We were talking about Domino's Pizza and the impact that the architecture, the design of this organization played on the success of this company. Again, it wasn't about the pizza itself. In fact, some would say the pizza's not their favorite. But no one would deny that the design of this organization and the strategy changed the industry. So we want to look deeper into the architecture of firms and how that makes a difference in the ability to execute and to drive performance. Now, one of the questions that managers often ask is why does the design of the organization or the architecture help some firms, but not others? And there's really two extremes here of what we'd maybe think of as a misfit in terms of the organization architecture. The first is the underdeveloped organization. This is a company that doesn't have the infrastructure in place, or the processes in place. It's unable to execute because of confusion, or waste, or lack of coordination. You may find that there's actually chaos in terms of how decisions get made in many organizations, particularly early in their life cycle find themselves here. That they really need to bring a little bit more discipline to the organization and use the architecture to create that infrastructure. On the other end, we also see organizations that can't execute because they're simply too bureaucratic, they're slow, they're rigid, the structure is hamstringing managers. Maybe they're operating in silos and they become myopic, and the net result is that the organization is unresponsive to change and driving innovation. Now neither of these organizations can execute very well, but they're very different. So, the idea is what's the appropriate architecture and design for your organization where it is? We're going to look at that a little more deeply. And there's some principles that really give us an opportunity to look at this more. It begins with the idea that organizations, their structure and their design help them process information and drive decisions, and that begins with the strategy. So the strategy actually creates the environment of the organization. It enacts the environment. The environment doesn't exist out there and the organization just reacts to it. But in fact, the strategy defines how complex and how dynamic the environment's going to be. How many different markets we're going to be in, how many different products we're going to bring to market, what's the complexity of the technology, etc? The strategy determines a lot of that, same thing with dynamism or the amount of change. This is an academics word in terms of what's the velocity of change. And a strategy determines that as well in terms of how quickly our cycles change, what kind of innovation. What are the dynamics of the business that's rooted in our strategy? Both complexity and dynamism, we've talked about them before, lead to uncertainty. Things aren't stable, things aren't simple. And when they aren't that way, it's difficult sometimes to make decisions. We just don't have the information or the information on time that we need. So if you draw those all together, strategy creates these kind of conditions that lead to uncertainty that frankly the architecture has to deal with. So the structure and the architecture helps managers cope with that uncertainty and manage the information required to make decisions. Now there's a curvilinear relationship that we're going to get into. I'll show you a couple ways to think about this. But the amount of uncertainty is related to the bureaucratic solutions that sometimes organizations use. And sometimes those solutions work and sometimes they work against you. And we can think of it this way. Think of this curvilinear relations on two dimensions. The x axis is the amount of uncertainty. Remember your strategy sets that in motion, how complex your world is and how much it changes. Now on the one side of this figure, we see a firm in position A. This is a firm that has a very simple and stable environment, things are fine. This is pretty easy to manage. Then you have B, who's in the middle on this and then C in a highly dynamic, highly changing and complex environment. Now on the Y axis, we see the extent to which organizations use bureaucratic solutions, very formalized, structural ways of organizing the work. And the curvilinear relationship is one that we want to explore. So if I'm firm A, I can have an actually pretty simple organization. The design doesn't need to be complicated at all. But what we see is when an organization shifts from A to B. What typically happens is they need a little bit more structure, they need a little bit more capability to process information because the complexity and the amount of change makes it difficult for them to approach things. Well, early on what organizations often do is they create structures that make it easier for managers to make decisions by reducing the information processing that they need. They will centralize decisions so a boss at the top will make the decision for everybody else in the organization. Or when it gets too complex, they'll allow people to specialize. Division of labor rather than trying to manage all the work, they'll focus on their specialty. They'll standardized processes, there's one way of doing things, let's do it the same way every time, that way we don't have as many exceptions. And we'll start to formalize this. We'll start to have rules of operations. Standard operating procedures, and this actually works pretty well in most cases. And you can probably think of organizations that as they grow and their world gets a little more uncertain, they need to put in some of these practices for reducing the information processing requirements. But there's a tipping point on this. And what happens is that when a firm moves more towards the C position, reducing information processing won't work. Because the complexity, the amount of change just overwhelms the model. And so what happens is that organizations, instead of reducing information processing requirements. They have to make investments in increasing their information processing capability. And in this case, decisions actually get pushed down into the organization and decentralized closer to the action, where people who really have the information can make the decisions. There's also investment in lateral relations. So we've created these areas of specialization, now we have to invest in them connecting with each other. And those relationships are very important for sharing information. Instead of having rigid processes in an uncertain environment with lots of complexity to change, those processes need to become more flexible. Allowing for exceptions in non-routine situations. And there's also usually a big investment in information systems, so that people have ready access to the information, and the data they need to make decisions. Now you can see that, depending on where you are on this curve, one of these approaches to architecture may work for you. If you're a company in the position of B and you're managing like you're in A, you're going to be underdeveloped. You're not going to have the infrastructure necessary to manage your organization. On the other hand, if you're in C and you're managing like you're in B, this is going to feel very bureaucratic. You won't have the agility, won't have the dynamics to drive your business. So every organization has to look at where their organization sits on this continuum and design the right infrastructure and architecture to make it work.
