big concept. Companies develop processes for doing just about everything, and essentially, all work in a company is performed through some kind of process. A process may be defined as a set of steps or procedures that define how a function is to be per- formed and what results may be expected. A process also may be defined as a set of interrelated resources and activities that transform

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inputs into outputs. I think these definitions work well when put together.

Internal process design is the foundation of operational plan- ning. By definition, it consists of the development of approaches, methods, and guidelines for guiding virtually every activity performed within the company. Process design is likely to affect nearly every aspect of a company’s overall business, and may include detailed pre- scriptions for issues such as behavior, methods, and documentation around business functions such as:

• Preparation of drawings by the engineering department • Interviewing of potential new hires by the human resources

department • Preparation of invoices by the finance department • Assembly of products by the manufacturing department • Performance appraisal conducted by the first-line supervision • Ordering of parts and materials by the purchasing department

And let’s not forget project management! A project schedule is actually an excellent example of internal process design, albeit a one- time process.

Undoubtedly quite obvious from this list is the notion that inter- nal process design is performed by many different groups throughout the company. By definition, each group cares primarily about the processes that are used in their organizational subgroup. This leads to another common practice that many companies have adopted—the identification of a process owner. Process owners are typically accountable for all aspects of a given process, including process design, process improvement, and ultimately the performance capa- bility of the process itself. Identifying a process owner helps ensure that someone is responsible for managing that process and for opti- mizing its effectiveness.

To ensure continuous improvement in project results, every com- pany that executes a significant number of projects should identify a process owner for the project management process. In many cases, this role is served by the Project Office (or Project Management Office).

This critical concept ties directly back to our discussion regard- ing the implication of having a centralized versus decentralized proj- ect management function.

Control System Design

The purpose of control systems is to establish (and impose) the boundaries by which a company’s day-to-day business processes are

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conducted. It is an extension of internal process design, with an added element of checks and balances. Control system design is the mechanism by which managers may be assured that processes are being applied in an appropriate manner in accomplishing the com- pany’s strategic objectives. A secondary, more detailed, function of control system design is to ensure that specific tasks are being car- ried out and resources are being applied effectively and efficiently.

A classic example of control systems design is the process and methods a company uses to establish the size of next year’s depart- mental budgets. To further reinforce the perceived importance of maintaining control for some, consider the fact that many companies impose considerable regulatory control over the process by which a given organization is permitted to use the monies that have already been allocated to them. Many companies, for example, require a large number of signatures before a project is considered formally approved.

Control systems typically possess these characteristics:

• Well-defined procedures • Rules and/or guidelines • Exact, quantifiable data • Strict monitoring and measurement • Expectations of specific performance against predetermined

standards

Control systems are likely to be prevalent—and often quite rigid—in functional areas such as manufacturing, production, and assembly. Examples of control systems in these areas include proce- dures relating to inventory control, order processing and billing, and production scheduling.

Some typical examples of activities normally associated with control system design include:

• Approvals and authorizations • Verifications and reconciliations • Job descriptions and performance reviews • Security of physical assets and proprietary information

Although all companies perform some form of control system design, the needs of companies may differ considerably. Consequently, control systems must be specifically designed for each individual company, making these systems unique.

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OVERARCHING LINKAGES IN ORGANIZATIONAL PLANNING

Some organizational design elements can be viewed as spanning all three phases of organizational planning. Among these design ele- ments are project management (naturally), information management, capital asset infrastructure, human asset infrastructure, and technol- ogy infrastructure, to name a few. Let’s take a closer look at two of the more relevant of these overarching organizational design elements, project management and information management.

The Project Management Continuum

From a “big picture” standpoint, the discipline and practices of proj- ect management actually exist at different levels within a company. As Figure 3.2 attempts to illustrate, project portfolio management is largely a strategic element, program management is essentially a tac- tical element, and project management is an operational element. Together, these elements form linkages that span the entire spectrum of organizational planning techniques. This is a critical point, and one that is not well understood (or appreciated) today.

In fact, developing and implementing a solid project portfolio development process is undoubtedly one of today’s most important business-based issues, relative to the discipline of project management.

Why? Because one of the greatest opportunities that many of today’s companies have for effectively linking corporate strategy to business operations comes in the form of adopting a top-down approach to the process of identifying new initiatives. This process begins with project-portfolio development. Regrettably, not all com- panies do a good job of this.

Project-portfolio development can be very powerful, easy, and effec- tive, when implemented as a top-down process. This process starts much like the process of organizational management itself: by listing and quan- tifying the strategic goals of the company. This can be done easily and effectively by using approaches such as the Balanced Scorecard (refer to the discussion on Balanced Scorecard in Chapter 5). Through a process of progressive elaboration (much like a process of developing a work breakdown structure), goals and performance metrics are identified in increasing levels of detail. The endpoint is a list of proposed projects that are obviously and inarguably connected to the company’s strategic goals.

Unfortunately, I have observed in far too many situations a process in which one group within the company formulates strate-

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gic goals, and an entirely different group (ordinarily at or near the operational level in the organization) strives to develop projects that they hope will “fit the company strategy.” In effect, the two groups use the middle ground (the tactical planning arena illus- trated in Figure 3.2) as a kind of awkward meeting place, rather than using this area as part of a continuous pathway to purposefully link strategy development with project development. At best, the “bottom-up meets top-down” approach leads to a situation in which the company has identified a set of projects that may be compliant with strategy. This is not the same as identifying the optimum set of projects needed to advance the strategy. At worst, this approach can lead to a potentially significant disconnect between projects and company strategy.

In many cases, the disconnect occurs because those who are responsible for originating project ideas are not intimately familiar with the details of their company’s strategic intent. Accordingly, their project ideas spring from a combination of:

• What they believe is “within the spirit” of the company’s strate- gic directive

• Local (department) problems that are causing them immediate pain

• How much money is in their department budget (which was determined as an independent activity)

The application of a sound, top-down approach for identifying project initiatives is imperative. Once the optimum set of projects has been identified, much is to be gained by managing them in a coordinated fashion. This is the focus of program management. Program management can include combining small projects to tackle a major organizational issue. However, it also includes rou- tine activities such as enterprise-wide resource management. In short, program management reduces the amount of independent, random motion that occurs when large quantities of individual proj- ects are simply “cut loose.” Excellence in program management requires excellence in managing individual projects. This is the third element in the project management continuum shown in Figure 3.2.

In Chapters 5 through 7, we explore a variety of techniques for identifying projects using a top-down approach and managing them as a program. For now, it’s important to note that project management should be viewed as a critical link—and an integral component—of the overall organizational planning process.

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INFORMATION MANAGEMENT CONFIGURATION

As Figure 3.2 suggests, organizational design elements related to the area called information management planning may be viewed as spanning all three phases of organizational planning. Determining how the information management “system” should be configured may actually begin during the latter stages of the strategic planning process.

Before going too much farther, let’s clarify the terms shown in Figure 3.2. Here are three definitions that I would like to use for the purposes of our discussion:

• Information Systems. Computer-based sets of software, hard- ware, and telecommunications components that are supported by people and procedures, and that are used for the purpose of processing data and turning it into useful information.

• Information Technology. The full set of technological methods and approaches that collectively facilitate the construction and maintenance of information systems.

For our purposes, I’d like to express the combination of these two elements as simply information management.

In the so-called “early days” (circa late 1970s), information management was treated as more of a reactive support function. Many companies had departments with names like “data processing,” which often collected and manipulated data at a relatively low level of application, typically relating to localized, day-to-day operations. Eventually, company managers came to realize two things about this function: (1) In the absence of forethought, information management costs easily could become a ballooning and potentially uncontrollable expense for the company; and (2) the information management func- tion could be more effectively applied by recognizing its potential as a core business process, one that can effectively facilitate the effec- tiveness and efficiency across the company.

These realizations led to the existence of a new planning func- tion—information management planning (called information sys- tems planning by some). Referring once again to Figure 3.2, information management planning can effectively allow for the design and development of information management needs that effectively span the transition between strategic planning and tactical planning.

For example, consider Pep Boys, the American auto service chain. The operations of such an organization may seem simple enough not to warrant the integration of informa-

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tion systems into its business planning. However, manage- ment does consider information systems in its plans, which has resulted in the development of a data warehouse of close to 2 TB (terabytes), one of the country’s largest data warehouses. This warehouse is a major part of the com- pany’s long-range business plan. Among other activities, top management can use the data warehouse to find out which services are most popular with customers—informa- tion that serves a strategic purpose. The company can also use the data warehouse to continue to minimize customer returns due to car problems that were not fixed well the first time.

In this example, the use of data warehousing as a method for enhancing Pep Boys’ understanding of customer preferences touches on the organizational planning techniques of competitive strategy and competitive advantage. However, it is also easy to see how this type of activity could readily play into other organizational planning tech- niques such as project-portfolio development, core confidence analy- sis, internal process design, and functional design. It’s clear from this example that information management planning truly does span the entire spectrum of organizational planning.

Even though information management is highly integrated within the overall organizational management planning cycle, infor- mation management planning actually exists as a somewhat distinct planning function unto itself. Figure 3.3 illustrates the steps required to carry out information management planning, and shows how the steps are remarkably similar in nature to the overall organizational management planning process.

As an information management configuration is being devel- oped, planners must pay attention to a number of critical design factors:

• Flexibility. Refers to the extent to which a company can use (or reuse) the same components (hardware and software) for differ- ent functions, in different locations, and by different people over an extended period time.

• Scalability. Refers to the ease with which a given system or sub- system can be enlarged without degrading overall functionality, capability, or other measures of effectiveness and efficiency.

• Compatibility. Refers to the extent to which different compo- nents of hardware and software are able to interact with one another. Interaction might refer to information flow, data file swapping, or communications.

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• Standardization. Refers to the extent to which literally identi- cal components of hardware and software are used throughout the company. Standardization can be attractive from the stand- point of purchasing advantages, maintenance efficiencies, and compatibility.

• Financial justification. Refers to whether a given information management project represents the sound financial investment. This can be a difficult question to answer, because it often is dif- ficult to accurately assess the cash inflows and outflows relating to information management projects. Very often, many hidden benefits or hidden costs are associated with installations relating to information management. At times, this can make the process of performing a financial justification somewhat tricky, uncer- tain, and difficult. Unfortunately, this prompts some companies to simply give up and justify information management projects solely on the basis of a perceived need. This particular point is debated in the outset of Chapter 10.

BUSINESS PROCESS MANAGEMENT

Up to this point in the chapter, nearly all our discussion on organizational planning more or less assumed an orientation of initial startup; that is, how a company might go about organizing itself for business success.

But what about a company that has been in operation for a while? What does the concept of organizational management mean to these companies? For many, the answer comes in the form of three words: business process management.

Actually, the term “management” in business process manage- ment may be a bit misleading, because it sounds like a reference to

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FIGURE 3.3

Information management planning mirrors organizational planning.

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maintaining the status quo. But for most successful companies, the term business process management actually has a strong orientation toward the ongoing improvement of business processes. This ongoing improvement that companies make may be gradual or not so gradual, as illustrated by three different approaches to process management: business process improvement, business process reengineering, and business process redesign.

To provide context to the discussion on these three approaches, it can be very helpful to first have a discussion on what is commonly viewed as a baseline for the analysis of business processes, the value chain of business functions.

THE VALUE CHAIN OF BUSINESS FUNCTIONS

Decisions related to organizational planning and control often focus on the performance of several different business functions within the company. One of the most common ways of displaying these business functions is through the value chain. The term value chain refers to the sequence of business functions within which usefulness is added to the products and services of a company.

Figure 3.4 suggests that the value chain is comprised of all specific organizational departments. Although some overlap obviously exists in terms of nomenclature, it’s vital that you look at and think of the value chain in terms of business functions rather than departments.

The value chain of business functions includes the following elements:

• Research and development functions. Includes the identifica- tion of new ideas and concepts and the experimentation and testing of those new ideas and concepts (research). Research activities commonly relate to new products, services, or processes. It also includes a variety of development activities that are undertaken to answer questions regarding whether a new product should be produced in large quantities (called scale-up), whether it can be produced in a cost-effective manner, and even whether the new product will have sales appeal (mar- ket research).

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FIGURE 3.4

The value chain of business functions.

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• Engineering and design functions. Includes the detailed design, engineering, and planning functions required to get new prod- ucts, service, or process launched. This segment of the value chain is often the central focus of most projects executed by the company. Design and engineering functions may be applied to salable products, manufacturing equipment and machinery, or process development.

• Manufacturing and production functions. Includes the acquisi- tion and set up, as well as the ongoing operation and mainte- nance, of resources, materials, and facilities required to produce a product or deliver a service.

• Marketing functions. Includes all the functions and approaches that companies use to advertise, promote, and (hopefully) sell their products or services to customers, prospective customers, or users.

• Distribution functions. Includes a broad range of activities required to deliver products, materials, or services to customers or users. Comprised of activities such as shipping, retail deliv- ery, and warehousing.

• Customer service functions. Includes the post-sales support activities required to maintain an acceptable level of long-term customer satisfaction. Comprised of several activities, from help desk support to warranty repair work.

Although Figure 3.4 appears to show the value chain as a sequence of operations, it’s important to note that significant gains can be realized by reconfiguring the relationship between functions within the value chain. Cycle-time improvements, for example, are a common manifestation of project opportunities in which value chain functions can be addressed concurrently with minimal disruption.

HOW ORGANIZATIONS IMPROVE THEIR BUSINESS PROCESSES

Over time, most companies seek to improve the way they conduct their external business or their internal operations; in short, they use many of the elements described in this chapter. Three of the more common methods that organizations employ for improving their busi- ness processes are: (1) business process improvement (often referred to as continuous improvement); (2) business process reengineering; and (3) business process redesign. Each of these methods commonly use the value chain of business functions as an integral part of their analytical framework.

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Business Process Improvement

The term business process improvement refers to the concept of continuous improvement, applied to all processes within a company. In the past, “traditional” improvement programs tended to concen- trate at the lowest levels within a company, often focusing on the dimensions of day-to-day business such as work efficiency, productiv- ity, and cost reduction. A focus on improving the quality of all busi- ness processes is a relatively recent change in philosophy, stimulated primarily by the success of Japanese companies.

One of the more notable forms of ongoing business process improvement is kaizen, a Japanese term that means “gradual and orderly continuous improvement.” The Strategy of Kaizen is intended to pertain to all activities and all employees in a given company. In the kaizen philosophy, improvement in all areas of business—cost con- trol, data management, supply chain management, employee develop- ment, supplier relations, product development, and manufacturing productivity—serve to enhance the quality of the company.

Business Process Reengineering

Business process reengineering is a somewhat more radical approach to business process management, compared to continuous improve- ment. A good working definition for business process reengineering might be “the fundamental rethinking of business processes, aimed at achieving dramatic improvements in critical measures of perform- ance, such as cost, quality, efficiency, and service.”

The reengineering approach consists of asking deep and basic questions about all business processes, questions such as: Why do we do this?, Why is this process done in this manner?, and Is this process necessary? These types of questions are intended to reveal inappropriate, obsolete, or incorrect methods and assumptions. In contrast to continuous improvement, which involves changes to existing processes, reengineering often involves throwing out, dra- matically revamping, or eliminating existing processes and reinvent- ing new ones. The objective is to achieve very large improvements in performance, not the small, incremental improvements that an approach like kaizen would yield.

Success in business process reengineering requires four critical elements: (1) a deep understanding of existing processes; (2) an abil- ity to think creatively; (3) the courage to challenge existing beliefs and assumptions; and (4) the effective use of new technology, if required.

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Business Process Redesign

Although the result is frequently the same dramatic revision to exist- ing process, business process redesign is somewhat different from business process reengineering. While reengineering consists of sys- tematically examining the process or set of processes, business process redesign often is precipitated when a problem or opportunity is identified. Generally speaking, the customer or user (either inter- nal or external) is the driving force behind the redesign process. Often, business process redesign has a specific focus or goal, such as increased sales, higher profits, or improved level of service.

Business process redesign initiatives often have a broad impact across a company. For example, it would not be uncommon for a sin- gle effort to affect a company’s organizational structure, its existing governance of procedures and policies, and even its organizational culture.

It’s not uncommon for this kind of approach to precipitate a short-term dip in output and/or efficiency. One possible explanation for this short-term efficiency loss may relate to the fact that, in con- trast to the other two business improvement processes, business process redesign occasionally comes as a bit of a surprise and typi- cally has a more far-reaching impact on the overall company.

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