Business units come and go, but finance, HR, IT, marketing, legal, and R&D are forever. Nonetheless, many CEOs and top executives struggle with their functional organizations, and some question whether the established functional model is still relevant. In their view, functional priorities are all too often in conflict with — or not fully supportive of — the strategic needs of the business.
The challenge for the functional model today is that companies don’t need to build generic functional strengths. They need to build more specific, bespoke capabilities that are part of the inherent identity of the company, and hard for anyone else to duplicate.
For example, Walmart doesn’t succeed just because of a strong operations group. It has built impressive capabilities that include logistics, inventory processes, buying standards, real estate practices and labor models — most of which it created for itself. Similarly, Amazon doesn’t succeed because its people apply broad marketing expertise. It has sophisticated functions that together manage user-generated content, the in-depth tracking of consumer buying behavior, and the innovation of new features based on the resulting insights. No other company does these things the same way these two companies do.
In nearly all industries, the expertise needed to differentiate a company and win in the marketplace is much more complex than it was in the past. If a company wants to be better than anyone else, at something relevant to its customers, its specialists must be more efficient, technically proficient, and creative than ever before.
Therefore, it is crucial to be clear about the capabilities your organization most needs to stand apart. Too often we see functional leaders and staff struggling because this is not well defined. Imagine trying to use the objective of being “innovative” as a criterion for the multitude of investments a company must make around product launches and R&D.
Unfortunately, when the company isn’t coherent — when its strengths are not linked explicitly to its strategic focus — most functions end up trying to keep up with an overlong list of “really important priorities.” This is an unwinnable proposition.
How can you tell when the functional model is not working well? Typically, you will see functions being good at many things, but great at nothing. These functional teams struggle to meet the short-term needs of all their constituents, juggling an endless (and often conflicting) list of demands from line units. They talk about the long-term requirements to build true differentiation, but never seem to get the time or resources for them, and thus fail to gain the type of advantage that is required for success.
Indeed, mono-functional excellence will almost never guarantee success. The most distinctive, differentiating capabilities are almost always cross-functional. P&G’s vaunted ability to launch breakthrough products isn’t just a matter of R&D; it requires an integration of competencies, including consumer insights, engineering, external partnerships and brand marketing. Similarly, IKEA’s capability in creating and selling stylish but utilitarian furniture combines functional expertise in design, sourcing, manufacturing, packaging, logistics, the design of customer experience in its retail stores, and cost management; all of these reinforce each other.
This type of capability requires a higher level of cross-functional collaboration than many specialists are used to. But if the functional model is obsolete, what might replace it? There are several possible solutions, each with strengths and weaknesses.
Many companies try to build complex capabilities by assembling small-scale functional teams — committees of people from the relevant professional groups to tackle particular problems. These are relatively easy to organize and they can make a genuine difference in solving cross-functional problems.
Unfortunately, however, most cross-functional teams fall far short of delivering truly differentiating capabilities. They rarely have the time to resolve the different ways of thinking that people bring from their professional specializations. When the team members first come together, they tend to misunderstand one another. The teams are also limited by their conflicting functional priorities and sometimes a lack of clear accountability. Many of these teams will dissolve once the project is over, and their members may not work together again. They therefore have little incentive to overcome these hurdles.
Permanent cross-functional teams tend to fare better. A growing number of innovation groups bring together disparate functional skills (typically R&D, marketing, IT, and customer insight) to launch new products or services, and then keep the teams together afterwards. Frito-Lay Inc., for example, set up a unit like this in the early 1980s; merchandising, IT, and supply chain worked together to develop the company’s celebrated direct-store-delivery capability, enabled by handheld devices that Frito-Lay developed itself. Similarly, Pfizer Consumer Healthcare (since sold to Johnson & Johnson) set up communities of practice in the early 2000s, made up of lawyers, health professionals, and marketing experts who could help spread key ideas and best practices to brand and product groups around the world.
We’ve recently seen a more robust cross-functional construct emerge, one with an overarching organizational structure, based on building and maintaining a distinctive capability. Members of these capabilities teams are assigned permanently to them, reporting there rather than through a functional hierarchy. For example, a retail bank might have a single large group overseeing its remarkable capability in customer management — professionals who were formerly part of marketing, back-office operations, IT, sourcing, and legal organizations would all report to the same part of the hierarchy, all working together to maintain and improve the way their bank serves consumers and small businesses.
This approach links the organization’s specialists more directly to the capabilities that support the company’s core strategy, lifting them to a new level of accountability and reward above the status they would have had in functions like supply chain, finance, or marketing. One early variant of this approach, rapidly taking hold in technology-oriented companies, is the “strong-form” product management team — in which multifaceted product launches are overseen by a single leader, who coordinates all the activities involved in a product launch and has the final responsibility for the outcome. A few of these cross-functional groups are even gaining representation on their company’s executive team. Their leaders are officers with titles like Chief Risk Officer, Chief Innovation Officer, and Chief Growth Officer.
Different companies will find different paths, but every company will need to reconsider the functional organization as its primary way of managing specialized expertise. The most farsighted functional leaders are not just waiting for these changes to affect them. They are helping evaluate the current state of their company’s capabilities system, and suggesting ways to bring it closer to its potential. This is part of the functional leader’s new mandate as a strategic partner for the enterprise: delivering not what individual constituents demand, but what the enterprise needs.
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