How to Build a Great Hardware Company

Modern hardware companies are dealing with an age-old organizational problem: functional differentiation. While software development has intrinsically driven organizational integration since the introduction of object-oriented programming in the 1990s, most hardware companies are still struggling with organizational silos. R&D, sales, marketing and manufacturing usually tick along according to completely different logics. This article by Judith Muster (Partner at Metaplan) addresses how and why these silos create problems, and what can be done about them.

The advantage of silos: they enable complex processing

Silos are not a fault of organizing, but simply the result of the division of labor. They are necessary for each unit to concentrate on its subtasks independently of the rest of the organization. The design department, for example, does not need to be interested in the finer points of financial accounting or personnel development in central administration. The sales department for the Asian market can ignore the occupational safety problems at the main German plant.

The ability to divide work is the strength of organizations. This is the primary feature that enables organizations to process greater complexity. With the division of labor, organizational units can focus on their subtasks and specialize. Without the division of labor, the efficiency gains of the organization would fade away.

Their disadvantage: they create narrow views

However, with the division of labor, units can develop blind spots and lose their objective assessment. These thought patterns often divert with those of the overall organization, especially with those of other units. This makes organizations complex. The organization, which reduces complexity with its structures by making the division of labor possible in the first place, produces new complexities elsewhere.

Each structure has its own drawbacks

Developing a narrow perspective is not a misconduct of the members, but primarily a useful means to be able to work better. Ignoring the environment does indeed accelerate one’s own processes, but danger arises when the impulses originally relevant to the development of the company also fade out. When intervening to change the company direction, a strict hierarchy is usually followed — from the bottom of the organizational structure, up to the top, and back down into another department.

One attempt to avoid these disadvantages is the matrix organization, where responsibilities and communications channels are laid out not just by functionality and department, but also according to the product supported, or the regional responsibility. This way, it is easier to coordinate between the functional areas. However, the hierarchy, which could make a binding decision in the event of conflicting goals, is too far away from the day-to-day activities.

It is the task of management to reintegrate the silos or to pay attention to the possibility of controlling the matrix. There are two ways to do this: through structure or through leadership. A tool that makes structural decisions and their effects more visible is the “management mixer.”

At the controls of the organization: the management mixer

From a systems theory perspective, there are three parts to the structure of an organization: its communication channels, its programs, and its personnel. To become aware of the possibilities one has with this structure, one can imagine each of these parts like settings on a console for a mixer.

The slider for communication channels determines who should contact whom for tasks in an organization, and on how decisions are voted. The higher the regulator is set, the more sharply boundaries are drawn. A typical means of regulating communication channels is by the hierarchy or general structure of teams and departments.

The criteria according to which decisions must be made are bundled in the programs area. The higher this slider is set, the more conditions there are to consider when making decisions.

The personnel regulator determines which people can fill which positions and how differentiated the specifications are. In hardware companies, there is usually not much room for maneuvering and they therefore require specialists who are familiar with their field. However, a number of generalists, who may not have the strongest expertise but have widespread knowledge and are able to translate between different parties, are also needed.

Leadership: the final amplifier of the organizational signal

In addition to the structure regulators, organizations have a final, special regulator at the console. This one determines how much leadership is used in the organization. In this context, we do not understand leadership as a synonym for hierarchy, but rather as the assertion of open decisions, the resolution of contradictions and the management of expectations. Subordinates in this context can also lead their superiors if their offer of action is convincing.

You can think of routing as a power amplifier that brings all the signals coming out of the mixer to the same level. The amount of leadership that takes place depends on the position of the structure controls. If they are set higher, the possibility of influencing signals by means of leadership is reduced. Conversely, if the structure level is low, the more leadership is needed to make decisions.

Countering the weaknesses of functional differentiation with the help of the mixer

There are four conceivable ways to cushion the problems of the functionally differentiated department. At the communication channels level, cross-departmental coordination rounds are one possibility in which the reciprocal effects of the work of the other departments are addressed. For this form of coordination, it is important to draw together members of the right level who are equally familiar with the recurring problems at the interfaces. These should be found primarily in the operational area, but also speak the language of the other levels, and are themselves able to generate communication that is understandable for the different departments.

A common strategy based on programs and processes helps. For example, a cross-functional orientation can be used for decision-making and, above all, for conflicts between areas. This sort of decision making at such a high level needs to remain abstract in order to functionally connect to all areas of the company. This sort of structure would not be suitable as a strict rulebook regarding every situation, but rather as a series of guidelines, forming the basis of a discussion to settle areas of conflicting interests.

At the personnel level, options are limited. Hardware companies, like all organizations that work with industrial manufacturing processes, need members who are specifically qualified and not interchangeable. One thing that might help are job shadowing formats, in which developers visit the manufacturing process to gain an impression of how concepts and prototypes are turned into finished products.

A reintegration of silos via leadership means intentionally setting up gaps in the structures. When there is no fixed procedure for how two departments pass reconciliations, particularly when conflicting goals remain open, regular and open exchanges between those involved are forced to take place. In cases like these, the management’s task is to strike a balance between a fixed and a flexible structure with room for interpretation. It is important to ensure that time and energy flow into the important discussions and not into matters that can be resolved with a form.

Software integration within organizations

In most organizations, this mixed situation is enough to keep a management team on its toes for a while. If a company wants to raise the complexity to an even higher level, it should develop its own software, which can be integrated to run on its hardware. Integration has obvious strengths: the coordination paths between the two perspectives are shorter when both are planned under the same organizational umbrella. But what should this integration look like?

Either software production is a separate functional area alongside the hardware, or it can be resolved along the existing functional differentiation. In both cases, the organization must cope with a variety of problems. A simple solution for these kinds of complex questions does not exist.

Top management chooses which problems it wants to have

For hardware companies, it is essential that there are conflicts between functional areas, because in the logic of each respective area it is rational to subordinate the needs of the other area to its own. It should be expected that, just as in matrix organizations, functionally differentiated members and teams will often hold opposing or competing views and priorities. This is not an anomaly but is built into the logic of the organization. It is the responsibility of top management to permanently address this problem. This is where its existence is justified: by negotiating the conflicting goals of the operational levels and allowing members to work in peace.

A quote

“Every organizational structure has problems. It’s up to top management to decide what those problems should be, and they should be willing to work on them over and over again.”

Dr Judith Muster

About the author

Dr. Judith Muster is a partner in the organizational consulting firm Metaplan and a research associate at the University of Potsdam in the Department of Organizational and Administrative Sociology.

How to build a tech company?

An industry in transition: I would like to discuss with you, but also with international experts, what kind of organisation and processes are needed to create modern, innovative products that combine high-quality hardware with agile, smart software solutions. I would like to find out how we can jointly transfer German engineering skills into the digital or even autonomous age — which is why, in the coming months, I will be asking myself more than ever before: “How to build a tech company? Follow our Medium blog for this.

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Managing Director @ diconium | #Innovation #DigitalTransformation #Mobility | How do we transfer the successful German art of engineering into the digital age?