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Organisational Design

On June 10, 2019 in peopleware 8 minutes read

Table of Contents

Organisational Design

When selecting an organisational design, there are two competing desires:

The goal is to select the best design that can maximize both, under the current constraints.

Organisation design is made of:

Differentiation

The goal of differentiation is to define how hierarchy and critical tasks are distributed among departments.

Most designs favor one of two directions:

Standard Organisations

Below are two organisational structures that directly evolve from a vertical (functional) and horizontal design (divisional).

Functional Organisation

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.

Strengths:

Weaknesses:

Divisional Organisation

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.

Strengths:

Weaknesses:

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).

Strength:

Weaknesses:

Multidivisional Structure

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.

Strength:

Weaknesses:

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.

Strengths:

Weaknesses:

Matrix Structures

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.

Strengths

Weaknesses:

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.

Strengths:

Disadvantages:

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

Integration is the allocation of:

Coordination and control are the critical components of integration, which complements differentiation.

Coordination

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:

Common reasons for coordination failures are:

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:

When designing coordination mechanisms, we need to keep in mind:

Coordination can be vertical or horizontal:

Control

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:

Most business benefit from the below set of outcome measures:

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

Evaluating Design Effectiveness & Redesign

There are three basic symptoms of structural deficiency:

(Please note, these symptoms could also be caused by other causes (wrong strategy, wrong management)).

Possible solutions:

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.

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