By Arun Sharma, Professor, Marketing, Miami Herbert Business School, University of Miami
Arun Sharma will deliver a keynote address at the 2021 SAMA Annual Conference (May 24-26). To learn more, or to register, visit the conference website.
Resilience is an organization’s ability to withstand a major disruption, recover quickly and adapt to the changing environment. During the COVID-19 pandemic, some firms have flourished while others in the same industry have floundered. To give a couple of examples: Among department stores, Nordstrom has demonstrated resilience by dramatically increasing online sales; as a result, they have excelled. Arch competitor Neiman Marcus, on the other hand, has declared bankruptcy. In telecommunications, while most firms have posted strong results, Digicel has declared bankruptcy. Researchers who have studied this topic have found that having flexible resources (monetary, assets-based and human), flexibility and adaptability increase organizational resilience.
To better understand why some organizations exhibit resilience while others do not, we conducted interviews with senior executives, analyzed industry and firm performance, and examined extant academic research on organizational structure, resilience and liquidity. Liquid organizations develop and execute strategies faster than their competitors, they change direction and accelerate rapidly, and they are ambidextrous – by which we mean they can simultaneously leverage their existing competencies (“exploitation”) while at the same time they discover and harness new opportunities (“exploration”).
The first thing we did was to classify the organizations, at which point four distinct organizational categories emerged:
Hierarchical. In hierarchical organizations, every employee reports to one and only one supervisor (except for the CEO). This is the classic, pyramid-shaped organizational hierarchy. Most government entities, and many corporations, follow this organizational form. It is typified by slow and deliberate decision making, a decision-making process that is rigorously codified and decision making authority that is rigidly prescribed.
Matrixed. Matrix organizations are designed to increase teamwork between internal-facing (e.g., marketing, R&D, finance) and external-facing departments (geographic and product market). Most employees have dual responsibilities: to the function to which they belong (e.g., marketing) and the market in which they operate (e.g., Latin America). A matrix organization is typically visualized as a rectangle with internal functions (horizontal lines) and markets (vertical lines) forming the structure. Most modern organizations follow a matrix structure. Unfortunately, the amount of teamwork expected in matrix structures has not materialized, and rather than focusing on making the best possible decisions, negotiated decision making is the norm.
Entrepreneurial. Entrepreneurial organizations are unstructured, where both functional roles and reporting structures are flexible and adaptable to the context. Employees typically perform multiple functional roles, and decision making is decentralized and team-based. Due to the lack of structure, these firms are typically small and have fewer employees. Decision making is quick, and the organization is adaptable. However, scale and growth require organized decision making, and most entrepreneurial organizations shift towards matrix or hierarchical organizations as they grow.
Liquid. Liquid organizations use team-based structures to increase the quality, speed and innovativeness of outcomes. They focus on skilling their employees in multiple functional areas and create organizational relationships to become more flexible and adaptable. Liquid organizations combine the speed and flexibility of entrepreneurial organizations with the scale of global organizations.
Resiliency of organizations
Our second project involved examining the context under which each organizational form would be most successful. In analyzing our data, we identified two dimensions that affected organizational success: the degree of disruption and resilience. Then we moved on to identify the context under which each type of organization would be most prone to success.
We found that hierarchical organizations are only successful when there is a limited need for resilience, and disruptions are limited and short term. That is because hierarchical firms are slow to recognize disruption and tend to be deliberate (i.e., slow) in making decisions.
By contrast, matrix organizations tend to be more resilient and able to make decisions more quickly – but only when disruption is limited. This is because the matrix organization’s complex structure makes rapid strategic and tactical decision making very difficult. For this reason, matrix organizations are best suited to times that require high degrees of resilience, but only if disruption is limited and short term. Extensive academic research shows that matrix organizations function favors stable environments but falter when conditions are prone to changing rapidly.
Entrepreneurial organizations are flexible, which equips them for addressing major and long-term disruption; but they struggle to exhibit resilience because they do not have the resources (monetary, assets-based and human) to sustain them during long-term disruptions.
Finally, our research found that liquid organizations are best suited to thrive when resilience and adaptability are most in demand. Liquid organizations are both resilient (thanks to their scale) and possess the ability to sustain and grow through major disruptions due to organizational speed, flexibility and adaptability. In our research on the impact of COVID-19, we find that the most successful and resilient firms have been those that are the most liquid.
Our Recommendations: Liquidity and you
To increase resilience, we recommend that leaders take steps to increase organizational liquidity.
Specifically, we recommend they take three steps:
- Create and use teams to increase liquidity and quality of deliverables. We suggest that executives form teams by pairing people from different vertical markets or functional areas. (For more on creating teams within the strategic account management program, see “Addressing the New Normal: Creating Liquid Strategic Account Teams,” in the Fall 2020 issue of this magazine.)
- Increase the multifunctional expertise of executives through training and assignment.
- Reduce boundaries between the firm and suppliers by creating teams that include people from both firms.
In summary, our results suggest that leaders need to focus on increasing resilience by increasing liquidity. While the emergence of multiple highly effective vaccines portends an end to this global recession, it surely won’t be the last time organizations face conditions requiring high resilience levels.
Arun Sharma is a marketing professor at the University of Miami’s Herbert School of Business, has published extensively on strategic accounts, and is ranked in the top 1% of all marketing professors. Find him online at https://www.theliquidorganization.com/.