Strategy, Structure & Innovation

Integration into Product Performance, Quality and Reliability

“We need a meeting to discuss the strategy.”

“What is your strategy?”

“We need a new business strategy.”

“Our strategy is to reorganize to cut costs.”

Strategy is never independent of structure, no matter the level of sophistication. You cannot, or should not, think in terms of one without the other. Structure consists not only of capital equipment and buildings, but the organization as well.

What you must know about strategy is the relationship to structure, and that the phase relationship is precarious and critical. Once you develop a strategy and put a structure into place to execute, the structure beyond the point of strategic initiation can quickly become flawed. In the midst of the current technical revolution it is not a matter of years, but could be weeks or months. Minimum structure with designed flexibility is the only way to stay effective in the midst of a revolution. Often, in an effort to meet strategic objectives in a time of stress, structure is expanded, which may impede innovation. Just as the relationship between strategy and structure must be kept in phase, so must the relationship between structure and innovation.

The history of war is a story of countries that were structurally prepared to fight the last war all over while the strategy of war changed. The structure for the last war impeded the innovation necessary for the next.

The history of companies might not be as well as studied, but the failures and near failures are a story of Strategy, Structure and Innovation breaking phase relationship.

When I was a young man, I worked for a company that made components and assemblies for hard drives. It was a thrilling learning experience in more ways than one. The business was new and we were getting engaged early. We thought we would all be rich in no time!

I was in my early 30’s when I became the operations manager (yes, it was a long time ago) and had little idea what I was doing. We were making 1 megabyte hard drives that were as big as a small washing machine, expensive to power and selling for $40,000. Today you can buy a terabyte for a few dollars. I was learning to use VisiCalc before the days of Excel while making projections that were in retrospect, silly. We bought machine tools and built tooling as if we would be able to sell all we could make, without a clue as to the technical breakthroughs an hour away.

We?no sooner had the plant up and running at less than full capacity when innovation in storage capacity rendered what we were making junk. We were victims of Moore’s Law, which says that computing power and storage capacity will double every two years. Moore was wrong.?It doubled every year!

Strategy and Structure broke phase relationship at a speed that stunned us all. We had done a good job of doing the wrong thing. We created innovative tooling to keep the spindles cutting metal, but with a bit more labor and simpler machine tools and fixtures, we could have lasted longer. We were innovative, but wrong.

I learned a painful lesson about Strategy and Structure, but it took many more years before I could articulate it. It took time, experience, and study before I could write about the importance of Strategy, Structure and Innovation.

Strategy and Structure: Chapters in the History of the American Industrial Enterprise by Alfred Chandler, was published in 1962. As an historian, not a management guru, he researched the strategic and structural evolution of four companies; Dupont, General Motors, Standard Oil and Sears Roebuck. Each was a pillar of American capitalism. The growth of these companies became important to American enterprise. These were companies that grew as they served markets not accessible prior to railroads, rapid communications, shipping, disbursed manufacturing centers and supply chains. They had to figure out how and build the structure to meet the strategy, without impeding innovation.

Sergio Caredda reviewed and summarized the Chandler’s book, and identified four sequential stages

1. Acquisition of resources such as employees and materials and the buildup of marketing and distribution.
2. Establishment of functional structures to increase efficiency.
3. Adoption of growth and diversification strategy; diversification into new markets and products to overcome limits of home markets.
4. Creation of the then revolutionary divisional form to manage large conglomerates.

Even though published in 1962, his summary is still important. I think Caredda left out a critical element of Chandler.

Initial strategy always breaks phase relationship with strategy. Once this happens, structure may well impede strategy. The risk is that the structure drives the strategy, not the other way around!

The structural strains caused by a new strategy often impede strategic execution.??During the period Chandler studied, company size and market domination allowed for caution and measured responses. Change took time not available today.

I don’t know that anyone who is not surprised by the new industrial revolution we are engaged in today, but Chandler knew the basic foundation required to thrive.

According to Chandler, Organizational Innovation is the key to keeping Strategy and Structure from breaking phase relationship to the point of failure. The significance of innovation is such that I have titled this article, Strategy, Structure and Innovation.

In older organizations, he says, the expansion of legacy departments is often the antithesis of innovation. Older departments may expand the structure in order to perpetuate their own existence, garnering power to do so from higher and higher levels. In the language of LEAN, such departments are monuments.

I would argue that General Electric is an example where the structure drove the strategy when Jack Welch, among other things, defined the company as a Six Sigma company.

Kodak defined itself as a company that made film and cameras and built the structure to do so. One of their employees, Steve Sasson, invented the digital camera. Leadership took no interest as it was judged a threat to the existing structure. Structure drove the strategy, and innovation was discouraged. Sasson is in the engineering hall of fame. Kodak is gone.

Contrast that with Stellantis, an interesting company that combined Chrysler, Fiat and Peugeot, three companies from three countries and cultures. Stellantis no longer defines itself as an automotive company but rather an Electronic Mobility Company. The strategy is clear, and suitable for the times.

The Role of Innovation

If you choose to buy a copy of Strategy and Structure by Chandler, I suggest you include a copy of How Innovation Works and Why it Flourishes in Freedom, by Matt Ridley.

Ridley studied the relationship between Invention and Innovation.?He investigated steam engines, turbines, the telegraph, wireless communications, transistors, computers and more.?In almost every case, one person owns a patent.

Ridley reveals that in each case, it was a race to the patent office to be first, with one example of a patent filing taking place two hours before a disappointed competitor. Behind the story of invention is a greater story of innovation, with many contributing while one owns the patent. In such inventions as the steam engine and the turbine, the patent owners built machines of little practical value because of poor efficiency. England was the first to use coal fired steam engines and the first to fill the air with dense smog.

It was the freedom to innovate that provided machines that were of practical value, leading to efficient engines that power our economy, transport our goods and give us the freedom to move around.

Important inventions were a function of timing and technical application. The Wright brothers were the credited with the first sustained flight. They were innovators who had invented nothing!

The point Ridely wants to drive home is that innovation does not get the same credit as invention, but that innovation makes inventions practical. The real game is innovation!

Ridley claims in?How Innovation Works?that “Big companies are bad at innovating, because they are too bureaucratic, have too big a vested interest in the status quo…”

From the lessons of Hadley in?Strategy and Structure, we learn to think in terms of the integration of strategy and structure and maintaining phase relationship, being wary of how structure drives strategy when broken.

From Ridley in?How Innovation Works?we learn the relationship between Structure and Innovation. Neither works without the other.

That means that Strategy, Structure and Innovation are intertwined. Maybe it could be better stated that they must be carefully integrated.

Structure, Innovation and Quality

There is no doubt that emphasizing the importance of quality has had made substantial improvements in goods and services over the last 50 years. Quality has become an integral part of organizational structure, without which, demanding strategic goals cannot be met.

I submit that in many companies today, the structure for quality has broken phase with the strategy. In some companies, the structure of quality has grown to the degree that the strategic objective of quality departments is to perpetuate its existence. Goals are colored belts, progressive levels of certification, seminars to teach tools, not strategy-centered product performance and reliability, grounded in first principles. Training often starts with a large pool of candidates in seminars, progresses through several certification levels with the “last man standing” certified as some sort of master or the blackest belt.

The very nature of such a program requires massive structure.

Ridley claims that outsiders can help with innovation. Proctor and Gamble learned that it could not efficiently invent its own way to new products. The choice was to add structure or look to the outside. P&G, while looking outside, knew that in order to meet its strategic objectives, it was important to keep the outsiders from becoming part of the internal structure.

When outsiders become part of the structure, their value is limited. It could be argued that it is negative once the outsiders’ objectives becomes to build its own structure within the client structure.

As for outsiders, I suppose the expression, “Don’t let the camel get its nose in the tent” is simple but effective.

Strategy, Structure and the Customer

A periodic examination of the integration of strategy and structure begins with the customer.

My first job out of college was for Rehrig Pacific Company, led by Brad Rehrig. He was a fascinating entrepreneur. I learned a lot from him, but being a slow learner, it took years for me to know. More than once, Brad said, “Nothing happens until something is sold.”

Ideas had to be sold. The link from the factory floor to the customer had to be clear. Structure had to be supported by what customers wanted. The venture into hard drives was recognized for what it was, and terminated. The company learned and has flourished, growing many times over since I was there.

Quality organizations might want to take a fresh internal look at themselves, beginning with the definition of quality.

The definition of quality, I think, has been muddled. The scope of many quality departments has grown well beyond the narrow objective of providing quality products to customers.

What is a workable, operational definition of quality? For some, it is meeting a specification. For others it is reduced variation, assuming reduced variation about a mean has value to the customer. Although this might be true for a few inputs, most don’t matter within the limits of current control because the customers won’t care.

I recently worked on a project where a purchased assembly failed to perform its intended function, but each was to specification and had passed validation. Specifications are often flawed, but it’s too late if the customer figures that out.

For others, quality is defined as customer enthusiasm. That is a step in the right direction, but I don’t know how to quantify it. Harley Davidson Motorcycles certainly knows how to create customer enthusiasm, but a few decades ago, enthusiasm was a function of mystique, not quality performance.

First and foremost, a definition needs to be established that is consistent with the business strategy, quantifiable, and one that the departmental structure can be measured against. This is necessary to be certain that the structure is kept in phase with the strategy. It should also be a definition that innovators can relate to.

Let me offer a functional engineering definition. But allow me to preface that definition by going back to fundamentals.

Operational Definition of Quality

Machines perform functions. There are only seven functions, regardless of the domain. There are three properties that dictate how well those functions are performed.

Measuring both quality and reliability really means knowing how well those functions are being performed. Characterization of those functions can be easily done in a way that points at where improvements need to be made or where care needs to be taken when cost reductions are considered.

Such characterization is the only way to know in advance of your customers and your competitors that your product is going to match the market’s expectations for quality and reliability. In contrast, most validation testing today is focused on crossing the finish line with no discrimination between a product that is as fresh as it started and one that barely crawled over (in some cases carried on a stretcher.)

Poor performance results from the failure of?one of the seven measurable functions. Total Performance Characterization (TPC) is our system to?see what is happening?and which function is failing.

TPC is functional decomposition of machine behavior based on First Principles. Failed functions are always a function of energy or power not going where it is supposed to go. Think of energy leaks.

Whereas validation tests to survival beyond a time limit Total Performance Characterization goes well beyond validation.

• The definition of quality is really a definition of measurable performance.

• Quality is defined as how well a product’s functions perform at t0, the point of sale.

• Reliability is defined as how long those functions perform well.

Total Performance Characterization is a system to diagram, measure and monitor the flow of energy through a system. TPC starts with System Behavior. Energy flows to create function. Energy leaks create decay and loss of function. TPC should be the precursor to FMEA. TPC is based on First Principles of science. TPC is a look at function that provides valuable insight which leads to exciting opportunities for innovation.

As a leader, strategy and structure are never independent. Structure must be flexible and lean. Structure tends to grow to the point where it drives strategy. Managers might allow it. Leaders don’t.

Innovation must be promoted. Structure can impede or promote innovation.

An operational engineering definition of quality needs to be performance based. Performance needs to be defined in functional term based on First Principles.

Training must be lean and designed without becoming a structural burden.

John Allen and David Hartshorne, founders of The New Science of Fixing Things are setting the pace for innovation in quality engineering. TNSFT has merged with Crossover Solutions?https://www.xosol.com ?in order to obtain the structure to meet the strategic objective of providing access to their work to more clients internationally.