Centre of Excellence.

That is a dangerous attitude. A company periodically needs to shake itself up, regardless of the competitive landscape. Even if the external environment is not changing in ways that demand a response, the internal environment probably is. The human dynamics within an organisation are constantly shifting - and require the organisation to change along with them. Over time, informal networks mirror the formal structure, which is how silos develop. Restructuring gets people to start forming new networks, making the organisation as a whole more creative. It also disrupts all the routines in an organisation that collectively stiffly innovation and adaptability. Finally, restructuring breaks up the outdated power structures that may be quietly misdirecting a company's resource allocation.

All these processes - silo formation, the accretion of deadening routines, and the emergence of corporate baronies - take place all the time. But when everything is going well, you tend not to notice them, just as many seemingly fit people don't realise that their arteries are dangerously clogged. We present here a simple questionnaire that can serve as a kind of cholesterol test for your company, enabling you to see if your regimen needs minor or major adjustments. We begin, though, by looking at the ways that unhealthy structures and patterns can build up, threatening your firm's health.

The Formation of Silos

Most companies and business units are organised around a simple criterion - be it function, product, geography, or market. The problem with this is that communication and collaboration tend to become trapped in functional, product, geographic, or other silos. As a result, a functionally organised firm, for instance, may be slow to recognise product opportunities, while a product-oriented firm may find itself duplicating work.

In theory, the solution is to organise as a matrix in order to force interaction across dimensions. But matrix organisations are notoriously difficult to manage because they blur accountability and slow down decision making. A better solution, we submit, is to periodically reorient the organisation around a different criterion. When a firm reorganises in this way, the old networks and culture do not suddenly vanish; employees often maintain their old patterns of interaction for quite a while, as first observed by professors Jackson Nickerson and Todd Zenger of Washington University. So, at least for the near term, employees cooperate along both informal and formal networks. As a consequence, the firm gets the best of both worlds.

Cisco systems is a case in point. From 1997 to 2001, Cisco was organised into three units, representing three lines of business, each focused on a distinct customer type. Each unit had its own marketing, sales, and R&D organisations. Employees typically worked and had most of their interactions within their units.

In a major reshuffle following the company's first ever loss, in 2001, Cisco was reorganised by functions. This included the creation of a centralised R&D group and 11 subgroups to promote more rapid and cost effective technical innovation. In this new structure, engineers who had worked in one of the three units could exchange ideas and collaborate on product development with their peers across the company. Cisco undertook these changes to foster economies of scale and to streamline an increasingly overlapping product offering. Many feared, however, that the centralised R&D group would lose touch with customers. The fear proved unfounded - in large part, we believe, because of the strength of the old networks and of Cisco's customer-oriented culture.


fostering communication

Idea in Brief
A seemingly health, well performing company can be more vulnerable than you might think because of a build-up of corporate cholesterol; natural human dynamics that limit communication, creativity, and efficient resource allocation.
Rather than wait for the heart attack to strike, executives should consider changing their firm's structures, rewards, and processes while performance is still good.
Surveying the workforce can help executives determine how urgent the need is for change and what king of changes to contemplate. Companies that take charge of change in this way are high performers and popular places to work.

When it came to developing services and products for customers, it seemed that people still picked up the phone or met with former colleagues to develop optimal, cross-technology solutions.

Of course, formal structure and informal networks and culture eventually realign. Over time, people have fewer interactions with their old contacts, and once again their primary interactions occur in a silo. The firm's management may decide to revisit its organisational structure again. That is precisely what Cisco seemed to be doing in 2004, with the creation of three Business Councils: cross-functional and cross-technology senior management groups that were meant to be, as one of the chairs put it, "the voice of the customer," providing feedback in Cisco's strategy, products, and services. They also represented a partial reversion to the old structure - each council focused on a particular customer type.

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