IS ORGANIZATIONAL HIERARCHY GETTING IN THE WAY OF INNOVATION?

The Rise of New Organizational Models

Over the past few decades, there has been much debate about the demise of traditional hierarchical structures. The consensus appears to be that while bureaucracy still has a place in some circumstances, it is increasingly becoming less fit for the needs of today’s businesses. So, what exactly brought us to this point? Technology has, of course, been a major factor. Robotics, automation, and 3D printing are enabling companies to develop and launch new products faster and more economically, and in ever smaller quantities than before.

Further, the broader adoption of the internet of things (IoT) to produce data, blockchain and APIs to share data, and analytical and AI capabilities to understand the data, are enabling companies to test both product and internal ideas more rapidly, frequently, and with lower cost and risk. Much of the attention around these advances has focused on the new possibilities they are opening up in the market. But the internal organizational implications are at least as profound. New and emerging technologies are making it possible for organizations to evolve into new ways of organizing and acting by pushing the boundaries of what technology can enable. But this potential will only be realized if firms are prepared to adapt and embrace them enthusiastically.

Historically, organizations have attempted to do this by experimenting with a range of alternative approaches: a team of teams (small independent teams with an overarching umbrella team), an open organization (communities of people with a common purpose and no top-down hierarchy) and Holocracy, to name a few. But most have proved inadequate, with no clear front runner emerging.

Our research shows, however, that the defining design elements of a winning new organizational model are coming into focus: RenDanHeYi, or a version of it, which was introduced by Haier. This organizational philosophy and system is composed of several innovative characteristics, including the breaking of large hierarchical units into “microenterprises” (MEs), turning support functions into profit centers that must sell into the enterprise rather than cost centers, and relating to employees as intrapreneurs.
Companies who embrace four elements of this approach in particular are significantly outperforming their peers. GEA, for example, has doubled its business organically in the last four years, according to GAE CEO Kevin Nolan. We believe we are on the brink of a seismic shift, where companies are waking up to the fact this new model offers them the opportunity not just to adapt, but to substantially replace their hierarchical, bureaucratic perspective with something radically different.

The Four Elements of the New Organizational Model

Over the past eight years, we have been conducting a research study into the barriers within organizations to internal innovation and the emergence of new organizational models that address these barriers. Over the course of the study, we spoke to over 150 employee innovators, discussed the topic with around 100 heads of strategy from mid-to-large enterprises. These enterprises include financial services, media, technology, pharmaceuticals, real estate, professional services, NGOs, education, and infrastructure firms. Most are large ($1 billion to $60 billion revenue), and about 20% are mid-sized ($100 million to $900 million revenue). We interviewed around 20 of today’s leading authorities on this topic (Rita McGrath, Michael Tushman, and Martin Lindstrom to name just a few). And we conducted a quantitative survey of around 500 mid-level managers and interviewed experts on the key defining characteristics of Haier’s RenDanHeYi model.

Two clear, overarching messages emerged from an in-depth analysis of this wealth of data and interviews.
First, that firms are gradually becoming less centralized — although their evolution towards decentralization has been a slow and nonlinear process.
Second, there is clear and statistically significant evidence to show that companies who use elements of a looser RenDanHeYi model outperform their peers in terms of entrepreneurial activity, the ability to attract and retain top talent, and ultimately financial performance.

This research also brings into focus four clear characteristics of these organizations, most of which replace their traditional hierarchy. These characteristics are:

• Treat employees like intrapreneurs
• Work in smaller independent units (MEs) rather than business units
• “Manage” MEs with decentralized marketplace structures rather than centralized authority
• Let MEs choose which support services (e.g. R&D, finance, IT) to work with

How to Implement the Four Elements

It’s simplistic to think that the right approach to adopting a new organizational model is the same for each company or each area of your company. In some situations, hierarchical models will maintain the advantages they have enjoyed for hundreds of years. And even where a less hierarchical model is likely preferable, the degree to which you implement an alternative model will vary. To design the right approach for your specific case, consider taking three steps:

• Decide where to consider implementing a new organizational approach
• Decide how deeply to implement and initiate first actions

Evolving into a new organizational model is not easy. It involves unlearning and deconstructing management norms, processes, structures. But our research suggests a company need not embark on an across-the-board transformation to start seeing the benefits. The real opportunity is to embrace the organizational power of new technologies and implement the more decentralized models they make possible selectively in areas of the organization where new technology and/or non-hierarchical models offer a more competitive approach.

This article was originally posted by: HRB