Factor 18: Corporate Hierarchy

This factor deals with decentralization versus centralized hierarchy.

Factor extremes as measured in survey:

The organization has a decentralized structure and minimum hierarchy

vs.

The organization has a highly centralized structure with considerable hierarchy

Overview to restructuring initiatives

One of the characteristics of innovative companies is that they try to try to retain the culture which, in the early years, contributed to their success. As the organization becomes larger the challenge is to maintain a level of control over operations while at the same time sustaining the original creativity. A balance is required as growth takes place.

Possible Initiatives to Modify and Improve the Culture for Innovation

Form separate smaller venture’ groups; arms length companies or multi-investor groups to search for, create, or incubate new ideas.

Setting up an organization which is separate from the parent at least for purposes of day-to-day management of the business is one method of maintaining the creativity that is often associated with smaller organizations. Using corporate funds to set up a traditional wholly-owned venture capital firm and using this new venture group as a window to new technologies and markets, and as a possible source of acquisitions and investments is another approach. Alternatively the risk can be shared with the formation of a venture capital partnership as one of several investors.

Set up a new venture division within the corporate structure

Setting up a new venture division is another way that innovation can be encouraged but only if the division has the status of a separate division and a different set of investment and growth criteria. Ultimately the new venture can be spun- off to other parts of the corporation after start-up or maintained as a self standing entity or, turned into an IPO with the thought of recouping invested capital.

Establish an overall organizational model that stimulates innovation

Organizations that operate with entrenched management, an internal focus, a formal structure and policy which is risk adverse and where decisions are made only with full information at all times are unlikely to survive in a world which is changing rapidly. The converse organizational model is probably more relevant. An organization with the following attributes; a fearless leader, focused externally, and informal structure, with limited aversion to risk taking and operating by making intuitive but informed decisions is the desirable model. Minimum hierarchy and flexible financial controls are the order of the day.

Keep small and decentralized but bolster the system of internal controls

Keeping divisions small through a process of segmentation is one approach to fostering and sustaining creativity. The greater the decentralization, however, the more important it is to have an effective system of financial and administrative controls, including an approach to planning, that will work with a highly decentralized organization. Tight financial controls with a highly flexible, almost autonomous, approach to management is a balance favored by many innovative companies. Poor performance invites more attention, and sometimes, the introduction of heavy-handed controls, so the answer is to be successful.