Vertical Leverage

The vertical layers of an organization are there to lead the organization forward, ensuring it remains viable, and to help the horizontal flow of work deliver valued outcomes.

As an organization grows so does the number of people, customers, products, markets all bringing with them an exponentially growing number of variables. This leads to the enormous complexity, that occurs every day, in every organization. The usual response is to create an organizational structure based on vertical functional silos. The reason for this is because it is simpler to understand. “Let's put all the sales people together, same for production, finance, human resources, marketing. That makes sense, doesn’t it?” The problem is this doesn't create vertical leverage, it creates vertical bureaucracy. Please see “Why do we have vertical silos?” and “Why have an organization?”. The vertical functional silos break up the horizontal work flow and the management layers become the coordination and escalation processes across the single function departments as per "Why can't we make decisions?"

To create vertical leverage each layer has to perform their purpose within the organization. Elliot Jaques' Stratified Systems Theory explains how each layer has their aligned tasks to undertake and decisions to make.  As we rise up through the organization the layer's role increases in timeframes and therefore complexity. By operating in this way we ensure that not only are the day to day activities completed but also we have the higher layers of the organization looking out over longer timeframes to lead the way into the future. The issue of ever increasing complexity is managed with each layer making the decisions that are aligned to that level.  We are applying all of our resources against the complexity of the large number of variables within the organization. 

For example, if we have an organization which has five reporting layers, with five direct reports at each layer, the number of people within the organization looks like the diagram below;

If we do not trust our employees at layer 1 (described as Stratum 1 by Jaques) to make any decisions, we have taken out 3,125 people who could be helping us. If those decisions flow up to the first line managers, those managers now have five times the number of decisions to make every day. We have also lost the experience, knowledge and skills of 3,125 people. Remember Steve's story in "Where to Start". Now we may not be asking these employees about mergers and acquisitions. But we would be asking them about how to improve our processes, that is after we had provided training in continuous improvement. In this way we harness their experience, knowledge and skills. We start to mobilize, “every ounce of intelligence” as per Konosuke Matsushita’s quote in, “Why is the exception, the exception and not the norm?”.

Looking at our pyramid of layers we can ask, what are the tasks each layer performs? What do Managers do, what do Vice Presidents do, and so forth. Jaques discovered that there is a natural role for each layer based on the timeframes that the layers need to work across.

For employees it is the next three months: what tasks have I been assigned, what tools do I need, have I been taught how to do this task?

For managers it is the next year: do we have the right people assigned to the work, what new work will be coming in, what training will we put in place, have we fixed the issue with payment processing? The table below provides an overview for each layer and examples of the tasks.

Along with the timeframe for each layer and the decisions the people have to make there is also the requirement for a hierarchy of “nested” mission statements. Using Disney’s mission statement as an example, “World's leading producers and providers of entertainment and information”, we find that this doesn’t connect well with the person (3 month timeframe) selling popcorn at California Adventure. Therefore, there needs to be a “sub-mission” statement which is “nested” within the overall mission statement. For the people working in the theme parks this could be, “We provide our guests the best entertaining and fun experience possible”. This leads our popcorn seller to ask the guests they are serving, “are you having fun today?”. The guest's response may be an issue they are having that day. Our popcorn seller wouldn’t hesitate to help resolve the issue so that they end up having the best entertaining and fun experience. Instead, a response we might find in the worst example of a vertical siloed organization is, “sorry pal, do I look like guest relations?”

The Vice President and General Managers of theme parks are looking broader than the popcorn seller or the theme park’s catering manager. The Vice President and General Manager are looking at the relevance of theme parks in terms of how people want to be entertained and receive information. Their sub-mission statement could be, “to be agile and innovative to lead the way in delivering the best entertaining and fun experience possible for all people.” They will have made decisions about updating the Star Tours ride to align to the new movie release. Of course the popcorn buckets will have Star War themes but the catering Manager took care of that as per his level of responsibility.

They will be looking across various forms of entertainment, both physical park based and others so that they continue to lead the way. One place they may look at is what W. Chan Kim and Renee Mauborgne describe in Blue Ocean Strategy as “an unprecedented entertainment experience”, that is Cirque du Soleil.

A one time accordion player, stilt-walker, and fire-eater, Guy Laliberte, is now the CEO of Cirque du Soleil, one of Canada’s largest cultural exports. Created in 1984 by a group of street performers, Cirque’s productions have been seen by almost forty million people in ninety cities around the world. In less than twenty years Cirque du Soleil has achieved a level of revenue that took Ringling Bros. and Barnum & Bailey – the global champion of the circus industry – more than one hundred years to attain…

…it created uncontested new market space that made the competition irrelevant. It appealed to a whole new group of customers: adults and corporate clients prepared to pay prices several times as great as traditional circuses for an unprecedented entertainment experience.

This is the level of thinking where the Vice President and General Manager need to spend their time. Not on how much popcorn did guests want to buy that quarter. That is the Manager and Employees responsibility.

The Chief Executive Office and the Executive Vice President are working through even greater time frames. They are asking themselves questions like if we are to be the “World's leading producers and providers of entertainment and information” in the future is having theme parks relevant for our customers? How will our customers want to be entertained in ten or twenty years’ time? Before we buy the rights to Star Trek and build a Star Wars/Star Trek theme park based on intergalactic travel, will there be actual intergalactic travel? Will we be able to travel into space, making the real experience a better entertainment and information option than rides at a theme park? Who do we partner with to show us the sign posts towards the future that emerges from all possible futures. Maybe we ask the Vice President to not just update Star Tours as they decided, but to create an information experience in Tomorrow Land on intergalactic travel with our new partners.

An example of how this level of thinking played out is at Kodak. In 1975 a young Kodak engineer presented the CEO and EVP with a working prototype of the digital camera. Actually we assume the CEO and EVP were shown the prototype, but chances are it was stopped long before it could reach the layers of the organization that needed to see it. It was probably stopped because Kodak’s mission statement was about creating shareholder value and the digital camera was seen as a threat to shareholder value as it would severely impact their main product, photographic. Why bother the CEO with that, it’s a waste of their precious time. As we know Kodak missed the change to digital photography even though their marketing department was advertising that Kodak allowed people to "Share Moments, Share Life".

But let’s play this out as an alternative history.

The CEO and EVP of Kodak are presented with a new invention out of their labs, the digital camera, and are told it will take 18 to 20 years to become mainstream. Given that Kodak’s mission statement is “Share Moments, Share Life” they can see a new future for their company. Realizing that it will be a number of years before they go to market they put in place long term funding to develop the concept. This includes creating a separate division to make sure it has a supportive environment to develop and not be cut off by short termism. In 1991 Kodak make and patent the first digital camera and are ready to enter the market [This is true]. A few years later the Internet is starting to gain traction. Kodak quickly recognize that the Internet is a powerful “sharing” platform. They set up a team to investigate how the Internet can be used to “Share Moments, Share Life”. This evolves into a multitude of sharing applications called K-Gram, K-Book, K-Tube and K-tweets. And as they say, the rest could have been history.

The table below outlines the layers of an organization, with examples of tasks, generic nested mission statements and Jaques' mental processing descriptions.

When each layer performs their role the organization gains vertical leverage so that 1 + 1 = 3.

5 x 5 Stratum Layers.png