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Organization Design

Creating an Effective Organizational Structure

Organization Design - Creating an Effective 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, how it can affect people, and how to implement it effectively.

The Impact of Organization Design

Organizational design involves implementing organizational structures and systems that align to an organization's core strategies. Often organization redesign happens because a business is growing or needs to downsize. However, it may also be because of a change in leadership, strategy, or due to changes in the organization's wider environment in which it operates.

When organizational design is effective it can have a number of benefits, including:

  • Increased effiency.
  • 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.
  • Missed targets and poor performance. [1]

Even if a particular setup was successful in the past, that doesn't mean it will remain so for ever. 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.

What Triggers Organizational Design?

Organization design is often triggered by three common issues:

1. Changes in the Environment

Changes here could refer to internal or external changes. 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 changes may be exciting, but some are worrying. However, they all require a response – and that likely means some alterations to the way you operate.

2. You've Launched a New Strategy

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 generate more of its profits from advertising. In which case, it would have to set new goals for website engagement and advertising revenue, which would in turn trigger a need to redesign its organization and structure so that it could successfully achieve its new strategic goals.

3. Your Current Design Is Not Fit for Purpose

Change is often gradual, but at some point in time, a "tipping point" is reached at which the organization recognizes a need to adapt to such changes.

Perhaps you're organization has continued to uphold a very strict, hierarchical structure and has so far been unwilling to offer flexible working options, but recently its noticed that this has negatively affected recruitment and staff retention. Absences are also up and engagement is low. Enough's enough: your organizational design needs to change if you are to continue to attract and retain the talent you need to stay competitive.

Types of Organization Design

Organization Design is often divided into two distinct styles:

  1. Hierarchical.
  2. 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 – ower-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.

Hierarchical Organization Designs

Hierarchical organizational designs often fall into two main categories:

  • Functional structures. Functions – such as accounting, marketing, HR and so on – are separate, each led by a senior executive who reports to the CEO. This can be a very efficient structure, allowing for economies of scale because specialists work for the whole organization. However, there needs to be clear lines of communication and accountability. There's also a danger that functional goals end up overshading the overall aims of the organization, and there's often little scope for cross-team collaboration.
  • Divisional structures. 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 of this type of structure is that each division is free to concentrate on its own performance, and its people can build up strong local links. However, this can also lead to duplication of duties. People may also feel disconnected from the company as a whole, and enjoy fewer opportunities to gain training in different areas of the business.

Organic Organization Designs

Organic organizational designs include:

  • Simple/Flat structure. This type of structure is common among small businesses. There may only be two or three management levels, with people working together as one, large team, and reporting to the same, single person. This can be a very efficient way of working, as responsibilities are clear, and there's a useful level of flexibility. However, it can also hold back progress if the company grows to a point where the founder or CEO no longer has enough time to make all the decisions.
  • Matrix structure. Here, 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 different hierarchies, which may start to compete. This may even create tension and result in conflict, in some cases.
  • Network structures. Often known as a "lean" structure, this type of organization has central, core functions that operate the strategic business, and outsources or subcontracts non-core functions. This structure is very flexible, and it can adapt to new market challenges almost immediately. However, there's an inevitable loss of control due to its dependence on third parties, and all the potential problems that result from managing outsourced or subcontracted teams.

Tip:

Our article on Organograms and Organigraphs can help you to design and visualize your organizational structure.

Note:

Recently, trends in organization design have moved away from linear, top-down approaches, and toward more organic (but often more complex) structures. This has resulted in new designs emerging, such as:

How to Use Organization Design

The complexity and scope of Organization Design means that it's usually the responsibility of the senior management team to implement it. But many organizations find that a collaborative approach across all levels is essential for organization design to be truly effective in the long term.

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

1. Consider the Impact

First, you'll need to consider the impact that a change in your organization's design will have by assessing it against a number of factors. These include:

  • Strategy. If your organization's strategy is built around innovation, 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 fit.
  • Size. You could paralyze a small organization by creating too many specialized teams. Conversely, specialization in a larger organization can mean you benefit from economies of scales. Your organizational design may need to change, too, as your business grows. The Greiner Curve is a useful tool for recognizing growth milestones and understanding the sorts of changes that need to take place to ensure your organization continues to thrive.
  • Environment. If your market environment is unpredicatable or volatile, your organization needs to be flexible enough to react. However, elements of a more rigid, hierarchical structure may still be important to protect you against turbulence, and to ensure that key functions – such as compliance and financial accounting – are carried out accurately and on time.
  • 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 effective when there's a higher degree of flexibility.
  • Incentives. These should support any new organizational design. For example, if you want to grow by acquiring new customers, then you'll have to refocus the incentives that you offer to your sales team accordingly. If you don't, then that team may be working out of sync with everyone else.

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.

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2. Create a Collaborative Plan of Action

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 create an action plan to help you 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. Doing this will also enable you to gain buy-in from people across the organization, and ensure that it suits the purposes of both the organization and its employees.

3. Communicate and Provide Support

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 new organization design 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.

Typically, there are three key triggers for Organization Design: a change in the environment, a change in strategy, or a current design that is no longer fit for purpose.

Organization Design is generally divided into two main approaches:

  • Hierarchical. Usually very rigid and complex, with a top-down management approach.
  • Organic. A more flexible, flat structure, where collaboration and two-way participation is encouraged between leaders and team members.

There are three key steps that can help you to implement a new organization design. These are:

  1. Considering the impact.
  2. Creating a collaborative plan of action.
  3. Communicating and providing support.

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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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