Why have an organization?

Borrowing from Michael Gerber's The E-Myth Revisited, an organization allows us to “work on the business” as well as “working in the business”. The revenue and profits generated by the output of the organization means we can hire people whose job is to be proactive in making the business run more effectively. These people are subject matter experts such as product development, marketing, human resources and finance. They are managers that provide leadership to guide the organization forward and support for the front line staff to complete their work. The end result is that an organization can achieve 1 + 1 = 3. That is, the synergy of an organization means that it can produce a result greater than the individual parts.

The evidence however points to the opposite result. We see organizations failing or being broken up to release value, innovation coming from startups not established firms and surveys showing that two thirds of employees are disengaged at work. But this should not be the case. An organization can produce greater than the sum of the parts, be a motivating place to work, deliver exceptional customer service and as a result deliver returns to the shareholder. Here is how.

There are two concepts as to how an organization needs to operate, horizontal flow (working in the business) and vertical leverage (working on the business).

Horizontal flow is the understanding that the value an organization creates comes from the work that flows horizontally through the organization. Value is in the eyes of the customer. The customer uses the products of the organization if they see value in those products. The value they see is how those products improves their lives not the organization.

Vertical leverage come from the layers of an organization that provide the leverage to produce a result which is greater than the sum of the parts. That leverage includes;

  • providing the mission, vision, goals and principles of the organization,
  • scanning the horizon to be aware of possible futures,
  • creating effective structures that enable the horizontal work flow,
  • working with employees to implement better work practices,
  • fixing issues, removing roadblocks,
  • sharing resources, expenses and capital,
  • greater access and coverage of markets and
  • brand recognition.