A network organization structure and financial fluency are the last two of the five traits of an agile enterprise. Without them, the first three traits will be crippled.
Agile organizations replace command and control with training and trust. They are structured to provide their business units with the flexibility they need to decide and act on their own within broadly defined parameters set by senior management. People are empowered to do whatever is legal and not expressly prohibited instead of only doing what is specifically permitted.
Everyone in an agile enterprise understands the common language of business – that’s finance. People understand enough finance to assess opportunities and options and determine which ones are in the company’s best interests. And, because everyone (not just senior management) benefits when the company does well, people are always looking for new opportunities.
The agile enterprise is more than just an attempt to apply technology to create speeded up versions of traditional organizations from the last century. Technology is necessary but not sufficient. To create agility, a new business model is needed before technology can really be effective.
Network Organization Structure Enables Freedom of Action
The organization structure of an agile enterprise doesn’t look much like the traditional pyramid-shaped hierarchy of a twentieth-century industrial corporation. Hierarchies move way too slowly because pyramids inevitably create decision-making bottlenecks as information gets passed up the chain of command (see Figure 1). In a fast-paced world (regardless of how many information systems are installed), a few people at the top simply can’t do all the thinking for everybody else.
An agile enterprise has a network organization structure and promotes coordination over control. A network structure allows decentralized decision making and more freedom of action for autonomous business units. Senior management makes sure people are well trained, and then management trusts people to act without having to ask permission first (see Figure 2).
A network of autonomous business units acts like a school of fish, a flight of birds, or a swarm of bees. The business units coordinate with each other, yet each thinks and acts for themselves within the parameters defined by senior management. And if an opportunity proves to be a big one, then new business units are created to grow into those new markets instead of letting any one business unit get too big. Network organization structures promote swarming behavior like that illustrated in Figure 3.
Financial Fluency is Required by All
Agile enterprises employ transparency (trait #1) and people are trained to read balance sheets and income statements, and they get access to updated reports every week. People quickly learn to read these reports (whether they have an MBA or not) because people can always figure out things that interest them. Since agile organizations are composed of entrepreneurial employees (trait #2) who earn a portion of their compensation from quarterly performance bonuses, that means real money is riding on business results, so everyone from participatory senior managers (trait #3) to brand new hires has skin in the game and everyone is interested in the financials.
In addition to balance sheets and income statements, everyone understands breakeven points. Everybody in the company is able to do a breakeven analysis on their projects or the support activities they perform. This simple calculation tells employees the minimum activity level necessary to pay for themselves and anything else they or the company might do. It allows people to size up situations and determine which ones are worth pursuing and which ones are not.
Every person in a responsive organization understands how to apply breakeven analysis so they can do things such as:
• Calculate the sales level at a given gross margin percentage that would be needed to pay for a new investment
• Translate sales into relevant business terms, such as the number of billable hours or production levels they need to achieve to fill given sales targets
• Calculate the breakeven level for their work unit given normal billable hours or production levels after subtracting out their variable costs
• Calculate their share of the profits that would result from exceeding their breakeven points
• Know how much money they would lose if they do not reach their breakeven points
People at each level of an agile organization any know their operating numbers and their breakeven points better than senior management does. Because of this, performance targets necessary for higher profits become clear to everyone and people see what their share of the profits (or the losses) would be. This common understanding is extremely powerful; it is what creates consensus and guides effective entrepreneurial behavior; it enables the decentralized decision making that agile organizations depend on.
Business Models for this Century Must Embrace Uncertainty
In every agile enterprise there are ongoing conversations about where to centralize certain functions like finance, marketing, logistics, and selected IT functions to get economies of scale. But at no time does the notion of centrally controlled economies of scale ever become the main business strategy or the dominant operating policy. Centrally controlled hierarchies optimized for economies of scale were the model for industrial corporations in the relatively slow moving and predictable twentieth century, but they don’t work in the fluid and unpredictable economy of this century.
Agile organizations always focus on building and harnessing the entrepreneurial energy of their members; that is the main driver of their business strategies. They understand that in the competitive and unpredictable world we live in now, responsiveness driven by the entrepreneurial energy of autonomous business units is the more profitable course. Because only autonomous business units with local decision making authority can move fast enough to capitalize on opportunities or respond to threats in a timely manner.
The real time global economy has become like a stock market with all the volatility that implies. Events unfold in bewildering and unpredictable ways. The agile enterprise embraces this state of affairs and learns to use it to its advantage. Agile and responsive organizations generate better profits because of their ability to make many small adjustments every day to improve their performance as conditions change and because of their ability to move quickly to seize profitable new opportunities that come their way.
That is why the five traits of an agile enterprise (network org structure, financial fluency, transparency, entrepreneurial employees and participatory senior managers) and the business practices that promote agility are the basis for sustainable prosperity in this century.
Learn more in my book Business Agility: Sustainable Prosperity in a Relentlessly Competitive World
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