A major source of intrigue for me, both as an investor and devotee to lifelong learning, is analyzing why some businesses fail when dealt the perfect hand of cards while others win against all odds. Rational thought opines the winners simply have the better product, the cheaper price, and/or superior service. While these factors are characteristics of top performing businesses, they do not single-handedly explain, at the aggregate level, the success some companies continually revel in despite others' products or services being "the better mousetrap."
What does continued, long-term success in business stem from? The People & Culture
People are the Root of all Innovation
A company's success cannot be solely attributed to a superior product or service because products can be reverse engineered and processes can be copied, often resulting in the low-cost provider claiming the majority of sales. To understand the differentiating factor in one organization's success over another's, we must delve under the hood at how a company arrived at said superior product or service. It all boils down to one thing: the people. Products don't create themselves. People create them through intellect and the ability to execute.
Information abundance in the digital age has shortened product lifecycles and trends, demanding quicker innovation. The long-term solution for excelling in this ever-increasing competitive landscape is to structure a superior culture within the organization, where adaptability, velocity, and a growth mindset define the ability to stay ahead of competition. People must be given the proper tools and authority to innovate and respond to obstacles quicker than competitors to remain on top.
The Power and Pitfalls of Organizational Structures
Vertical Structure
The vertical organizational structure, one where a hierarchy and chain of command exists in a pyramid format, often inhibits creativity and creates angst for employees who do not see eye-to-eye with their managers. The hierarchy not only contributes to employee dissatisfaction through managers dictating procedures to subordinates, but also creates department silos that do not interface properly with one another nor optimize efficiency across functional processes.
Performance tends to get judged based on how well a person follows the rules and fits into the culture of the large organization, rather than evaluating an individual based on the number of ideas she contributed and executed. As a result, companies in a hierarchical structure often get stuck in the rut of simply focusing on execution, which can continue to drive down costs and improve profitability for some time. However, as the company's core competency loses its competitive advantage to adversaries who are innovating to improve on or disrupt existing solutions, the behemoths focused solely on execution can be overtaken. The vertical structure limits creative capacity and creates a culture of following the rules and reinforcing existing processes, rather than fostering creative disruption that differentiates the organization from its competitors.
Horizontal Structure
The horizontal structure emphasizes an employee-centered approach where very few, if any, individuals are superior to others. This provides a heightened sense of empowerment and opens communication channels across everyone within the organization to focus on teamwork and collaboration. Famous examples of successful flat organizations are Zappos and Valve, where all employees participate in organizational decisions and are incentivized to innovate and pursue the projects they believe are most valuable.
This structure is common at many startup firms, allowing them to quickly disrupt and find success. They foster creativity through the proper culture from the start and are able to maintain this with a relatively small number of employees compared to the conglomerates by focusing on hiring self-motivating, trustworthy employees who operate autonomously.
The Ideal Structure Conundrum
In principle, organizations should strive for a flatter structure because of the massive downstream impacts from implementing an empowering culture focusing on innovation, but this becomes less and less feasible as an organization grows, thus the conundrum. Without standard procedures and some sort of hierarchy in place at larger organizations, chaos would likely ensue because there are simply too many moving parts and too many employees that cannot be trusted with the power to make decisions at the organization level.
Startups champion the enabling culture needed to drive innovation, creativity, and disruption, but as the culture contributes to their success in taking market share from larger competitors and their companies grow, a shift toward a vertical hierarchy is warranted. These companies find it necessary to start creating functional departments and defining standard processes, all the while tending to the vertical structure pitfalls of the prior market leaders that were dethroned. This loop is summarized in Figure 1 below.
Figure 1. Startups Tend to Structure Horizontally, but Company Growth Leads to a Vertical, Hierarchical Structure
Once an organization has a vertical hierarchy in place, it is nearly impossible to transition to a flatter structure because most individuals in power have no interest in creating a structure wherein they lose power and become peers with those below them. Further, the possibility of this shift is diminished by its sheer magnitude, requiring an enormous resource and energy commitment by the entire company that could have sizable opportunity costs.
An Adaptive Culture Overcomes Obstacles
If the horizontal structure is not feasible for larger companies, but the vertical structure inhibits innovation, what is the ideal structure?
A hybrid structure that leverages standard procedures and delegation to optimize efficiency, while maintaining an employee-centered culture focusing on the promotion of employee ideas.
As globalization continues, a more horizontal structure will shine because customers will demand fast response times and better service. This trend is already evident with the business landscape shifting from conglomerates to more decentralized, pure plays. The number one focus for companies needs to be on hiring the right people every step of the way so that even as the organization becomes more vertical with growth, there is a trust to empower people to make decisions.
Companies should adopt an open door policy, giving lower level employees access to managers for sharing ideas and raising concerns. Often, lower level employees generate the best ideas for operational efficiency and product improvements because they are the ones working directly with customers and executing daily procedures. By rewarding idea generation and promoting a culture where anyone can have her voice heard, companies can benefit from many of the advantages of a flat structure.
Building an adaptive culture with a high velocity and growth mindset that continues to overcome unforeseen obstacles requires hiring the right people. With trustworthy and creative people in place, distributing the power to make decisions, quickly innovate, and generate new value streams will flow naturally. When people and culture become the primary focus, downstream hurdles take care of themselves.
Originally published on LinkedIn
Written by Chris Robertson