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We tend to meet any new situation by reorganizing, and a wonderful method it can be for creating the illusion of progress while producing inefficiency and demoralization.

Typically, cost reductions are delayed, are across-the-board (eliminate 10 percent, say, from every department) and are not oriented toward what the business design should be at the end of the reduction effort. Consequently, the effort usually fails. In fact, cost reduction and internal re-engineering approaches more often than not misconstrue the fundamental nature of the problem. The point is not to become more efficient at activities that are losing customer and economic relevance, but to alter the business design in a way that matches customer demands and is consistent with the new economic order in your industry.

During structural breaks in hard times, cutting costs isn’t enough. Things have to be done differently, and on two levels: reducing the complexity of corporate structures and transforming business models. At the corporate level, the first commandment is to simplify and simplify again. Since companies must become more modular and diverse, eliminate coordinating committees, review boards, and other mechanisms connecting businesses, products, or geographies. The aim of these cuts is to provide lean central and support services that don’t require business units to spend time and energy coordinating their activities. Break larger units into smaller ones to reveal cross-subsidies and to break political blockades. You may think that coordination costs will rise if you fragment the business, but you must do so to expose what ought to be streamlined.

Then start reforming individual businesses. In general terms, the first task is to understand how a business has survived, competed, and made money in the past. Don’t settle for PowerPoint bar charts and graphs. If the business is too complex to comprehend, break it into comprehensible parts. Once you gain this critical understanding, you can start the work of reshaping.