Welcome to the era of hyper-competition, outsourcing and cost reduction. As if the pressures of day-to-day operations weren’t enough of a burden, the demand for growth continues to be on the mind of executives.
But how can an organization be expected to keep costs under control and grow at the same time? It’s a challenge confronting even the best HR organizations. Nevertheless, growth and cost reduction can be designed into the same organization.
Growth germinates from the distinct value offerings an organization offers customers, especially when the value is greater than that offered by the competitors. And growth is sustainable when differentiation is designed into the organization. Therefore, increasing productivity and lowering costs for activities that don’t create competitive advantage constitutes the smartest type of pruning.
As such, a key to designing an organization that sustains differentiation is to understand which activities in an organization must be different from competitors’ and which activities can be at par or even below par. This is called strategic activity analysis, and is something that guides HR leaders when designing an organization that is both effective and efficient.
This process of strategic activity analysis occurs in three basic steps:
- Articulate a marketplace value offering that expresses differences;
- Categorize activities according to the strategy expressed in the value offering; and
- Design and resource the organization and its processes starting with the strategic work.
Lets examine each of these in detail.
1. Articulate a marketplace value offering that expresses differences.
Speaking of mission or strategy statements, how many times have you heard “…to be the premier provider of…?” Not that this verbiage is inappropriate, it just doesn’t help the organization make choices around what activities are really important for the organization. One consistent theme in the strategy literature over the last decades has been the issue of strategic trade-offs. An organization is deluded if it claims its strategic position is to be the premium provider of products, with the highest touch, the lowest cost, the fastest response and the highest quality all at the same time. Instead, an organization should craft a value offering that articulates differences. This also will identify offerings that are above par, at par and below par.
A value offering is recommended to not only articulate the above, at and below par offerings, but also be expressed in the language of the customer. The value offering is written in the ideal. In other words, identify what the organization wants as the reasons the targeted customer will choose or not choose the organization? Imagine the customer saying: “I choose you over competitors because you are (better, greater, stronger) than your competitors,” and “this is where you are equal to or even below your competitors.”
For example, a customer might say, “I choose your company because:
- You are faster in your response times than your competitors;
- You have people who know more about my business and our industry than your competitors;
- Your products and service perform more consistently than your competitors; and
- Your price is reasonable for the value I receive, although you cost more than your competitors. And despite the fact that:
- Your geographic reach is less than your competitors;
- The range of products and services you offer is less than your competitors; and
- Your products and services are less innovative than your competitors, but at par with industry.”
This fictional value offering indicates which activities must be different from competitors, above competitors, at par and even below par. Everyone has limited resources — everyone must choose where value will and will not be offered. Understanding and appreciating this enables the organization to focus your limited resources on the most strategic and differentiating activities versus trying to be everything to everyone.
This is the essence of competitive organization design. One means of providing insight into organization design is to analyze how activities strategically affect the organization’s value offering. We call this strategic categorization.
2. Categorize activities according to the strategy expressed in the value offering
Place each of the organization’s activities into one of the following four categories:
Support organizations such as HR, legal, finance, etc. rarely, if ever, constitute competitive work (unless the organization does that function’s work for the customer).
Our experience is that the most activities in organizations are found in the Necessary and Compliance categories. Furthermore, the list of Competitive work is very short. However, the first two columns involve work that maximizes effectiveness and growth, whereas the last two columns involve tasks that are based on efficiency and cost reduction.
A key point about strategic categorization is that this analysis is not about ranking work in levels of importance. All work is important. Payroll is very important. The organization would stop functioning without it. However, the company doesn’t exist to do that task, and thus, no matter how good it gets at processing payroll, it will not gain market share through issuing paychecks to employees with greater efficiency. To repeat, strategic categorization is not about importance, but about an activity’s relative impact on the organization’s strategy and marketplace value offering.
3. Design and resource the organization and its processes starting with the strategic work
How do you get market growth and cost reduction simultaneously? For one, you don’t take resources from the work in the Competitive column — you take it from Necessary and Compliance work. That said, Necessary and Compliance work must be done right and to the specified requirements but no more.
By definition, Necessary and Compliance work only offers a downside. By downside we mean that if this work is not done right, it could put you out of business, but no matter how good you get at doing it, you won’t gain market share.
A key principle of design is to build an organization around Competitive and Competitive Enabling work. For instance, if an organization states its people will know more about customers’ needs than the competitors do, then the organization’s design must support and facilitate this. Essentially, planners must answer the question: “What activities drive knowing more?” The answers could be: “Hiring the best”, “Training to get the best”, “Job experience to develop the best”, “Best customer/industry information systems” or any combination of the above.
However, most often when there is competitive claim, the activities that support the claim are done no different than competitors. If the mix of activities that support a value offering are no different than competitors, then sustainable differentiation is a myth.
On the other hand, if the activities are truly different, they will be resourced and treated differently. This is the precision edge of competitive organization design designing for effectiveness and efficiency. If all your HR processes match best-in-class HR processes, your activities (functionally excellent as they are) are no different than other best-in-class organizations.
When this happens, HR may claim functional excellence, but that excellence does not contribute to sustainable differentiation.
For example, most banks claim to compete on customer service. However, in practice, few functional practices differ from bank to bank to bank.
For example, in many banks with a customer service strategy, HR activities are for the most part the same as in other banks and therefore fail to directly contribute to competitive differentiation.
Banks where HR practices are truly different and aligned around customer service through recognition, reward, performance management, information systems, leadership behavior and employee development directly impacts the organization’s value offering and its competitiveness.
Similarly, many HR organizations claim to contribute to their organization’s competitiveness through benefit and compensation practices, practices that are rarely different from any other HR organization. When HR practices are designed around the organization’s marketplace value offering (not HR’s value offering), difference in HR activities become more competitively effective and valuable.
HR can prove itself as a direct contributor to competitiveness when its practices directly support the organization’s value offering and when it reduces cost in activities that are Necessary and Compliance Work.
HR can only be seen as a strategic partner when its contribution to competitiveness is designed into the organization. As Arthur Jones once said, “Every organization is perfectly designed to get the results that it gets.” This statement has never been truer than for HR.