The Importance of Organizational Design and Structure

In the period from 1998 – 2011 I had the pleasure of being a mentee of the President & CEO of Statkraft Mr. Bård Mikkelsen. We met once too two times a month for a period of 12 years. One of the great thing of being a mentee is that you get to discuss different topics with a senior executive who freely share his business and leadership challenges with me. As well as helping me understand how hard it is to run an organization, he showed me how he was managing to adapt — or not — to changing


Organizational structures.

A constant theme during meetings over the period of 12 years was how to build an organization and how the different economic crisis have forced organizations to rethink their strategies and change the way they operate. Very often we see that companies switching their focus from markets to products or competitors, rather than looking at the big picture. This can result in lots of piecemeal change initiatives rather than looking at the overall organizational design.

As a management consult I rarely come across leaders who advocate whole organizational redesign or use it as a way to support their people and business. When organizational strategy changes, structures, roles, and functions should be realigned with the new objectives. This doesn’t always happen, with the result that responsibilities can be overlooked, staffing can be inappropriate, and people — and even functions — can work against each other.

A critical success factor for organizations today is the ability to adapt their structures, systems and processes to capture new markets and expand existing ones.  A critical determinant of strategic competitive advantage is organization design.  This article demonstrates the strategic importance of organization design for business leaders; the impact effective design has on the bottom-line; and tips on how to design organizations for flexibility.


Why should business leaders care about organization design?

Research shows that there are identified four key components – strategy, culture, structure, and execution – which they called “management practices”:

Successful companies, those that sustained marketplace advantage over time, use specific ways to manage these practices.  In structure, the focus of this article and a central component of organization design, the researchers found that the most effective structures are those that:

            Eliminate bureaucracy

            Simplify the environment, making it easy to work in

            Promote cooperation and exchange of ideas and information

            Put the best talent where the action is

            Establish systems for the seamless sharing of knowledge.

How well organizations align their structures, processes, management systems and cultures with a well-articulated strategy, greatly impacts their ability to execute and achieve bottom-line results.  Exactly how organizations align structure with strategy is discussed further below.

It has been demonstrated repeatedly that organization design – the process of consciously defining and creating that alignment – can significantly impact competitive advantage. 

One could argue that there is no time for organization design.  After all, who has time to really think all these connections through, when the world around us is changing so quickly? 

Research  indicates that organization design is a powerful way to position organizations for sustainability.  It enables organizations to adapt and thrive in turbulent change, so that they won’t be swept away by the forces they face.  In other words, effective organization design helps build strategic capability.

Ultimately, organization design is the job of the top executive team, whose main focus must be creating and articulating a well-tuned strategic direction, along with ensuring the ability of the business to execute that strategy. 


What is strategic about organization design?

In a word…everything!!!  Strategy cannot be successfully executed without the right organization design. 

            It provided greater ability to carefully allocate resources (people and money) to specific areas to drive strategy

            It ensured that the right information was reaching the right people at the right time

            It provided greater transparency in the financial performance of its key products and technologies that in turn enabled it to track the effectiveness of its strategy


Organization redesign is often needed during the normal course of implementing business strategy.  Existing organization designs can lose relevance as market conditions change, leadership changes, and processes change to increase efficiency.  These changes can occur slowly, “sneaking up” on the company and accumulating to the point where a redesign is needed.  And a key problem for leaders is that by the time they recognize the need for redesign, it may be too late…like the “frog in boiling water” analogy!  Leaders need to respond early to the increases in temperature in their environment and take the needed actions.


Some typical early warning signs that call for an organizational redesign include:

             Slowdown/difficulty in meeting business plan targets

            Disconnects in key processes as they flow across different departments or work groups

            High levels of conflict within and between organizational units

            Difficulty obtaining and sharing resources across the organization

            Lengthy, cumbersome decision-making processes

            Role confusion/turf issues

            Metrics are hard to define or overly complex

            Productivity declines

What these indicators all point to is a fragmentation in the smooth flow of information, materials and decision-making.  These are signs that the structural boundaries are located in the wrong places.  Leaders should monitor these signs and initiate redesign efforts sooner versus later.  This will enable them to respond more quickly and effectively to market changes.

Also, when employees and leaders begin talking about “communications” problems in the organization, take note.  The root of these communications problems is often an inappropriate structure, either at a macro-organizational level or involving specific roles within the organization.  Structure creates inherent barriers to the free flow of information.  Executives need to make careful, thoughtful choices around where to place boundaries to balance the need for the free flow of critical information without creating information overload in the company.


Important considerations when developing an organization design

As executives lead redesigns there are some critical things to think about and do.

1. Start with a statement of strategic intent 

Many leaders believe they have a coherent organization strategy.  And while most do have a strategy in mind, they must also communicate it adequately.  We often hear that managers and peers do not “get it” – they do not really understand the strategy and its implications for day-to-day business.  Often strategies are vague, or lack the direction for action needed for effective execution.

As a management consult I have worked with clients to develop a statement of strategic intent prior to a redesign.  The statement of strategic intent is the vehicle for clarifying an underlying strategy for all the leaders and employees of the organization.

In practical terms, the statement of strategic intent is a concise statement that communicates how the organization plans to differentiate itself from its competitors on the basis of products, markets, technology, pricing, or people.  It identifies the key customers/markets and articulates the value proposition for those key customers.  It is different from a mission statement in that it defines a specific course of action that supports the overall mission

The statement of strategic intent is the basic building block for an effective organization design.  It is the ultimate objective that the design is supporting.  Without clear definition of the strategic intent, it is almost impossible to develop an effective structure. 


2. Determine the high level organizational boundaries that support the strategic intent

Once the statement of strategic intent is agreed to, the executive can develop the “right” structure.  If the strategy reflects a technology/product focus, the structure should reflect that.  If the strategy is a mass-production, low cost strategy, a different structure is warranted.  Understanding the strategic intent provides guidance to where to place organizational boundaries.

This is easier said than done.  When developing a macro-level organization design (product/technology focused, customer/market focused, efficiency-focused, etc.) the key consideration is that it must enhance the primary competitive advantage needed by the company. 

During the early design phase, structure/process modifications are often incorporated that address other core competencies, such as the need for production efficiency or brand/product differentiation.  These modifications enable leaders to create unique organizational hybrid designs that can be shifted to address new market needs at later dates. 


3. Where you draw boundaries is critical to strategy execution 

When designing your organization, pay attention to the key breakdown areas.  A “breakdown” is a failure of the organizational system to operate as planned.  Examples of critical breakdowns include:

             Inability to translate customer needs into viable products  

            High manufacturing production costs 

            Problems in cross-selling all products and services to the key customers 

            Problems in creating the right products for different geographies or customer segments

            Frequent lack of communications between key functions/departments

If these breakdowns are preventing the organization from executing its strategy or achieving its business goals, “redrawing the boundaries” is required.

All organizational structures have inherent liabilities.  Organizational boundaries often create new barriers to the free flow of information, materials and decisions.  Yet, leaders often feel that once they have determined the key organizational boundaries, their job is done.  

Effective organization design recognizes that mechanisms and structures must be implemented that cut across departmental boundaries so that information is properly shared.  If people cannot talk to one another, and hold the important dialogues needed to achieve results, then the redesign is essentially useless.  

Basic kinds of integrative mechanisms include:

            Cross-functional teams… often created to solve problems that cut across many different functions or organizational units.

            Specialized roles (e.g., “Process Owner”) to ensure that processes are implemented consistently across different business units, and continuous improvement of those processes occur)

            Standing meetings

Integration mechanisms play a key role in bringing diverse groups of people together, all of which own a “piece of the puzzle”, enabling them to create the rich dialogue necessary for organizational productivity.

While organization redesign is not about a “silver bullet” or a quick fix, it can generate quick results.

There are multiple examples of companies continually restructuring, trying to find the right structure to solve their problems.  Centralize I/T, decentralize I/T, institute shared services, outsource, etc.  Continuous restructuring is often the result of limited understanding of the true cause of the performance gaps or clear linkage with the statement of strategic intent.  And while these redesigns may resolve some of the current issues, without proper analysis and careful deliberation, they often produce other consequences that then must be addressed.  Similarly, an organization redesign may be done because other companies have done them, and claim success.

But creating an effective organization design is not about mimicking competitors.  Rather, it requires being intentional and deliberate about your own organization’s performance and positioning. 

This does not mean that an organization design process must be a lengthy or resource intensive exercise.  There are design approaches that accelerate the process and create results very quickly.  There are sets of analytical tools available to guide the executive in determining the appropriate structure.  These tools include process mapping, non-value analysis, variance analysis, responsibility charting, etc.  However, these tools do not include the proverbial napkin on the back of which organizations are all too often designed!


6. Organization design is more than moving the boxes

The traditional definition of organization design is creating an organization chart.  Yes, an organization chart is one manifestation of an organization design process, but quite a simplistic one.  Organization design is a more robust process that focuses on aligning structures, systems and processes to achieve strategic objectives.  Organization redesigns provide a good opportunity to examine critical business processes.  In fact, analyzing core business processes often identifies where most of the critical breakdowns are occurring.  Business process analysis becomes a tool for identifying where to place organizational boundaries.

Often, I see little more than a traditional hierarchy flattening out, perhaps broadening into a matrix structure in parts of the organization. More often than not, though, the hierarchy remains embedded in the “new” structure, which can cut across its effectiveness and leave people confused. Worse, organizations rarely show people how to operate in a new structure, which can also undermine effectiveness.

As a management consult very often my clients tell me that they find it increasingly difficult to operate within outdated or dysfunctional structures. My prevailing impression is that organizations either overlook the importance of organizational design or simply don’t know what to do.

This isn’t surprising since the subject is complex and often poorly explained by academics and consultants, finding a practical approach to organizational design can be difficult.

It is also a pity since structure dictates the relationship of roles in an organization, and therefore, how people function. An outdated structure can result in unnecessary ambiguity and confusion and often a lack of accountability. Structures can be complicated: one British bank where I coach has a clear hierarchy at the top but a complex matrix structure further down which, according to my clients, allows some managers to dodge their responsibilities while others can move troublesome staff around or “exit” them easily. 

Poor organizational design and structure results in a bewildering morass of contradictions: confusion within roles, a lack of co-ordination among functions, failure to share ideas, and slow decision-making bring managers unnecessary complexity, stress, and conflict. Often those at the top of an organization are oblivious to these problems or, worse, pass them off as or challenges to overcome or opportunities to develop.

When doing an organization design, executives should also address critical organizational systems that will ultimately support the structure.  Some of these systems include: rewards, goals and metrics, decision-making, training and staffing. 


7. Poor executive performance is often blamed for poor design.

Executives are generally replaced when they fail to achieve expected business results.  Poor business results are often attributed to poor individual performance or poor leadership skills.  After all, it is easier to change the person than the structure.  The underlying problem, however, is often a poor design.  A poor organization design can prevent the business unit leader from having full and adequate control over key resources (marketing, product development, etc.).  Similarly, key business information may not be available to him/her, or decision-making processes may undermine his/her ability make critical decisions quickly, and with the proper level of accountability.

How do you know an organization design is successful?

There are clear indicators for measuring success of organization design efforts.  Here are a few of the results-based indicators that may be found as early as three months after a major redesign:

            There is a faster cycle time for developing the right products/services defined by company strategy.

            The company’s resources move quickly when needed.

            Your business is able to adapt to changes in market conditions quickly, without creating a feeling of chaos to employees and suppliers.

            Work is getting done efficiently – without rework, excessive reviews.

            The right information is getting to the right people.

True bottom-line results indicators – achievement of revenue, and finally profit targets – may appear a year or more after the redesign.

Three organization design tips 

1.           Develop a statement of strategic intent. The organization needs to understand what the key strategic foci are, both internally and externally.  The statement needs to be involved in the leadership team and others in the organization, and then it must develop a process to ensure that this statement is communicated throughout the organization and is clearly understood.


2.           Create the right integration mechanisms to align the product structure with overall business objectives


3.           Don’t expect perfection…no design is perfect…provide some latitude for adapting to changes that emerge during the design process.  Over time, there will be more changes, creating a healthy organization that remains agile and flexible.  After all, organizations are dynamic systems.

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