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Enterprises change at a breathtaking pace, reorganizing too often. Wasting a lot of time, energy, money and morale in the process. in the middle of a market tornado, enterprises try to reach a “stable state”. We would argue, enterprises should strive to reach a dynamic state. A state where adaption doesn’t equal reorganization. Such an organizational design is already being utilized.

The Multidimensional (MD) Design

The Multidimensional Design was originally developed at Dow Corning. It eliminates the need to reorganize when faced with a significant internal or external change.

The need to organize comes from the need to divide labor. To organize is to divide labor among different individuals or groups and to coordinate their activities in such a ways as to obtain a desired output. The more divided the labor, the more coordination is required. There are only three ways of dividing labor, meaning only three types of organizational unit:

a)    Functionally defined units (Purchasing, R&D, Industrial Relations, etc.)

b)   Product- or service-oriented output units (the magazines of a publishing company, the coffee of Starbucks)

c)    Market- or user-defined units (units defined by the geographic areas they sell in)

Most enterprises have all three types of units. Their importance is often ordered in the structure of most organizations. If product uniqueness is most important, then product-defined units dominate. If costs are the primary concern, functionally defined units rise to the top. All reorganizations involve changing the relative importance of the three criteria used in dividing labor, that is, changing the organizational levels at which units of the three types appear.

If units of all three types are established at a particular level of an organization, as their relative importance changes all that is required at that level is a reallocation of resources among them. Their reorganization is not required. Therefore, if the three types of unit are established at every level of an organization, the need to reorganize at any time is completely eliminated. Units of any of the three types can be added or subtracted without requiring reorganization; the organization’s structure remains the same.

Conventional representations of organizational structures do not indicate the interactions of the units. Three-dimensional representation of an organization makes it possible to show explicitly the interactions that should or do take place between units.

Product- or Service-Define Output Units

In a multidimensional organization, product- and service-defined (output) units consists of a management and only a small supporting staff, but no other personnel, and no facilities other than what is required to house this small staff of people. They are responsible for providing or arranging for all the activities required to make their products and services available to customers. These units obtain income from sale of their products and services. If they require more capital than they generate or accumulate, they can apply for it from a higher level of the organization. They are expected to treat such funds as loans or investments. They must pay for their use, one way or another.

Function-Defined Input Units

Units whose outputs are consumed primarily by other internal units are functionally defined , or input units. Functional units are often divided into two types, one defined as “operations” and the other as “service”. Operation units are ones that have a direct effect on the output (operations) of the organization, for example, manufacturing, maintenance, and purchasing. Service units have no such effect; they affect the nonoperational behavior of other units; they affect the nonoperational behavior of other units. Functional units are free to both purchase whatever they need and to sell whatever they produce or provide, either internally or externally. Their purchasing and selling decisions are subject to intervention from above and to compensation for such intervention when appropriate. They receive the income that their sales generate, and they pay the cost of whatever they purchase.

Market- or User-Defined Units

Market units – units that are defined by the users by the users they serve – have two complementary functions. First, they sell the outputs of any other unit in the organization that wants to use their services, as well as selling outputs externally. Second, market units also serve as advocates of the users in the markets for which they are responsible. They should not only represent the company in the market, but also the market in the company.

Market units evaluate the activities and outputs of other internal units from the point of view of potential and actual users of the organization’s outputs, who are outside of the organization and are affected by these outputs. For that reason, market units operate as consultants to the executive office and other unit heads.

Performance measures

A uniform, explicit, and operationally unambiguous measure of performance – which incorporates some function of the amount of profit generated, for example, return on capital employed – can be applied to units at every level, including the executive office. This makes possible comparison of the performances of units at all levels and discourages make-work and bureaucracy. However, profit is by no means the only important performance characteristic. Recall that in socially-systematically conceived organization, development of the organization, its stakeholders, and its containing system are its overriding objectives. Although profit is necessary for corporate development, it is not sufficient.

In our next installation, we discuss a plan being a system of solutions.

Previous installations can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6 and Part 7, Part 8, Part 9.

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For the sake of scaling, enterprises tend to create internal service divisions that are bureaucratic and monopolistic: Accounting, Procurement, R&D, Human Resources are usually run as subsidized monopolies. The pool that pays for their services is covered by an overhead charge imposed on the units served.

In general, subsidized monopolies are generally insensitive and unresponsive to the users of their services, but they are sensitive and responsive to those who subsidize them. Subsidizers are often not users of the service, hence less aware of the services’ deficiencies from the users’ point of view. In addition, bureaucracies try to ensure their survival by becoming as large as possible; they operate on the (not unreasonable) assumption that the larger they are, the more important they are and the more difficult they are to eliminate.

Centrally controlled corporations stimulate the increases in costs of internally provided products and services because the supplying units do not need to compare their costs and prices with those of external suppliers. How can you value a subsidized internal unit? It’s impossible. In a market controlled enterprise, users, not subsidizers, evaluate suppliers and express their evaluation in a way that counts – by their purchases.

As organizations of any kind become larger and more complex, the ability of centralized controllers to know all they need to know to manage their organizations effectively diminishes. Thats’s why an enterprise based on market economy works better in large systems: it disperses economic control among many enterprises that must compete with others in order to survive. And survival requires meeting or exceeding the expectations of customers and consumers.

Market Enterprise

A few requirements are important for an internal market economy to work within an enterprise:

• Every unit within the enterprise has to be either a profit center or a cost center that is part of a profit center that is responsible for the cost center’s performance. Profit Centers are not always expected profitable but they have to be accountable.
• Profit Centers have the freedom to buy any service or product they want from whatever source they want, and to sell their outputs to whomever they want at whatever price they want or are are willing to accept.
• A corporate unit that reduces the value of the corporation shouldn’t be part of it no matter how profitable it is when looked at separately. For that reason, the enterprise has the ability to intervene in a unit’s purchases and sales bot only when it benefits an organization as a whole.
• If there any executive reasons to buy services from internal resources even though outside suppliers are cheaper, the executive can force the unit to buy from within but has to pay the difference out of his own unit’s budget. This means that a selling unit will never have to sell its output at a price lower than it wants to and can.
• A manager doesn’t tell his or her subordinate units what to buy and sell unless a negative effect on other parts of the corporation or the corporation as a whole can be perceived.
• The executive units receives income from two sources: a) it charges for the operating and investment capital it supplies to subordinate units b) it imposes a tax on the profitability of each unit.
• Each profit center can accumulate profit up to a certain level that all stakeholders agreed on. Profits in excess of the specified amount will be passed up to the corporate level for its use.

Why a market enterprise?

Every enterprise unit operating within an internal market economy becomes a profit center. Therefore, for each unit the same success metrics can be applied. It allows managers to hone their skills better since they have a lot of autonomy and it gives each stakeholder an opportunity shine. Managers will be more concerned to get all the information they need to run a profitable unit and offering that information to other units to improve interactions.

The biggest challenge in implementing this system is the tendency of managers to withhold information. They fail to see that empowering all stakeholders might decrease their stranglehold on information and power but, at the same time, empowers all stakeholders to run a much more profitable organization. And an organization everybody is invested in. It is often recommended to remove managers that are more concerned with their own power base and not the overall health of the organization.

These managers often form connections with units that are unable to compete effectively or are no longer needed in the enterprise. While dealing with these challenges, the enterprise should never forget that without converting to a market enterprise, the whole organization might become extinct.

In the next installment, we will talk about organizational structures.

Previous installations can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6 and Part 7, Part 8.

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Transforming an enterprise into a community is consistent with an increasing amount of dissatisfaction with the dominant concept of what a corporation is and who owns it. Community enterprises are created by common purpose rather than a common place. Nobody owns the community. Communities consider members as citizen and not as human resources. Citizen with varied responsibilities as well as rights.

Transforming an enterprise into a community is imperative to allow the system to focus on interaction of all parts and not on separate actions. A community enterprise allows everyone to participate in making decisions that affect them directly. In addition, control is circular, not linear. We don’t recommend eliminating hierarchies because labor must be coordinated in a complex working environment. But hierarchies don’t equal autocracies.

Community Design

Each manager will have a board, consisting of the manager’s supervisor, his subordinates and pertinent stakeholders. Most managers will be part of three levels of boards, interacting with five levels of management. This amount of interactions and access significantly reduces internally generated problems.

The boards are tasked to plan, police themselves, coordinate and integrate with other boards, improve quality of work life and overall performance and, last but not least, approve the board chair.

Boards meet at least once a month. The difference to normal meetings, that often accomplish nothing, is that managers don’t consider them as work interruptions. Instead, board meetings help managers to manage interactions with all stakeholders and facilitate their work. Boards don’t operate under the tyranny of majority, their goal is to operate by consensus. If consensus can’t be achieved, board members are tasked to work under the premise of consensus through experimentation. However, board members have to consent on the success metrics of the test and  a follow-up plan.

The agenda can be set by any member of the board. In the early stages of the enterprise transformation, a facilitator might be used to help the board with the first baby steps. This should be supported with an initial introduction to group processes.

Each board acts independently, can implement any decision if it doesn’t affect any other or the organization as a whole. Managers should ask their boards for advice on decisions they have to make but the responsibility for the decisions is solely with the managers, not the boards.

Empowering all stakeholders compered to empowering a few managers will improve the performance of the enterprise dramatically.

Let’s discuss this further in Part 9.

Previous installations can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6 and Part 7.

Actually, just speak.

Wednesday, June 23, 8 am PT, 11 am ET

A conversation with Gail Collins, Internet analyst at BGC, a firm with $1.2 billion in revenue and offices in 19 cities. His coverage includes GOOG, YHOO, AMZN, EBAY and others. Every Wednesday at 11 am ET, Gail hosts an investor conference call.

In this week’s installment, we will talk about Facebook as the next chapter in targeting failure, lessons for business leaders that can be learned from World Cup, the difference between efficiency and effectiveness and the problems with digital marketing. Should be an interesting hour and I hope you can join us.

Please register here to the dial-in number. Hope you can join us.

https://secure.confertel.net/tsregister.asp?course=5074015