Organization Design

Understanding and Influencing Organizational Structure

Organization Design - Understanding and Influencing Organizational Structure

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Organization Design can drive efficiency and success in your business.

Organization Design is a process for shaping the way organizations are structured and run.

It involves many different aspects of life at work, including team formations, shift patterns, lines of reporting, decision-making procedures, communication channels, and more.

Organization Design – and redesign – can help any type of organization to achieve its goals. Sometimes, a large-scale reorganization is necessary. At other points, more subtle shifts in structures and systems can ensure that an organization continues to thrive.

In this article, we'll look at when and why Organization Design is necessary, and how it happens in practice. As a result, you'll know how to contribute to the process whenever you get the chance.

We'll also explore how different organizational designs affect the people who work within them. That way, you'll be able to recognize and respond to both the challenges and the opportunities – wherever you work.

The Impact of Organization Design

An organization's design must be right for it to operate efficiently and effectively, and its structures and systems need to be aligned with its core strategies.

There are many potential benefits to having a design that suits the business and its people, and the environment in which it operates. For example:

  • Increased efficiency.
  • Faster and more effective decision making.
  • Improved quality of goods and services.
  • Higher profits.
  • Better customer relations.
  • Safer working conditions.
  • A happier, healthier and more motivated workforce.
  • Greater preparedness for future challenges.

However, if there are flaws in its design, an organization can suffer serious problems, including:

  • Ineffective problem solving.
  • Wasted time.
  • Lack of coordination between different parts of the business.
  • Inconsistent quality of work.
  • Failures of legal compliance.
  • Reputational damage.
  • Low morale, leading to high staff turnover.
  • Below-target business-level results.

Even if a particular setup was successful in the past, that doesn't mean it will remain so for ever – or even for long. As businesses develop, and as the world around them changes, it's vital that they keep a close eye on the way they're organized.

And when it's no longer fit for purpose, that's the time to put a new phase of Organization Design into action.

Organizational Design: When and Why?

There are three common "triggers" for Organization Design:

1. Something's changed, either inside or outside of the business.

Perhaps you've bought some new technology, or a rival has entered your territory. Maybe an important piece of legislation affecting your business has changed.

Some factors are exciting, some are worrying, but they all require a response – and that likely means some alterations to the way you operate.

2. You've set new strategies or goals.

An organization might take the strategic decision to approach its work in a different way for any number of reasons. It might also change the ways it measures success.

For example, a publishing company might decide to produce less in print, offer more free content online, and aim to make most of its money from advertising. In which case, it would have to set new goals for website engagement and advertising revenue, and it would need to implement an Organization Design process to pursue this new strategy.

3. The current design no longer works.

Many aspects of change affecting an organization are gradual. But, in time, a "tipping point" is reached.

Perhaps you've increased your people's flexible working options, but problems are beginning to show: absence is up, deadlines are being missed, and there's a growing sense of inequality across the business. Enough's enough: your organizational design needs to change.

Note:

Within the lifespan of any organization, there are typical moments when Organization Design is required. The Greiner Curve is a useful tool for recognizing these points and understanding the sorts of changes that need to take place.

Hierarchical and Organic Organization Design

Organization Design is often divided into two distinct styles: hierarchical and organic.

The table below shows some of the key features of hierarchical and organic designs – examined in terms of complexity, formality, levels of participation, and communication styles.

Characteristic Hierarchical structure Organic structure
Complexity High – with an emphasis on horizontal separation into functions, departments and divisions. Usually lower – less differentiation and functional separation.
Formality High – lots of well-defined lines of control and responsibility. Lower – no real hierarchy, and less formal division of responsibilities.
Participation Low – employees lower down the organization have little involvement in decision making. Higher – lower-level employees have more influence on decision makers.
Communication Downward –  information starts at the top and trickles down to employees. Lateral, upward and downward –  information flows through the organization with fewer barriers.

It's worth emphasizing that one isn't intrinsically better than the other. Organizations need to choose a design that matches their strategies and goals, suits the environment they're operating in, and is right for their people.

It's also possible to mix elements of both styles, or to emphasize one or the other at particular times, or in specific areas. There's a good example of this in our Book Insight podcast on "Holacracy," a tightly organized system that also allows for creative connections.

Examples of Hierarchical Organization Designs

Two popular types of hierarchical organizational designs are Functional Structures and Divisional Structures.

In a Functional Structure, functions (accounting, marketing, H.R., and so on) are separate, each led by a senior executive who reports to the CEO. This can be a very efficient way of working, allowing for economies of scale as specialists work for the whole organization. There should be clear lines of communication and accountability.

However, there's a danger that functional goals can end up overshadowing the overall aims of the organization. And there may be little scope for creative interplay between people in different teams.

In a Divisional Structure, the company is organized by office or customer location. Each division is autonomous and has a manager who reports to the CEO. A key advantage is that each division is free to concentrate on its own performance, and its people can build up strong local links.

However, there may be some duplication of duties. People may also feel disconnected from the company as a whole, and enjoy fewer opportunities to gain training across the business.

Examples of Organic Organization Designs

Organic structures include Simple/Flat Structures, Matrix Organizations, and Network Structures.

The Simple/Flat Structure is common in small businesses. It may have only two or three levels, and people tend to work as a large team, with everyone reporting to one person. It can be a very efficient way of working, with clear responsibilities – as well as a useful level of flexibility.

A potential disadvantage, however, is that this structure can hold back progress when the company grows to a point where the founder or CEO can no longer make all the decisions.

In a Matrix Structure, people typically have two or more lines of report. This type of organization may combine both functional and divisional lines of responsibility, allowing it to focus on divisional performance while also sharing specialized skills and resources.

However, Matrix Structures can become overly complex, effectively having to uphold two hierarchies, with potential tensions between the two.

A Network Structure – often known as a "lean" structure – has central, core functions that operate the strategic business. It outsources or subcontracts non-core functions. This structure is very flexible, and it can adapt to new market challenges almost immediately.

But there's an almost inevitable loss of control due to its dependence on third parties, and all the potential problems that come from managing outsourced or subcontracted teams.

Tip:

Our article on Organograms and Organigraphs can help you further when you want to visualize how a particular organization works.

New Styles of Organization Design

Recently, the trend in Organization Design has been away from a linear, top-down approach, toward more organic (but often more complex) structures and systems.

And as new types of organizations emerge, they have an increasing range of designs to choose from. These include:

Working Within Different Organizational Designs

There are pros and cons to all of these designs, so you need to adapt to both the difficulties and the advantages of all the different organizational designs that you encounter.

We have a range of articles that can help you to thrive in a variety of organizations – for example, Working in a Matrix Organization, and Managing a Geographically Dispersed Team.

But however an organization is designed, you may still spend most of your time working alone, in the office or remotely. Our article on working as a team of one has advice about doing so successfully, whatever changes go on in your wider organization.

Making Organization Design Decisions

The complexity and scope of Organization Design means that it is usually the responsibility of the senior management or leadership of a company. But many organizations find that a collaborative approach across all levels is essential for design to be truly effective in the long term. You can find out more about this in our article about the related discipline of organization development.

But for those who get to shape the Organization Design process itself, how should they go about it?

Here are some of the key factors to consider:

Strategy. If your organization intends to be innovative, a hierarchical structure may be a block. But if your strategy is based on low-cost, high-volume delivery, then a rigid structure with tight controls may be the best design.

Size. You could paralyze a small organization by creating too much specialization. In larger organizations, on the other hand, there may be economies of scale from maintaining specialized departments and teams. Designs may need to change, too, as organizations grow.

(We've already referred to the Greiner Curve, about organizational growing pains. For ways to cope personally, see our article, Dealing With a Wide Span of Control.)

Environment. If your market environment is unpredictable or volatile, your organization needs to be flexible enough to react. But elements of a hierarchical structure may still be important, to protect you against turbulence, and to ensure that key functions – compliance tasks, for example – are carried out accurately and on time.

Note:

Organization Design encourages you to focus on what your company is doing. But it's also important to consider its relationships with other organizations, and how they may be affected by any changes. For advice on this, see our article, How Businesses Work Together.

Controls. Some activities need special controls (such as patient services in hospitals, money handling in banks, and maintenance in air transport) while others are more efficient when there's a high degree of flexibility.

Incentives. These need to support any new organizational design. If you want to grow by acquiring new customers, for example, then you'll have to refocus the incentives that you offer to your sales team accordingly. If not, that team may be working out of sync with everyone else.

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Organization Design in Practice

Once you've considered these and any other relevant factors, you'll likely have a suitable structure in mind. So the next step is to ensure that you've selected the most appropriate options, and to define the steps needed to put the new design in place.

There are a number of tools to help you to do this, such as SWOT and PEST analysis, using focus groups and surveys, internal audits, and collaborative process reviews. 

From there, good Organization Design involves not only changing the systems by which people work, but also supporting people to adapt successfully.

For example, your analysis might persuade you to move to a matrix structure. But that won't succeed unless people get support to work outside their former departments. You'll need to ensure that communication is clear and effective, and that performance management approaches are relevant and fair.

With your ideal design in mind as a map to follow, draw up a clear plan for the way it will work in the context of your organization. Be precise about roles and responsibilities, and define exactly how your new systems and processes will operate.

Then, organize your people to follow this new design. There may be changes in personnel and working locations. Make sure that everyone's practical needs are met, allowing them to perform their role in the organization. You'll also need to check that all the necessary support functions are in place, and that you have a plan for successfully managing change.

Tip:

The new design will have implications for every area of the business. Ensure that you take into account the impact on customers and suppliers. Check that your IT resources and communication processes are fit for purpose. And think what it will mean when you're next recruiting and onboarding new hires.

Whatever model you're working to, ensure that the management structure is in place to launch the new design, and to support it in the long term.

And keep returning to your reasons for changing. Ongoing analysis of performance measures and business-level results will show whether your Organization Design process is working, and alert you whenever further changes are required.

Key Points

Organization Design is a process for shaping the way your organization operates, to help you to pursue your strategies and meet your goals. It involves setting up structures and systems, as well as helping people to adapt to new ways of working.

The three key triggers for Organization Design are: when new challenges arise, when different strategies are set, and when old systems are no longer fit for purpose.

Organization Design comprises two main approaches: hierarchical and organic. Analyze carefully any potential new design, to ensure that it matches your priorities, suits the environment you operate in, and meets your people's needs.

Whenever you implement new ways of working, be alert to any unintended consequences, and help everyone involved to cope throughout the process of change.

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Comments (15)
  • Over a month ago Michele wrote
    Hi amelia_anderson,

    We're glad that you found the article informative. Organization design is a necessary skill that optimizes the structure to achieve business objectives. It is especially useful in anticipation of a restructure.

    Michele
    Mind Tools Team
  • Over a month ago amelia_anderson wrote
    This is great information, thanks for sharing...navigating to more articles.




  • Over a month ago BillT wrote
    Hello elraymonds,

    Thank you for sharing the link. We include this and other tools such as Tree Plan and SmartDraw software, and draw.io app in our article for diagramming Tree Diagrams found here: https://www.mindtools.com/community/pages/article/tree-diagrams.php

    Bill
    Mind Tools Team
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