Mastering complexity in global development organizations

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1 Discussion Paper Mastering complexity in global development organizations July 2006 A benchmark study across technology intensive industries

2 Contents 1 What is the "Organizational FIT"? 2 How to master organizational complexity? 3 How to put it into practice? Organizational_Fit_060721.ppt/m 2

3 What is the "Organizational FIT"? Motivation 1 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 companys 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. Organizational_Fit_060721.ppt/m 3

4 What is the "Organizational FIT"? How it was done 1 How it was done The process, we went through Development of Research Global study methodology Scanning of scientific First quantitative approach 68 global companies - databases of organizational assess Automotive, Aerospace & -ment Defense and Electronics 108 research papers reviewed and Organizational FIT Industry "practices" evaluated describing the correlation between 10 strategic "Organizational Fit" 235 documents taken objectives and 15 across five dimensions: into consideration organizational dimensions Joint development with the Chair of Innovation Management of the [%] University of Berlin Organizational_Fit_060721.ppt/m 4

5 What is the "Organizational FIT"? Methodology 1 Illustration of the Organizational FIT Index methodology Correlation between strategic objectives and organizational dimensions 10 strategic dimensions "Organizational FIT Index" Correlation between 15 organizational 400 matrix points dimensions Organizational_Fit_060721.ppt/m 5

6 What is the "Organizational FIT"? Overall organizational fit 1 The average organizational fit of 58% across the board demonstrates that a significant potential for optimization remains for most companies Average organizational fit index Remarks Organizational structure and Significant potential in network optimizing fit between 57% strategy and organization Operational No industry specific pattern structure: Governance: Management of Resources No strategy specific pattern critical interfaces and budgets 72% 61% No regional pattern 58% Fit to depend solely on Operational structure: individual company Integration and Governance: validation processes 54% 56% Project/program/ situation product management Source: Arthur D. Little, Development Excellence Study Organizational_Fit_060721.ppt/m 6

7 What is the "Organizational FIT"? Methodology: Strategic Dimensions 1 Companies' strategies have been classified according to their general positioning and a set of characteristics which drive their business Strategic Dimensions Strategic Positioning Business Characteristics Importance of differentiation (e.g. brands) in product portfolio Cost leader Importance of short innovation cycles Importances of reuse of concepts, modules, and components Relative importance of development costs Importance of supplier integration Quality Product complexity Innovation leader leader Importance of customization (customer specific requirements) Organizational_Fit_060721.ppt/m 7

8 What is the "Organizational FIT"? Methodology: Organizational Dimensions 1 Five clusters of organizational dimensions have been considered Organizational Dimension Organizational Top level structure of development organization structure and Market/regional orientation of development organization network Engineering network structure and allocation of competencies Operational structure: Governance: Management of critical interfaces Resources and budgets Advanced & series development Engineering resource planning Engineering & design/styling Budget allocation Launch management Operational structure: Integration Governance: Project/program/ and validation processes product management System integration Role and authority of project mgmt. Procurement & production integration Product life cycle responisbility Sales integration Validation Organizational_Fit_060721.ppt/m 8

9 What is the "Organizational FIT"? Study participants 1 From September 2005 till February 2006 a total of 68 companies were interviewed around the globe Participating industries Companies originating from: Manufacturing and Regional coverage consumer goods Europe (incl. CEE) 20% Total: USA 68 global A&D 12% 56% Automotive OEMs Japan/ South East Asia companies and suppliers 12% Electronics Electronics Size of the participating companies Background research Sales figures > 20 Bn 0-500 Mio 10%10% Academic patronage: 500 Mio-1Bn 14% 5-20 Bn 26% Chair of Technology & Innovation Management Others40% Prof. Dr. Gemnden, 1-5 Bn University of Berlin Source: Arthur D. Little, Development Excellence Study Organizational_Fit_060721.ppt/m 9

10 What is the "Organizational FIT"? Overall organizational fit 1 The average organizational fit of 58% across the board demonstrates that a significant potential for optimization remains for most companies Average organizational fit index Remarks Organizational structure and Significant potential in network optimizing fit between 57% strategy and organization Operational No industry specific pattern structure: Governance: Management Resources No regional pattern of critical and budgets 72% 61% interfaces 58% Fit to depend solely on individual company Operational structure: strategy and situation Integration and Governance: validation processes 54% 56% Project/program/ product management Source: Arthur D. Little, Development Excellence Study Organizational_Fit_060721.ppt/m 10

11 Contents 1 What is the "Organizational FIT"? 2 How to master organizational complexity? 3 How to put it into practice? Organizational_Fit_060721.ppt/m 11

12 How to master organizational complexity? Individual FIT Index 2 For each study participant we have determined the individual "Organizational Fit" Example: XYZ Corp. Strategic positioning "Organizational Fit" Cost leader Organizational Organizational Fit 67% 58% 5 structure and network 2 Operational 78% 57% 2 3 structure: Quality 4 4 Innovation Management leader leader of critical Governance: not important very interfaces Resources and budgets Importance of differentiation in product portfolio X 72% 60% 80% Importance of short innovation cycles X 61% Importance of degree of reuse of concepts, modules & components X Importance of development costs in relation to total product costs X Importance of supplier integration in the development process X 54% 65% 40% 56% Product complexity X Operational structure: Governance: Degree of product customization to customer specific demands X Integration and validation Project/ program/ processes product management Average score of participants Organizational_Fit_060721.ppt/m 12

13 How to master organizational complexity? Key recommendations 2 The study reveals some general recommendations which are valid for all participating companies and "independent" from the selected strategies General recommendations from the study 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 Organizational_Fit_060721.ppt/m 13

14 How to master organizational complexity? Individual FIT Index 2 furthermore, for the majority of study participants following improvement areas have been identfied: Frequently identified improvement potentials 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 Organizational_Fit_060721.ppt/m 14

15 How to master organizational complexity? Top level structure 2 For 83% of the interviewed companies the cross-BU engineering organization is the most appropriate choice 1.1. Organizational structure and network Top level structure Alternatives & % chosen Study results [% of] Strategic considerations a) Engineering across all BUs 51% Cross-BU engineer. optimum All industries Recommendation Board for 83% of companies Balance distinctive offerings BU BU BU for markets with synergies across BUs 83 Central - Cost effective but complex to manage Often found as transitory (e.g. integration not finished b) BU specific engineering 49% after PMI) Recommendation Board Automotive + A&D frequently 17 choose the suboptimum b) BU BU BU BU specific engineering Note: Decentralized Rarely to be Preliminary general recommen the optimum -dation for typical medium sized Lacking synergies machine builders; valid for the optimum for % of companies majority of engineering & Cost/ quality optimizations manufacturing study participants; % chosen alternative % with appropriate choice specific recommendations for depend on strategic objectives Organizational_Fit_060721.ppt/m 15

16 How to master organizational complexity? Market/ regional orientation 2 When dealing with globalization of R&D most companies show dysfunctional behavior 1.2. Organizational structure and network Market/ regional orientation Alternatives & % chosen Study results Strategic considerations a) (Globally) centralized structure 40% All industries For 42% of the companies a globally centralized Head of engineering structure makes sense, for Recommendation 42 58% the regional component is more important b) Matrix structure 51% Achieving global synergies is easier within a Local Local Local Local centralized organization but 29 business head business head business head business head this is generally perceived to be too complex to Head of eng. manage c) Decentralized structure 9% Matrix Management is en vogue but in most cases Local Local Local Local 29 not appropriate (it seems business business business head business that companies prefer the head head head sub-optimal compromise rather than making a clear optimum for % of companies decision) % chosen alternative % with appropriate choice Organizational_Fit_060721.ppt/m 16

17 How to master organizational complexity? Allocation of competencies 2 Companies typically struggle with historically grown integrated engineering locations and often failed so far in implementing clear Centers of Excellence 1.3. Organizational structure and network Allocation of competencies Alternatives & % chosen Study results Strategic considerations a) Full range of competencies in each 40% All industries Most engineering engineering location organizations have grown Engineering Engineering Engineering historically, change is location 1 location 2 location 3 therefore emotional and Competence 1 x x x 12 difficult Competence 2 x x x For 9 out 10 companies a Competence 3 x x x Center of Excellence (CoE) approach is appropriate Competence n x x x Most interviewed companies without CoEs b) Specific competencies in each 60% are in the process of engineering location 88 transitioning towards this Recommendation Engineering Engineering Engineering organizational model location 1 location 2 location 3 Competence 1 x Competence 2 x Competence 3 x optimum for % of companies Competence n x % chosen alternative % with appropriate choice Organizational_Fit_060721.ppt/m 17

18 How to master org. complexity ? Engineering resource planning & allocation 2 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 Alternatives & % chosen Study results Strategic considerations a) Centralized planning 70% All industries Centralized budget is "Top-down Global engineering budget preferred (perceived as allocation" Recommendation easiest) but not always Local engineering Local engineering Local engineering appropriate = control units units units 40 Market mechanism, partly b) Market mechanisms 4% understood, difficult to do "Competitive but often appropriate for Global engineering budget introducing a stronger Recommendation bidding for orders" 2 51 market orientation Local engineering Local engineering Local engineering units units units Decentralized planning tends to be driven by local 26% P&L`s but lacks synergy c) Decentralized planning across the business units Local engineering Local engineering Local engineering budget budget budget 3 9 Research and development Local engineering Local engineering Local engineering budgets follow different units units units optimum for % of companies allocation logics % chosen alternative % with appropriate choice Organizational_Fit_060721.ppt/m 18

19 How to master organizational complexity? Allocation 2 Most companies should give budget governance to projects. For the rest a mixed allocation would be the optimum 2.2. Governance: Resources & budgets Allocation Alternatives & % chosen Study results Strategic considerations a) Budget governance by development 41% All industries project Budget allocation by project Line Line Line for 73% the most Recommendation function 1 function 2 function 3 appropriate solution Project Development 73 Strong project budget project management requires b) Mixed budget allocation 39% full control of budget & resources Line budget Line budget Line budget Short cycles, tough Line Line Line 27 deadlines function 1 function 2 function 3 Project Development For a high degree of reuse budget project a mixed budget allocation is c) Budget allocation to line functions 20% appropriate to avoid project 0 0 specific optimization Line budget Line budget Line budget Budget allocation has grown Line Line Line function 1 function 2 function 3 historically and companies Development optimum for % of companies are still suffering from the project effects % chosen alternative % with appropriate choice Organizational_Fit_060721.ppt/m 19

20 How to master organizational complexity? Project management 2 A strong project manager tends to be the optimum organizational model, especially when seen as "Multi-Project-Manager" 3.1. Governance Project management Alternatives & % chosen Study results Strategic considerations a) Full responsibility and authority with 38% project manager All industries For 95% full responsibility Line Line Line with PM is the appropriate Recommendation function 1 function 2 function 3 option 95 Heavy duty PM good way Project manager Development project to realize your strategic b) "Matrix" principle objectives (low risk 42% option) Line Line Line function 1 function 2 function 3 Potential risk: Project 2 5 specific optimization Project manager Development project Requires change in line function self perception c) Main responsibilities and authority 20% (from technical solutions to is within line function competency management) Line Line Line 0 0 Besides budget issues PM is function 1 function 2 function 3 also about "soft" Project manager Development project organizational skills optimum for % of companies (culture, coaching, transfer % with appropriate choice of know how) % chosen alternative Organizational_Fit_060721.ppt/m 20

21 How to master organizational complexity? Product/ program management 2 Even though 92% of the companies interviewed considers PLM responsibility an issue, only one third have a structured solution for life cycle management 3.2. Governance Product/ program management Alternatives & % chosen Study results Strategic considerations a) One personalized responsibility (e.g. 34% All industries 92% see life cycle within engin., prod. mgmt,) over entire life cycle management important, Product mgmt. BU/ board only 34% personalize this Recommendation 92 responsibility Engineering Production Sales After Sales For 92% personalized b) Committee approach 46% responsibility appropriate: BU/ board Clear accountability Product mgmt. Life cycle integration 0 4 issues addressed Important to reach costs Engineering Production Sales After Sales & quality targets c) No specific product/ program mgmt., 20% Manufacturability & decisions taken on BU/ board level 3 4 serviceability BU/ board Life cycle responsibility still implemented to a low extent Engineering Production Sales After Sales optimum for % of companies Important to reach costs and quantity targets % chosen alternative % with appropriate choice Organizational_Fit_060721.ppt/m 21

22 How to master organizational complexity? System integration 2 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 Alternatives & % chosen Study results Strategic considerations a) Dedicated system integration centers 44% with local concentration of teams All industries Most interviewees are faced with increased system Recommendation Line function 1 Line function 2 Line function 3 integration responsibility in the System integration team 1 63 coming years For 63% of the interviewees, dedicated system integration b) Formalized system integration without 33% teams to be appropriate: local concentration of teams Master complexity of their products (e.g. launch, Recommendation BU/ board 19 ramp-up) For short innovation cycles Engineering Production Sales After Sales (e.g. software) Reduce redundancies System integration process & workflow SupplierOEM interface c) No formalized system integration 23% 18 Dedicated teams are a major lever for avoiding quality BU/ board problems For long innovation cycles (e.g. Engineering Production Sales After Sales optimum for % of companies A&D) a workflow solution may be appropriate % chosen alternative % with appropriate choice Organizational_Fit_060721.ppt/m 22

23 How to master organizational complexity? Procurement & production integration 2 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 Alternatives & % chosen Study results Strategic considerations a) E, M, P under one head 20% BU / board All industries COO approach is 100% appropriate Recommendation M, E & P S AS 100 M E P COO approach to foster technical solution at optimum b) E and M under one head 16% P independent BU / board manufacturability and costs M&E P S AS 0 0 Avoid silo optimization, open up value chain thinking M E Any integration from E/P and c) E and P under one head 7% M independent BU / board 0 0 M better than independent M E&P S AS Different integration levels are seen across industries: E P E&P integration: e.g. 0 0 BMW, DC and Volvo d) E, M and P independent BU / board 57% Trucks M E P S AS COO approach: MCG optimum for % of companies % chosen alternative % with appropriate choice Organizational_Fit_060721.ppt/m 23

24 How to master organizational complexity? Sales integration 2 A Key-Account organization or an organization combining sales and application engineering is strongly recommended for B2B businesses 4.3. Operational structure: Integration & validation processes Sales integration Alternatives & % chosen Study results Strategic considerations a) Functional organization 41% All industries Generally a customer E S orientated organization is Project A better for B2B businesses 0 0 Project B Customer orientation High correlation with b) Key-Account matrix market success 40% Positive on cycle times Recommendation E S KAM A 41 Danger of being too much in customer focus ignoring KAM B cross customer synergies c) Customer orientated organization 19% Customer orientated organization is particularly E&S Advanced Eng. 59 applicable if sales is based KA A on module / platform with KA B customer specific KA customization optimum for % of companies Recommendation % chosen alternative % with appropriate choice Organizational_Fit_060721.ppt/m 24

25 How to master organizational complexity? Validation 2 Typically validation is not done effectively ignoring emerging governance issues 4.4. Operational structure: Integration & validation processes Validation Alternatives & % chosen Study results Strategic considerations a) Centralized 28% All industries Centralized planning appropriate in 98% of the Recommendation Project 1 Project 2 Project n cases Validation office 98 Standardization and bundling of validation activities become more and more b) Project specific with centralized 50% important resources Recommendation Project 1 Project 2 Project n 2 Generally for all companies 2 with complex systems option Validation office a) is a strategic must Cross project / organization c) Validation within project teams 22% standardization of testing Project 1 Project 2 Project n 0 0 and validation Governance issues emerging (DIN /IEC 61508 optimum for % of companies Functional Safety / Safety % with appropriate choice systems) % chosen alternative Organizational_Fit_060721.ppt/m 25

26 How to master org. complexity? Integration of advance & series engineering 2 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 Alternatives & % chosen Study results Strategic considerations a) "Advanced engineering/ research" 62% All industries Go for independent if independent from series engineering Emphasis is on product Recommendation Example Engineering innovation High risk of resource Advanced series cannibalization engineering engineering (firefighting) 89 Telematics Active safety Line Line Modularization is required function 1 function 2 Alternative Go for integration if: propulsion Speed of integrating new b) Integrated in product engineering 38% concepts Engineering Early integration of Example suppliers 11 More emphasis on costs Line Line function 1 function 2 Adv. eng. Adv. eng. Remark: Often 3 layers: line funct 1 line funct 2 product A product C Research Series B Testing optimum for % of companies Advanced engineering % chosen alternative % with appropriate choice Series engineering Organizational_Fit_060721.ppt/m 26

27 How to master organizational complexity? Integration of engineering & styling 2 As styling gets more and more important for B2B organizational issues need to be discussed 5.2. Critical process interfaces Integration of engineering & styling Alternatives & % chosen Study results Strategic considerations a) Styling integrated within (advanced) 31% engineering Series All industries In B2B industrial goods engineering design gets more and more Adv. eng. & Line Line important 78 design function 1 function 2 Design to be independent Styling Adv. eng. for premium B2C b) Styling independent from engineering, Avoid too much influence 11% 0 11 same reporting from engineering / more Recommendation lines Eng. & design freedom Styling Line function 1 Line function 2 If packaging / 0 11 manufacturability c) Different reporting lines of styling and 17% /serviceability issues occur engineering BU / board an integration to be 0 0 considered Styling Engineering d) Not relevant 41% optimum for % of companies % chosen alternative % with appropriate choice Organizational_Fit_060721.ppt/m 27

28 How to master organizational complexity? Launch management 2 Most companies launch products with the project team Thus often not leveraging critical experience in product launch 5.3. Critical process interfaces Launch management Alternatives & % chosen Study results Strategic considerations a) Separate launch team 26% All industries Launch as top issue for all industrial companies: Recommendation Option I Option II In time, in spec., in BU / board BU / board budget Engineer Engineer Showed to be bottleneck Production S Production S 98 -ing -ing Development project Good Pilot- Pilot- engineers but often lacking industrialization know how Plant Plant b) Simultaneous engineering team with Launch teams with 60% standardized set of methods 2 2 specialized competencies Recommendation BU / board integrated in engineering or Project Mgt. production is in 98% of the cases the most appropriate solution SE- Launch- Engineering Production S 0 0 Team Simultaneous engineering most chosen option, but c) No formalized launch management 14% due to risks associated optimum for % of companies specialized teams (option a) % chosen alternative % with appropriate choice more favorable Organizational_Fit_060721.ppt/m 28

29 Contents 1 What is the "Organizational FIT"? 2 How to master organizational complexity? 3 How to put it into practice? Organizational_Fit_060721.ppt/m 29

30 How to put it into practice? Improvement 3 Our suggestion of the improvement trajectory Three step approach Improvement Trajectory 1 2 3 Get independent Identification of Bring it down to outside view and improvement areas concrete actions feedback on Workshop series Organizational study results to align corporate development in strategy and R&D Report development organization Actions / tracking Presentation by Arthur D. Little Organizational_Fit_060721.ppt/m 30

31 How to put it into practice? Contact persons 3 Wir stehen Ihnen fr eine detailliertere Vorstellung der Studienergebnisse und als Diskussionspartner fr mgliche Ansatzpunkte gerne zur Verfgung Volker Bellersheim Senior Manager Maschinen- und Anlagenbau Arthur D. Little GmbH Leopoldstrae 11a 80802 Mnchen Tel.: +49/89/3 80 88-728 Fax.: +49/89/3 80 88-750 Mobile 0175/5806-210 eMail: [email protected] Organizational_Fit_060721.ppt/m 31

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