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Large organizations always face the issue of balancing integration and differentiation – a fundamental and unavoidable tension that leads to the well-known pendulum game of periodic centralization and decentralization efforts.
Like with the ambidexterity challenge (see part #6 of this series), this tension cannot be solved unilaterally; companies need to live with its dialectic nature and accept the ebb and flow as the very essence of organizational life.
The role of functional differentiation is to assure deep expertise in the various functional verticals, such as marketing, sales, strategy, HR, production, procurement, finance, and more. Regional and divisional differentiation is designed to maximize the adaptation of an organization to specific regional or market contexts by giving a high degree of autonomy to decentralized units.
Differentiation, however, comes with a price. It creates silos as well as centrifugal forces that are in structural conflict with an organization’s need to orchestrate and govern the overarching whole.
To create synergies and economies of scale, and to avoid the break-up of an organization, the dynamics of differentiation must be mitigated by integration efforts. Traditionally this happens through hierarchical structures and linear process prescriptions that exert the necessary degree of command and control to hold the organization together.
Unfortunately, the price of integration through vertical accountability is often an abundance of micro-politics, the reinforcement of divisional and functional silos, and the development of bureaucratic processes – all factors that slow organizations down, make them inward oriented, and work against flexibility and strategic responsiveness.
The digital context with its need for speed, adaptability, and customer centricity asks for a stronger role of stakeholders that are at the periphery without the cumbersome processes that traditional corporate governance is known for.
Platform business models, for example, require new collaborative architectures that reach not only across functional and divisional silos but also connect the stakeholders of the external business ecosystem as a value-creating network, shaking up traditional functional roles and established market and stakeholder relationships.
Organizations must create mechanisms that foster integration through responsible self-governance of peripheral units, guided by overarching principles, and supported by institutionalized tools for horizontal collaboration and exchange.
Instead of vertical hierarchical command and control, organizations must create mechanisms that foster integration through responsible self-governance of peripheral units, guided by overarching principles, and supported by institutionalized tools for horizontal collaboration and exchange.
Such tools can be digital platforms, strategic dialogue architectures, dedicated units that serve as brokers between stakeholders, or other interventions that assure connectivity.
Daimler’s swarm organization (see part #5 of this series) is a typical example of an initiative that is designed to foster cross-functional collaboration and self-organization, with impressive results.
A very different, but equally successful approach to foster connectivity is Otto Group’s dedicated knowledge management unit that encourages and enhances the sharing of knowledge and practices across the 100+ businesses of the group, using a sophisticated mix of technical tools and cultural interventions to create and nurture an ongoing culture of networking and collaboration.
When we talk about the challenge of creating new forms of connectivity across traditionally separated silos, we tend to think primarily about emphasizing horizontal collaboration across functional and divisional boundaries, and about engaging in novel networked ways with customers and other external value partners.
Designing horizontal connectivity won’t be effective if it is not accompanied by mechanisms of vertical alignment that transcend the traditional paradigm of command and control
As important these two dimensions are, it is equally important to rethink vertical processes that connect the top with the bottom (or, perhaps more fitting, the center with the periphery) of the organization.
Top-down (or inside-out) processes are instrumental for creating the overall strategic and organizational context that enables effective ways to engage in and co-shape the business ecosystem. And bottom-up (or outside-in) processes are indispensable for understanding and leveraging customer and other market insights.
Designing horizontal connectivity won’t be effective if it is not accompanied by new mechanisms of mutual vertical alignment that transcend the traditional paradigm of command and control.
Cross-boundary management as a strategic key success factor
The digital revolution is driving a process of (inter)organizational reconfiguration that challenges the traditional setup of internal and external boundaries and requires dealing with them in new and creative ways.
Creative boundary management has become an indispensable organizational capability
This is why creative boundary design and management has become an indispensable organizational capability. The logic of the digital economy rewards those who excel in engaging stakeholders across functional verticals, and who can break up traditional value chains by establishing and leveraging the economics of newly configured, networked business ecosystems.
When (re)designing boundaries, it is important to understand their very nature as major building blocks and enablers of any social system. Boundaries – both internal and external ones – play a critical role as providers of identity, security, comfort, and orientation.
At the same time, they are also barriers that constrain us, as they inhibit collaboration and contribute to silo culture and an inward orientation of organizations.
This double-faced nature makes boundaries a frequent issue of contention, on a geopolitical (walls against migration), organizational (functional/divisional silos, stakeholder relations), or micro-social level (tensions between neighbours). The main reason for this contention is that, in their very essence, boundaries constitute difference, which threatens identity.
Only if we play at the edge, “reach across the aisle”, and expose ourselves to the unknown we can transcend our mindsets; otherwise, we remain in a tribal bubble
At the same time, this difference (of culture, of language, of norms etc.) is the primary space where learning and innovation happens – on an individual, organizational, and strategic level. Only if we “play at the edge”, “reach across the aisle”, or “expose ourselves to the unknown”, we can transcend existing paradigms, mindsets, and behavioural patterns; otherwise, we remain in a tribal bubble.
Transcending this bubble is a difficult and delicate task, requiring courage, political skills, the willingness to give up dear habits, acquire a new mindset, new capabilities, and embark on a joint organizational learning journey with functional peers and the relevant external environment.
To make this journey successful, it is important to identify and embrace the productive elements of friction that unavoidably happens at boundaries and to recognize and fight unproductive friction by unmasking its often irrational and/or political foundation.
This article is the 7th part of a series about Digital Transformation Challenges in Large and Complex Organizations. It is based on a qualitative study conducted by the Center for the Future of Organization at the Drucker School of Management at Claremont Graduate University.
Other articles in this series
- Digital Transformation Challenges – Part 1: Introduction and Overview
- Part 2: Is Digital Transformation really so special?
- Part 3: The three buckets of digital transformation initiatives
- Part 4: The agility challenge
- Part 5: Agility in practice: the swarm organisation @Daimler
- Part 6: The ambidexterity challenge
- Part 8: Organizing for Transformation – the Governance Challenge
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