Mastering complexity in global
development organizations
A benchmark study across technology
intensive industries
Discussion Paper
What is the "Organizational FIT"?
1
How to master organizational complexity?
2
How to put it into practice?
3
With this study, Arthur D. Little is aiming to introduce a first quantitative
approach to evaluating and improving the design of global R&D organizations
Background and motivation of the study
In order to win in the global competition, companies active in high-tech areas need to make sure
that their innovation strategy is executed smoothly.
As there is no single best way of doing business, the fit between strategy and organization
becomes crucial and research has shown that the organization does either support or contradict
specific strategic goals.
Oddly enough, the fit between innovation strategy and development organization has received
little management attention: the design of development organizations is usually done in a
pragmatic and incremental way, with little systematic thinking to master the complexity involved.
In order to provide top managers with the appropriate tools to design their organizations, Arthur
D. Little in cooperation with the University of Berlin have developed a technique to measure how
closely a company’s development organization fits with its strategy.
This measure, called the FIT-index, is based on profound academic research on successful
development organizations and tested with the 68 global companies from the Automotive,
Manufacturing, Aerospace and Defense industries who have chosen to participate in this study.
1
Development of
methodology
Global study
How it was done…
What is the "Organizational FIT"?
– How it was done…
Research
Scanning of scientific
databases
108 research papers
reviewed and
evaluated
235 documents taken
into consideration
68 global companies -
Automotive, Aerospace &
Defense and Electronics
Industry "practices"
"Organizational Fit"
across five dimensions:
1
The process, we went through …
[%]
First quantitative approach
of organizational assess
-ment
Organizational FIT
describing the correlation
between 10 strategic
objectives and 15
organizational dimensions
Joint development with the
Chair of Innovation
Management of the
University of Berlin
1
What is the "Organizational FIT"?
– Methodology
Illustration of the Organizational FIT Index methodology
15 organizational
dimensions
10 strategic
dimensions
"Organizational FIT Index"
Correlation between
400 matrix points
Average organizational fit index
Remarks
Significant potential in
optimizing fit between
strategy and organization
No industry specific pattern
No strategy specific pattern
No regional pattern
Governance:
Project/program/
product management
Operational structure:
Integration and
validation processes
Operational
structure
:
Management of
critical interfaces
Organizational
structure and
network
Governance
:
Resources
and budgets
61%
56%
57%
54%
72%
1
Fit to depend solely on
individual company
situation
What is the "Organizational FIT"?
– Overall organizational fit
58%
The average organizational fit of 58% across the board demonstrates that a
significant potential for optimization remains for most companies
Companies' strategies have been classified according to their general
positioning and a set of characteristics which drive their business
Strategic Dimensions
Cost leader
Innovation
leader
Quality
leader
1
What is the "Organizational FIT"?
– Methodology: Strategic Dimensions
Importance of differentiation (e.g.
brands) in product portfolio
Importance of short innovation cycles
Importances of reuse of concepts,
modules, and components
Relative importance of development
costs
Importance of supplier integration
Product complexity
Importance of customization
(customer specific requirements)
Organizational Dimension
Governance: Project/program/
product management
Operational structure:
Integration
and validation processes
Operational structure:
Management of critical interfaces
Organizational
structure and
network
Governance:
Resources and budgets
Five clusters of organizational dimensions have been considered
Top level structure of development organization
Market/regional orientation of development organization Engineering network structure and allocation of competencies
Engineering resource planning Budget allocation
Role and authority of project mgmt. Product life cycle responisbility System integration
Procurement & production integration Sales integration
Validation
Advanced & series development Engineering & design/styling Launch management
1
Regional coverage
–
Europe (incl. CEE)
–
USA
–
Japan/ South East Asia
Total: 68 global companies Electronics Automotive OEMs and suppliers Others
Participating industries
Companies originating from:
Background research
Size of the participating companies
Academic patronage:
Chair of Technology &
Innovation Management
Prof. Dr. Gemünden,
University of Berlin
56% 12% 20% 12% Electronics Manufacturing and consumer goods A&D 10% 14% 40% 26% 10% 0-500 Mio € 500 Mio-1Bn € 1-5 Bn € 5-20 Bn € > 20 Bn €1
What is the "Organizational FIT"?
– Study participants
Source: Arthur D. Little, Development Excellence Study
From September 2005 till February 2006 a total of 68 companies were
interviewed around the globe
Average organizational fit index
Remarks
Significant potential in
optimizing fit between
strategy and organization
No industry specific pattern
No regional pattern
Governance:
Project/program/
product management
Operational structure:
Integration and
validation processes
Operational
structure
:
Management
of critical
interfaces
Organizational
structure and
network
Governance
:
Resources
and budgets
61%
56%
57%
54%
72%
1
Fit to depend solely on
individual company
strategy and situation
What is the "Organizational FIT"?
– Overall organizational fit
58%
The average organizational fit of 58% across the board demonstrates that a
significant potential for optimization remains for most companies
What is the "Organizational FIT"?
1
How to master organizational complexity?
2
How to put it into practice?
3
For each study participant we have determined the
individual "Organizational Fit"
2
"Organizational Fit"
Strategic positioning
Governance: Project/ program/ product management Operational structure: Integration and validation processes Operational structure: Management of critical interfaces Organizational structure and networkGovernance: Resources and budgets
60%
78%
80%
40%
How to master organizational complexity?
– Individual FIT Index
57%
61%
56%
54%
72%
Average score of participants
58%
65%
Organizational Fit67
%
Cost leader Innovation leader Quality leaderImportance of differentiation in product portfolio
Degree of product customization to customer specific demands
Importance of short innovation cycles
Product complexity
Importance of degree of reuse of concepts, modules & components
Importance of development costs in relation to total product costs
Importance of supplier integration in the development process
X
X
X
X
X
X
X
not important very
3
5
2
24 4
The study reveals some general recommendations which are valid for all
participating companies and "independent" from the selected strategies
Avoid the "over-simplification trap" – Design your engineering organization
balancing closeness to markets with economies of scale across BUs, regions
and brands
Plan and allocate resources on the basis of market mechanisms wherever
possible and fund development projects directly
Implement personalized responsibility – Get rid of cozy committees
Put more emphasis on integration and validation processes as product
complexity increases with distributed functions
Develop competencies at critical engineering interfaces – Styling and launch
management
General recommendations from the study
2
1.
More coordination of R&D across BUs in order to realize synergies
(-> CTO/ Corporate Technology Mgmt. in a market oriented decentral R&D structure)
2.
Stronger role of project managers, budgets should be mainly with projects vs.
line functions
3.
Personalized product life cycle responsibility
(-> product managers)
4.
Separation of technology/ module and product development
5.
Dedicated system integration centers and product validation according to
standard processes respectively with central resources
6.
Engineering, procurement, and manufacturing under one leadership
7.
Strong customer oriented organization with permanent customer focused sales &
engineering teams
(->commercial and technical key account management)
8.
Standard product launch management processes and clearly defined overall
launch responsibilities
… furthermore, for the majority of study participants following improvement
areas have been identfied:
Frequently identified improvement potentials
2
For 83% of the interviewed companies the cross-BU engineering
organization is the most appropriate choice
Board
…
BU BU BU
1.1. Organizational structure and network – Top level structure
Alternatives & % chosen
a) Engineering across all BUs
Strategic considerations
Study results [% of]
All industries
Cross-BU engineer. optimum for 83% of companies Balance distinctive offerings for markets with synergies across BUs
Central - Cost effective but complex to manage
Often found as transitory (e.g. integration not finished after PMI)
Automotive + A&D frequently choose the suboptimum b) BU specific engineering
Decentralized – Rarely to be the optimum
– Lacking synergies
– Cost/ quality optimizations 83
optimum for % of companies % with appropriate choice
2
Board…
BU BU BUb) BU specific engineering
17How to master organizational complexity?
– Top level structure
51% % chosen alternative 49%
Recommendation
Recommendation Note:Preliminary general recommen -dation for typical medium sized machine builders; valid for the majority of engineering &
manufacturing study participants; specific recommendations for depend on strategic objectives
Strategic considerations
Study results
All industries
42
When dealing with globalization of R&D most companies show dysfunctional
behavior
Head of engineering
2
1.2. Organizational structure and network – Market/ regional orientation
a) (Globally) centralized structure
b) Matrix structure c) Decentralized structure Head of eng. Local business head Local business head Local business head Local business head Local business head Local business head Local business head Local business head 29 29
How to master organizational complexity?
– Market/ regional orientation
optimum for % of companies % with appropriate choice 40%
% chosen alternative 51%
9%
Alternatives & % chosen
For 42% of the companies a
globally centralized
structure makes sense, for 58% the regional
component is more important
Achieving global synergies is easier within a
centralized organization but this is generally perceived to be too complex to manage
Matrix Management is en
vogue but in most cases not appropriate (it seems that companies prefer the sub-optimal compromise rather than making a clear decision)
All industries
12 Engineering location 1 Engineering location 2 Engineering location 3 Competence 1 Competence 2 Competence 3 Competence n…
x x x x x x x x x x x x1.3. Organizational structure and network – Allocation of competencies
2
a) Full range of competencies in each engineering location
b) Specific competencies in each engineering location Engineering location 1 Engineering location 2 Engineering location 3 Competence 1 Competence 2 Competence 3 Competence n
…
x x x x 88How to master organizational complexity?
– Allocation of competencies
optimum for % of companies % with appropriate choice 40%
% chosen alternative 60%
Companies typically struggle with historically grown integrated engineering
locations and often failed so far in implementing clear Centers of Excellence
Study results
Alternatives & % chosen
Strategic considerations
Most engineering
organizations have grown historically, change is therefore emotional and difficult
For 9 out 10 companies a Center of Excellence (CoE) approach is appropriate
Most interviewed
companies without CoEs are in the process of transitioning towards this organizational model
Strategic considerations
Study results
All industries
40
Top down approach in distributing R&D budgets the most common option.
However, only for 40% the optimum solution
2.1. Governance: Resources & budgets – Engineer. resource planning & allocation
Global engineering budget
"Top-down allocation" Local engineering units Local engineering units Local engineering units
How to master org. complexity ?
– Engineering resource planning & allocation
a) Centralized planning
b) Market mechanisms
c) Decentralized planning
Global engineering budget
Local engineering units Local engineering units Local engineering units "Competitive bidding for orders" 51 2 9 3
optimum for % of companies % with appropriate choice 70%
% chosen alternative 4%
26%
Alternatives & % chosen
Centralized budget is preferred (perceived as easiest) but not always appropriate = control
Market mechanism, partly understood, difficult to do but often appropriate for introducing a stronger market orientation
Decentralized planning tends to be driven by local P&L`s but lacks synergy across the business units
Research and development
budgets follow different allocation logics
2
Local engineering
budget Local engineering budget
Local engineering budget Local engineering units Local engineering units Local engineering units
Recommendation
Recommendation
2.2. Governance: Resources & budgets – Allocation
Project
budget Development project
Line function 1 Line function 2 Line function 3
All industries
73How to master organizational complexity?
– Allocation
a) Budget governance by development project
b) Mixed budget allocation
c) Budget allocation to line functions
Line function 1 Line function 2 Line function 3 Development project
Line budget Line budget Line budget
Project budget
Line
function 1 function 2 Line function 3 Line Development
project
Line budget Line budget Line budget
27
0
optimum for % of companies % with appropriate choice 41%
% chosen alternative 39%
20%
0
Most companies should give budget governance to projects. For the rest a
mixed allocation would be the optimum
Budget allocation by project for 73% the most
appropriate solution
– Strong project
management requires full control of budget & resources
– Short cycles, tough
deadlines
For a high degree of reuse a mixed budget allocation is appropriate to avoid project specific optimization
Budget allocation has grown historically and companies are still suffering from the effects
2
Strategic considerations
Study results
Alternatives & % chosen
3.1. Governance – Project management
All industries
95 Line function 1 Line function 2 Line function 3 Project manager Development projecta) Full responsibility and authority with project manager
b) "Matrix" principle
Line function 1
Line
function 2 function 3 Line Project manager Development project
Line function 1 Line function 2 Line function 3 Project manager Development project
5
0
optimum for % of companies % with appropriate choice 38%
% chosen alternative 42%
20%
c) Main responsibilities and authority is within line function
2
0
A strong project manager tends to be the optimum organizational model,
especially when seen as "Multi-Project-Manager"
For 95% full responsibility with PM is the appropriate option
– Heavy duty PM good way
to realize your strategic objectives (low risk option)
Potential risk: Project specific optimization
Requires change in line function self perception (from technical solutions to competency management)
Besides budget issues PM is also about "soft"
organizational skills
(culture, coaching, transfer of know how)
2
Strategic considerations
Study results
Alternatives & % chosen
How to master organizational complexity?
– Project management
3.2. Governance – Product/ program management
All industries
92
Even though 92% of the companies interviewed considers PLM responsibility
an issue, only one third have a structured solution for life cycle management
BU/ board
Production Sales After Sales Engineering
92% see life cycle
management important, only 34% personalize this responsibility
For 92% personalized responsibility appropriate:
– Clear accountability
– Life cycle integration issues addressed
– Important to reach costs
& quality targets
– Manufacturability &
serviceability
Life cycle responsibility still implemented to a low extent
Important to reach costs and quantity targets
a) One personalized responsibility (e.g. within engin., prod. mgmt,…) over entire life cycle
b) Committee approach
c) No specific product/ program mgmt., decisions taken on BU/ board level
BU/ board
Production Sales After Sales Engineering
Product mgmt.
BU/ board
Production Sales After Sales Engineering
4
4 3
Product mgmt.
How to master organizational complexity?
– Product/ program management
optimum for % of companies % with appropriate choice 34% % chosen alternative 46% 20% 0
2
Strategic considerations
Study results
Alternatives & % chosen
All industries
63
System integration teams are considered a must for all situations involving
complex integration in rigorous time frames
4.1. Operational structure: Integration & validation processes – System integration
System integration team 1
Line
function 1 function 2 Line function 3 Line
…
Most interviewees are faced with increased system
integration responsibility in the coming years
For 63% of the interviewees, dedicated system integration teams to be appropriate:
– Master complexity of their products (e.g. launch, ramp-up)
– For short innovation cycles (e.g. software)
– Reduce redundancies
– Supplier–OEM interface Dedicated teams are a major
lever for avoiding quality problems
For long innovation cycles (e.g. A&D) a workflow solution may be appropriate
a) Dedicated system integration centers with local concentration of teams
b) Formalized system integration without local concentration of teams
c) No formalized system integration
BU/ board
Production Sales After Sales Engineering
System integration process & workflow
BU/ board
Production Sales After Sales Engineering
19
18
How to master organizational complexity?
– System integration
optimum for % of companies % with appropriate choice 44% % chosen alternative 33% 23%
2
Strategic considerations
Study results
Alternatives & % chosen
Recommendation
All industries
100
Companies increasing go for a COO approach integrating E, P and M, being
the optimum solution in 100% of the cases
4.2. Integration & validation processes – Procurement & production integration
a) E, M, P under one head
b) E and M under one head – P independent
c) E and P under one head – M independent d) E, M and P independent M E M, E & P BU / board S AS P M E M & E BU / board P S AS E P M BU / board E & P S AS M BU / board E P S AS 0 COO approach is 100% appropriate
COO approach to foster technical solution at optimum manufacturability and costs
Avoid silo optimization, open up value chain thinking
Any integration from E/P and M better than independent
Different integration levels are seen across industries:
– E&P integration: e.g.
BMW, DC and Volvo Trucks
– COO approach: MCG
How to master organizational complexity?
– Procurement & production integration
optimum for % of companies % with appropriate choice 20% % chosen alternative 16% 7% 57% 0 0 0 0 0
2
Strategic considerations
Study results
Alternatives & % chosen
All industries
0
4.3. Operational structure: Integration & validation processes – Sales integration
A Key-Account organization or an organization combining sales and
application engineering is strongly recommended for B2B businesses
S E Project A Project B a) Functional organization b) Key-Account matrix
c) Customer orientated organization S KAM A KAM B E E&S KA A KA B KA … Advanced Eng. 41 59
How to master organizational complexity?
– Sales integration
optimum for % of companies % with appropriate choice 41% % chosen alternative 40% 19% 0
2
Generally a customer orientated organization is better for B2B businesses– Customer orientation
– High correlation with market success
– Positive on cycle times Danger of being too much in
customer focus ignoring cross customer synergies
Customer orientated
organization is particularly applicable if sales is based on module / platform with customer specific
customization
Strategic considerations
Study results
Alternatives & % chosen
Recommendation
All industries
98
Validation office
Project 1 Project 2 … Project n
4.4. Operational structure: Integration & validation processes – Validation
a) Centralized
b) Project specific with centralized resources
c) Validation within project teams
Validation office
Project 1 Project 2 … Project n
Project 1 Project 2 … Project n
Centralized planning appropriate in 98% of the cases
Standardization and bundling of validation activities
become more and more important
Generally for all companies with complex systems option a) is a strategic must
Cross project / organization standardization of testing and validation
Governance issues emerging
(DIN /IEC 61508 –
Functional Safety / Safety systems)
2 2
0
How to master organizational complexity?
– Validation
optimum for % of companies % with appropriate choice 28% % chosen alternative 50% 22% 0
2
Typically validation is not done effectively ignoring emerging governance
issues
Strategic considerations
Study results
Alternatives & % chosen
Recommendation
All industries
89
For 89% of the companies, an advanced engineering organization
independent from series engineering is appropriate
5.1. Critical process interfaces – Integration of advance & series engineering
Advanced engineering series engineering Engineering Line function 1 Line function 2 … … Telematics Active safety Alternative propulsion Example
a) "Advanced engineering/ research" independent from series engineering
b) Integrated in product engineering
Engineering Line function 1 Line function 2 … Adv. eng. line funct 1 product A Series B Adv. eng. line funct 2 Testing … product C … Example
2
Go for independent if – Emphasis is on product innovation– High risk of resource
cannibalization (firefighting)
– Modularization is required
Go for integration if:
– Speed of integrating new
concepts
– Early integration of suppliers
– More emphasis on costs
Remark: Often 3 layers:
– Research
– Advanced engineering
– Series engineering
11
How to master org. complexity?
– Integration of advance & series engineering
optimum for % of companies % with appropriate choice 62%
% chosen alternative 38%
Strategic considerations
Study results
Alternatives & % chosen
All industries
78
Series engineering Adv. eng. &
design function 2 Line Styling Adv. eng.
… Line
function 1
As styling gets more and more important for B2B organizational issues need
to be discussed
5.2. Critical process interfaces – Integration of engineering & styling
a) Styling integrated within (advanced) engineering
b) Styling independent from engineering, same reporting
c) Different reporting lines of styling and engineering
Styling Line function 1 Line function 2 Eng. & design
…
Styling Engineering … BU / board
2
In B2B industrial goods design gets more and more important
Design to be independent for premium B2C
– Avoid too much influence from engineering / more freedom
If packaging / manufacturability
/serviceability issues occur an integration to be
considered
11
0
How to master organizational complexity?
– Integration of engineering & styling
optimum for % of companies % with appropriate choice 31% % chosen alternative 11% 17% d) Not relevant lines 41% 0 0 11 0
Strategic considerations
Study results
Alternatives & % chosen
All industries
5.3. Critical process interfaces
– Launch management
98
Most companies launch products with the project team – Thus often not
leveraging critical experience in product launch
… Engineer -ing BU / board Production S Plant … Engineer -ing BU / board Production S Plant Option I Option II
a) Separate launch team
b) Simultaneous engineering team with standardized set of methods
c) No formalized launch management
BU / board S Engineering Production SE- Launch- Team Project Mgt.
2
Launch as top issue for all industrial companies:
– In time, in spec., in budget
– Showed to be bottleneck
Development project – Good
engineers but often lacking industrialization know how
Launch teams with
specialized competencies integrated in engineering or production is in 98% of the cases the most appropriate solution
Simultaneous engineering most chosen option, but due to risks associated specialized teams (option a) more favorable
2 2
0
How to master organizational complexity?
– Launch management
optimum for % of companies % with appropriate choice 26% % chosen alternative 60% 14% 0
Strategic considerations
Study results
Alternatives & % chosen
Recommendation
What is the "Organizational FIT"?
1
How to master organizational complexity?
2
How to put it into practice?
3
Our suggestion of the improvement trajectory …
Improvement Trajectory
Identification of
improvement areas
Workshop series
to align corporate
strategy and
development
organization
Bring it down to
concrete actions
Organizational
development in
R&D
Actions / tracking
Get independent
outside view and
feedback on
study results
Report
Presentation by
Arthur D. Little
1
2
3
3
How to put it into practice?
– Improvement
Wir stehen Ihnen für eine detailliertere Vorstellung der Studienergebnisse
und als Diskussionspartner für mögliche Ansatzpunkte gerne zur Verfügung
How to put it into practice?
– Contact persons
3
Volker Bellersheim
Senior Manager
Maschinen- und Anlagenbau Arthur D. Little GmbH Leopoldstraße 11a 80802 München Tel.: +49/89/3 80 88-728 Fax.: +49/89/3 80 88-750 Mobile 0175/5806-210 eMail: [email protected]
