than their division vice president, since functional leaders
were responsible for rewards and promotions. Only the CEO
and his executive team had the discretion to resolve disputes.
All of these symptoms fed on one another and collectively
hampered execution – until a new CEO came in.
The new chief executive chose to focus less on cost control
and more on profitable growth by redefining the divisions to
focus on consumers. As part of the new organizational model,
the CEO designated accountability for profits unambiguously
to the divisions and also gave them the authority to draw on
functional activities to support their goals (as well as more
control of the budget). Corporate functional roles and decision rights were recast to better support the divisions’ needs
and also to build the cross-divisional links necessary for developing the global capabilities of the business as a whole. For
the most part, the functional leaders understood the market realities – and that change entailed some adjustments to
the operating model of the business. It helped that the CEO
brought them into the organizational redesign process, so that
the new model wasn’t something imposed on them as much
as it was something they engaged in and built together.
2. Important information about the competitive environment gets to headquarters quickly. On average, 77% of
individuals in strong-execution organizations agree with this
statement, whereas only 45% of those in weak-execution organizations do.
Headquarters can serve a powerful function in identifying
patterns and promulgating best practices throughout business
segments and geographic regions. But it can play this coordinating role only if it has accurate and up-to-date market intelligence. Otherwise, it will tend to impose its own agenda and
policies rather than defer to operations that are much closer
to the customer.
Consider the case of heavy-equipment manufacturer Caterpillar. 1 Today it is a highly successful $45 billion global company, but a generation ago, Caterpillar’s organization was so
About the Data
We tested organizational effectiveness by having people fill
out an online diagnostic, a tool
comprising 19 questions ( 17 that
describe organizational traits and
t wo that describe outcomes).
To determine which of the
17 traits in our profiler are most
strongly associated with excellence in execution, we looked at
31 companies in our database for
which we had responses from at
least 150 individual (anonymously
completed) profiles, for a total
of 26,743 responses. Applying
regression analysis to each of the
31 data sets, we correlated the 17
traits with our measure of organizational effectiveness, which
we defined as an affirmative
response to the outcome statement, “Important strategic and
operational decisions are quickly
translated into action.” Then
we ranked the traits in order,
according to the number of data
badly misaligned that its very existence was threatened. Decision rights were hoarded at the top by functional general offices located at headquarters in Peoria, Illinois, while much of
the information needed to make those decisions resided in the
field with sales managers. “It just took a long time to get decisions going up and down the functional silos, and they really
weren’t good business decisions; they were more functional
decisions,” noted one field executive. Current CEO Jim Owens,
then a managing director in Indonesia, told us that such information that did make it to the top had been “whitewashed and
varnished several times over along
the way.” Cut off from information
about the external market, senior
executives focused on the organization’s internal workings, overanalyzing issues and second-guessing
decisions made at lower levels, costing the company opportunities in
fast-moving markets.
Pricing, for example, was based
on cost and determined not by
market realities but by the pricing
general office in Peoria. Sales representatives across the world lost sale
after sale to Komatsu, whose competitive pricing consistently beat
Caterpillar’s. In 1982, the company
sets in which the trait exhibited
a significant correlation with our
measure of success within a 90%
confidence interval. Finally, we
indexed the result to a 100-point
scale. The top trait – “Everyone
has a good idea of the decisions
and actions for which he or she
is responsible” – exhibited a
significant positive correlation
with our success indicator in 25
of the 31 data sets, for an index
score of 81.
