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:
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.
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.
This is what business modeling is about.
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.
From there, things like organizational structure and design become critical.
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:
McKinsey 7S model
A model with seven tangible and intangible organizational design elements, including strategy, structure, systems, shared values, skills, staff, and style.
Galbraith’s star model
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.
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.
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.
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.
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.
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.
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.
Costco employs around 288,000 full and part-time employees around the world.
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.
Over 70% of its warehouse managers started in entry-level roles and many corporate team members started their careers in stores, depots, and business centers.
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.
- 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.
Types of Organizational Structures
Siloed Organizational Structures
Open Organizational Structures
Connected Business Frameworks
Nadler-Tushman Congruence Model
McKinsey’s Seven Degrees of Freedom
Organizational Structure Case Studies
Airbnb Organizational Structure
Facebook Organizational Structure
Google Organizational Structure
Tesla Organizational Structure
McDonald’s Organizational Structure
Walmart Organizational Structure
Microsoft Organizational Structure
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