How to Effectively Boost Performance Through Organizational Restructuring
In times of economic turbulence, CEOs facing performance pressure often resort to one key decision: restructuring. However, research by Bain & Company shows that fewer than one-third of restructurings significantly improve performance. Companies like Chrysler and Yahoo, for example, fell into deeper trouble after restructuring.
The Key to Performance Improvement: Decision-Making Effectiveness
American business historian Alfred D. Chandler observed in the 1960s that a company’s organizational structure must align with its strategy to ensure the successful achievement of strategic goals. This concept has greatly influenced corporate management. Most business leaders follow the principle that organizational structure supports strategy. When a strategy is not effectively executed, they tend to revise the organizational structure.
Reflecting on numerous company visits over the years, it’s understandable that organizational adjustments are frequent. External environments are constantly changing, particularly during economic downturns when uncertainty is higher, and corporate strategies need continual adjustments.
But how many companies truly understand what kind of organizational structure best supports their strategy? Bain & Company’s research on over 50 restructuring cases found that fewer than one-third of these efforts significantly improved performance, with companies like Chrysler and Yahoo actually worsening their situations. In our study of Asian companies’ business performance and strategic transformations, we found a core link between organizational structure and strategy: decision-making capacity. Corporate strategy is executed through decisions, and decisions are made by specific organizational units. Only when the organization effectively enables decision-making can it meet strategic goals.
Organizational Structures That Hinder Decision-Making
A survey was conducted across nearly 30 companies from different industries in Hong Kong, including CEOs, senior management, salespeople, marketers, R&D staff, and finance professionals, to assess the necessity of restructuring. The survey was based on 10 dimensions that evaluate whether the organizational structure supports effective decision-making, including organizational structure, employee roles, processes, information flow, performance standards, incentives, priorities, decision-making methods, staff, decision behaviors, and organizational culture.
The results showed an average restructuring necessity score of 28.58, as illustrated in the accompanying chart. According to Marica Blenko's industry data, a score above 35 indicates a healthy company. Scores between 31 and 35 suggest room for improvement but no imminent signs of organizational collapse. Scores below 30 indicate significant organizational issues that need addressing.
The survey revealed that many Hong Kong companies face structural challenges. For instance, performance standards and incentive systems are not conducive to effective decision-making, and decision-making capabilities vary widely across different levels. Despite this, companies often resist structural changes, which creates a significant barrier to improvement.
Targeted Structural Adjustments to Improve Decision-Making
The overall survey results indicate a widespread need for structural optimization in Hong Kong companies. Performance standards and incentive measures that fail to encourage effective decision-making are a common issue. However, restructuring must be tailored to each company to improve decision-making effectiveness. For example, finance staff in some companies noted that “the organizational structure hinders cost-related decisions,” while sales teams reported that “key decision-makers are unable to access necessary decision-making support in a timely manner.”
Unless a company is very small, decision-making effectiveness is usually compromised. Research shows that companies with fewer than 100 employees generally “perform well but could improve.” In contrast, larger companies often find that their organizational structure severely impedes decision-making.
Long-Established Companies Face Greater Restructuring Pressure
Companies that have been in operation for over 20 years scored an average of 28.27, below the industry average. These companies particularly struggled with ineffective performance standards and incentive measures, and their organizational culture often hinders efficient decision-making. Restructuring in these companies is critical but challenging due to the need to consider numerous stakeholders. However, they can take inspiration from Hospira’s approach, which improved decision-making through innovative training programs focused on identifying key organizational decisions.
Companies in the 6-10 year range, which are often in a growth phase, face market volatility as an opportunity for self-improvement. For them, restructuring to enable faster decision-making is a key area of focus.
Building an Organizational Structure That Enables Effective Decision-Making
The most effective way to navigate market volatility is to maintain stable performance growth, but that is easier said than done. Research by Marica Blenko and others shows that business performance is closely tied to decision-making, not directly to organizational structure. However, organizational structure is closely linked to decision-making capacity. Therefore, Hong Kong companies looking to sustain performance growth must focus on optimizing their organizational structure to enhance decision-making capacity.
According to the restructuring decision-driven organization theory, companies should benchmark against key competitors and evaluate their decision-making effectiveness from four angles: decision quality (Q), decision speed (S), decision execution (Y), and decision investment (E). If the score is below 20, it’s time to take action. The steps for implementing restructuring are as follows:
1. Based on the company’s strategy, outline the value creation path (value chain) and identify the company’s key decisions. Focusing on key decisions is the entry point for restructuring.
2. Categorize decisions by organizational level to determine which decisions should be made at each level. Avoid adjusting levels based on individuals and discard the old hierarchical relationships.
3. For each decision, determine the required authority for decision-makers at each level and delegate the necessary authority.
4. Adjust other elements of the organizational system, such as incentives, information flow, and processes, to align with the decision-making needs. All components must be closely tied to strategic objectives and decision-making requirements.
5. Equip managers with the necessary skills and emphasize cultural integration.
During the restructuring process, it is essential to promote decision-making capacity and foster a culture that supports it. Organizational restructuring is a significant change, and the greatest obstacles are often those whose interests are threatened or who oppose the new vision. Failing to address these roles can significantly undermine the effectiveness of the restructuring.
Recommended Reading: