Changing which parts of your company have full profit and loss (P&L) responsibility is not a decision to take lightly. Executives considering a major rearrangement need to carefully consider the timing and pacing of these changes. The authors offer three scenarios in which to consider a restructure, and advice on how to manage organizational change without too much disruption.
Companies regularly shake up their organization structure, whether it’s due to a change in strategy, a change in leadership, or for other reasons. Most of these changes are incremental, while a few are radical. In our decades-long experience, we’ve observed a leap-and-hops pattern in which a series of minor adjustments is followed by a major rearrangement, after which the cycle starts all over again.
Most major rearrangements, or “leaps,” involve a change of profit and loss (P&L) responsibility in the organization’s primary dimension. Companies can be organized around product category, region, customer segment, distribution channel, business function, asset, program, major account, or any other value-driving dimension.
For example, let’s take consumer goods company Procter & Gamble (P&G). In July 2019, P&G reorganized around six industry-based sector business units (SBUs), each with sales, profit, cash, and value-creation responsibility for one or more product categories. This leap, which CEO David Taylor described as “the most significant organization change we’ve made in the last 20 years,” elevated product as the company’s primary dimension. A few years later, in 2021, the company “hopped” from six to five SBUs.
Most companies in a given industry stick to the same primary dimension. For example, large pharmaceutical companies (e.g., Amgen, BMS, GSK, Merck, Pfizer) tend to have function (research, development, supply, commercial) as their primary dimension. Industrial equipment companies (e.g., ABB, Atlas Copco, Eaton, Emerson) tend to have product as primary dimension. Food and beverage companies tend to seek a balance between region and product, with most giving more weight to region (e.g., AB InBev, Coca-Cola Company, Danone, Nestlé, PepsiCo) and others to product (e.g., Cargill, Mars, Tyson Foods).
Companies don’t change their primary dimension just because their business strategy changes. Ultimately a company changes its primary dimension only when it believes that the change will enable it to deliver value to its customers more effectively. That depends on:
- Creating verticals that sustain expertise through their focus, critical mass, and stability
- Clearly delineating the verticals’ responsibilities and assigning accountability for performance
- Establishing clear interfaces and minimal friction losses between verticals
Executives considering a major rearrangement should ask two key questions: 1) When has the time come to change our primary dimension? and 2) Once we have decided to change, how fast should we go?
To address the first question, we’ve identified three situations where it makes sense to consider changing the company’s primary dimension:
1. When the business model changes
If “the way we make money in this business” changes fundamentally, a change of primary dimension may be in order. Telecommunications companies, for example, used to be organized by asset (fixed network, mobile, internet, IT systems) but changed to customer (e.g., consumer, corporate, wholesale) as technological and commercial convergence overturned their business model. Motion-picture studios traditionally were organized by channel (movie theater, home entertainment, broadcast television), but some changed to product (e.g., direct-to-consumer entertainment, live sports and news programming, content production, advertising) as on-demand streaming of bundles of content changed the name of the game in their industry.
2. When the organizational structure is outdated
Young companies often have a flat organization structure that they keep stretching as their business expands. Each time a new entity (e.g., country, product category, customer segment, or asset) is added, its manager is added to the CEO’s direct reports.
Such a string-of-pearls approach works well — up to the point where the CEO’s span of control becomes unmanageable and/or opportunities for collaboration between the large number of entities are left unattended. For example, a global midstream energy company we worked with had grown over a period of 15 years from four to more than 20 assets, each with P&L responsibility and reporting directly to the CEO. At that point, the company decided to rethink its historically effective organization structure.
3. When overcompensating for organizational design flaws leads to inefficiency
Any organization design choice involves negotiating concessions — for example, between global and local, control and autonomy, or centralization and decentralization. When leaders make a major design change, the result is never perfect — it’s typically the least-bad design, so to speak. Subsequently, they put small add-ons in place after implementing the new design (the “hops” we mentioned above) to try and compensate for any imperfections. If they graft too many corrections upon the design, the organization becomes totally opaque and unwieldy. At that point, it may be time for a major change, including of the primary dimension.
Changing an organization’s primary dimension is like a country deciding to switch from driving on the left side of the road to driving on the right: You don’t decide it lightly, and you surely cannot implement it gradually. That brings us to the question of pacing: Once you have decided to change the primary dimension, how fast should you implement it?
Rupture without disruption
When you make a leap and radically change your organization design, you intentionally make a clear break with the previous way of doing things. But much as you want rupture, you want to avoid disruption. You have to safeguard your company’s ongoing business, which depends on the continuity of your people, networks, and processes.
In determining the pace of your change, you want to make a careful but firm transition. Consider these four points:
Anticipate the unintended consequences of the change.
Switching an organization’s primary dimension is a profound structural change, and leaders must anticipate the collateral effects. When changing the “anatomy” (formal structure) of the organization, be mindful also of its “physiology” (processes) and “psychology” (attitudes), to use terms from researchers Christopher Bartlett and Paul Beamish.
For example, as part of its reorganization, the previously mentioned midstream energy company undertook what it called a “recalibration” of its corporate values. The exercise aimed to bolster employees’ commitment to the company as it remodeled its formal structure. Through a participatory approach, employees could indicate what they thought should or should not change in the company’s core beliefs, attitudes and behavioral patterns.
Address your new silos.
Switching an organization’s primary dimension doesn’t make silos go away — it just creates new ones. Leaders must ensure lateral coordination between the new verticals, which can be done through hard-wiring (such as a formal matrix or coordination function) or soft-wiring (such as councils, planning processes, or knowledge networks).
Apply a strict comply-or-explain rule.
When changing the organization’s primary dimension, usually a small CEO-sponsored group designs the new model. The subsequent detail design phase involves a much broader group of managers to ensure proper migration, communication, and buy-in.
During that phase, people regularly plead for adjustments or exceptions to the target model. The arguments and anecdotes they use may make sense from a local optimization perspective, but rarely do when considering the full picture. Therefore, the sponsor should apply a stern comply-or-explain rule: Any proposed deviation must be explained very well and can only be accepted after approval by the governance body that approved the target model.
Move when in calm seas (as much as possible).
Major structural changes are sometimes foisted onto the organization when the company is already suffering from other ills, such as leadership strife or strategic vacillation. For example, food company Danone’s “local-first” initiative of 2020 implied a change of the primary dimension from product to region, alongside the replacement of the CEO and the near-complete renewal of the board of directors. Global energy company ENGIE switched its primary dimension from product to region in 2016, only to flip back to product in 2021. Turbulence and uncertainty are not conducive to a serene discussion about organization design: They drain energy, lead to fatigue, prevent alignment, and make people leave at all levels needlessly.
Changing an organization’s primary dimension, i.e., making a different choice of which verticals have full P&L responsibility, is not something to get into lightly. But don’t do it belatedly either, when your degrees of freedom and the time to handle it carefully are severely limited.