PwC Cannabis Series: Operating model design

Operating model and organizational structure design more important than ever

With these significant market pressures, companies hoping to build lasting businesses and create shareholder value should adopt more mature, sophisticated operating models and organizational structures that align with, and enhance, their overarching strategy and culture.

In Chapter 2 of our Cannabis Series, we discussed the importance of strategy in the blossoming cannabis industry to define an organization's areas of competition and winning capability set. With the complexity of the industry increasing, a robust strategic plan to identify where and how the organization will compete is more necessary than ever. That said, a strategic plan in isolation will not solve industry participants’ woes. 

To successfully execute the corporate strategy and ensure accountability throughout the business, the operating model and organizational structure should both validate and reinforce strategy and align operations with corporate ambitions. These reinforcing structures will drive organizational focus, enabling operational excellence and efficiency, thereby setting the foundation for sustainable growth.

Companies may recognize the symptoms of an ill-defined operating model and organizational structure but either misdiagnose the problem as a strategy issue or attribute the problem to personnel. Some of these symptoms include:

Most will agree that these issues are detrimental to an organization. However, many companies remain hesitant to engage in a robust design process. The most common rationale to avoid operating model and organizational structure redesign is typically tied to the fear of disrupting the organization or the worry of losing key cultural elements that contributed to the organization’s success to-date, or both. While these concerns are understandable, rectifying the underlying cause of the issues will ultimately create a more sustainable company and serve to enhance the organizational culture that makes each company unique.

The choices facing executives

After reviewing the operating model and organizational structures of many companies in adjacent industries such as pharmaceutical, alcohol, tobacco and consumer packaged goods, it is apparent that there is no single blueprint for how a cannabis company should design its enterprise. However, there are two primary decision points for executives:

• Management structure: identify how the company will structure reporting relationships and determine the span of control for executives / management.

• Operating domains: identify the primary operating domains around which the business will be structured. 

Management Structure

Designing the reporting relationships within a company is not only dependent on the overarching strategy and scope of business operations, but also on the genesis, history and culture of the organization. Two typical models for consideration are the one-dimensional hierarchy, or the multi-dimensional matrix.

Each option has a set of advantages and disadvantages for executives to consider as shown in the following table.

Identifying which option best suits an organization requires an understanding of the following:

• the critical capabilities and skill sets required for the roles - executives with a broad span of control will require a fundamentally different skill set than those overseeing highly specialized organizational groups

• the long-term growth trajectory for the organization - a diverse and complex anticipated future state business model will likely require greater specialization and focus throughout the organization.

Most organizations will likely employ a hybrid model that combines elements of a one-dimensional hierarchy (refer Figure 1) and a multi-dimensional matrix (refer Figure 2).  However, designing the future state requires a deep introspection on the current state and foresight on the evolution of the business.

Operating domains

Concurrent with deciding the type of management structure, executives should identify the primary operating domains around which the company will be structured. The common dimensions seen in mature organizations are:

• corporate functions that provide pan-enterprise support.

• geographies grouped by adjacent regions or commercial zones.

• business units structured around common products or categories, end customers, end industries or value chain segments, or both. 

Selecting which dimension(s) will become the skeleton of the future state design will depend on the company’s strategy, areas of competition and overall go-to-market approach.

To illustrate:

• function-led models are often used by companies with few interdependencies across functional units, single or undifferentiated end-markets and elevated levels of functional specialization.

• region-led models enable companies to customize commercial (e.g., sales, marketing, etc.) and operational (e.g., legal, regulatory, etc.) functions to local market conditions and specifications.

• business units enable consolidation of specialized skills with well defined segments that can benefit from consolidation of expertise and enhanced autonomy.

Figure 1 - Illustrative One-Dimensional Hierarchy

Figure 2 - Illustrative Multi-Dimensional Hierarchy

Taking the first step

A clearly defined strategy is the foundation for developing an operating model. Before design can begin a company should ensure their corporate strategy and objectives are defined and agreed upon across management. The organization’s core values should also be determined and coalesced around defining how the business operates. 

Operating model and organizational structure design is never easy. Cannabis companies should reflect on their current state and consider what is required for future success.