5 minutes read
What is the single most important organizational design decision that leaders have to make? I would argue that for most managers it is the basic structural layout of their organization or organizational unit. Not only does the organizational structure define the key functional logic of an organization. It is also this very decision that typically comes up at critical junctures of the organizational life cycle, such as periods of rapid growth for maturing start-ups or strategic re-direction for established organizations.
Given this importance it is surprising that often there is a too early and narrow focus on the divisional unit structure (the “lines and boxes”) of the organization. A shortcut like this, however, risks bypassing a link to strategy and crucial activities. And it ignores how those units are linked together and shaped. Typical symptoms of such an approach include rigid organizational silos that kill cross-divisional cooperation, slow and highly politicized decision-making, or enervating organizational complexity.
How can leaders avoid jumping to org charts and take a more balanced and holistic approach to organizing? As part of our first management kit, we have come up with a framework that covers the six key elements of an organizational structure. The elements are summed up in the kit board shown below, a practical tool that can be used as a canvas for defining your organizational structure (for a free preview of the kit, click here). The framework-based work process that accompanies the kit helps to answer the following questions.
1. Goals: How does our organization design follow our strategy? For example, do we understand the implications of our strategic priorities such as new markets or product areas for our organizational structure? And, even before that, are strategic priorities formulated in a way that they can inform organizational design?
2. Limits: How do we set the scope and limits of our design work? Re-organization efforts may only affect certain parts of an organization, like one function or a specific geography. Excluding a particular unit from the reorganization scope sometimes is a conscious decision in order to preserve certain strengths and capabilities. But also external regulatory limits may have to be observed such as Chinese walls requirements in Banks.
3. Activities: What key activities drive our strategy? Understanding your key activities is the critical link between your strategic objectives and the organizational structure. For example, a research-driven company will want to make sure that the according activities of initiating, conducting, and translating research will be reflected in the organizational set-up, while a service company often will focus on the activities related to client interaction and service delivery.
4. Units: How do we separate functions into units? Typical examples are functional (e.g. development, production, sales), geographical (e.g. countries, regions), customers or market segments (e.g. B2B vs. retail), or process units (e.g. large development projects). A discussion of pros and cons of plausible unit structure options should be informed by a sound and shared understanding of strategic priorities and of which activities support those priorities.
5. Links: How do we link different units and ensure cooperation? Very often the specialized, divided unit structure yet has to work together, e.g. to develop new products or services or to ensure common standards. There is a wide range of organizational options to ensure cooperation and avoid “silo effects”: from defining according links and activities on the level of role profiles to the point of integrating two unit structures via a matrix.
6. Shape: How do we set spans of control and organizational layers? The answer to this question defines how hierarchy – that is differences in decision-making authority – is reflected in the organization. Two key levers are the number of direct reports a manager has and the number of layers between the CEO and the lowest level of formal decision making authority in the organization.
Coming up with answers to those key questions, one can’t escape critical trade-offs. For example, breaking up an organization into divisions or functions to foster specialization and focus will always come at the cost of extra fragmentation and complexity, increasing the need for coordination in turn. Reaping the benefits of one unit structure type will forego the benefits of other structural options.
These trade-offs, as well as the fact that there will be no general “one best answer” across different organizations, mean that sustainable management solutions combine best practices with an internal understanding of the organization’s strategy, capabilities, and culture, and that this combination should happen within an integrated design process. This process ideally leverages the knowledge of the team that will work within the new structure and that captures the action learning benefits from the design work within the organization. And in order to support this process, the framework is only the centerpiece of a comprehensive management kit that includes: a process guide to help optimize organizational structure, exemplary meeting agendas supporting leaders to facilitate workshops along the way, and a set of key practical tools to design individual structural set-up elements, like unit grouping logics, cross-unit groups, or spans and layers.
Starting with this first post, our blog will share ideas, discuss key management challenges related to organization design and pass on best practice tips on how to leverage the kits. Focus of our first blog posts will be questions related to building organizational structures in particular:
- How to best run an organizational design project
- Why we are obsessed with organizational charts (and what to do about it)
- Organizational Design Thinking
- The world’s most effective business school (your organization)
- Organizational silos
- The challenges of lateral self-governance, e.g. Holacracy
- How to align project set-ups and organizational structure