Strategy before structure, not the other way around

How is it that startups organize differently than large industrial companies? How is it that different consultancy companies are now merging? How is it that many large companies find it difficult to make use of today’s rapid technological development? The answers lie in an understanding of the processes for which new technologies create the conditions.

Every business we can see around us today was formed once in history. At that particular time, certain conditions prevailed, such as technical and customer-specific ones. That, in turn, set the framework for the basic structure that was formed, then.

We can put it this way: at every point in history, structures are created in a logical way, then, because they are based on what we could even do, then.

However, this does not mean that the logic of that time is as relevant today, because the conditions are different today. Things that were not possible in the past are now possible, for example, and thus new ways of organizing, which were not possible then, are also possible now.

When companies that were perhaps formed almost a hundred years ago, such as many industrial companies, gradually grew large, overtime, in turn created the conditions for completely different types of activities to also be formed. As a starting point, they were called support functions.

But as a consequence of the professionalisation of certain functions over time and the development of new knowledge and technologies they gradually became activities in their own right. Then they became separate legal entities. IT consulting companies, management consultants, design agencies, law firms are good examples of just that. That’s how all these consulting industries have become.

One might assume that running relay races is fast, as long as one don´t find a different, faster, way to run.

A concrete example of all this I have now touched on is that most of today’s major global industrial companies live on with a fundamental division of operations internally into product development, operations and marketing.

It was logical to organise themselves in this way when they were set up, partly because the costs of developing new products were high and therefore they wanted to be sure in advance that there would be customer needs, once the new product was ready.

Thus: a separate marketing function, a separate product development function and a separate operations function.

Why spend a lot of money developing something expensive if you didn’t know customers wanted it?

The most important reason why the music industry could not understand the imporance in streaming is that they market research and trusted the result that they got.

Today, however, both the technical and market conditions are different. For example, it is not nearly as expensive anymore, especially in a digital world, to develop new products. But it is also the case that customer preferences change in completely different ways today.

And how, then, are we to know that a customer who may be responding to a future need at the moment will also accept in reality a few years later, when a new product is ready?

A good example of the latter can be found, for example, in the music industry. Just as streaming services began to evolve, in 2006, the global music industry conducted a major global customer survey. The answer they received was that customers preferred CDs. However, what the investigation did not take into account was that those customer preferences would change rapidly.

Today, there are not many music consumers who prefer CDs.

But in addition: Today it is also technically possible, at least if the product is digitally connected, to test drive a feature, or even a new product, directly with a customer and that way directly find out if there is demand or not. This requires no more market research at all – something that many market investigators already know, but prefer not to talk much about.

When you put your key in your Tesla tomorrow it might be a different Tesla than my Tesla. It is because Tesla constantly do “live testing” (todays market research) with us.

Tesla doesn’t do any market research on whether customers want Spotify in their cars. Instead, they give that opportunity directly to a selection of customers for some time, see how they react, then decide whether or not to launch Spotify in their cars.

The costs of just testing are low, not least in comparison to doing a large customer survey, which may not yet provide the answer you are looking for. At the same time, the speed of this way of working becomes extremely high in relation to a downpipe-based approach. And all this has now been made possible thanks to the Tesla car being digitally connected.

Back when cars weren’t connected, this wasn’t even possible.

This is an example of a natural, resource-efficient, and fast way, to work as many of today’s startups apply. But it is also an example that illustrates how difficult a large downpipe organization would find it if trying to work in the same way – this way of working goes completely against the division of marketing, product development, production. Because who internally would take responsibility for a “Tesla test” like this within a large company that is divided by downpipe? Who would decide? And how long would it take just to organize the work itself?

This explains why many newly formed companies would rather organize themselves into small teams, where the teams have everything from marketing, product development and operations, in their hands. And not that you organize yourself in a drainpipe according to the logic of the old large industrial companies.

All this points to the fact that, over time, the large old industrial companies will have to reorganise themselves, or of their own accord. If they do not, they will not be able to fully capitalise on today’s technological opportunities.

What could previously be called marketing itself, product development by itself and operations itself, can today be made one and the same.

The renowned American management researcher Alfred Chandler once wrote the book “Strategy and Structure“, in an attempt to explain that it is the strategy that should lead to the answer to how a business should be structured, not the other way around.

Chandler was right about all that, but it’s easy to forget.

We are often happy to take today’s structures for granted.

But why is that really?

This development also has, and has already had, consequences for companies’ various support functions and, for example, different types of consulting companies. If, over time, there is not a separate marketing function, who should a marketing consultant sell to? If, over time, there is not a separate design department, who will a design consultant sell to? If, over time, there is not a separate management department, who should a management consultant sell to? And what kind of services should then a future kind of consultancy firm sell?

This approach provides an understanding of the movements we can see in different consulting segments, for example were IT consultants merge with management consultants and design agencies.

The way in which consultancy firms organise themselves, what services they provide and what types of skills they have employees must simply, in order to succeed, have to reflect over time how their customer base is developing, and what the new technological conditions give rise to for kinds of opportunities.

The power of the disruptive power of digital technology development is so great that in the future we will see more and more businesses restructuring themselves fundamentally.

Darwin was right: It is the one who is best at adapting to the time you live in who will do best in the long run.

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