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When to Change Your Company’s P&L Responsibilities – HBR.org Daily

Companies regularly shake up their organization structure, whether it’s due to a change in strategy, a change in leadership, or for other reasons. Most of these changes are incremental, while a few are radical. I…….

Companies regularly shake up their organization structure, whether it’s due to a change in strategy, a change in leadership, or for other reasons. Most of these changes are incremental, while a few are radical. In our decades-long experience, we’ve observed a leap-and-hops pattern in which a series of minor adjustments is followed by a major rearrangement, after which the cycle starts all over again.

Most major rearrangements, or “leaps,” involve a change of profit and loss (P&L) responsibility in the organization’s primary dimension. Companies can be organized around product category, region, customer segment, distribution channel, business function, asset, program, major account, or any other value-driving dimension.

For example, let’s take consumer goods company Procter & Gamble (P&G). In July 2019, P&G reorganized around six industry-based sector business units (SBUs), each with sales, profit, cash, and value-creation responsibility for one or more product categories. This leap, which CEO David Taylor described as “the most significant organization change we’ve made in the last 20 years,” elevated product as the company’s primary dimension. A few years later, in 2021, the company “hopped” from six to five SBUs.

Most companies in a given industry stick to the same primary dimension. For example, large pharmaceutical companies (e.g., Amgen, BMS, GSK, Merck, Pfizer) tend to have function (research, development, supply, commercial) as their primary dimension. Industrial equipment companies (e.g., ABB, Atlas Copco, Eaton, Emerson) tend to have product as primary dimension. Food and beverage companies tend to seek a balance between region and product, with most giving more weight to region (e.g., AB InBev, Coca-Cola Company, Danone, Nestlé, PepsiCo) and others to product (e.g., Cargill, Mars, Tyson Foods).

Companies don’t change their primary dimension just because their business strategy changes. Ultimately a company changes its primary dimension only when it believes that the change will enable it to deliver value to its customers more effectively. That depends on:

  • Creating verticals that sustain expertise through their focus, critical mass, and stability
  • Clearly delineating the verticals’ responsibilities and assigning accountability for performance
  • Establishing clear interfaces and minimal friction losses between verticals

Executives considering a major rearrangement should ask two key questions: 1) When has the time come to change our primary dimension? and 2) Once we have decided to change, how fast should we go?

To address the first question, we’ve identified three situations where it makes sense to consider changing the company’s primary dimension:

1. When the business model changes

If “the way we make money in this business” changes fundamentally, a change of primary dimension may be in order. Telecommunications companies, for example, …….

Source: https://hbr.org/2022/04/when-to-change-your-companys-pl-responsibilities

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