Feature
Editor's Note: This article was updated on Sept. 6, 2023 to include new data and information.
Human resource leaders say organizational design ranks No. 2 out of their top five priorities, according to a report from Gartner — just behind leader and manager effectiveness.
The biggest drivers of these priorities, the report added, include rising inflation, scarce and expensive talent and global supply constraints, something the research firm refers to as a "triple squeeze" of pressures.
What Is Organizational Design?
At its core, organizational design refers to the deliberate process of shaping an organization's structure, roles and responsibilities to align with its strategic priorities, achieve its business goals and adapt to the ever-evolving market landscape. It's similar to architects planning the layout of a building, ensuring every brick and beam is strategically placed.
Edgar Arroyo, president of SJD Taxi, said he’s been part of teams implementing organizational design at multiple organizations. And it's important, he added, because business outcomes are shaped by how performance is rewarded and measured in the company, how decisions are made and how responsibilities are allocated.
“If a company wants to be known for innovation but new product proposals still require multiple layers of approvals before a prototype is made, that can reduce the speed at which ideas get implemented and new products go to market while customer preferences may already have shifted dramatically,” he said.
To successfully implement organizational design, he continued, it's important to define objectives or desired outcomes, take time to understand the existing organization, implement a few changes at a time and measure short-term and long-term changes as a feedback loop.
Related Article: You Need to Improve Your Digital Employee Experience. Do You Have the Resources?
7 Types of Organizational Design
A company's organizational design can vary widely based on its age, size, industry, goals and more.
Some primary types of organizational structures include:
1. Functional Design
In this traditional organizational structure, departments are organized around specific job functions, like marketing, finance and human resources. It's effective for companies seeking deep specialization within specific domains.
2. Divisional Design
In this context, divisions are based on products, services or market segments. Each division operates somewhat autonomously, with its own set of resources and procedures, making it suitable for large corporations with varied product lines.
3. Matrix Design
The matrix structure combines elements of both functional and divisional designs. The dual management structure — employees report to both functional managers and project or product managers — can promote accountability and is designed for businesses needing flexibility and multidisciplinary teams.
4. Hierarchical Structure
This organizational structure is one of the most common around today, following a direct chain of command, from the company's top executives down to general employees. Businesses adopt this structure for clear, streamlined processes with reduced conflicts due to lack of ambiguity.
5. Flat Structure
In a flat organization design, there are few middle managers between employees and top-level managers. This structure requires less supervision and increases employee involvement, making it effective for small businesses and startups.
6. Network Design
Rather than a centralized structure, companies using this organization design operate as hubs, outsourcing or collaborating with external organizations and contractors. This structure is favored by businesses wanting to stay lean and capitalize on external expertise.
7. Team-Based Design
This organizational structure organizes employees around project teams rather than around specific functions or products. It promotes collaboration and is ideal for organizations with project-centered operations.
6 Factors That Impact Organizational Design
Organizational design is not a one-size-fits-all approach. Crafting the optimal blueprint for a company hinges on a number of factors. Recognizing these driving forces is essential in any organizational design process:
Business Strategy
At the heart of organizational design is the company's business strategy. The design should facilitate the achievement of strategic goals, whether that means entering new markets, launching innovative products or enhancing customer experience.
Existing Organizational Structure
Before diving into an organizational redesign, it's crucial to assess the existing structure. Understanding current strengths and weaknesses can guide adjustments and modifications.
Business Units and Interrelations
Different business units may have unique needs and goals. The design should consider how these units interact, collaborate and contribute to the company's overall objectives.
Size and Scale
A small startup's organization design will differ significantly from that of a multinational corporation. As companies grow, the design often needs to evolve to accommodate increased complexity and diversity.
External Environment
Market dynamics, regulatory changes, competitive landscapes and the world as a whole play a pivotal role. After the pandemic, the most obvious change was the design of the digital workplace, said Ron Carucci, co-founder and managing partner at Navalent.
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“The challenge is that most people just got shoved into working from home, and everybody had to pioneer their way into figuring out how to make a dining room into an office or their basement into a classroom," he said. "And we survived that." Yet the design evolution constantly continues for workplaces.
Technological Advances
With the digital age in full swing, technology can impact how teams collaborate and work. It's essential for the design to incorporate and adapt to the latest technological tools and platforms.
Related Article: What Is a Digital Workplace? Definition, Benefits, Best Practices
4 Organizational Design Principles
So where does organizational design kick in? It helps to understand the foundational concepts or organizational design principles before jumping in.
Organizational design is not a reorganization, where you change a few titles and place employees under different managers in an org chart, according to Carucci. Org charts do not tell you anything about the workflow and design of the organization. “All it tells me is who reports to who,” Carucci said.
Organizational design can be broken down into:
Systems: Hardware, Software, Culture
When designing an organizational system, think about the hardware and software: the structures, processes, technology and governance. Carucci said it's also important to think about the culture: the people, the norms of the organization, the mood and the level of employee engagement. These all have to be connected to be successful.
“How often do you walk into a company and there's a team over there working on streamlining a process, a team over there working on compensation, a team over there redesigning the company values, a team over there working on training people on a new enterprise resource platform,” Carucci said. “And no one's talking to each other. That's the typical approach and then when you try to piece it all together, it doesn't work.”
Strategy: Ensuring Alignment Across the Board
The systems and culture are driven by an item of strategic importance, and often the breakdown happens because there's misalignment. Executives in the same company will often give different answers when asked about fundamental company strategies. “It happens when everybody at the top is leading the place in a different direction," Carucci said. "The hardware and software of organization is nothing more than the embodiment of a strategy. This is who we say we are. If you get this right, you get a gold star.”
Grouping: Don't Be Afraid to Break Traditional Models
Traditionally, organizations group how they work by geography or function: finance, sales, marketing, supply chain, manufacturing. Other companies group employees around customers, processes and go-to-market strategies. Most organizations do a decent job getting the grouping of the work reasonably right, according to Carucci.
One important distinction to note when thinking about grouping in organizational design is defining what type of work your organization does. Carucci said organizations should break down work into three categories:
- Competitive work: This is the work that sets you apart. This is your “secret sauce” and should account for about 15% of work, Carucci said.
- Competitive enabling work: These are support mechanisms to competitive work. “If your competitive work is customer service, and that's what sets you apart, your customer analytics is your competitive enabling work,” Carucci said, and is typically 30% to 35% of work.
- Necessary work: The remaining work is grouped into the “necessary” category. This is work that keeps the lights on and keeps the organization in compliance. “You don't need to be better than anybody else here,” Carucci said. “But this is the vast majority of your work.”
“Necessary work has more immediacy and is more short-term and more urgent,” Carucci said. “So people will do that. And they don't protect their competitive work, and their competitive talent or the competitive-enabling worker talent. Those things have to be separated and quarantined so that it can be done at their best.”
Linking: Connectedness of Cross-Functional Teams
Organizations won’t work and won’t have good quality design unless groups can work together. No one group is a sum of the total company. “It's the conductor's job to make sure that it all sounds like one good symphony,” Carucci said. “So we have to link all this work together.”
Governance is how you link groups together. Identify what cross-functional teams are working together and link through processes. “Most companies fail to standardize,” Carucci said. “They say we can't do that."
"Standardization doesn't constrain agility. It liberates it. … You can link work through culture, a certain set of norms or ways you operate. There are lots and lots of ways you can link the work. The key is to do it on purpose.”
How can you link together East Coast and West Coast work in the most cost-effective way, for instance? What is the work you want to do and what is the competitive value of that work?
“You have to look at every place where your organization comes together and ask yourself when this seam gets stitched, what does good look like?” Carucci said. “And what's the best glue to use to bring that team together? And you have to do that for all of your work. Most organizations are just not willing to invest the time in doing the design work necessary to really think through the entire enterprise, and to group it and link it effectively, so that it can actually execute the strategy you've declared. That’s organizational design.”
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Start Small With Your Organizational Design Process
While there are formal documents that state how company processes should be, the underlying norms, mindsets and practices that shape how people do things are often different, according to Arroyo.
"Similarly, it's not enough to understand roles and responsibilities from an organizational chart as there are often many informal clusters of power and influence in the company as people connect beyond their teams and managers," he said. "Take the time to understand all the unwritten aspects of the organization so that the company can ensure that the target design can shape behaviors and practices to achieve the company's new goals."
To understand how these norms play out, implement a few changes at a time on a smaller scale and watch their effects before implementing them across the organization. Measure the short-term and long-term changes and add them to a feedback loop to help understand the progress. Set simple KPIs that measure whether the company is achieving the new objectives.
"This can help a company measure how the changes they are making is impacting their ability to meet their objectives, and either reverse or adapt their initiatives according to how well it's working," Arroyo said. "Short-term metrics are important so that the organization gets a timely pulse-check and can adapt quickly without investing more resources into something that may not be working effectively."
