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Firms which break down silos within their businesses are much better positioned to perform says Evenlode Global Income Fund manager Chris Elliott.

The fund manager argues that a strong indication of efficient structure is a company’s ability to manage silos that form internally and that while silos can focus operations, they can also prove destructive by creating internal barriers within the organisation.

He sees three examples of firms which have confronted the issue below.

Microsoft tears down horizontal walls

Elliott suggests that multinational companies are particularly susceptible to the formation of R&D silos within their organisations.

“This can result in duplicated efforts, a failure to learn lessons from technological dead ends and the inability to scale successful innovation,” he says.

“When Satya Nadella became CEO of Microsoft in 2014, he inherited a company with dysfunctional R&D silos. An internal culture of competition had been fostered, with the individual departments often working at cross purposes.

“In breaking down silos, Nadella drove a radical increase in investment in the Azure cloud business, previously an afterthought to the highly profitable Windows operating system and Microsoft Office. He also increased cooperation internally.

“While the success of Azure has provided a growth engine for investor returns, the willingness demonstrated to break down silos and fully leverage the benefit of new technologies give us confidence in Microsoft’s ability to catch the next innovation wave.”

Data sharing puts fizz back in Pepsi

He says that it is not just tech but also consumer-driven companies that can foster silos partly because of centralisation.

“Silos within a company are not limited to the horizontal structure. In search of cost savings, many companies have sought to centralise product design, procurement, manufacturing and marketing. This creates a vertical structure with division by function,” he says.

“This mitigates the dangers of horizontal silos and can generate economies of scale with suppliers. However, a new risk is introduced if the operational layers form silos that do not adequately communicate or allow data to flow vertically within the company.”

For example, development teams may design products that are too expensive to produce if they are unable to communicate with procurement or manufacturing.

He notes that Ramon Laguarta, the new Pepsi CEO has set out his vision for the company in February, stressing the need for an end-to-end value chain in place of functional silos

Laguarta said the next generation of value would be created by functions collaborating end-to-end on any process, versus the very vertical functional optimisation.

He highlighted the need to share data across the organisation and empower local operations to leverage Pepsi’s shared capabilities.

1000 messages for a million audiences

In targeted marketing, Laguarta envisages a major impact, moving from creating 20 specialised messages for 100 audiences to creating 1,000 messages for a million audiences.

“While it remains too early to assess the impact on results, similar programmes at Nestle and Unilever appear to be yielding excellent returns” says Elliott.

Disrupting inefficiencies at WPP

While most companies have a primarily vertical or horizontal internal structure, there are companies that operate in a more complex, matrix-like structure.

Elliot says these structures may evolve through the incomplete integration of acquired companies and/or cultural differences emerging between teams that pride themselves on their own brand or identity.

“This can result in inefficient competition between the teams for resources. This competition can lead to a failure to utilise the shared services for fear of losing a differentiated edge. The advertising industry is an example of the matrix approach’s drawbacks.

WPP evolved through acquisition, building a portfolio of creative businesses, each with a different brand, profit-loss account and leadership. These brands competed for clients and developed their own specialities. Wunderman became a leader in digital marketing, while JWT demonstrated strengths in television marketing.

Staff turnover between the sub-brands was low, resulting in lower information sharing. The many skilled data analysts were spread throughout the company, resulting in a repetition of tasks and a lack of data accessibility.

“When customer demand then shifted, management correctly identified the need to improve digital and offer a unified point of service to the customer, coined as ‘horizontalisation’,” Elliott says.

However, implementation was ineffective and slow.

New CEO Mark Read identified the silos as a significant part of the problem and has taken action. Wunderman and JWT have merged, sharing employee expertise and customer accounts. Employees are now encouraged to move between internal businesses. Disparate IT resources are being focused into a centre of excellence.

“The differences between these three companies illustrates there is no one internal structure that suits all businesses. Moreover, as markets change and the competitive landscape evolves, the most efficient structure for a company will also change.

“Investors should therefore expect management teams to implement initiatives that improve the information flow throughout the business. These actions can yield important indicators of long-term performance, often not yet visible in the reported numbers. For the patient investor, attention to such details can improve long-term returns.”

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