Results of Applying Principles of Organic Business Design

The first time published on 31 MARCH – 1 April , 2018

Part 1

Introduction

It seems that for the last 57 years the definition given by T. Burns and G.M. Stalker for organic organisation has not been changed. We can explain this phenomena by that the Organic Organisational structure was not in demand for these years: no need – no use – no evolution. In our previous publications – “The Major Principles of the Organic Business Design” and “5 Characteristics of an Organic Business” – we argued that the time for Organic Business has come now due to the market where changes become global and accelerating in pace at an unprecedented rate.

In this article, we will demonstrate the results of applying Principles of Organic Business Design (hereinafter Principles) to the organisation of business: what the organisation is in the Organic Business.  We base our work on the T. Burns and G.M. Stalker theory, though a few of their definition elements require a new understanding and re-interpretation. Within the following text, we will refer to mentioned Principles by stating the principle number, for example, (P.7) or (P.12).

Real-world Example

To make our method more realistic, we have decided to take a real-world example and chosen the Sainsbury’s chain of stores – the third biggest chain in the UK with more than 150 years of history. The information about Sainsbury’s that we use is a year old and does not necessarily reflect the current state of the company as well as its vision, plans and business targets, i.e. this information cannot be used for making any opinions, decision or suggestions about Sainsbury’s whatsoever. The organic model we describe was not presented to Sainsbury’s and was not observed or reviewed by it in any way. We have no relationships with Sainsbury’s and this article cannot be considered as any form of recommendation or promotion of Sainsbury’s.

That time, the company had about 74 executives and employed a bit less than two hundred thousand people through its net of stores and services. The company has its bank and recently acquired a few other retail brands. In our examples, we will touch only a high level of its humongous chart as shown in Figure 1. We have found the structure a bit overloaded with the number of direct reports to the CEO. The structure we use shows Digital Strategy and Data divisions as separate entities that are treated at the same level as a bank and a retail store-chain. We cannot explain this specific and take a freedom of manipulating with these units as well as with others with no relations to the reality of company’s structure positions. Another specific of this chart is an absence of the COO role that usually manages the operations and has an authority over the chain of stores, buyer relationships, marketing and other operations.

Figure 1. (select View Image)

The hierarchical structure allows us to assume that each “box” in the diagram represents either a business unit[1] (BU) or a few BUs grouped in the Departments. Also, we assume that each BU or Department realises particular business function or a few of them, though we cannot say how accurate a separation of duties and responsibilities this diagram reflects. However, the hierarchy clearly demonstrates the accountability of the BU and Department Managers to the upper management levels.

Functional View

The objective of any retail organisation and Sainsbury’s in particular is producing increasing revenue via servicing needs of their consumers. It is not clear why one or another hierarchical management structure fit with this objective. Moreover, it is not easy to trace and valuate an impact of investment in, for instance, HR or Data/DaaS (Data as a Service, which is in essence a leasing of someone’s else data) on the increase of the revenue. So, let us look at the company without “command-and-control” structure utilising its structure of tasks, that the organisation structure and related BU are supposed to solve.

If we know the task, we can figure out concrete business functionality that can solve it. There may be different functional solutions for the same task and the combination of these functions is unique to each company. Nevertheless, the set of such tasks can usually be split into three categories:

• the tasks needed for current operations (Operating Model)
• the tasks what have to be solved for the Target Operating Model (TOM)
• the tasks, more accurately – the task solutions, that are inherited from the past and not necessarily needed any more, but not retired yet.

The BU of the company realises certain business tasks. Some of the tasks are more or less important, which depends on the current operational needs and strategic targets of the company. The current tasks and their solutions can be presented in six functional groups (P4):

• Central Corporate Administrative functionality
• Financial functionality
• Retail Operational functionality
• Technological functionality
• Human Resource functionality
• Distribution and Logistic functionality.

The group of tasks may include its sub-groups of smaller tasks. Through a task view, we can group BUs in groups and sub-groups. The outcomes of the BU work may be used within the group and in other groups/sub-groups.

The diagram in Figure 2 shows the functional grouping and related BUs that work at the corporate level across group boundaries. A BU can have its own internal structure as well, but it is hidden to the rest of the company behind the functionality the outcomes delivered by the BU. The exception is the “Retail & Operation” functional group that represents a regional sub-grouping of retail products – the field stores.

If we separate manufacturing from sale, which is a traditional approach, the stores the outcomes of all other BUs of a retail company. Yes, the stores sell goods – food and things – but these items are not necessary produced by the same retail company and cannot be considered as its values for the end consumer. An effective and efficient selling is the product of a retail business.

Figure 2. (select View Image)

The store has a Store Manager aka Product Manager and several operating functions that are defined and supported by the work of all other functional BUs. The store has its own internal value streams (P.6) and participates in the corporate value delivery chain as the last group of delivery elements as shown in Figure 3.

Figure 3. (select View Image)

Depending on the size of a retail business, Merchandising may belong to the store, if there are only a few stores in the company, or can be elevated to the corporate level to reuse the best practices and innovative ideas across the groups of stores. Similar considerations relate to Human Resources, Technology, Marketing, Inventory, Distribution, Logistic and Supply Chain – some elements of these functions may be realised at the corporate level while others may be implemented in the store under the Store Manager supervision.

A value delivery chain illustrates which functionality influences which another one, but there is a reversed influence always takes place between each consecutive pair of chain elements. The entire chain acts, actually, as a circle. The centre of this circle is the store as a representative of the final consumer (Figure 4).

Figure 4.

If we learn how to influence the functional and informational relationships between the value chain nodes, we obtain the key to the mechanism of business flexibility, which segregate Organic Business structure from the mechanistic hierarchical structure. Just saying that Organic Business is flat is not enough – we need to manage and maintain this “flat” structure. Especially, when a business organisation with its strategy, planning and TOM operates in a dynamic market[2].

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[1] In this article, a Business Unit is the minimal in size logical segment of a company representing a specific business function and operating under supervision of an accountable manager.

[2] Supply and demand in markets always change. This is a routine business execution environment for a company. However, if the company notices such exceptional scale or pace of changes that its capabilities appear near to their limits in reacting and adopting these changes, we call such market a dynamic market from the company’s perspective.

Part 2

Internal Regulated Market

When we postpone not only subordination, but also grouping, we can notice that a use of an outcome from one BU by another BU portrays simple and well-known provider-consumer relationship pattern. In other words, one BU serves another BU. This type of relationships existed and currently exist in all models of organised business but was camouflaged by a management hierarchy.

A necessity of forming different provider-consumer chains is dictated by the needs of creating value delivery chains, i.e. dictated by the needs of the consumer market outside of the company. However, even this short observation depicts a notion of chain of services where each node plays a role of provider and consumer at the same time.

Following this line of logic, the operations of the BU should be driven by the functionality and outcomes needed by its consumers. There should be no other tasks for the BU and no additional cross-BU management other than for the new functionality and for the resolving exceptional situations. If the servicing is organised properly, the BU Manager, not the upper manager, has to take care of the business continuity of the BU and satisfying demands of its consumers.

The consequence of this approach is a change in traditional accountability and responsibility model. When we talk about service that one BU provides to another, we should assume that there is a trust between the interacting Bus. There are two major bases for such trust: 1) both BUs are created by and operate within the same organisation, and 2) accountability of the provider to the consumer (P.3). Actually, a reference to 1) is not necessarily sufficient because we really deal with services rather than with BUs, which can engage external services/providers that do not have an affiliation with the Top Corporate Management (TCM) and its authority. So, the only universal foundation of trust between consumers and service providers is the accountability for generating defined and expected business values, outcome (P.1). It is an accountability for the service quality, for the SLA, for its validity, for the support and, in general, for the BU actions and decisions. It is an accountability of each employee of the BU for the BU business to its consumers.

An accountability-based trust between consumers and service providers is the foundation for successful operating of the internal service-oriented ecosystem of an Organic Business. The BU/service managers have to be proactive (P.11) to constantly keep their services at a high standard. The mechanism for achieving and maintaining this standard is business flexibility (P.5) based on contractual relationships with the service suppliers and consumers. The contractual model promotes a competition between BUs in delivering the best value – quality and price – to its consumers (P.1) (P.3). If the market or, more accurately, the business execution context changes, the BU/service has to be able to react quickly. Particularly, it should be able to reassess the risks (P.7) and to change its relationships and engage different suppliers while servicing new consumers (P.2) (P.12).

Taking as an example a “Retail HR South” BU from the Figure 2 [part 1], the diagram in Figure 5 illustrates four major types of the contracts that each BU providing a service in the internal market has to set and maintain.

Figure 5.

So, each BU, upon creation, is contracted by the TCM regardless which functional group the service provided by this BU belongs. This is an explicit written contract where the functionality and the outcome of its service are defined, and accountability/responsibility of the BU Manager are specified. In this model, the BU Manager is accountable to the BU consumers and responsible to the TCM for providing planned revenue.

In many cases, a company sets bigger business tasks that would not be feasible for one BU. To realise such task compositions of the outcomes of several different BUs is required. We will discuss compositions later in the article; for the time being we note only that the BU may have an explicit or implicit contract with a composition (consumer). In the explicit contract, the terms of the engagement of the BU’s service are negotiated; in the implicit contract, the composition engages the BU’s service as-is, i.e. adhering to the service’s terms and conditions.

Additionally, the BU contracts other BU/service within (or even outside) the company and negotiates the SLA with providers. That is, the explicit contracts are used in this here; these ‘other’ BUs/services belong to Finance, Planning Technology functions and include the feedback from the field stores (P.2).

The last type of contract is about contracts with the BU’s consumers, internal and/or external. Depending on the nature of relationships, these contracts may be implicit or explicit. If consumers use the outcomes of the BU/service as-is and in-full, implicit contracts are sufficient. In this operating model, a BU may serve external consumers if internal consumers are happy with provided services.

The principal difference of the BU-TCM contract from the re-articulated hierarchical structure is in that the former is about registration and priorities in the BU tasks of taking corporate tasks for consideration – there is no mandatory commands. However, particular BU can omit the company/composition request. Such action leads the company to the creation of another BU with the same functionality and the first BU gets in the internal competition risking its existence if the new BU would provide better service. The internal market is market, but in Organic Business it is regulated market where the rules are set by the TCM.

The contracts a BU has with its consumers (including participation in the compositions) is an exclusive characteristic of Organic Business (P.3) (P.4). For example, the outcomes of the “Legal & Compliance” BU and HR “Resourcing” services are consumed by all other BUs in the company; the outcomes of the “Supply Chain” service is consumed by “Distribution” BU and “Logistics” BU – just to mention a few. In other words, the BU/services contract other BUs in the company as their consumers. Some internal BUs, e.g. Finance and Technology related ones, have potentials to offer their services to the external consumers as well.

Business Service and Decentralised IT Resources

Each business service is a means of realisation of business capability and means of access to its execution results. If a business capability is realised internally, it is likely that its implementation resources include technology. Taking Amazon.com Inc. as an example, we would like to illustrate how centralised corporate IT function transforms into the BU/service model, which we have described in the previous section.

Centralisation of corporate technological function in the IT Department aimed to gain efficiency in the use of limited technological resources and, via reusing them, reduce overall cost of internal development of technology products used for business capability implementations[1]. It seems that centralised IT does not provide a cost reduction anymore because the cost reduction happens nowadays in outsourcing, including Cloud. Amazon.com has constructed a development platform (AWS) comprising services that provide an advanced technology infrastructure as well as a development model where teams (known as Amazon “2-Pizza” Teams) of developers can work independently as small highly productive IT organisations. Two other technologies known as Microservices and API, which focus on an implementation of business tasks in the software, fully match the AWS model.

The teams are self-sufficient and include all specialists needed – from architects to developers and testers. Yes, this is a duplication of skills. However, all products such teams produce are not released “into testing and production” to other teams. Instead, the same team conducts all due testing, deploys the products in production environment and continues their support, enhancement and improvement.

Business functionality implemented or enabled by technology is organised in the same style. One set of independent development teams produces low-level business service, i.e. software that implements elements of particular business functionality defined in the business capabilities. Another set of independent development teams composes low-level business service into intermediary business solutions and, finally, into business utility services, e.g. cart payment, and products for the external consumers, e.g. AWS Marketplace with all necessary business utility services. It is important to note that each low-level business service delivers only its own narrowed outcome. To produce it, a team usually needs to cooperate with other services and use their outcomes.

In essence, this is an isolated creation of particular business value, which consumes a lot of supplements from other value producers. The major difference of this model for traditional process-centric one is in that the service consumes outcomes regarding who and where produced them – was it an internal or external service provider.

In such technology model, traditional centralised IT organisation remains, but becomes responsible for providing only sharable technology services like email, document management and alike. The major question to this model is how the teams know what they need to produce and how to manage the distributed production in line with the company needs. In the following sections, we will answer these questions. However, jumping ahead a bit, we can say now that the tasks come to technology from the TCM and the BU management while defined in the practice of the Architecture of Business [https://organicbusinessdesign.com/architecture-of-business-for-business-by-business/], which also controls and prevents functional duplication in the development and use.

Service Compositions, Business Solutions and TOM

A TOM in an Organic Business contrasts TOM of other type of business due to its dynamics. While it relaises the corporate strategy, its actual operational content has a natural ability to change in line and pace of the   changes in the market. This effect becomes achievable thanks to dynamic compositions of the BU/services and compositions of compositions.

Described organisation model allows a BU to participate in many compositions simultaneously – nobody commands them or limits their practice except themselves (P.9). If a BU/service sees an opportunity, but needs more resources, it has two major options:

It is more likely that, when a BU receives a request from TCM/Composition as a consumer, it turns to the corporate funding (aka Government funds) than would deny this request.   A use of corporate resource is the options specified in the BU-TCM contract. Corporate funds are formed by deductions made by each BU/service. Since each BU employs high professionals (and juniors who are in training), a layoff is not a way for saving funds for hiring more people (P.10).  A popular suggestion that organic structure assumes much lower requirements to individuals working in it because they work together, is incorrect – one professional is more efficient and effective than a group of just educated specialists[2].

A BU can produce new services upon approval of the Architects of Business[3] that situates in the central corporate Administration function, in the cross-functional cross-divisional architectural unit (CFCDAU). However, it would be implausible that a BU Manager supervised more than one or a couple of services – the TCM will split such BU in two or three BU eventually (P.7). Based on the requirement of high business flexibility (P.5) in the dynamic market, the BU should provide for one or only a few business tasks with related services.

The Principles of Organic Business Design […/the-major-principles-of-the-organic-business-design/]] stimulate creation a variety of service compositions for the TOM (P.5) (P.9) (P.6). The compositions exist only until they effectively address the needs of the market – external or internal. Complexity of the compositions depends on the business task and market conditions (P.6) (P.7) and is driven by the balance of short- and long-term risks (P.12). One composition can include another composition while the BU/services might not know about such inclusions while providing their routine services. An image in Figure 6 illustrates how individual BU/services join in bigger compositions and, depending on the demand composition of different size/complexity reach, for example, external consumers.

Figure 6.

Each composition is managed by a Composition Manager who controls the logic of membership and operation/execution of the composition as a whole. The Composition Manager is set by TCM/CFCDAU, but accountable to the consumers of the outcome generated by the resolution of the composition task. If the solution of a particular task is not actual any more, related compositions gets dismissed, which may not relate to the included compositions and BU/services (if their tasks still present)[4] (P.5).

Management of compositions and individual BUs capitalise on the professionalism of employees and keen to provide maximum revenue when servicing consumers (P.11). However, a harmony and unity of the objectives assigned to the BU (P.9), especially in the compositions, help to balance quality with affordability of services.

The life-cycles of business functionality and information are defined and managed by CFCDAU considering, first of all, corporate interests (P.9).  If a BU cannot be re-focused on a new functional task when the previous becomes obsolete, the BU can be dismissed and its personnel re-oriented in other BUs. The life-cycle of the compositions and BU/services is managed via needed business functionality by Architects of Business.

The primary task of the Architects of Business is to transform a corporate strategy into capability-based requirements to TOM implementation in the given business execution context (P.7) (P.11) (P.12). In effect, these requirements reflect the architectural solutions of the business tasks identified based on the strategy goals and objectives and within the corporate business model. The crucial ‘instrument’ of Architects of Business is business capability, which defines the functionality and resources needed for solving the business task.

For each identified business task, the Architects of Business decide (with an approval from TCM) which type of capability to create, i.e.

• a so-called Old Dynamic Capability, i.e. an internal capability to be realised via a new BU or a new service, or
• a so-called New Dynamic Capability, i.e. to engage an external capability and utilise it in the internal compositions, or
• a so-called Agile Business Capability, which can internal resources and has an ability to outsource the implementation while keeping the business functionality under the BU’s control (P.13).

When a business capability is defined and designed, needed implementation resources are specified. Thus, the BU/service is nothing more than a materialisation of low-level business capabilities – individual or grouped.  The BU/service compositions realise compound, more complex, capabilities. The Architects of Business work with the BU Managers, define the tasks for the compositions as needed and form them. Based on the market feedback (P.2), the Architects of Business manage the life-cycles of the compositions. As a result, TOM is a landscape of realised compositions of business capabilities.

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[1] According to the definition of business capability technology is one of the resources that can be used for an implementation of business functionality defined for the  capability.

[2] “Sainsbury’s staff were told that it plans to axe the roles of deputy manager, department manager, team leader and store supervisor… It is replacing deputies with a smaller number of operations managers. The other, more junior, management roles, are being composed under the new title of customer and trading manager”.

[3] Architects of Business should not be mistaken by IT’s Business Architects. The former architect/design the corporate business and its TOM while the latter deal with the impact of business on the technology strategy and its realisation.

[4] In Cloud technology, such dynamic use and release of resources is called elasticity.

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