Leaders today face a crisis in confidence in the way their companies function and perform. They wonder: In today's unforgiving and fast-moving environment, can the designs of their organizations balance velocity and acceleration? Can they translate strategy into value? Everything hinges on how effectively those designs can balance a scale and efficient growth orientation with designs that are agile and sustainable, focused on resilience and adaptivity.
If the parade of environmental jolts and economic shocks in the last decades hadn't already cast doubt on the effectiveness of traditional organizational designs, COVID-19 revealed their full vulnerabilities. Combined with unprecedented competition, such conditions are exposing organizations' inability to evolve at speed and scale. Today, no matter how good a company's strategy or business model might be, they will be utterly useless if the organization isn't set up to pivot quickly.
Designing organizations in the past was, to be sure, a lot easier. Traditional organizations rarely needed to adapt in any major way unless relatively predictable changes required it. Design was all about ensuring scale, efficiency and growth. It was just a matter of aligning the right processes, technologies and people to deliver a product or service within a particular structure—oriented around either your customers (Amazon and Zappos are examples), your products (like Apple or Google in its early years of Search), or your organization's functions (such as professional services like consulting firms).
But today's competitive marketplace demands that organizations accept that speed and resilience are required—and that they can accomplish that through their organizational designs. By designing explicitly for uncertainty, leaders can reduce their risk. They can build in a design that will support the execution of not only strategy, but of strategy that will inevitably evolve based on highly dynamic conditions.
To bridge the gap between traditional and digital businesses to outperform, organizations must be designed to string together a series of momentary advantages. That implies a design that will scale and deliver growth while enabling agility and sustainability. By sustainability, I mean organizations that have built-in features that are above all renewable—everything from eco-friendly building materials and healthy workplace design that can serve to rejuvenate employees' bodies and minds. But it also means designing the organization for sustainable outcomes: ensuring the company's product or service has a favorable impact on society and the environment.
Sustainability, along with the agility that comes with flatter, more collaborative designs, will define successful organizations in the coming decades. And it appears that a number of companies are doing just that. Research done by Gartner reveals that 52 percent of organizations surveyed during the 2020 COVID-19 crisis say they are shifting from designing their organizations for efficiency to designing them for flexibility. These companies are ensuring that their "structure follows strategy," as the late historian and Harvard Business School professor Alfred Chandler famously advocated.
With the certainty that unexpected events like the pandemic will only grow more frequent in the future, many organizations are now following suit by adopting organizational designs that can deal better with ambiguity. These companies are implementing scenario-planning exercises that include more frequent occurrences of a variety of calamities.
In this article, we will look at the specifics of how to design organizations that are built for speed and sustainability—and how to master that balancing act, as well as how to evolve the organization.
Design and the Organization's Ability to Scale and Grow
It's one thing to develop a growth strategy; it's quite another to execute it effectively at pace. Disruption accelerated by the COVID-19 environment is driving many companies to improve their agility and sustainability. Sixty-two percent of organizations say that, since the pandemic hit, decision-making has improved in their organization and that more of it has moved to the front line. Nearly three-quarters of employees report that their teams are working with greater agility since the pandemic hit, and 19 percent of employees ranked that decision-making will be more decentralized as one of the top-three permanent changes they expect once the pandemic is over.
Leaders today are finding it necessary to redesign their organizations and move from acting agile out of necessity to being agile by design. To meet the execution demands of scale and growth, organizations must differentiate between "brilliant improvisation" and a repeatable dynamic capability; in other words, capabilities that enable the company to adapt and evolve with rapid speed. Apple, for instance, has been masterfully successful due to its ability to "market technologically based products to consumers and developing features that people value."
Pursuing designs optimized for dynamism and speed doesn't mean giving up stability, however. This is a false trade-off. As New York Times columnist Thomas Friedman aptly put it, "You have to build an eye that moves with the storm, draws energy from it, but creates a platform of dynamic stability within it." Organizations that have passed the startup challenge must manage the inevitable tension between stability and change. They must produce and deliver well enough today to generate profits—but also plan and prepare for tomorrow. They must manage the complexities of multi-stakeholder demands.
The organizational designs that can operate in faster and more uncertain markets and environments will be flexible and agile, and they will be sustainable. But how do you create such designs?
How to Design Organizations for Speed and Sustainability
Every organization's design, of course, needs to be tailored to the business's goals, strategy, maturity, geographic and line-of-business footprint, among other factors. Advances in digital technologies and AI are forcing business leaders and investors toward opportunities for greater speed, cost reductions and operational efficiencies as companies scale. Such advances will ultimately lead to organizations that are designed to flex and roll with uncertainty.
As a first step, leaders whose business and operating models aspire toward digital must ensure that their organizational designs harmonize with the overall business strategy and value agenda. Leaders can begin, therefore, by asking themselves several critical questions and considering all their implications.
Are we properly organized and aligned to execute our strategy for growth? Many companies can master the essentials where they have a stable situation. But only companies that can pivot fast enough to string together momentary advantages will succeed in the current environment. Considering what some companies achieved during the pandemic, we can see clearly how alignment and responsiveness allowed those organizations to creatively access new capabilities at a speed and scale never seen before. Some fast responders rapidly switched out manufacturing lines for in-demand products, doubled production output or crafted new remote in-home services in a matter of days. Some built new, innovative partnerships and shifted their manufacturing lines to build ventilators.
Do we have the right governance to make better, faster decisions? The goal is to move leaders and, by extension, the management team as a whole, from single loop learning (making adjustments to correct a problem) to double loop learning (interrogating the root cause of the problem). Take, for instance, how the CEO of a Latin American airline tasked a group of senior leaders with answering the question: "Why aren't more of our countrymen taking advantage of our company's low fares?" Questioning their assumptions, the group of leaders realized that taxis to the airport were too expensive for the average customer—sometimes 40 to 50 percent the cost of the airfare—and transit services were too infrequent. The team decided to implement free and frequent airport shuttles. As a result, passengers were booking more than 3,000 free bus rides per day to the airport, making the Latin American airline the fastest growing in its home country.
While such double-loop learning helps make better decisions, the key to speedy decisions, according to McKinsey research, is to hold fewer meetings, with fewer decision-makers present at each one. It also found that leaders need to encourage real-time, high-quality debate over high-stakes decisions with the potential to shape the company's future (big-bet decisions)—and they need to delegate noncritical decisions to empowered employees and teams. Firms that make a special effort to gain speed outperform others by a wide margin on various outcomes, including profitability, operational resilience, organizational effectiveness and growth.
What is the most effective way to structure and govern the organization? Clearly, organizations in the digital era must be structured for agility—collaborative, team-based, open and transparent, and minimally hierarchical. The trouble is that many agile designs focus mostly on performance and not on outcomes—specifically, sustainability. That means embedding sustainability into the DNA of the organizational structure rather than siloing it as a project, a corporate initiative, a department or a position. Companies whose success includes sustainable outcomes focus on providing different stakeholder groups a meaningful voice in governance and decision-making. For example, a co-op company, which is typically jointly owned and democratically governed by employees, might include employee stakeholders in their board meetings in order to ensure that the economic, social and cultural needs of the communities where they operate and do business are met.
How do we run a business within a business (run a core business in parallel with a new business)? In today's world of constant disruption, organizations must constantly reinvent themselves—experimenting with and creating new businesses for the future without abandoning their core business. And they must know how to continually calibrate investments to grow new businesses at precisely the right time. Organizations must embed structural ambidexterity in the organizational design to account for core and new businesses. An approach recommended by John Kotter is to create a dual operating system—one built for reliability and efficiency, and another built for agility and speed to leap into the future.
Another way to build such ambidexterity into the organizational design is to create a series of microenterprises with unique mechanisms and ways of working to best support each engine. That approach has been refined by Haier, the $35 billion China-based appliance maker—the world's largest with more than 75,000 employees globally. Having long viewed bureaucracy as a competitive liability, Zhang Ruimin, Haier's CEO, built a company where everyone is directly accountable to customers (a policy he describes as "zero distance"), employees are entrepreneurs, and an open ecosystem of users, inventors and partners replaces formal hierarchy. Haier accomplished those things by evolving from a few monolithic businesses into some 4,000 microenterprises (MEs), most just 10 to 15 employees. With MEs free to form and evolve with little central direction, they all shared a common approach to target setting, internal contracting and cross-unit coordination.
We can think of Haier's distinct businesses as modules—discrete capabilities that can be "plugged and played" at will based on well-defined, standardized interfaces. In this way, enterprises operate as actual platforms with multiple autonomous businesses within a business—simultaneously transforming the core, expanding into adjacencies and growing new businesses. Even support capabilities can become business modules that can efficiently plug and play with companies inside or outside the organization. How do you craft your organizational design to accommodate not one but multiple future scenarios? One way is by employing active thought experiments, prioritizing the right questions over right answers and balancing action with learning.
Achieving the Balancing Act
Enabling growth today requires a deliberate focus on elasticity: building agility and sustainability into the design of the organization while creating confidence that the business can meet its performance objectives far into the future. In fact, companies need to adhere to the evolving societal standards and operate using sustainable business practices to scale and drive growth. Opting in or opting out of sustainability is no longer an option.
Sustainable organizations expand the term "performance" to optimize environmental, social and governance (ESG) outcomes as well as financial results. Since the relative emphasis on these outcomes change over time along with the methods for achieving them, there is no sustainability without agility. Indeed, the digital era has revealed the implications for the effective design and implementation of agile and sustainable organizations.
Take for instance a company's "location strategy," encompassing physical assets such as buildings and equipment. Increasingly, however, because the future of work appears to be a fully remote or hybrid workplace, organizational design should address remote-work issues as transforming existing offices into meeting spaces where employees can come into the office only as needed for collaboration.
Indoor spaces where employees work, learn, play, eat and even heal will also factor into design choices and decisions. Why? Healthy buildings can have an outsized impact on our performance and well-being. They affect creativity, focus and problem-solving ability, and they can even make employees sick, jeopardizing the organization's future in many ways, including dragging down profits. Whether its high rates of ventilation, few damaging persistent chemicals and optimal humidity, lighting and noise control, performance dramatically improves if you are working in optimal conditions.
Reshaping Your Organization for Its Future Evolution
Business life cycles have become shorter. But there is a difference between reactive improvisation (as we've seen in the pandemic) and proactive, continual evolution of organizational design. And I am not talking here about revisiting your design after a reorganization. In fact, rather than focusing attention on a reorganization as a means to scale and turbocharge growth, leaders should consider first proactively looking at the ways their current organizational design needs to evolve along with the business. Such evolution often requires the ability to quickly gain new capabilities; the ability to evolve from a startup into a mature business and the development of continuous change capabilities.
Organizations are often missing the capabilities needed to evolve quickly and expand and grow. Sometimes it's a capability that's hard to come by, like a creative imagination. In an article about the demise of Digital Equipment Corporation (DEC), the author notes: "The first glimpse came when the engineers at DEC saw the Apple II. Had they the imagination, in that taupe plastic box they could have seen the death of their entire industry."
But just as often, the problem is a broken business and operating model that doesn't drive enough profit. One consumer goods company, for example, saw its future in the growing segment of the healthy, ready-to-eat cereal category and adroitly picked up a vibrant, organic, upstart brand—an alternative cereal and nutritional convenience-food maker—only to succumb to the internal battles and need to cut costs and increase margins.
Companies experiencing fast growth must build an agile and sustained organization designed to rapidly deploy and redeploy talent and resources without denigrating operational capability in other areas. Capability building includes everything from training on how to run virtual meetings and executive coaching to workshops focused on teaching fundamentals around how to lead change. While companies face significant opportunity to expand and realize revenue and profit growth, they may not always readily have the organizational capabilities to do so effectively. Why? For one, external disruptions to a given market (e.g., new regulations, innovations, customer performance requirements) can quickly make current business and/or operating models less viable. Organizational designs must be able to outpace disruptive changes of environmental jolts, economic shocks and more classical reorganizations.
How do you get new capabilities fast? One way is to create a design not just for the organization but also for the ecosystem around it. Organizations can design in collaboration with a broad range of partners, including academic institutions, startups, alliances and even competitors.
In addition to gaining new capabilities, organizations—particularly startups—need to develop abilities that will make them faster and able to mature. But with growth, complexity and complication multiply. As the frequency and magnitude of disruption increases, the comfortable notion of being able to change or refresh your organizational design every so often is obsolete. Organizational designs need constant upgrades, not periodic tune-ups.
To evolve, organizations need to develop continuous change capabilities. For organizations seeking to scale and grow, not only should their leaders inspire change, but they also need to instigate change as catalysts. This stance enables companies to take an integrative and future-focused approach to their strategic redesign, allowing them to integrate structure, people, process and incentives as leverage points to drive growth. Engaging leaders at all levels and aligning mindsets and incentives to reinforce new behaviors goes a long way toward executing large-scale organizational design efforts and growing the company.
Similarly, many leaders agree that the long-term health of the planet can no longer be ignored and must have full standing in all decisions related to innovation, performance and overall agility, and sustainability of a company. Sustainability extends the definition of a healthy organization by focusing on the long-term economic and brand value driven by strategies that positively impact the environment and the social community in which a business exists.
Organizations can be designed to fit the ecosystems that continue to multiply as a product of the digital era. The organizational model of a high-growth company should be rooted in strategy-driven operating requirements that result in integrated structural, people, process and incentives decisions. Resourceful CEOs and management teams that can thrive in this challenging environment do so by designing new organizational forms that are agile, sustainable and far more responsive than the conventional analog company.
Claudy Jules, Ph.D., is a partner with McKinsey & Company and a member of the People + Strategy Editorial Board.
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