Better-functioning organizations

A recurring topic here is the potential for large and costly failures created by the dysfunctions of complex organizations (link). This perspective on organizations follows from the work of sociologists like Charles Perrow, Diane Vaughan, and Andrew Hopkins. But we can also ask the symmetrical question: is it possible for a medium- or large-scale organization to function well and to consistently to achieve its organizational purposes? Or are large organizations doomed to erratic performance?

Consider an example — say, a large industrial manufacturing company like John Deere. John Deere employs about 70,000 workers and managers in locations in thirty countries.

John Deere is a manufacturing company that produces farm equipment — tractors, harvesters, forestry equipment, residential lawn equipment, etc. Its corporate headquarters are in Moline, Illinois, and the company did $48.4 billion in annual sales in FY2021. This is roughly comparable to the revenues of Caterpillar, one of its main competitors, and a little over one-third the revenues of auto manufacturer Ford Motor Company. John Deere’s current market value is $113.8 billion.

John Deere is widely regarded as one of the better-managed and led companies on the American scene today. What are the corporate goals and priorities that John Deere’s executive team and upper management seek to achieve? Do they succeed? Is JD a social machine for success? Here are several unranked priorities:

  • Maintain and increase shareholder value
  • Maintain company’s stock price
  • Achieve a strong rate of profit
  • Extend market share domestically and internationally
  • Increase revenue year-to-year
  • Satisfy customers

More specific goals concern the organization and management of production, the design of new products, and ongoing assessment of “market trends” for the technology of earth-moving and farm equipment. These might include:

  • manage and improve manufacturing processes for efficiency and quality of product
  • anticipate technology changes that affect farm equipment and other JD products
  • maintain worker morale
  • maintain appropriate coordination across divisions of company
  • contain costs, including materials and labor
  • maintain safety standards in the workplace
  • conduct effective and focused research and development activities

The company has three main divisions, with further divisions within each: Agriculture and Turf, Construction and Forestry, and Finance. The organization chart indicates the internal structure of the company. (Click the image to see a more legible version.)

The org chart indicates ten members of the executive team, including the CEO as well as presidents of Agriculture and Turf Division, Agriculture and Turf Division (small agriculture and turf, international markets), Construction and Forestry, Aftermarket services, Financial, Technology, General Counsel, Human Resources, and Senior VP and CFO. Several of these officers have responsibilities extending across the whole corporation, while others are responsible for the main product divisions of the company.

Not visible from the org chart is the management of activities that extend across multiple divisions: for example, manufacturing, new product design, technology development, and logistics. Consider manufacturing. The company builds tractors, engines, and other heavy equipment in factories in the US, Brazil, Argentina, Finland, France, Germany (2), The Netherlands, India (4), and Mexico (2). These manufacturing facilities presumably “belong” to different divisions of the company; and each of them presumably has local chief managers and directors as well. How are coordination problems solved within this complex set of manufacturing activities and sites? Are there systems in place for transferring new technologies of advanced manufacturing from one site to another? Are there quality assurance and worker safety systems in place ensuring that top executives will quickly learn of locations where either product quality or plant safety are compromised? Does a factory in Brazil that makes combine harvesters have ways of learning from technology and process innovations that have been developed in a turf maintenance tractor factory in Finland? Or are the divisions and locations “siloed” so that each proceeds according to its own internal measurements, processes, and executive leadership?

One answer that the central JD executive team might give to this question about coordination is that it doesn’t matter very much. Their central responsibility is simply to manage manufacturing and sales processes in such a way that each market and division remains profitable and growing — and perhaps to shut down activities that show little promise of improvement over the medium term. How they achieve this result is a problem for local and regional management. But this isn’t a very convincing answer. If JD-Finland has redesigned a manufacturing process in a way that removes 10% of the cost of production, that is a savings that ought to be quickly shared with other factories around the world. Likewise, if JD-France has an unusual number of in-plant accidents, or JD-Mexico has a significantly high rate of product defects, the central management ought to be in a position to observe and correct those deficiencies. So an observer might suppose that there ought to be a central tracking system for technological and process innovation, safety performance, and quality ratings that extends across all regions and divisions of the company. If such a system is lacking, then the company is objectively less efficient than it could otherwise be.

A more serious source of corporate dysfunction can be found in the office of Finance, where the wizards are paying very close attention to the company’s stock price. These experts lobby the CEO to take steps to prop up revenues in the coming 24 months, so that Wall Street will look at JD stock with more favor. Canvassing the options for increasing net revenue, the CEO’s advisors recommend two things: to impose an IT fee on the users of the JD tractors and farm equipment “to offset the cost of these high-tech systems”; and to find significant sources of cost savings in heavy manufacturing plants. It is estimated that these changes will add 4% to net revenues in the coming 24 months. But these plans work out badly. Users of JD tractors are angered by the new fees — leading to a surge of interest in Mitsubishi equipment in the heartland. And factory managers achieve cost savings by reducing production-line staff and curtailing safety programs. As a result, unionized workers are motivated to support a costly strike in the next negotiation, and a surge of factory accidents takes place in a number of factories.

This example illustrates a common source of dysfunction within an organization: one division favors priority X, which interferes with achieving priorities Y and Z. Enhancing stock value was achieved in this scenario; but at the price of alienating both customers and workers. So who is most able to influence the CEO — the finance team, the HR team, or the marketing team?

This may sound like an entirely hypothetical and unlikely scenario; but something very much like it seems to have been in play in the background of the Boeing 737 MAX debacle. Here is an excerpt from a story in Industry Week about the sources of failure in the 737 MAX software redesign process:

Engineers who worked on the Max, which Boeing began developing eight years ago to match a rival Airbus SE plane, have complained of pressure from managers to limit changes that might introduce extra time or cost.

“Boeing was doing all kinds of things, everything you can imagine, to reduce cost, including moving work from Puget Sound, because we’d become very expensive here,” said Rick Ludtke, a former Boeing flight controls engineer laid off in 2017. “All that’s very understandable if you think of it from a business perspective. Slowly over time it appears that’s eroded the ability for Puget Sound designers to design.” (link)

Two observations are relevant from the example of a somewhat fictionalized John Deere company. First, a degree of decentralization and specialization is inevitable in a complex organization. Different products and markets need to be managed by leaders and managers who focus their attention on those particular technical and market conditions. But second, an organization is always vulnerable to conflicts of priority and demand from the various divisions and voices within the company. The advocacy of the General Counsel may be at odds with the office responsible for product innovation; the finance team may be at odds with both labor relations and safety management executives. 

John Deere seems to be an especially successful corporation when it comes to accomplishing its business goals as well as its safety and quality goals. And it pays close attention to worker satisfaction within the company (link). The interesting question is this: how has this success been maintained over decades? Does it have to do with the recruitment and selection of employees and senior executives who do a particularly good job of balancing priorities? Is there a culture at John Deere that allows it to escape some of the potentially damaging dynamics of the mentality of “maximize revenues, maximize stock price” over all else? Does a medium-duration timeline for corporate decision-making help — a situation in which executives are encouraged to offer plans and solutions that will best serve the company and its stakeholders (customers, workers, investors) over the longterm?

(Here is a relevant discussion of the dysfunctional decision-making that occurred in the US steel industry after World War II, leading to its permanent decline relative to international competitors; link.)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: