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2024 seems to be a year of cost reduction. Many of the country’s largest companies like GM, Nike, Mattel, United Airlines, Macy’s, and many more are laying off employees, closing stores, decreasing spending on innovation, and doing what they can to reduce excess spending. The large companies aren’t the only ones. Organizations of all sizes are dealing with cost reduction efforts.  

Cost reduction is most commonly associated with layoffs, and that seems to be many organizations’ first response—laying off a bunch of people to meet investor expectations quickly. Instead, we want to share how to make cost cutting more effective and really work. Sometimes that means laying off personnel, but that might not be the best solution for your organization. It’s important to look at the root issues first. 

Increased costs can be attributed to any number of root cause issues. Prior to any cost reduction effort, it’s important to do a root cause analysis of the company’s issue, which may include: 

  • Bureaucracy – Excess paperwork wastes time and effort that should be focused elsewhere. It adds extra steps where they aren’t needed and takes a long time to get anything done. Someone is required to create the paperwork, check the paperwork, file the paperwork, and it’s almost always unnecessary. 
  • Poor communication – Unclear, conflicting, or repeated communication means wasted time and duplicated efforts. When people have to redo their work because they receive conflicting communication, it leads to excess and avoidable labor costs. 
  • Unmotivated people – Lack of motivation leads to lack of efficiency. When people don’t get work done or don’t spend their time appropriately, the company is wasting money on a salary and getting little in return.  
  • Excess organizational layers – Adding more hierarchies and branches to the reporting structure can prevent the real work from getting done. Too many people get involved, which adds more steps in a process and muddles accountability. Decisions take longer and employees get frustrated. 
  • Complicated processes – Inefficient or outdated processes often have extra unnecessary steps that just make things more complicated. It requires more labor hours and wastes employees’ time and effort. 

Reducing costs and solving issues like the ones mentioned above centers around one major thing—your organization’s structure. 

Why Does Organizational Structure Matter?

How you structure your organization impacts how and where you invest time and money. There are four main ways to structure the reporting relationships or departments in an organization: by geography, by product type, by customer, and by function. 

Let’s take FedEx, for example. They are currently structured by geographic region—US, Canada, Latin America, Europe, Asia Pacific, etc. This structure allows FedEx to tailor its logistics and delivery services to the needs and regulations of each geographic market.  

But what if FedEx suddenly decided to structure their company by product type? Everything would be a disaster. Instead of their marketing team promoting FedEx as a hub for shipping, printing, notary services, etc., they’d have to market each service separately. You’d walk into FedEx and have one employee in charge of shipping envelopes, another in charge of large boxes, and another just standing around to help customers with the copy machine. You can imagine what would happen if they were structured by customer or function, too. 

How to Structure Your Organization

Analyze business drivers (geography, product type, customer, and function) to determine how to structure your organization.

1. Geography

Who this is for: Businesses whose product or service offerings vary greatly by location

Examples: FedEx, Coca-Cola, Hilton 

A company organized by geography allocates structure, decision-making, and processes around physical locations. When business practices or product/service offerings vary by location, this is a viable option for organizing operations, especially if the company is global. 

Managing business operations across multiple locations adds complexity, particularly in areas with differing cultures, business practices, laws and regulations, languages, climates, physical geography, and infrastructure. A multinational company may need to differentiate its market approach to better concentrate efforts on each location’s specific needs. Geographic differences limit the ability to standardize all business operations and competencies into a one-size-fits-all format. 

The disadvantage to organizing by geography is the difficulty of sharing resources across boundaries. Physical separation leads to more complex logistics and increased wait time to contact needed personnel, receive documentation, and access raw materials, supplies, approvals, etc.

2. Product Type

Who this is for: Businesses whose product or service offerings vary greatly by product type

Examples: Proctor & Gamble, Microsoft 

For some organizations, organizing by product type allows for faster product development. This is efficient for organizations who offer a wide variety of consumer goods or products that are difficult to manage under one umbrella. 

Organizing by product allows companies to specialize and innovate within each domain. They can focus on product development and market strategies within each product line to stay competitive and meet customer needs. 

The disadvantage to organizing by product type is a decrease in standardization, leading to more complex and differing standards, processes, and equipment. Product customization results in fewer common equipment parts and materials, which means a decrease in buyer power and the ability to buy in bulk. Additionally, customers may have multiple points of contact within the company if they’re investing in multiple products.

3. Customer

Who this is for: Businesses whose product or service offerings vary greatly by customer

Examples: Oracle, Salesforce, American Express 

Organizing by customer provides the ability to customize products and services to meet unique customer needs. With increased focus on the customer, personnel are empowered to build deep relationships and focus on customer loyalty. Personnel are also empowered to bundle and cross-sell services, increasing the quantity and range of services available. Organizing by customer helps prevent the commoditization of the company’s service offering. 

The disadvantage to organizing by customer is the divergence of standards between customers. This disparity in customer service could lead to challenges in production. Increased product customization and focus on the customer can lead to duplication of efforts and increased overhead.

4. Function

Who this is for: Businesses designed around activity groups or departments, such as Finance, Marketing, Research & Development, Human Resources, etc. 

Examples: Ford, Pfizer, 3M 

A company organized by function operates when designed around its activity groups or departments. This allows departments to develop deep expertise and specialize. This structure requires strong coordination across departments to ensure everyone is aligned around the company’s strategic objectives. This structure also supports the implementation of standardized processes and enables knowledge sharing. 

Aligning by function means the true integration of functions occurs at the leadership level. Functions operating in silos cause contention over cross-functional performance goals and shared resources. Organizing by function also creates difficulty in managing diverse products and customers due to less flexibility in making changes. With decision makers concentrated at the top of the organization, employees are less empowered to make decisions based on the diversified needs of a customer or region. 

When companies organize around function, a centralized structure is typically implemented. If the other business drivers (product type, customer, geography) do not vary significantly, then organizing by function may be most efficient. 

Decision-Making Structure—Centralization vs. Decentralization vs. Matrix

Once the organizational structure is defined, the decision-making structure can be addressed. This is all about where decisions are made versus where people sit geographically. As the structural needs of a company are assessed, the operations and support functions should be considered independently.

The Centralized Organization

The centralized structure is beneficial when knowledge, information, and decision-making are concentrated at the top and filtered to lower levels for implementation. The centralized model has a vertical reporting structure where leaders closely manage and enforce decisions. Large retailers are a prime example of centralization. All decisions (staffing, merchandising, store layout, pricing, etc.) are made centrally while most of the personnel are in the stores. 

The key advantage of centralization is heightened control over decision-making by top-level managers. They have the power to shape organizational change and ensure change remains consistent with their strategy. 

Corporate leadership of a centralized organization must deeply understand the complexities in which the company operates. A centralized company operating in multiple regions may fail to recognize different cultural, legal, and business practices across countries. It’s difficult to diversify operations with a centralized structure. Additionally, with a dependency on a few top leaders for strategic decision-making, a company would be greatly impacted by the loss of a leader, whether temporary or permanent.

The Decentralized Organization

In a decentralized structure, decision-making is distributed among lower levels or divisions. This structure type is most common in companies with differentiated products and operations in multiple geographies. 

The diversified nature of decision-making increases participation and democracy. Managers and key decision makers are spread across the organization and the reporting structure can be relatively flat. This provides increased accountability and employee empowerment. Employees can see the results of their efforts. The decentralized model also provides increased flexibility to respond to minor issues and changes. 

The diversified nature of decentralization does not easily yield economies of scale and operational efficiencies. Standardization is difficult to achieve due to the changing needs of customers and business operations across different geographies. Decision makers may have conflicting decisions and goals, creating role confusion and inconsistent direction for personnel. Additionally, the decentralized model makes it challenging to control the consistency and quality of product/service offerings. 

Weatherford International is a relatively decentralized organization with various business units operating under the Weatherford International umbrella. With operations in over 100 countries, Weatherford has acquired many smaller entities and located authority closer to the customer. While efficiency within the individual entities may be achieved, the decentralized model may not allow for commonalities among entities to be leveraged or for lessons learned to be shared across the larger organization.

Read more about efficient decentralization here.

The Matrix Structure

The matrix is a dual structure, combining both functional specialization and business product or project specialization. Examples include large organizations like IBM, Nestle, NASA, and Shell that manage a diverse range of products and services across geographies, industries, and/or business units. This structure theoretically takes the best of centralized and decentralized structures and creates the ideal structural model, intended to balance the power between both sides of the matrix. 

A key advantage of the matrix structure is the capitalization of intercompany communication. The dual-reporting nature of this structure increases information flow through cross-functional communication channels. At the same time, the dual-reporting relationships of the matrix structure can prove disadvantageous by creating a lack of accountability for performance goals, resulting in unmet performance measures or uncompleted tasks. Dual-reporting may result in conflicting directions and role conflict and ambiguity. Personnel may feel a loss of prestige, authority, and control over their conventional roles.  

The matrix model requires additional managerial and administrative personnel to support the complex structure, which is a cost. Matrix companies tend to be bureaucratic, and decision-making can be overly complex. 

With centralization, you have the assured enforcement of internal controls and compliance. With decentralization, you have diversification across geographies. Combining the two makes for a challenging—but not impossible—implementation.  

Organizational Design Considerations

Before jumping into a redesign, we use the following approach to help our clients through the organizational design process: 

1. Define key leadership roles. This starts with defining the key leadership team under the CEO. Executive leadership can outline the company’s core work processes and translate them into the key executive roles. 

2. Define division of responsibility. This means deciding how operations will be segmented. Examine the level of complexity and impact of each business driver (geography, product type, customer, and function). For example, if you have a high degree of differences across product lines, it may be best to divide organizational responsibilities across product lines. 

3. Define delegation of decision-making. Should decision-making be centralized or decentralized? Look at the organization’s core processes and decide where accountability should be delegated. Customized processes requiring specialization may be delegated (or decentralized) while repetitive decisions may be kept central. 

4. Define specific roles. Based on everything above, define the managerial and supervisory roles. This includes identifying knowledge, skills, and abilities required for each position. 

5. Implement Process Changes. Once the design is finalized, define what process changes need to be implemented as a part of the new organizational structure. This includes identifying changes to procedures, policies, rewards, and performance management processes. 

Implementation Considerations

After going through the redesign process, make a plan for implementation. Here’s an overview of key steps: 

1. Develop organization charters. Organization charters are a way to clearly define the purpose and goals of each department in an organization. This helps define accountability for results, budgetary goals, and performance expectations for every department.  

2. Prioritize supporting process improvements. Every organizational change first requires a change in how business is conducted. This means identifying what process improvements should be made to support the new organizational structure efficiently and effectively.  

3. Identify the right employees. Define the roles and responsibilities needed for the new organization and fill positions with the right people who are motivated and committed. 

4. Develop a communication plan. Set a clear timeline for implementation. Plan to effectively present and promote these changes to internal and external stakeholders. Identify and empower key personnel throughout the organization who are strong opinion leaders and will help advance the efforts of the transition among their peers. 

5. Finalize the roadmap. Ensure the plan is well-defined, achievable, measurable, and has executive leadership buy-in. 

6. Implement the new structure. Define how the executive team will operate once changes are realized and remain actively involved and invested in the transition process. Listen to affected personnel along the way and manage expectations while refining the implementation plan as needed. 

At Trenegy, we help organizations reduce costs by taking into account the entire organizational structure. We’ve helped dozens of organizations save money, time, and resources in the most efficient and effective way. For more information, email us anytime at info@trenegy.com.

 

More on Cost Reduction:

Cost Cutting with Long-Term Results

Cost Savings: A Wartime Strategy for CFOs

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