The Accordion Effect: How Organizational Structure Ebbs and Flows
Much like in music, in business companies follow a rhythm. That rhythm is usually determined by the market landscape and external economic conditions. Companies try to stay in tune to the changing business climate and adjust their strategies and resources appropriately. When studying businesses certain patterns emerge, and these patterns can help predict an organization’s long-term success.
In good economic times companies tend to invest more heavily in projects such as new plants, R&D, marketing, technology and most importantly in people. They grow headcount and invest in training employees.
Conversely, in tough times companies tend to curb spending on capital projects, make do with antiquated technology and plants and they cut headcount. This yo-yo approach to aligning company resources with market conditions is often significantly detrimental to an organization’s long-term success. The culture is the first to suffer and innovation declines with it. It can take years to build an employment brand, and only one layoff to destroy it. Read more about this challenge in our blog post: Hiring Freeze: Two Words That Can Cause Irreparable Damage To An Organization
An accordion is a great image for the ebbs and flows that organizations go through. As an accordion expands it fans out much like an organization that is in an expansion phase. An accordion makes music whether it is being squeezed or pulled. Likewise, an organization performs whether it is expanding or contracting. When an accordion is expanded sound is created as air flows into the bellows. The physical size of the accordion is expanded by the flow of air. When an accordion is contracted the air is squeezed out making sound as air flows out of the bellows.
An interesting observation can be made by studying the patterns of organizational growth and contraction. In times of growth and expansion, companies tend to decentralize and invest resources in the field, closer to the customer and the point of impact. Organizational design during expansion often takes the form of a regional approach or product line approach where separate P&Ls are created, and more autonomy is given to the regions or lines of business. That autonomy empowers business units to invest in innovation and to work more closely with customers to solve problems and serve as a solutions provider. It is exciting to be a part of an organization that is going through an expansion phase and growing resources. The culture of an organization in this phase is usually quite upbeat, innovative and dynamic.
On the flip side, when a company experiences an economic downturn the model quickly shifts from decentralized to centralized. The rational behind this shift is that a centralized structure produces economies of scale. Rather than having resources deployed in the field, an organization can consolidate resources to a corporate headquarters and scale a functional area down significantly. For instance, an organization with regional R&D teams in five regions can consolidate the R&D team centrally and cut the number of engineers. Of course, there are serious downsides to this approach, but the goal of centralization is usually “cost out”. Centralized structures provide for greater command and control. This shifts a company’s culture and typically creates an accountability driven culture rather than an empowering one. Read more about Cost Out=Culture Out in our other blog post.
Centralization=Cost Out
Decentralization=Expansion and Growth
Having been a part of several organizational re-engineering projects to both centralize and decentralize, I have seen the same mistakes made over, and over again. Organizations tend to abandon their growth strategies in tough times in exchange for strategies that are focused on maintaining a position in the market. This defensive approach might deliver short term benefits, but the long-term impact on an organization can be quite detrimental. The best organizations balance their focus on offence and defense, much like a basketball teams does.
The accordion player never stops moving the configuration of the instrument. She is constantly making fine tuned adjustments, as should an organization. Aligning the organization’s design with the strategy should be a dynamic process. The market conditions will always be evolving. The best organizations recognize the need to evolve not just the strategy, but also the organizational structure to retain an innovative and dynamic culture which is positioned to capitalize on opportunities.
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