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Tips, advice, and information for South African business owners

28 Jan

Structure Follows Strategy

Your strategy for achieving your entrepreneurial vision depends on the people around you, yet, how you organise your people can make or break your strategy. The funny thing about business strategy, though, is that it is most noticeable during the planning phase in the typically annual round of business planning. This is odd because the most important phase of any strategy is its execution, and that’s when it is least discussed.

The same could be said of the organisation’s structure. Unless your company is a very small start-up, you’ll want to regularly assess both the strategy and structure of your business throughout the year. For almost all small businesses, usually those in stages 1 and 2 of the 5-stage business growth model (stage 5 being the multi-national giant), organisational structure is almost irrelevant, but it becomes crucial from stage 3. One of the indicators that a company is ready to transition into stage 3 is where the owner-manager’s direct involvement in operations is stretched.

The typical symptoms are the owner’s slow decision turn-around or poor decisions, long hours at work, high stress levels, an increase in issues with quality and customer complaints, and a dip in staff morale. This is the point where the owner and the business reach their ceiling in the Peter Principle, unable to progress beyond their level of competence. (Interestingly, this is also the moment where many of our clients reach out to us for support.)

The owners must learn new skills, such as delegating, how to manage managers (versus managing the work directly), building business systems to formalise the work, and developing leadership qualities.

A critical factor at this point is how to organise the people. If you’re picturing the stereotypical org chart right now, you’re on the right track. Except, while the organogram’s boxes and lines show reporting lines, how you organise your business has a massive, often unseen, impact on the company’s ability to execute and achieve the strategy.

For example, although an ad agency might thrive on a project-oriented structure, the same approach to reporting lines and laissez faire authority would sound the death march for a financial advisory.

Hence, structure follows strategy.

As your small business grows, it’s best that you consciously design your org chart. This is especially relevant when transitioning into stage 3 of the business growth model because it’s when you will hire your first professional managers e.g. a site foreman in construction, marketing and sales manager, a factory supervisor, or branch managers.

There are several variations of the basic organisation structures, such as the 9 listed by HubSpot, offering a curious new perspective on some old models. But common to any structure is that it must solve problems of communication, accountability, decision authority, culture and systems.

Despite centuries of technological and social change, human organisational structures have not really changed much since the ancient evolution of human agriculturalist villages, towns and cities. The relatively modern work of Henry Mintzberg in 1979, The Structuring of Organizations, conveniently summarised by Mind Tools, describes essentially 4 structures:

1. Entrepreneurial: a flat, networked structure tightly controlled by a strong leader and one or two top managers. The common lack of business systems and rules give this organisation its advantage, but this becomes the Achilles heel limiting growth unless the structure evolves. This lack of formal structure implies a high dependence on the owner, which is the greatest obstacle to the owner extracting value beyond exchanging time for money. The owner’s 4 strategic options are to (a) liquidate, (b) sell out, (c) disengage (retain equity, but no longer manage), and (d) grow to stage 4. (This is another common point at which we engage many of our clients.) For the owner to achieve any of the last 3 options successfully, a more-formal org structure is mandatory.

2. Machine (bureaucracy): the business can literally be modelled as a machine. This structure works well when production processes are stable and workers are specialised. Control is usually centralised and authority lines and limits are clear. This structure doesn’t suit an environment prone to external shocks.

3. Divisional / diversified: seldom relevant to small business, a diversified structure groups people around brands, products, processes, or market segments. Each division can operate with high autonomy from others. Economies of scale can be achieved for shared services, like IT, HR and accounting, but scarcity of these resources can create competition between divisions. Militaries and conglomerates are classic examples of this structure.

4. Innovative / “Adhocracy”: this superficially sounds like an entrepreneurial / flat structure, but it applies a projectised approach to delivering on ad hoc opportunities. With power delegated to wherever it’s needed, projects operate almost as stand-alone business units, achieving a nimbleness impossible with centralised authority. The drawback is reporting lines can be ambiguous and talent can be hard to retain.

Regardless of how we define our org structure and why, the most important factor informing our choice must be that it offers the optimal alignment of our people with our strategy.

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