Organizational design is a systematic process that enables an organization to establish principles and structures in support of its objectives.
Understanding organizational design
In a technical sense, organizational design can simply be defined as the administration and execution of a company’s strategic plan.
This means that strategy determines the optimal design and not the reverse.
Strategy in turn is driven by the mission, vision, and overarching goals of the company.
Consider the example of a market-leading company seeking to maintain its position.
It will employ the cost-leadership strategy with a strong, centralized authority, hierarchical chain of command, and many standardized operating procedures.
A more innovative and fast-growing company, on the other hand, will employ an organizational design that enables it to be fluid and adaptable.
The structure on which the design is based will be characterized by looser control, decentralization, and greater employee autonomy.
Effective organizational design clarifies all aspects of organizational life and the roles, processes, and structures that ensure objectives are met.
It also results in several benefits such as increased profitability, improved efficiency, superior corporate culture, exemplary customer service, and reduced operating costs.
Organizational design principles
The notion of designing an organization can be difficult to grasp for some companies. What is an organization, exactly? And what is it about an organization that needs to be designed?
The answers to these questions will of course vary from one situation to the next.
But a worthwhile starting point is the five principles outlined by Michael Goold and Andrew Campbell in their 2002 book Designing Effective Organizations: How to Create Structured Networks.
These principles, which are impacted by various internal and external factors, include:
Specialization
Boundaries should exist to foster the development of specialist skills.
Higher specialization reduces inefficiencies, and these specialist skills should be sufficiently protected from the prevailing company culture.
Coordination
Tasks and activities should be carried out and coordinated within a single unit.
This can be a business unit, business function, overly unit, sub-business, shared service unit, or project unit, among others.
Knowledge and competence
The third principle states that responsibility for tasks should be handed to the individual or team that is most qualified.
For example, the CEO must not be involved in situations where subject-matter experts possess substantially more knowledge.
Control and commitment
A principle where managerial control is balanced with employee engagement and motivation.
Whilst easier said than done, control processes should be cost-efficient, foster employee commitment, and be aligned with the particular unit’s responsibilities.
Innovation and adaptation
Lastly, organizational design should be sufficiently structured to enable the organization to be flexible and dynamic.
Again, this structure will be different from one organization or industry to the next.
Organizational design vs. product development
When building a company from scratch, initially, the organizational design might not matter that much.
Meaning, of course, the team will be the critical component behind the startup’s success, yet a small team might not need a defined organizational structure altogether.
There, the culture will be formed as a result of a small, motivated team which is after the same goal, an outlandish vision, and a willingness to relentlessly work toward that vision!
Thus, initially, product development plays a much more critical role than organizational design.
A startup in the early stage, rather than emphasizing on scaling up the company through more and more hires.
It will be looking for ways to enable more and more people to use the product.
As a side effect of it, the company will make the hiring process among the main elements of this success.
As the company grows and the startup becomes a scaled company, business modeling becomes the key.
Organizational design vs. business modeling
Once the product is quickly growing and a core team has learned how to work together, it’ll be critical to enable the product to have a business engine that can make it scale.
It’s about the ability to attach a business engine to a product so that the same product can be tested at further levels of scale.
For instance, imagine you launched an accounting software for lawyers. Now the product is pretty solid and extremely valuable to that niche.
You have attached to it a business model, which leverages a freemium strategy to the product, and a set of premium features that the final customers are willing to pay for.
You also learned where and how to distribute and market that product.
Now, by leveraging that business model, you can test if the same product, with a few minor tweaks, can be adapted to be sold to doctors.
The business model enables you to do that; It enables you to test whether the product can be scaled to other adjacent niches, thus proving that that model is viable and scalable.
Organizational design vs. organizational structure
As a company has built a solid product and it has attached to it a scalable business model, that is when things start to move at a fast pace.
The company there might quickly move from a few dozen to hundreds or thousands of employees.
That’s because once the product and business model are validated, it becomes a matter of trying to see whether, with a larger organization, the company can be further scaled.
In that context, a company will find itself in an organizational structure it has grown into. With an understanding of the HR processes that led the company to get there.
Yet, without a conscious understanding of the sort of organizational design that makes sense to scale things from there.
In other words, the company might have experimented with various types of organizational structures, yet without a structured approach.
At that stage, the organizational design puts a structure to scale up operations by hiring more people in functions that are critical to further scale the product.
For instance, take the case of a software company that has finally figured out the product and business model.
It needs now to test it in a way that can reach more and more customers.
Thus, the company will focus on the core functions of the organization. Let’s say, in this case, engineering, marketing, and sales.
Thus, with an organizational design approach, the company will hire dedicated HR, able to scale those functions to enable the growth of these departments to reach more and more customers.
There, organizational design is critical as it can make or break the company.
To recap, where initially, the product development workflow is critical.
Over time, that needs to be matched by a scalable business model.
And as the business model becomes viable at a smaller scale, organizational design becomes critical to enable the company to test its business model at wider and wider scales!
Organizational design models
In this section, let’s take a look at some of the models that define common approaches to organizational design:
The McKinsey 7-S Model was developed in the late 1970s by Robert Waterman and Thomas Peters, who were consultants at McKinsey & Company. Waterman and Peters created seven key internal elements that inform a business of how well positioned it is to achieve its goals, based on three hard elements and four soft elements.
A model with seven tangible and intangible organizational design elements, including strategy, structure, systems, shared values, skills, staff, and style.
The Galbraith star model was developed by American organizational theorist Jay R. Galbraith in 1982. The model provides a framework with which an organization can sustain its value propositions and business model over time.
One of the oldest and most common models developed by American theorist Jay Galbraith.
Here, there is less of a focus on culture with more attention devoted to employee rewards and incentivization.
Transformational leadership is a style of leadership that motivates, encourages, and inspires employees to contribute to company growth. Leadership expert James McGregor Burns first described the concept of transformational leadership in a 1978 book entitled Leadership. Although Burns’ research was focused on political leaders, the term is also applicable for businesses and organizational psychology.
Developed by the Center for Organizational Design in 1995, this model assists leaders in better understanding their companies and instituting a successful redesign.
It considers eight elements: environment, strategy, core process, structure, systems, culture, results, and leadership.
Organizational design example
Let’s conclude by taking a general look at the organizational design of Costco. For the sake of this example, we’ll use the seven elements from the McKinsey 7S model.
Strategy
Strategies are roadmaps that outline a company’s vision for the future and how supporting goals and objectives will be achieved. Operations, on the other hand, define how each department within a company plans to carry out the strategy on a weekly, monthly, or quarterly basis.
Costco has a somewhat unique business strategy characterized by private-label branding, efficient inventory management, and high-volume sales of bulk products.
The company operates a membership-only warehouse club where consumers pay a subscription fee to access its stores.
This business model allows Costco to offer deeply discounted prices that undercut competitors since most revenue is collected from the annual subscription fee.
Structure
Costco utilizes a matrix organizational structure with predominant functional groups and secondary geographic divisions.
Functional groups house the processes necessary to maintain operations in the retail industry, such as merchandising, accounting, depot operations, and human resources.
Twelve separate geographic divisions help Costco manage its strong North American presence.
Systems
An effective inventory management system is a key component of any retail business.
Costco stocks fewer items than its competitors to reduce the costs associated with carrying inventory.
What’s more, the company utilizes just-in-time (JIT) inventory management where data is shared with many of its main suppliers.
Proctor & Gamble, for example, is able to determine re-order points in real-time and send more inventory only when it is needed.
Shared values
Costco has a simple but vital mission to provide quality goods and services at the lowest prices. This is supported by the following four ethics:
Take care of our members.
Take care of our employees.
Obey the law, and
Respect our suppliers.
Costco’s corporate culture is one that co-founder James Sinegal spent decades perfecting. It is built on values such as passion, pride, respect, and integrity.
Skills
Costco suits employees who are energetic, ambitious, and enjoy the challenges and opportunities that arise from working in a fast-paced retail environment.
Employees must also be service-oriented, strong communicators, and possess basic mathematical aptitude.
Those in middle and upper management are also highly skilled in merchandising, purchasing, marketing, conflict resolution, information systems, and accounting, to name a few areas.
The company’s recruitment process starts with an online application that includes a personality questionnaire, with successful candidates progressing to an interview.
Candidates may be interviewed two or three times and screening normally involves drug and alcohol testing.
Costco has an attractive remuneration structure by retail standards with affordable healthcare coverage and biannual contributions to employee retirement funds.
The company is also an advocate of individual progression and prefers to promote from within.
Costco’s management style furthers its people-first culture, with CEO Craig Jelinek cognizant of the fact that employees who are treated well tend to stick with the company for longer.
Jelinek understands the trials and tribulations of cashiers and other subordinates because he was one himself when he joined Costco in 1984.
Jelinek’s three pillars of people-centrism permeate the entire organization. These include:
Leading with respect.
Practicing empathy, and
Treating employees fairly.
Key takeaways
Organizational design is a systematic process that enables an organization to establish principles and structures in support of its objectives.
To help define organizational design and its components, five principles were created by authors Michael Goold and Andrew Campbell. These relate to specialization, coordination, knowledge and competence, control and commitment, and innovation and adaptation.
Models which clarify common approaches to organizational design include McKinsey 7S, Galbraith’s star model, and the transformation model developed by the Center for Organizational Design.
In a functional organizational structure, groups and teams are organized based on function. Therefore, this organization follows a top-down structure, where most decision flows from top management to bottom. Thus, the bottom of the organization mostly follows the strategy detailed by the top of the organization.
In a flat organizational structure, there is little to no middle management between employees and executives. Therefore it reduces the space between employees and executives to enable an effective communication flow within the organization, thus being faster and leaner.
Project portfolio management (PPM) is a systematic approach to selecting and managing a collection of projects aligned with organizational objectives. That is a business process of managing multiple projects which can be identified, prioritized, and managed within the organization. PPM helps organizations optimize their investments by allocating resources efficiently across all initiatives.
Harvard Business School professor Dr. John Kotter has been a thought-leader on organizational change, and he developed Kotter’s 8-step change model, which helps business managers deal with organizational change. Kotter created the 8-step model to drive organizational transformation.
The Nadler-Tushman Congruence Model was created by David Nadler and Michael Tushman at Columbia University. The Nadler-Tushman Congruence Model is a diagnostic tool that identifies problem areas within a company. In the context of business, congruence occurs when the goals of different people or interest groups coincide.
McKinsey’s Seven Degrees of Freedom for Growth is a strategy tool. Developed by partners at McKinsey and Company, the tool helps businesses understand which opportunities will contribute to expansion, and therefore it helps to prioritize those initiatives.
Mintzberg’s 5Ps of Strategy is a strategy development model that examines five different perspectives (plan, ploy, pattern, position, perspective) to develop a successful business strategy. A sixth perspective has been developed over the years, called Practice, which was created to help businesses execute their strategies.
The COSO framework is a means of designing, implementing, and evaluating control within an organization. The COSO framework’s five components are control environment, risk assessment, control activities, information and communication, and monitoring activities. As a fraud risk management tool, businesses can design, implement, and evaluate internal control procedures.
The TOWS Matrix is an acronym for Threats, Opportunities, Weaknesses, and Strengths. The matrix is a variation on the SWOT Analysis, and it seeks to address criticisms of the SWOT Analysis regarding its inability to show relationships between the various categories.
Lewin’s change management model helps businesses manage the uncertainty and resistance associated with change. Kurt Lewin, one of the first academics to focus his research on group dynamics, developed a three-stage model. He proposed that the behavior of individuals happened as a function of group behavior.
Airbnb follows a holacracy model, or a sort of flat organizational structure, where teams are organized for projects, to move quickly and iterate fast, thus keeping a lean and flexible approach. Airbnb also moved to a hybrid model where employees can work from anywhere and meet on a quarterly basis to plan ahead, and connect to each other.
eBay was until recently a multi-divisional (M-form) organization with semi-autonomous units grouped according to the services they provided. Today, eBay has a single division called Marketplace, which includes eBay and its international iterations.
IBM has an organizational structure characterized by product-based divisions, enabling its strategy to develop innovative and competitive products in multiple markets. IBM is also characterized by function-based segments that support product development and innovation for each product-based division, which include Global Markets, Integrated Supply Chain, Research, Development, and Intellectual Property.
Sony has a matrix organizational structure primarily based on function-based groups and product/business divisions. The structure also incorporates geographical divisions. In 2021, Sony announced the overhauling of its organizational structure, changing its name from Sony Corporation to Sony Group Corporation to better identify itself as the headquarters of the Sony group of companies skewing the company toward product divisions.
Facebook is characterized by a multi-faceted matrix organizational structure. The company utilizes a flat organizational structure in combination with corporate function-based teams and product-based or geographic divisions. The flat organization structure is organized around the leadership of Mark Zuckerberg, and the key executives around him. On the other hand, the function-based teams based on the main corporate functions (like HR, product management, investor relations, and so on).
Google (Alphabet) has a cross-functional (team-based) organizational structure known as a matrix structure with some degree of flatness. Over the years, as the company scaled and it became a tech giant, its organizational structure is morphing more into a centralized organization.
Tesla is characterized by a functional organizational structure with aspects of a hierarchical structure. Tesla does employ functional centers that cover all business activities, including finance, sales, marketing, technology, engineering, design, and the offices of the CEO and chairperson. Tesla’s headquarters in Austin, Texas, decide the strategic direction of the company, with international operations given little autonomy.
McDonald’s has a divisional organizational structure where each division – based on geographical location – is assigned operational responsibilities and strategic objectives. The main geographical divisions are the US, internationally operated markets, and international developmental licensed markets. And on the other hand, the hierarchical leadership structure is organized around regional and functional divisions.
Walmart has a hybrid hierarchical-functional organizational structure, otherwise referred to as a matrix structure that combines multiple approaches. On the one hand, Walmart follows a hierarchical structure, where the current CEO Doug McMillon is the only employee without a direct superior, and directives are sent from top-level management. On the other hand, the function-based structure of Walmart is used to categorize employees according to their particular skills and experience.
Microsoft has a product-type divisional organizational structure based on functions and engineering groups. As the company scaled over time it also became more hierarchical, however still keeping its hybrid approach between functions, engineering groups, and management.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
