Why is this happening? The five systemic drivers of your organization’s performance
June 15, 2016
Chasing daunting financial and operating goals, many leaders are struggling to understand why their organizations are performing as they are, and what is making it so difficult to deliver and sustain better results. This post presents a simple and powerful framework for analyzing the many complex factors that collectively determine your organization’s performance. The resulting clarity will enable you to make critical improvements and unleash new levels of energy, performance and results.
My last post discussed that, like any system, to improve the performance of an organization, you need to improve its design; and to improve its design, you need to enhance the consciousness of its designers (its leaders). This post will begin to explore how the design of an organization determines its performance. Future posts will explore how the consciousness of its leaders determines the organization’s design.
The five subsystems of an organization
As a complex living system, the performance of any organization results from the design choices leaders make in five key “subsystems”: vision, business model, organizing model, operating model and ecosystem. To achieve high performance, leaders must make good design choices in the each of these subsystems, and ensure that all five integrate and align.
Two dimensions for each subsystem: architecture and culture
Further, each of these subsystems comprises both architecture (“hard” elements such as products, processes and economics) and culture (“soft” elements - values, mindsets and behaviors). It is critical to address both dimensions, and how they interact, to improve the performance of each subsystem, and of the system as a whole.
General framework for any level of organization
This framework can be used to analyze the performance of any level of organization, from teams, to functions, to business units, to the enterprise, and even to the market ecosystem. While the level of complexity obviously varies enormously, analyzing the architecture and culture of the five subsystems, individually and collectively, enables a deep and clear understanding of what is driving the performance of an organization.
Why these five subsystems? The human roots of organizations
Why are these five subsystems such a powerful framework to analyze an organization? Its because organizations are essentially human systems - and more specifically, economic systems created to amplify human capabilities and better meet human needs. The five subsystems of the organization actually reflect five categories of human needs and capabilities:
Examining the organization this way enables us to see how well the organization is amplifying the capabilities and meeting the needs of all of its stakeholders. By definition, the better it does so, the better it is performing.
Example: improving new product development performance
Let’s look at an example. A global manufacturer needed to dramatically improve its new product development (NPD) performance. After years of effort, new products accounted for just 20% of revenue, compared with a goal of 50%, leading to an overall revenue shortfall for the company. New product development costs were running at 120% of budget, new products were taking twice as long as estimated to get to market, and they were getting traction at less than half the projected rate.
A central issue was that the company’s leaders could not agree on the problems or their root causes. “New product development” encompassed a broad range of activities across every business unit and multiple functions, each of which was working largely in isolation. There was little trust and collaboration amongst all the different groups and stakeholders, and a growing environment of fear, risk-aversion and finger-pointing as the board and CEO exerted ever more pressure to improve the situation. Underlying all of this was a perception of huge complexity - that this was a “wicked problem”, beyond solution.
Clearly, this situation was not sustainable. The company formed a senior level NPD design team, comprising representatives from all business units and all relevant functions. After an introductory training session, this design team used this framework to tease out and group all of the critical issues the company was experiencing in new product development:
Vision: recognizing and choosing
“Vision” denotes how the organization views itself and its environment, and the choices it makes, most importantly in defining itself and what it seeks to accomplish - its goals. The design team recognized that a number of the NPD issues they were facing related to the company’s vision for new product development. It quickly became clear that there was a lack of understanding and alignment around the 50% goal, what that actually meant, and why it was important. Further, there was no shared agreement on what the company was actually trying to accomplish with new product development, and even on what was the definition of new product development, versus normal operations. The team realized that their culture tolerated this lack of clarity, as everyone assumed the senior leaders had it all figured out. It was now apparent this was far from the case.
Business model: contributing and receiving
An organization’s “business model” refers to how it creates value, and for who - its economics. Many of the issues facing the design team related to the company’s business model for new product development. Customers were unexcited about most of the company’s new products, which seemed over-priced and did not meet their needs. Functions like Engineering, Manufacturing, Marketing and Product Management felt under-resourced, lacked the processes and capabilities they needed, and were unclear about cost allocations. Many team members were unhappy, feeling that their compensation did not fairly reflect the efforts they were being asked to undertake. External suppliers were similarly disengaged, as they felt continually gouged, while investors were concerned that NPD was not earning sufficient return on investment. In short, none of NPD’s stakeholders were happy with the value being created - each felt that they were contributing more than they were receiving. Underpinning all of this was a deeply embedded myopic culture, where each stakeholder group was looking at value creation only from its own perspective.
Operating model: thinking and doing
An organization’s “operating model” refers to how it thinks and acts - how it surfaces issues, explores options, makes decisions, defines plans, and executes. The design team realized that they were also facing many issues with NPD’s operating model. The company was doing a poor job of fully recognizing all of the NPD opportunities and challenges that needed to be addressed. It had a slow, inflexible decision making process, poor oversight of execution, and no vehicle for learning, so was stuck endlessly repeating the same mistakes. NPD reviews were intimidating and fear-driven experiences, where little of substance was really discussed. Product Managers were spending hours on detailed documentation, little of which was being digested by Engineering, Manufacturing or Marketing. In an effort to improve things, Engineering was exploring agile development, Manufacturing was exploring lean operations, and HR was working with Sales on a new approach to sales training and after action reviews for new products, though all of these were being done in isolation, and did not align. All of these architectural realities were being reinforced by a culture that reserved most decision-making for senior leaders, insisted on detailed, linear planning in order to execute, and tolerated minimal risk or deviation from plan.
Organizing model: being and connecting
An organization’s “organizing model” refers to the way in which it determines who participates, what roles they play, and how they interact. The design team saw that the NPD organizing model was causing a number of issues. Many of the key roles needed were unclear, or duplicated across functions and business units. Most NPD-related groups had little real autonomy, and as performance worsened, the company’s leaders imposed even more control and hierarchy. As a result, there was a lack of accountability for many of the company’s NPD activities, and creativity was stifled. There were also many issues relating to interaction between groups, with insufficient transparency, and collaboration. All of these issues meant there were serious disconnects between Engineering and Marketing, between Sales and Manufacturing, and between two of the largest business units. At the root of this organizing model was a culture that reinforced a lack of belief and trust in people at other levels and in other parts of the organization, that paid little attention to the needs and contributions of others, and that engendered competition amongst all functions and business units for resources, recognition and rewards.
Ecosystem: shaping and adapting
An organization’s “ecosystem” refers to the market, social and regulatory environment within which it operates. The design team recognized that many of the NPD issues it faced related to how the company interacted with its ecosystem. It was paying insufficient attention to a complex and rapidly evolving ecosystem, and was far too internally focused. There were many new and different groups of customers emerging, several of which were not well understood. New competitors were coming in with digitally-enabled products that were threatening to disrupt the market, and there was no comprehensive understanding of the competitive environment. There were major changes happening in the company’s supply chain, some of which had been ignored, and new regulations were emerging in many markets. These problems were anchored in a culture that had evolved over many years of market leadership and success, at the core of which was a deep-seated belief that the company did not need to pay much attention to the external environment, as it could impose its will on the market. Clearly this was no longer the case, and probably hadn't been for years.
Conclusion: enhancing performance through redesigning the system
Through using this framework, it became clear to the NPD design team that, rather than the fault of any one person or group, the company was grappling with significant systemic challenges in each of its five NPD subsystems. The framework helped the team make sense of a complex array of architectural and cultural factors, distinguishing between presenting symptoms and root causes, and between the prime drivers of performance and those factors that had minor impact.
While this analysis was sobering, it also gave the team renewed energy and determination. It was now clear that, rather than a hopelessly complex situation that was beyond resolution, their new product development system was simply performing as it was currently designed. To enhance performance, the architecture and culture of each of the five subsystems, and the system as a whole, needed to be redesigned.