How carmakers can manage complexity without hurting growth

Munich, January 2023

How carmakers can manage complexity without hurting growth

Munich, January 2023
T

he Viable System Model (VSM) can help automotive companies steer a path to sustainable profitability while managing their increasing organizational complexity

The growth paradox

75 percent of companies are unable to grow profitably over the long term., according to Sebastian Raisch, Gilbert Probst and Peter Gomez, authors of Wege zum Wachstum. One of the main reasons for this, is called the “growth paradox”, which describes companies chasing growth in a way that creates complexity, which actually inhibits growth.

Many executives say that it is not the complexity of external market conditions that causes them problems but the control of complexity within their own organization. Internal processes and administrative structures build up as the company grows, making it difficult for executives to maintain direct contact with their business and customers. As a result, they lose the essential focus on developing the potential for success.

This is where the Viable System Model (VSM) developed by the cybernetician Stafford Beer can help organizations make their complexity controllable and embed the important principle of self-organization.  

Why automotive company reorganizations often fail

The goal of many reorganizations is to „manage“ corporate complexity. However, Berylls’ research and feedback from our clients suggests that most such exercises in the automotive industry only achieve limited success. Martin Pfiffner, author of The Neurology of Business: Implementing the Viable System Model, has identified the following cardinal errors that mean reorganizations often fail to have the desired impact:

  • Starting with organizational charts: Drawing boxes and lines in a chart to show the company’s future shape only displays the surface layout, like the icons for Windows functions on a computer screen. Organizational charts do not reveal a company’s underlying operating system.
  • Losing sight of the customer benefit: Almost every reorganization mission statement talks about focusing on the customer. In practice, only a minority of re-organization programs target what the customer is really willing to pay for.
  • Copying from competitors: Executives often ask for „best practices“ and „benchmarks” before making decisions about organizational structure. Resist the temptation – fitting another company’s structure on top of your unique culture and strategy is unlikely to succeed.
  • Treating the symptoms: Time pressures sometimes lead organizations to address the symptoms rather than the root cause of a problem.
  • Escaping into the matrix: A popular but illusory way out of the complexity trap is to build a matrix organization which maximizes the number of interfaces between people. Instead, the number of necessary rather than possible contacts should be minimized.
  • Prioritizing people over problems: In many cases, organizational projects start with decisions about who should take on which positions rather than about the key issues that need to be tackled.
  • Defining without equipping new units: Companies frequently establish new business units while failing to provide them with the resources and competencies to manage themselves successfully.
  • Organizing the new in the old: Successful innovation is one of the most difficult challenges for a leader because everything is new and uncertain. A common mistake is not separating new from old business units, to allow innovation to flourish.
  • Failing to differentiate supporting units from operational units: Reorganizations frequently do not distinguish between operating units which are responsible for results and supporting units which provide internal services. The former should grow and have plenty of autonomy, while the latter should only be as large as necessary.
  • Neglecting an organization’s “Neurology”: There is often too much focus on individual processes and structures, and not enough attention paid to developing a functioning “neurology” where control and communication “nerve pathways” connect the different organizational units.

How the Viable System Model (VSM) addresses the challenge of complexity

The VSM offers executives a framework for avoiding these errors and shows how they can solve the problems created by complexity. Its primary focus is not to define structures such as divisions and departments within a successful organization, but to define the relationships between them.

A fundamental principle of the VSM is that the operational units of a company must be organized as viable systems according to the same model. This principle, called “recursivity”, enables problem-solving strategies for dealing with complexity and creating order out of chaos across the organization.

Box: How the Viable System Model was created

Why VSM is especially relevant to automotive companies

Many major OEMs and suppliers are undertaking or considering hugely ambitious reorganization programs to keep pace with the industry’s accelerating transformation. The VSM, correctly applied, is a critical approach for managing these organizations’ increasing complexity while maintaining growth and staying ahead of competitors.  

To manage the increasing complexity within automotive organizations, the VSM provides five key control functions:

Figure 1: Viable System Model in an automotive company

Source: Berylls Strategy Advisors, following Pfiffner (2020) - Die dritte Dimension der Organisierens

Berylls’ research and our work with clients globally confirm that the VSM has repeatedly delivered rapid, effective solutions. Here are our key insights about how the VSM can be applied to achieve the only success that counts – satisfying customers to generate sustainable, long-term profitability:

Putting the customer first

It is crucial to design the organization’s dominant control dimension correctly to ensure that the business is structured in such a way that it focuses on the customer’s purchasing criteria and can implement the defined strategy effectively. Potential control dimensions include products, technologies, customer groups, applications, or regions.

Examples:

Premium OEMs: Cars, Vans, Service & Parts, Digital Services, Financial Services

Automotive Software Suppliers: Car Operating System, Omni Channel Commerce, After Sales, Production Automation, Enabler Technologies

Determining how far to decentralize:

Within operating business units, it is important to ensure that managers are responsible for the competencies and resources that determine success (System 1, see Figure 1). This autonomy should cover all functions that have a direct influence on the criteria that determine purchasing, such as product development.

At the same time, responsibility for organization-wide functions such as IT cannot be delegated, while central management may need to maintain control of plants or production capacities shared by operating units to achieve synergies between them (System 2).

The right degree of centralization can be calculated by asking the following questions:

Firstly, can we afford decentralization?

If the answer is yes, will decentralizing a task influence one or more key customer purchasing criteria?

If the answer is no, can a synergy be achieved by continuing to centralize the task?

If the answer is again no, the task should be assigned to the relevant unit because of the principle of subsidiarity.

Flattening further than conventional wisdom suggests

“How many direct reports can be managed?” is the wrong question. In our experience the traditional rule that there should be a maximum of seven „direct reports“ fails in most cases. The correct approach is to look at horizontal and vertical complexity and consider how much autonomy operational units need to perform at their best and whether they need more or less support from senior management (horizontal complexity). In addition, reorganization programs should address whether senior management has sufficient scope for intervention to limit the autonomy of operating units in the interests of the whole company (vertical complexity).

At one automotive supplier, a VSM diagnosis showed that the organization could be flattened from five to four management levels by dissolving three business units and converting ten new product units into fully-fledged operational units. This flattening was possible because the product divisions were different and to a large extent able to manage their complexity independently. Furthermore, senior management had significant vertical complexity control to ensure overall optimization of the product areas (System 3).  

Navigating into the unknown

In the automotive industry, navigating a rapidly changing environment must also be organized, with senior management taking the lead (System 4). Senior executives and senior operation leader (System 4 and 3) must balance what is right for today’s business with what is important for the future, while identifying external opportunities and threats. The last function to be designed is normative management (System 5) which defines the business mission and formulates governance policies which establish the guard rails within which strategic and operational management can function. This interplay of operational, strategic and normative management is of utmost importance to a successful transformation.

Conclusion: Why OEMs and suppliers are increasingly deploying the VSM to steer a path to sustainable growth

The timely redirection of human and financial capital from the old to the new business is both the most difficult and important task currently confronting the automotive industry. Figure 2 shows this interplay and the shift from the lower S-curve to the upper S-curve. However, too many senior automotive managers lack sufficient time to devote to strategic questions such as how much to invest in electromobility, connectivity or ADAS development because they are mired in operational issues which absorb most of their attention.

 

Figure 2: Adaptability – When do we change course?

Source: Malik, Berylls Strategy Advisors

By applying the VSM, an increasing number of OEMs and suppliers have executed successful organizational transformations that free up management time while delivering the critical interplay of operational, strategic and normative management. In plain terms, they are at least one step ahead of their competitors in seizing the opportunities created by this period of industry transition and transformation.

Authors
Dr. Christopher Brüggemann

Associate Partner

Peter Eltze

Partner

Laura Kronen

Partner

Dr. Martin Pfiffner

Foundation Council bei Fondation Oroborus

Dr. Christopher Brüggemann

Dr. Christopher Brüggemann (1983) is a Project Manager with focus on transforming organizations to improve performance, speed and agility. He is also an expert in strategy deployment, organizational design, and transformational change. Christopher has advised numerous companies through multiyear organizational transformations, often focused on operating model development and putting new ways of working, structures, processes, decision making mechanism in place.

Before joining Berylls, Christopher worked at Sixt SE, several other consultancies, and served as a research associate in cooperation with Deutsche Telekom. He has a PhD in economics and a diploma degree in business administration of Bayreuth University.

Peter Eltze

Peter Eltze (1964) joined Berylls Strategy Advisors as a Partner in November 2015. He began his career in the medical technology division of an integrated technology corporation, and became a project manager at Malik Management Zentrum St. Gallen in 1996 before being appointed Partner in 2001. From 2003, in his role as member of the executive board, he was in charge of Management Education & Development. Since the end of the 1990s, Peter Eltze has advised companies in the automotive and mechanical engineering industries. At Berylls, his consulting activities focus on integrated organizational development (strategy, structure, culture), transformation management, and executive development.
Education in wholesale and international trade; administrative sciences at the University of Constance, Germany.

Laura Kronen

Laura Kronen (1980) is a partner at Berylls Group with a focus on transformation. She is passionate about moving people and organizations forward. With over 18 years of industry and consulting experience, her focus is on transformative challenges in the operations context – from executives to individual employees, at manufacturers and suppliers. She helps her clients align strategy, structure, and culture in their respective market environments to build resilience.

Prior to joining Berylls, Laura Kronen worked at PwC Strategy&, Volkswagen AG and Audi. She holds a diploma degree in industrial engineering from the Karlsruhe Institute of Technology (KIT).

Dr. Martin Pfiffner

Dr. Martin Pfiffner (1965) works at Oroborus Fondation. Martin is one of the world’s leading experts on the practical implementation of the Viable System Model and Syntegration. Over the last thirty years, he has advised numerous economic, public, and private entities across the world, helping them get back on track and achieve success. His work centers on “The third dimension of organization,” which he defines as the neurology of an organization. His most recent book is The Neurology of Business: Implementing the Viable System Model (2022)

Martin studied economics at the University of St. Gallen (HSG) and earned his doctorate. At the time, he served as an assistant to professors Peter Gross (sociology, multi-option society) and Fredmund Malik (systems-oriented management theory). Later he studied in Canada and in Wales with Professor Stafford Beer, the pioneer of management-cybernetics.