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New Organizational Structures

Network Structure This modern structure includes the linking of numerous, separate organizations to optimize their interaction in order to accomplish a common, overall goal. An example is a joint venture to build a complex, technical systems such as the space shuttle. Another example is a network of construction companies to build a large structure. Virtual Organization

This emerging form is based on organization members interacting with each other completely, or almost completely, via telecommunications. Members may never actually meet each other. See Virtual Teams
Self-Managed Teams

These teams usually include from 5-15 people and are geared to produce a product or service. Members provide a range of the skills needed to produce the product. The team is granted sufficient authority and access to resources to produce their product in a timely fashion. The hallmark of a self-managed team is that members indeed manage their own group, i.e., they manage access to resources, scheduling, supervision, etc. Team members develop their own process for identifying and rotating members in managerial roles. Often, authority at any given time rests with whomever has the most expertise about the current activity or task in the overall project. Often members are trained in various problem-solving techniques and team-building techniques. These teams work best in environments where the technologies to deliver the product or service are highly complex and the marketplace and organization environments are continually changing. Self-managed teams pose a unique challenge for the traditional manager. It can be extremely difficult for him or her to support empowerment of the self-managed team, taking the risk of letting go of his or her own control.
Learning Organizations

In an environment where environments are continually changing, it's critical that organizations detect and quickly correct its own errors. This requires continuous feedback to, and within, the organization. Continual feedback allows the organization to `unlearn' old beliefs and remain open to new feedback, uncolored by long-held beliefs. In a learning organization, managers don't direct as much as they facilitate the workers' applying new information and learning from that experience. Managers ensure time to exchange feedback, to inquire and reflect about the feedback, and then to gain consensus on direction. Peter Senge, noted systems theorist, points out in his book, The Fifth Discipline (Doubleday, 1990, p. 14), that the learning organization is "continually expanding its capacity to create its future ... for a learning organization, `adaptive learning' must be joined by `generative learning,' learning that enhances our capacity to create."

Self-Organizing Systems

Self-organizing systems have the ability to continually change their structure and internal processes to conform to feedback with the environment. Some writers use the analogy of biological systems as self-organizing systems. Their ultimate purpose is to stay alive and duplicate. They exist in increasing complexity and adapt their structures and forms to accommodate this complexity. Ultimately, they change structure dramatically to adjust to the outer environment. (Some assert that self-managed groups are self-organizing systems, although others assert that self-managed groups are not because an ultimate purpose is assigned to team members). A self-organizing system requires a strong current goal or purpose. It requires continual feedback with its surrounding environment. It requires continual reference to a common set of values and dialoguing around these values. It requires continued and shared reflection around the system's current processes. The manager of this type of organization requires high value on communication and a great deal of patience -- and the ability to focus on outcomes rather than outputs. Focus is more on learning than on method.

A new organizational model for airlines

They should consider the business unit model, but independence must be balanced by coordination.
MAY 2006 Yael Heynold and Jerker Rosander

In This Article

Exhibit 1: A traditional organizational structure for airlines Exhibit 2: A hybrid structure for diversified airlines About the authors Comments

Over the past decade, as competition in the airline business has intensified, traditional carriers have pursued strategies to spur growth, trim costs, and improve profits. To counter the threat from low-cost competitors such as Southwest Airlines and Ryanair, some have created their own budget or regional carriers. The result: today the world's 20 largest aviation groups operate about 50 airlines. In pursuit of higher profits, large traditional airlines have also diversified into related businesses. In doing so, they broaden their customer base to provide services (such as aircraft maintenance and catering) to other airlines and to other kinds of operators (for instance, air cargo space to freight forwarders and maintenance services to the defense sector). To reduce costs, these airlines have repeatedly sought concessions from their workers. Such changes greatly increased the complexity of managing aviation groups, which have traditionally been organized along functional lines, with all operations from sales services to flight operations reporting directly to the CEO (Exhibit 1). As this complexity increased, decision-making bottlenecks at the top of some companies began to hinder their ability to respond rapidly to shifting competition. The focus of top executives on the core passenger airline often diverted attention from emerging opportunities in higher-margin businesses. Performance suffered as parts of companies lost sight of the bottom line, and a lack of information impaired both cooperation and oversight.

Back to top To avoid these difficulties, large, diversified aviation groups should contemplate a major overhaul to replace the functional organization with a number of business units that have more autonomy and accountability for their performance. Such fundamental change in the shape of a company is a big step that can take three years or more to complete, but the advantages of the business unit model can make the shift worth undertaking. This model helps companies respond more quickly to changing market conditions, focuses middle managers on profitability, enables business unit managers to negotiate more competitive labor terms, and promotes the development of talented young leaders. Indeed, the business unit approach has already been fully

adopted by several aviation groups, including Lufthansa in the 1990s and Air Canada, Qantas Airways, SAS, and Singapore Airlines more recently. Aviation groups switching to the business unit model must avoid several pitfalls that can erase the positive effects of the new organization. The challenge is to balance greater autonomy for business units with close collaboration among them when coordinated efforts are essential for maximizing the group's profit; poor coordination, for example, can hobble strategic functions such as planning for a company's flight network and aircraft fleet. But if coordination efforts go overboard, units will fail to embrace accountability for profits, duplicate roles will emerge, bureaucracy will proliferate, and costs will rise. Finally, the CEO and the corporate center may well maintain too much decision-making authority, thus undermining the agility and accountability of the business units.
Outgrowing the traditional model

For airlines, the functional organizational model worked well for decades. It promoted deep technical expertise and economies of scale by grouping specialists together and focused accountability for the direction and efficiency of all divisions on one person: the chief executive. Peripheral businesses and small customer segments typically got limited attention from management, however, while the mainstream passenger business received most of the attention. This functional model probably remains the best choice for some aviation groups, particularly those that outsource most support functions (such as catering and maintenance), lack the sophisticated information systems needed to manage more complex structures, or serve only a few homogeneous customer segments. Yet many other carriers, like railroad and oil companies before them, have outgrown the traditional model. The rise of low-cost carriers is altering the nature of competition in the industry by spurring some traditional airlines to expand into businesses that offer higher margins or require less capital than their core passenger operations. Functionally organized airlines often lack the flexibility to meet the varied needs of an ever more diverse customer basea problem that crimps their ability to grow in ancillary businesses and in the fast-expanding market for budget travel. Because managers in a functional organization, with the exception of the CEO, aren't responsible for profitability, costs can easily get out of line. Moreover, labor agreements that cut across several parts of a company can lead to higher wages and benefits as everyone from baggage handlers to the catering staff receives some of the same perks the cockpit crew gets. To counter those shortcomings, aviation groups should take a hard look at the idea of adopting a new form of organization structured around separate business units, each with broad decisionmaking authority and responsibility for its own profitability. Such a structure resembles the classic business unit model of many diversified companies and of many retailers and banks, where individual units operate independently on a day-to-day basis and set their own strategic direction. For airlines, however, this structure must differ in one significant way: units operating as stand-alone businesses would quickly destroy the network value that comes, for example, from coordinating interconnecting flight schedules, efficiently allocating aircraft across a number of routes, and using the fare structure to maximize revenue throughout a large network. Airlines

thus need a hybrid structure that reaps the benefits of independent business units while maintaining strong links among them (Exhibit 2).

Back to top This type of organization has substantial advantages for diversified aviation groups. To begin with, business units with independent operating authority can tailor their strategies and respond more quickly to changes in the marketplace. After SAS created separate business units for Denmark, Norway, and Sweden in 2004, for example, each unit gained a better understanding of its unique competitive challenges. As a result, the Swedish unit moved swiftly to develop a tailored response to growing competition from local low-cost carriers: it simplified the service offering on domestic flights, added 12 direct flights from Stockholm to other European destinations, and adopted pricing based on one-way travel. Overall, the tailored business unit strategy, resulting from increased autonomy, shortened decision times, and entrepreneurial management, generated an eight-percentage-point increase in the utilization of available seats in the second quarter of 2005, to nearly 70 percent. Autonomy can also spur growth in neglected parts of a company. At Lufthansa, for instance, the share of group revenue from ancillary business units such as Technik (the maintenance division) and cargo increased by about ten percentage points, to 35 percent, from 1995 to 2004.

Once an aviation group's top executives have less responsibility for day-to-day operations, they can focus on strategy. The CEO of a traditional network carrier that recently switched to business units, for example, freed up several hours a week by delegating to business unit leaders tactical decisions about the number and type of aircraft that should be added to existing routes. In the past, he had routinely mediated debates between the manager of the group's fleet and network, who tended to recommend adding capacity, and the more conservative sales manager. This CEO now intervenes only when serious disputes arise and spends the freed-up time on regulatory questions and other strategic issues. The new structure can help reduce costs too. When business unit managers negotiate a labor contract, for instance, they can make a stronger case that employee work rules and wages should be in line with those of direct competitors, especially in short-haul airlines and support services such as catering and ground handling. SAS, for example, managed to negotiate labor unit cost reductions of more than 10 percent as part of its Turnaround 2005 program. The new business unit structure made an important contribution because it provided for the use of more direct benchmarks from the labor arrangements of competing low-cost carriers. Furthermore, business units make companies more transparent by allowing executives to assess any unit's profitability with an accuracy and level of detail that often can't be attained in functional organizations. This transparency promotes accountability for performance as well as a better allocation of capital and talented managers within the group. In one aviation company, for instance, the creation of business units made possible simple comparisons of returns on capital that had previously been out of reach. As a result, the top management of the group increased its investment in regional airlines that not only fed passengers to the core airline hubs but also generated attractive margins because returns in those regional businesses were several percentage points higher than the returns of the core airline. By creating more positions with profit responsibility, the business unit structure helps airlines to retain stars and groom future leaders who can serve in "CEO-in-training" roles (where promising young managers run their own businesses). In one group, for example, the freight division was seen as boring until it became an independent unit with an attractive CEO role. An up-andcoming executive was appointed to run the business, which then became one of the most desirable parts of the company for high-performing managers. It is now growing profitably by more than 15 percent a year, twice as fast as it had been earlier.
Making business units fly

The shift to a business unit structure is a delicate, complex operation. Experience shows that aviation groups tend to get caught in one of several trapsabove all, a tendency to underestimate the importance of coordination among the newly created airline business units. In several companies where individual airlines were given full control over their own networks and schedules, the parent organization failed to ensure that their efforts were complementary. As a result, the airlines within these companies started to compete against one another. Although these groups' airlines did collectively gain market share, yields declined and profits suffered. Managers in a business unit that is accountable for its own profitability also tend to optimize its costs or revenues, even at the expense of the group. Business units may, for example, want to

purchase call-center services from a low-cost outside supplier even if the group is left with excess capacity. The new structure can also lead to wasteful duplication of support functions, with each business unit establishing unnecessarily large independent staffs for human resources, accounting, or other functions. Although business units do need small staffs for these functions, larger head count reductions in the corporate center should more than offset the numbers. Nonetheless, giving business units too little freedom can be just as troublesome as giving them too much. Under a functional structure, the CEO and other top managers have hands-on operational responsibility. It can be hard for them to cede decision-making power to the newly appointed heads of business units. Indeed, for top managers, the transition to a different leadership style can be among the most difficult aspects of reorganizing. In some companies, executives who failed to adapt had to leave. To avoid these traps, companies must make two fundamental changes when they reorganize: they should establish a clear division of responsibility between the business units and the corporate center as well as create formal links among business units to ensure smooth cooperation.
Defining roles

For business units to function autonomously, they must play clearly defined roles within the group. Airlines constitute one type of business unit, with each airline typically targeting related customer segments that together are big enough to justify its own fleet of aircraft. These airlines are supported by services business units, such as maintenance and catering, which compete in distinct subindustries and are organized around their specialized assetsfor example, aircraft hangars and repair equipment. All of the back-office functions of these business units should be as decentralized as possible. Support activities (including accounting, budgeting, and performance evaluations of middle managers) should shift to business units. Where substantial economies of scale exist, in activities such as payroll and revenue accounting, operations should be centralized under a separate business unit that handles shared services. To ensure that the total number of back-office employees in the group decreases under the new model, the CEO's reorganization plan must include head count targets for business units, shared services, and the corporate center. In the new structure, the corporate center handles tasks for which central control remains most effective. One such task is fleet strategy: determining the optimum number of aircraft, the best mix of aircraft types, and the appropriate balance between purchased and leased planes. These are the company's biggest capital- investment decisions, and they affect all business units. A coordinated fleet strategy also permits top management to shift aircraft among units according to demand. The design of the route network should be coordinated centrally as well. Although each airline in a company should propose its own optimal network, invariably several will want to fly the same attractive routes during times of peak demand or to exit cities where the point-to-point economics are unattractive. In such cases, the center, in deciding which business unit flies where, must take into account the profitability of the overall network or the group's broad strategic objectives. When each business unit's annual profit targets are in line with the expected

profitability of its routes, units that have been told to fly less profitable ones are not penalized. Of course, the more each airline operates in distinct geographic markets or serves unique customer segments, the less the corporate center needs to intervene. In addition, the center must manage the group's brands, determining, for example, which business units are allowed to use the parent company's name. A group's airlines and support businesses may need its brand to attract customers. Other units, including ground handling, may benefit from the image of independence conferred by a name with no connection to the group. The corporate center must also ensure that business units using the name of the parent adhere to its brand attributes, such as quality and safety standards. Financial controls must remain firmly centralized, with a team to ensure accounting integrity, to measure the performance of business units, and to allocate capital or divest businesses. Whether business units should purchase catering, maintenance, ground handling, and other services internally or externally also is a question for the center. Similarly, it should decide whether units are free to seek external customers, as some airline groups' maintenance units are doing.
Coordinating business units

Business units need guidelines on how to interact. To create the right economic incentives, the group should establish transfer prices for major products and services traded internally. Pricing should balance accuracy with practicality and be detailed enough so that airlines can make intelligent trade-offs between the level of service they provide and the costs they incur. Take the case of the customer service agents who handle passenger check-ins. An airline "buys" this service from the ground-handling unit, and premium benefits should cost more than the basic service. For example, airlines offering their passengers short waiting times with a number of check-in optionsat the main service counter, in the frequent-flier lounge, at the departure gate, and at the valet-parking drop-offwould pay more than airlines requiring passengers to tolerate a single long queue. Ideally, prices should be based on the cost of buying products and services on the open market, an approach that works well where there is a choice of service providers. Sometimes, however, aviation groups dominate their region, and no competitive market exists for some services. In that case, transfer prices should be based on the company's actual costs plus a fair return on capital. Because there is no competitive downward pressure on prices, the corporate center should set annual improvement targetsfor instance, by benchmarking costs at similar companies when possible. Establishing transfer prices can be tedious because many airlines lack detailed financial data and benchmarks. To avoid lengthy internal arguments, the corporate center should establish clear standards for both the required level of detail in the price structure and the step-by-step process that business units must follow to determine prices. Once they have been set, the corporate center should regularly review whether they are up to date and reflect actual costs or market prices. The main effort to set internal prices typically takes about a year. Because transfer prices require such effort to put in place, business units often resist them at first. Before long, however, business units tend to embrace them because they show, for the first time, what it takes to make the business profitable.

Business units must also formalize their performance expectations for the products and services they exchange internally. They should strike agreements that focus on the most important elements, such as quality, delivery times, penalties for any failure to meet previously agreed standards, and joint initiatives to improve performance. These agreements should be embodied in simple, practical documents, of ten pages or fewer, that are developed by business units without help from lawyers. Other interactions not related to products and services must also be considered. A major category involves decisions that are made in one business unit but impinge on the processes of othersfor example, the creation of the flight schedule, which has a bearing on most operations. Activities (such as corporate sales, call centers, and fuel purchases) that could benefit from economies of scale make up another of these categories. Finally, activities such as yield management, marketing, and safety can benefit from shared skills. For all these activities, airlines need mechanisms that coordinate the work of the business units. The mechanisms may include rigorous processes that cut across them, routine information exchanges, and committees that meet regularly. One Asian aviation group's experience with scheduling illustrates the importance of close coordination. After the group was restructured into business units, each of its airlines developed flight schedules. These were passed on to the business units responsible for maintenance, ground handling, and other services so that they could develop their own plans. One airline in the group scheduled very late departures from its main hub. After a year of poor profitability, the airline and other business units began to explore ways of jointly reducing costs. Only then did the airline learn from the ground-handling unit that if its last planes departed just 20 minutes earlier, two shifts of workers instead of three would suffice, significantly lowering labor costs. That experience inspired changes in the scheduling process for all of the group's airlines. Now they ask the business units to give them feedback on draft schedules, thereby allowing the group to make scheduling trade-offs that take into account the influence of departure times on revenues and costs. The new process dramatically increased the number of participants in the scheduling process but reduced the airlines' ground-handling costs by around 10 percent. Experience shows that switching to a business unit structure benefits aviation groups with a number of airlines and well-developed services businesses: it helps these airlines to become more competitive in a market where the growing rivalry from low-cost carriers and high fuel prices are squeezing margins. To reap the benefits of the new organizational model, aviation groups must balance the autonomy of the business units with the need to coordinate their efforts. Meanwhile, the corporate center must relinquish most operating roles in order to focus on strategic activities and on oversight of the business units' performance.