Using Organizational Architecture to Lead Change

Effective leadership involves more than developing and communicating the right strategic vision for the company. To encourage employees to carry out the corporate vision, companies must ensure consistency among the following three main components of their organizational architecture: (1) the allocation of decision-making authority; (2) performance measurement systems; and (3) reward systems.

The authors illustrate the application of this framework with the case of Xerox’s (eventually) successful attempt to create a customer-oriented workforce in the 1980s. But a more effective demonstration of the importance of these principles, as the authors go on to suggest, might well be the same company’s well-known failure to harvest the commercial promise of the many inventions by its research group in Palo Alto, one of which became the basis for Steve Jobs’ success at Apple.

This organizational framework is especially useful for evaluating the likely effects of major corporate initiatives such as “Six Sigma” or the “Balanced Scorecard.” For example, it could be used to help top management determine whether, and under what circumstances, decentralization is likely to improve decision-making and performance, as well as the changes in the firm’s performance management and incentive systems that would be required to make decentralization work.

Finally, the authors apply the framework to another important leadership issue: corporate ethics. Since the scandals of the early 2000s and the passage of Sarbanes-Oxley, many, if not most, U.S. companies have issued formal codes of conduct, appointed ethics officers, and instituted training programs in ethics. But a key question for top management is whether the incentives established by the company’s organizational architecture reinforce or undermine the code of conduct. Ensuring consistency in organizational design is an important leadership function—one that is critical to encouraging ethical behavior as well as the pursuit of shareholder value.