Designing Effective
Hierarchies
Paul Olk
December 6, 2008
National Yunlin University of
Science and Technology, Taiwan
December 2008
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Key Managerial Challenges for
Small Business Growth
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Control –
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Is there trust between managers and employees?
Does resource allocation system imply trust?
Is it easier for an employee to ask for permission than for forgiveness?
Responsibility
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In growth, the distinction between authority and responsibility becomes more apparent
Effective delegation -- Key component of success
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Tolerance of Failure – identify reasons (e.g., lack of commitment,
lack of skill, external factors)
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Change – retaining an innovative and opportunistic culture requires
variations in planning, operations and implementation
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Flexibility – helps companies establish the needed external ties to
access and accumulate new resources
From Kuratoko & Hornsby, New
Venture Management, 2009
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Transition from Entrepreneur to
Manager
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Probably the most difficult but important
transition to achieve (Hofer & Charan, 1984)
 Problems especially challenging when the
company is characterized by:
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A highly centralized decision-making system
An overdependence on one or two key individuals
An inadequate repertoire of managerial skills and
training
A paternalistic atmosphere
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Warning Signs for Companies
 Slow
response time
 Rigidity
in regard to change
 Underground
 Internal
frustration
 Customer
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activity
alienation
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When we reduce hierarchy, what
changes about each of our four
managerial levers
• Information?
• Authority?
• Competence?
• Rewards?
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If not command and control,
how to control?
Four Control Types
From Robert Simons (HBR, March-April 1995 – Control in the Age of Empowerment
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Diagnostic Control Systems
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Allow managers to ensure that important goals are
being achieved efficiently and effectively –
Monitoring goals and profitability – MBOs, budgets,
goals and objectives
Often become dysfunctional when folks are left to
their own devices to achieve them – managing the
denominator
Advantage is to eliminate the need for constant
monitoring
Build and support clear targets
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• Belief systems
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Empower individuals and encourage them to search for
new opportunities
They are concise, value-laden and inspirational
These should reflect deeply rooted values not
fashionable
Are required because of decentralization and job
switching
Help figure out how a person can contribute
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• Boundary systems
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Establish the rules of the game and identify actions and
pitfalls that employees must avoid
Tell them what they cannot do, helps them be more
creative
A yin to the belief systems yang — dynamic tension
between commitment and punishment
Sets ethical behavior and codes of conduct
States where the company will not proceed in business
Organized to do right
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• Interactive control systems
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Enable top-level managers to focus on strategic
uncertainties;
learn about threats and opportunities as things change,
and respond proactively
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Example – W.L. Gore
www.wlgore.com
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Maker of Goretex and thousands of other products –
fabric, medical, electronic & industrial -- in a wide
range of industries
Approximately 8,000 associates in 45 locations around
the world
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Including Australia, China, Hong Kong, India, Japan, Korea,
Malaysia, Singapore, Taiwan, New Zealand
Annual revenues top US$1.8 billion
11th year in a row in Fortune’s ‘100 Best Companies to
Work For’ in U.S. and also in several other European
lists
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W.L.Gore’s Design Principles
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Flat lattice organization.
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No chains of command nor pre-determined channels of
communication.
Everyone has the same title – Associate
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Team-based environment that fosters personal
initiative, encourages innovation, and promotes
person-to-person communication among all of our
associates.
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Associates commit to projects that match their skills,
rely upon sponsors for guidance
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W.L. Gore Design Principles (cont.)
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Four basic guiding principles articulated by Bill
Gore:
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Fairness to each other and everyone with whom we
come in contact
Freedom to encourage, help, and allow other
associates to grow in knowledge, skill, and scope of
responsibility
The ability to make one's own commitments and keep
them
Consultation with other associates before undertaking
actions that could impact the reputation of the
company
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Example: Semco
semco.locaweb.com.br/ingles/
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and various Youtube videos
Founded in 1953 and has its headquarters in Sao Paulo, Brazil
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Redesigned by Ricardo Semler in the early 1980’s, at the age of 22
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Initially focused on shipbuilding, Semco now produces over 2,000
products including dishwashers, digital scanners; banking and
environmental services; managing non-core business of
multinationals (Wal-Mart, Carrefour).
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Annual sales of $160 million, up from $4 million when Semler took
charge, often growing at 30-40 percent a year.
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Employs more than 3,000 people with an annual employee turnover
of just one percent.
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Workers set their own salaries, share company profits and hire and
fire their own managers. No job titles and no personal assistants
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Example: Oticon
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Danish manufacturer of hearing aids
 150 persons in Headquarters
 Under Lars Kolind, in early 1990s, created a
‘spaghetti organization’
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Defined by projects not functions
No formal offices but mobile workstations and cellphones
Individual responsibilities vary by project
Minimal management responsibilities
Much faster in developing innovations than
competitors
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Example: Google
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Primarily organized around small teams,
especially for product development
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Team leadership rotates depending upon project
requirements
Most engineers work on more than one team
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Want individuals to be motivated to commit to a
project – follow their passion
 Select hiring: “Keep the bozos out and reward
people who make a difference”
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Google (cont.)
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Communication
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Learn fast, fail fast
Don’t get much resources for a project until
successful but don’t need much approval to launch it
Get a lot of peer review feedback
A company-wide rule that allows developers to
devote 20% of their time to any project they
choose
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Haier and the Flexible Hierarchy
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Top executives set top-down priorities for the
organization, middle managers and
employees have great latitude in negotiating
their specific objectives and autonomy in
executing against them.
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Encourages the SAPE Cycle -- sense,
anticipate, prioritize and execute.
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Ideal for unpredictable markets, which
emphasize speed and adaptability.
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Concrete steps to take:
 Priority-based
Contracts
 Transparency in Monitoring Performance
 High-powered Incentives
 Limit the Downside Risk of
Decentralization
 Train a Cadre of General Managers
 Keep the Pressure On
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Transition from Entrepreneur to
Manager (Hofer & Charan, 1984)
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Entrepreneur must want to make the change in his
or her own behavior
Must involve greater participation in day-to-day
decision-making
Institutionalize 2 or 3 key operating tasks,
including selecting new people to supplement or
replace the ‘indispensible’ individuals who
currently performed these tasks
Middle-management must be developed
The organizational structure and management
systems and procedures must be modified
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Review from the Readings:
General Concepts
 Align
healthy hierarchy concepts with
business strategy
 Develop sustained and visible
management commitment through action
 Take a cumulative approach
 Develop a shared mind-set
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Goals for the four levers
 Information:
From closely held or
integrated at the top to widely shared
 Competence: Distributed across all levels
 Authority: From decisions made at the
top to decisions made all along the line
 Rewards: From rewards based on
position to incentives and rewards based
on accomplishments
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Information
Share information more effectively
 Align
channel and message
 Share good and bad news
 Use both cognitive and emotive news
 Make messages both complex and simple
 Use information to encourage change
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Competence
Increase competence across vertical
boundaries
 Conduct
a competence audit
 Improve staffing
 Train and develop
 Establish career banding
 Establish a 360-degree feedback process
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Competence Audit
(Fill out in subgroups and then discuss and integrate as a whole)
Type of
Skills We
Competence Have Now
Changes
Facing our
Business
Skills We
Will Need in
the Future
Technical
Cultural
Competence Gap
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Career Banding
 Develop
limited number of career
categories within which managers and
employees have a wide range of flexible
salaries
 Challenges of
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Defining new job categories – On what basis?
How many?
Resistance to changes in employment
contracts
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360 Degree Feedback
 360
feedback provides information on
style – see yourself as others see you
 May reveal unknown weaknesses and
promote change
 Gets manager used to seeking feedback
 Opens up line of communication and may
lead to enhanced participation and trust
 Best used when not part of evaluation
 Identify areas for personal growth
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Authority
Locate appropriate decision points
 Challenge
current decision-making
assumptions
 Use town meetings to shift authority
 Shift manager’s role from controller to
coach
 Remove layers if necessary
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Selected Efforts for Challenging Current
Decision Making Assumptions
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Treat every new assignment as a start-over
Send people shopping for ideas
Put idea gathering on your own agenda
Set up little experiments (10% failure; 3M’s
Stretch Goals)
Make it safe for others to experiment
Eliminate ‘firehosing’ (of ideas)
Honor your risk takers
Debrief every failure as well as every success
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Town Meetings – Phase I:
Preparatory Work
Identify critical business issue that a crosshierarchical discussion about can make a
difference
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Develop a measurable stretch goal
Divide the issue into several sub-themes
Develop thought-starter questions for each
subtheme
Identify, invite and assign people throughout
the organization who can contribute to each
subtheme to a subgroup
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Town Meetings – Phase II:
Conducting the Workshop
Introduce the workshop
1.
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The problem
The role of each subgroup
The process for the next few days
Team Session 1: Brainstorming
2.
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Each subgroup produces a set of ideas to present
Gallery of ideas
3.
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Each subgroup presents to rest of group
Participants vote on ideas
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Payoff Matrix to Ideas
Easy to
Implement
Difficult to
Implement
Small
Payoff
Quick Hits!
Time Waster
Big
Payoffs
Bonus
Opportunity
Special Effort
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Town Meetings – Phase 2 (cont.)
Team Session 2: ActionRecommendation Session
4.
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Subgroup develops top action
recommendations and work plans
Town Meeting
5.
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Each subgroup presents its action
recommendations
A decision is made on the spot
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Town Meetings – Phase III:
Follow-up
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Communication of decisions and next steps –
subgroup assignments and expected results
Implementation of decisions and work plans
Tracking and monitoring progress – set key
dates
Progress reviews and additional work-planning
sessions
Closure work session – lessons learned
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Rewards
Use rewards to motivate behavior
 Base
rewards on performance and skill
 Share rewards up and down the
organization
 Use non-financial rewards as well as
financial rewards
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Selected Efforts for Non-financial Rewards
 Make
recognition public
 Design the reward and recognition system
participatively
 Provide feedback en route
 Schedule celebrations
 Be a cheerleader in your own way
 Have fun
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Change Levers Summary
Points
 The
position on each of these four
dimension must complement and reinforce
the others
 Loose vertical boundaries like a jazz band
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