Why Organization Design Matters: Part 2

This series on organization design targets readers unfamiliar with the subject, illustrating how intentional design enhances performance.

The previous post (Why Organization Design Matters: Part 1), posed two questions to tee up specific, tangible reasons why design matters.

• What’s the payoff for an organization that commits to deliberately and thoughtfully redesigning itself?
• What practical, impactful difference does it make?

Part 1 offered five responses to these questions and addressed the first – the critical contribution of design to operationalizing strategy. In this post, we’ll examine the second– aligning the organization to its marketplace.

Market Alignment: Designing to align with current and emerging demands

Organizations do not exist or operate in a vacuum. A discussion of open systems theory is beyond the scope of this post, but it is important to appreciate that all organizations operate in the context of a larger environment.

In the crudest sense, environment is everything outside of an organization’s boundary. However, not everything outside an organization’s boundary is relevant. The undifferentiated, external environment can usefully be narrowed to its most relevant aspects and three concepts help to do that.

The first is domain. Domain is the claim an organization establishes for itself in terms of range of products, population served, and goods or services rendered. For example, universities are not in the business of highway construction and maintenance and pharmaceutical companies are not in the business of oil and gas exploration and production. Organizations operate within their chosen domain.

The second concept is task environment. Task environment is those parts of the environment that are relevant to an organization’s goal setting and goal attainment. An organization’s interactions with these elements define its task environment.

The third concept is environmental dynamics. Environments are not stable. They are subject to undercurrents and upheavals that sometimes subtly and other times dramatically change the landscape.

• Trends: Slow-moving but steady impacts over time.
• Forces: Faster impacts than trends but not as sudden as events. Technical disruptions are prime examples.
• Events: Sudden impacts, such as the COVID-19 pandemic, which rapidly alter the landscape.
• Developments: Impacts that unfold over time, neither as slow as trends nor as sudden as events. The penetration of managed care into the healthcare industry and the acquisition and consolidation of independent hospitals into large national networks, as you’ll read in just a moment, are examples.

When domain, task environment, and environmental dynamics are combined, they help us define and characterize an organization’s “marketplace” – a more useful concept than environment as simply everything outside an organization’s boundaries.

Markets and organizations interact constantly. Organizations must regularly scan and understand their marketplace, learning and planning adaptively and proactively. Ignoring this dynamic interaction can be highly problematic. Here is one such story.

The Case of Medical Devices

I had the privilege of consulting with a medical devices company on a fundamental redesign of its sales and marketing organizations. Medical Devices (not its real name) not only designed and developed surgical devices and procedures but also trained physicians in procedures and the use of its devices. From the time of its founding, it experienced a meteoric early rise to $600 million in revenue by the end of year five. In year six, sales slumped.

Since the time of Medical Devices’ launch, the landscape of healthcare had begun to change dramatically and swiftly. Managed care had begun to penetrate much deeper into many more markets. A great deal of acquisition and consolidation had changed the face of the market, and large national networks had acquired independent hospitals. As the combination of managed care and national networks began to dominate, the sales target had shifted. Where it was once the chief surgeon who determined what procedures and what equipment would be used, increasingly those decisions were being made by procurement departments.

The market reality and associated assumptions upon which Medical Devices had been founded were changing rapidly and, in some cases, had vanished. The initial assumption of a homogenous market landscape was gone. Further, the marketplace was highly variable even within existing regions and headquarters marketing didn’t understand the nuances in the various geographies. The locus of control for decision-making had shifted – a huge break from the founding assumption. The clinical sales force that Medical Devices had been hired and trained to sell to chief surgeons was ill-equipped to sell to the procurement officers that had displaced them. In short, the organization didn’t align with the major marketplace characteristics that had evolved and were continuing to evolve quickly.

The Medical Devices leadership team, after much thoughtful discussion and reflection, concluded they didn’t know what they didn’t know and needed to get smart fast. They further concluded that the challenge ran deeper than operational fixes would address and determined that marketing and sales organizations must be redesigned to better align with the marketplace.

A thorough description of how leadership and the whole organization worked to get smart and position themselves for redesign will be addressed in depth in later posts when we look at the process of redesigning an organization.

The proposal for the sales and marketing redesign incorporated several key features (among many others):

• Shift to Field-Centric Focus: Moving emphasis from headquarters to the field to better address regional market needs
• Increase in Geographic Regions: Expanding from four to eleven regions to align with important geographic segments, allowing for more targeted strategies
• Profit and Loss Centers: Making each geography a profit and loss center to encourage local market scanning, learning, and adaptive planning
• Forward Deployment of Marketing: Placing parts of headquarters marketing in the field to provide front-line market analysis and strategy
• Market Development Function: Creating an organizational unit to work with managed care organizations, demonstrating how the company’s devices and procedures could improve patient outcomes and recovery times
• Sales Force Re-equipping: Training the sales force to sell to procurement officers in addition to chief surgeons

Implementation began with a prototype geography to test and refine the new approach. Full implementation was completed within 15 months.

The Value of Alignment to the Marketplace

At the beginning of this post as in the first post of this series, I posed two questions:

• What’s the payoff for an organization that commits to deliberately and thoughtfully redesigning itself?
• What practical, impactful difference does it make?

Consider the following:

In the second year following the redesign, with the features of the redesign in place across all the new geographies and the sales force retrained, top-line growth increased by $100 million on previous revenue of $600 million. In each of the next two years, that $100 million top-line growth was repeated. By the end of year four following the redesign, revenue approached $1billion.

Designing to align with the current and emergent demands of the marketplace can make a difference. Members of the Medical Devices organization certainly thought so.

• What about your marketplace has changed/is changing?
• Does your organization still reflect the founding assumptions that may very well no longer match the current marketplace conditions?
• Where does your organization’s marketplace seem to be headed and what needs to be done to have your organization meet it effectively in the future?