Organisational DesignOn June 10, 2019 in peopleware • 8 minutes read
Table of Contents
- Organisational Design
- Evaluating Design Effectiveness & Redesign
When selecting an organisational design, there are two competing desires:
- Internal Efficiency, which focuses on exploitation of our existing markets, production processes and investments;
- External Flexibility, which focuses on exploration of new markets, new products and new business models.
The goal is to select the best design that can maximize both, under the current constraints.
Organisation design is made of:
- Differentiation, the allocation of:
- Tasks: Defining work activities & specialization;
- Authority: Decision making power & chain of command;
- Resources: Allocation of resources & departmental groupings.
- Integration, the definition of mechanisms for:
- Coordination: How will the parts involved collaborate toward shared goals;
- Control: How will we evaluate we are moving in the right direction.
The goal of differentiation is to define how hierarchy and critical tasks are distributed among departments.
Most designs favor one of two directions:
- Vertical Designs, favor Internal Efficiency and feature:
- Specialised tasks;
- Strict hierarchy, many rules;
- Vertical communication and reporting systems;
- Few teams, task forces or integrators;
- Centralised decision making.
- Horizontal Designs, favor External Flexibility and feature:
- Shared tasks, empowerment;
- Relaxed hierarchy, few rules;
- Horizontal, face-to-face communication;
- Many teams and task forces or integrators;
- Decentralised decision making.
Below are two organisational structures that directly evolve from a vertical (functional) and horizontal design (divisional).
In functional design, each function is siloed, with products cutting across functions in a matrix-like fashion. This significantly expands the role of the CEO and his leadership team in all products, as that is the main point of coordination.
- Economies of scale, thanks to stable operating environment and technology;
- Resources can develop their skills in depth.
- Shared ownership across divisions for a product’s performances;
- Slow in responding to environment changes;
- Hierarchy can slow down coordination and integration.
In divisional design, organisations are structured according to product groups, services, geographies, or markets, with each division being a company unto themselves, with their own marketing, their own engineering, their own finance, etc. Some functions might be centralized, such as legal and HR, but everything else that is necessary for a product lives within that product’s organization.
The competitive advantage of such companies is usually in their management acumen and capital reserves, and the preferred employee is a generalist, able to quickly master any job with a refined set of skills.
- Increased coordination across functions;
- Allows adaptions and large companies, as this model scales to a large number of products;
- Decentralizes decision making;
- Performances of each division is clear, and so is motivation: senior division leaders have much of their income tied to the performance of their division.
- Reduces coordination across divisional lines, possibly duplicating functions;
- Reduces economies of scale, as divisions stay smaller;
- Reduces specialization and standardization.
Hybrid Organisations Structures
Below are three kinds of hybrid structures, which try to embrace a mix of horizontal and vertical design, for practical use today.
Product Division Structure
In this structure, some functions are common to all divisions, so they shouldn’t be part of the Product divisions (e.g. Marketing, Finance).
- More adaptive at the division level, without sacrificing efficiency in centralised functions;
- Better alignment between functional and divisional goals.
- More difficult integration of vertical & horizontal slices, can require additional control mechanisms and hence higher administrative overhead.
This organisation has division managers, but also a centralised corporate layer, sitting between the CEO and Division managers focused on standardizing practices across the business (e.g. hiring, accounting) for cost saving.
- More sophisticated control & integration systems;
- Better capital resource allocation decisions;
- Corporate level can focus on long-term strategies.
- Accountability for divisional performances are spread and more difficult to evaluate;
- New layers in management can slow down innovation;
- Top management can grow too fast / become too powerful.
Product Team Structure
This organisation puts shared functions in their own divisions (R & D, Marketing, Accounting) with their own VP, which offer services to multiple Product Development Team, one for each new Product.
- Higher decentralisation to increase flexibility;
- Higher integration / ownership at the team level;
- Responsive to market demands, with shorter development times.
- More difficult coordination across teams;
- Loss of corporate control.
In this design, you have different functions and different service groups; it’s a very flexible structure, catering to companies that offers services to customers that might come and go at any time.
- Reduced functional barriers;
- Increased communication;
- Flexible user of human Resources;
- Product & functional focus.
- Lacks stable control structure;
- Uncertainty over dual authority;
- Higher integration / coordination costs.
Dynamic Network Structures
This structure focuses the organisation on the core business, while hiring external firms for the non-critical functions; it offers the most external flexibility, but internal efficiency is uncertain.
- Lean and mean, only hire resources when needed;
- Very flexible;
- High specialisation;
- Very low overhead.
- Limited hands-on control;
- Unclear organisational boundaries;
- Defection is easy;
- Weakened employee loyalty.
Business Groups (Conglomerates)
Business Groups are networks of legally independent companies, held together by a single owner; the high diversification in goals, challenges and markets means these could be very complex to manage efficiently.
Yet, in certain markets (where capital is difficult to come by) and conditions (when the company is a family business) these companies can thrive.
Integration is the allocation of:
- Coordination (how the parts work together);
- Control (how do we know we’re going in the right direction).
Coordination and control are the critical components of integration, which complements differentiation.
Coordination is the integration, harmonization or execution of orderly pattern of activities in an organisation in order to move in an agreed direction. It requires:
- Shared knowledge
- Shared objectives
- Accurate communication
- Timely interactions
Common reasons for coordination failures are:
- Competition for critical and scarce resources
- Disagreement on objectives
- Disagreement on what actions to take to achieve common objectives
- Lack of trust
- High turnover of staff and managers
Coordination is critical for organization design because it makes it possible for different units to work together effectively, even in the face of more interdependent tasks and growing complexity in their endeavors.
Interdependence can be of three types:
- Pooled (independent): Standardize with rules, plans;
- Sequential: Plan with scheduled, task forces and vertical communication;
- Reciprocal: Mutual adjust plans with horizontal structure, full-time integrators, face to face communication, unscheduled meetings and cross-functional teams.
When designing coordination mechanisms, we need to keep in mind:
- Cost of designing and implementation (low memo, high meeting);
- Information carrying capacity (low memo, high meeting).
Coordination can be vertical or horizontal:
- Vertical coordination refers to the ways different hierarchic levels within an organization coordinate their activities; possible mechanisms are:
- Hierarchical referrals, rules, plans, standard operating procedures, new positions in the hierarchy, vertical information systems.
- Horizontal coordination refers to the ways different units at the same hierarchic level within an organisation coordinate their activities; possible mechanisms are:
- Paperwork, direct contact, liason roles, task forces, full-time integrators, permanent teams.
Control is critical to see if the organization is moving in the right direction and producing expected outcomes, or if it is deviating from the expected direction.
The basic idea of a control system is to execute on a strategy, a set of hypotheses about creating a desirable effect by manipulating controllable factors, with outcomes measurements (lag indicators) and performance drivers (lead indicators), and linking outcome measures to financial outcomes.
Developing a strategy can be done using the following steps:
- (Goal) What is my vision of the future?
- (Outcomes) If my vision succeeds, how will I differ?
- (Drivers) What are the critical success factors?
- (Measurements) What are the critical measurements?
Most business benefit from the below set of outcome measures:
- Return on investment;
- Revenue growth / mix;
- Cost reduction / productivity;
- Market share;
- Customer acquisition;
- Customer retention;
- Customer satisfaction;
- Internal process:
- Feature cycle time;
- Quality control;
- Waste and rework needs;
- Learning and growth:
- Employee satisfaction / retention / productivity.
The complexity of this model is in developing a cause <> effect hypothesis, which sees certain outcomes above as manipulatable drivers for other outcomes (for example, increased employee satisfaction could reduce waste and rework).
One framework for managing and implementing strategy is the Balanced Scorecard, referred to as the BSC.
Critical Issues in Control Systems
- Basic mistakes in performance measurements are:
- Don’t use only your own performance as benchmarks, but also your competitors’;
- Do not only focus on past indicators to measure success;
- Do not set measures that are easy to manipulate;
- Do not use measurement systems that are no longer relevant or useful;
- Do not overvalue numbers at the expense of qualitative measures (see Gemba).
- Centralize control roles, so you can separate policy from service activities:
- Policy activity involves imposing standards to measure divisional performance;
- Service activity involves dealing with divisions as customers.
Evaluating Design Effectiveness & Redesign
There are three basic symptoms of structural deficiency:
- Decision-making is delayed or lacking in quality, e.g. every decision involves management to the point leadership becomes a bottle-neck;
- The organisation does not or cannot respond innovatively to a changing environment, e.g. our organisation lags behind to evolutions in the market;
- There is too much conflict among units in the organisation, e.g. due to scarcity of resources or wrongly distributed tasks.
(Please note, these symptoms could also be caused by other causes (wrong strategy, wrong management)).
- Foster communication to improve decision making (build informal networks to compensate for the limits of the formal structure);
- Build agility to improve responsiveness (expose people to new aspects of their tasks and opportunities for collaboration);
- Break up entrenched interests to resolve conflict (change the measurement of performance to create a shift in mindset).
So, should we redesign our company? Research shows that a company’s structure results in better performance if and only if it improves the organisation’s ability to make and execute key decisions better and faster than competitors.
If you can synchronize your organisation structure with its decisions, then the structure will work better and performance will improve.