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What Is An Organizational Structure And Why It Matters
An organizational structure allows companies to shape their business model according to several criteria (like products, segments, geography, and so on) that would enable information to flow through the organizational layers for better decision-making, cultural development, and goals alignment across employees, managers, and executives.
Understanding the organizational structure of a company allows an understanding of how decisions are made. It is also a powerful tool for executives to shape their organization toward desired goals and long-term objectives.
For that sake, designing a proper organizational structure also allows the execution of a company’s business model. Based on the organizational structure the company will also have a different shape.
For instance, some organizations are typically hierarchic, which implies a top-down approach of information flow and definition of roles.
Theoretically, the organizational structure is critical for several reasons. Some of them might be:
Definition of roles within the organization, so that each employee knows its place and where she belongs.
Goals alignment that makes groups of people work in coordination to achieve common business objectives.
Culture development based on the shape of the organization.
Productivity via a system meant to use the people part of the organization in the best possible way.
Efficiency in the use and allocation of resources within the organization.
Better decision-making process by allowing the flow of information within and across several departments.
Lacking an organizational structure might make it difficult for the organization to grow efficiently.
It might make it difficult for employees to understand their place in the organization. It might make it difficult for managers and executives to have a big picture of the company.
It might make it difficult for owners and shareholders to understand who’s accountable for what.
Traditionally, one of the critical differentiators of an organizational structure is centralized vs. decentralized. Wherein a centralized organization the information flows from the top to the bottom of the organization linearly.
In a decentralized organization, companies try to remain more agile and flexible via nonlinear information flows, where multiple touchpoints allow information to travel across several parts of the organization.
Typically organizational structure can be categorized based on several parameters and priorities.
Based on the parameters and preferences the organization will take into account, it will also get shaped by these. More specifically an organizational structure can be organized in:
Functional organizational structure
It is a type of organization where people are grouped according to their area of professional competence and specialization. Typically this kind of organization is very bureaucratic and has a top-down approach.
This implies that each department will have his manager or director. This kind of organization allows employees to specialize at best in specific functions. However, it will also limit their flexibility.
While most traditional companies run this kind of organizational structure, many startups that need to make sure its small teams remain flexible and adaptable might opt for a different structure, where people are incentivized to form cross-functional teams
Divisional organizational structure
It is a type of organization where groups are organized according to the projects, or products the company focuses on.
This structure is more flexible to the hierarchical organization, as each division will run almost as an independent business, that has independent control over resources and money spent. Each division working as an independent organization can be grouped by product line but also geography
Matrix organizational structure
It is a type of organization that blends elements of a functional and divisional structure. While it sounds appealing in theory, it might be hard to implement.
As it might make people report to several bosses within the same organization and the communication flow might become too challenging as this might also generate confusion in the executive and management
Flatarchy organizational structure
It is a type of organization born from the startup way of acknowledging more independence and autonomy to employees, where they are closer to the chain of command, and the decision-making process.
This type of organization still benefits from hierarchies, but it flattens them by generating an adaptable model for organizations. While this kind of approach might work well with small and medium-size organizations, it might be difficult to implement for quite large organizations
Other types of organizational structures
Other types of organizational structure might also be based on several factors. For instance, in between the hierarchical and flatarchy, there might be several levels of organizations based on how loose are those hierarchies.
Also how far employees are from top management and how freely the information flows. Besides whether employees are involved in the decision-making process.
Choosing the kind of structure of your organization is very important, as based on that your company will be able to achieve a long-term objective, create a culture that fits those goals and it makes employees happy and efficient.
A holacracy is a management strategy and an organizational structure where the power to make important decisions is distributed throughout an organization. It differs from conventional management hierarchies where power is in the hands of a select few. The core principle of a holacracy is self-organization where employees organize into several teams and then work in a self-directed fashion toward a common goal.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.A U-form (unitary form) organizational structure describes a company managed as a single unit along functional lines such as marketing and finance. Conversely, an M-form (multidivisional) structure describes a company divided into multiple semi-autonomous units. Financial targets from a central authority control each unit.A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.
A business model is a framework for finding a systematic way to unlock long-term value for an organization while delivering value to customers and capturing value through monetization strategies. A business model is a holistic framework to understand, design, and test your business assumptions in the marketplace.
Where the organizational structure and design are critical to building a culture congenial to the company’s long-term vision and mission. A business model is a machine, the engine that will propel that organization toward the goal.
Indeed, any company which has a great organizational structure, but lacks the viability of its business model, won’t go far. Where culture matters to create valuable companies able to scale (remember culture might work as the glue that keeps a large number of people work together), a business model is an enabler for that.
It is important to highlight that the more a company grows the more culture and organizational design might matter compared to business model innovation. In fact, a large organization has to keep its operations as efficient as possible to keep its operations make sense.
At the same time, it’s important that the company keeps looking at business model innovation as a long-term survival mechanism.
Organizational structure case studies
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.
Starbucks follows a matrix organizational structure with a combination of vertical and horizontal structures. It is characterized by multiple, overlapping chains of command and divisions.
Apple has a traditional hierarchical structure with product-based grouping and some collaboration between divisions.
The Amazon organizational structure is predominantly hierarchical with elements of function-based structure and geographic divisions. While Amazon started as a lean, flat organization in its early years, it transitioned into a hierarchical organization with its jobs and functions clearly defined as it scaled.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.Nike has a matrix organizational structure incorporating geographic divisions. Nike’s matrix structure is also present at the regional and sub-regional levels. Managerial responsibility is segmented according to business unit (apparel, footwear, and equipment) and function (human resources, finance, marketing, sales, and operations).
Create business innovation units not necessarily aligned with the core organization
Business model innovation is not an easy game. Indeed, in many cases, innovation spurs from the most unexpected places, and an organization that is not ready to capture it might be well disrupted in the future.
But how do you structure a large company for business model innovation? Where a small company is able to adapt more quickly to changing times. Large corporations might not survive and adapt fast enough.
In part that’s due to the fact that large corporations are extremely well aligned with their key customers. And as highlighted in the book, The Innovator’s Dilemma, in most cases managers in those companies make sound decisions in not pursuing certain opportunities.
That’s because often opportunities that don’t make sense in terms of the bottom line and key customers might also be those that in the long run will turn out to succeed.
That is why it’s important to have within any organization “innovation units” or small teams of people that operate independently and that are not necessarily aligned with the overall organization’s goal and vision.
That bit of “messiness” might be well repaid when those small innovation units stumble upon a new business line, which will become the core business in the years to come.
Intrapreneurship
The intrapreneur is an employee which is usually assigned to innovative projects that can impact the company’s future success. As such, the intrapreneur is an employee that acts as an entrepreneur within the organization. While the intrapreneur has access to the resources of the organization she does not bear the risks connected to it.
In some cases, organizations design their company to empower employees to take action as they were entrepreneurs.
While this sounds interesting in theory, for larger organizations – where most of the activities are focused on keeping and maintaining existing processes – intrapreneurship might not be viable, if applied to the whole organization.
Instead, the company will have a dedicated group of people that will be more independent or assigned to specific projects, that are highly innovative. Or the company, still in a scale-up stage, can assign part of the time of its employees to run projects they like.
For instance, Google’s 20% Project used to give its employees the freedom to pursue the products and projects they loved the most.
Centralization vs. Decentralization
The debate over-centralization vs. decentralization is still open. Classic examples of extremely centralized organizations is represented by Government and bureaucracies in general.
Companies, especially at large scale use a hybrid approach, where one part of the business is highly centralized, and other parts are instead, highly decentralized.
For instance, Coca-Cola uses what I defined as a franchained business model where its corporate structure is centralized. However, at the level of the bottler, once operations are established, Coca-Cola leaves them independent to run the business.
Coca-Cola follows a business strategy (implemented since 2006) where through its operating arm – the Bottling Investment Group – it invests initially in bottling partners operations. As they take off, Coca-Cola divests its equity stakes, and it establishes a franchising model, as long-term growth and distributionstrategy.
Another example is Amazon. In general a centralized company, mostly run in hierarchies. To run some parts of its business it uses a different approach. In last-mile delivery, Amazon relies on an army of “independent drivers” or partners, that are not directly tied to Amazon’s hierarchy, but kept independent.
Last-mile delivery consists of the set of activities in a supply chain that will bring the service and product to the final customer. The name “last mile” derives from the fact that indeed this usually refers to the final part of the supply chain journey, and yet this is extremely important, as it’s the most exposed, consumer-facing part.
Other Organizational Frameworks
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.
The Kepner-Tregoe matrix was created by management consultants Charles H. Kepner and Benjamin B. Tregoe in the 1960s, developed to help businesses navigate the decisions they make daily, the Kepner-Tregoe matrix is a root cause analysis used in organizational decision making.
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 ADKAR model is a management tool designed to assist employees and businesses in transitioning through organizational change. To maximize the chances of employees embracing change, the ADKAR model was developed by author and engineer Jeff Hiatt in 2003. The model seeks to guide people through the change process and importantly, ensure that people do not revert to habitual ways of operating after some time has passed.
A holacracy is a management strategy and an organizational structure where the power to make important decisions is distributed throughout an organization. It differs from conventional management hierarchies where power is in the hands of a select few. The core principle of a holacracy is self-organization where employees organize into several teams and then work in a self-directed fashion toward a common goal.
Tipping Point Leadership is a low-cost means of achieving a strategic shift in an organization by focusing on extremes. Here, the extremes may refer to small groups of people, acts, and activities that exert a disproportionate influence over business performance.
The Value Net Model argues that co-operation and competition between organizations are not only desirable but also necessary when doing business. This is in stark contrast to traditional thinking, which argues that such competition impedes business success and profits.
First proposed by accounting academic Robert Kaplan, the balanced scorecard is a management system that allows an organization to focus on big-picture strategic goals. The four perspectives of the balanced scorecard include financial, customer, business process, and organizational capacity. From there, according to the balanced scorecard, it’s possible to have a holistic view of the business.
Strategic analysis is a process to understand the organization’s environment and competitive landscape to formulate informed business decisions, to plan for the organizational structure and long-term direction. Strategic planning is also useful to experiment with business model design and assess the fit with the long-term vision of the business.
Maslow’s Hierarchy of Needs was developed by American psychologist Abraham Maslow. His hierarchy, often depicted in the shape of a pyramid, helped explain his research on basic human needs and desires. In marketing, the hierarchy (and its basis in psychology) can be used to market to specific groups of people based on their similarly specific needs, desires, and resultant actions.
A tech business model is made of four main components: value model (value propositions, mission, vision), technological model (R&D management), distribution model (sales and marketing organizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.
There is a part of any business that anyone can see. Usually, this is the customer-facing side of a company. Everything that deals with customers, from its segments, channels relationship, and how a value proposition and perception about a product or service is delivered. While this side is important, there is an even more critical part, the back-end business. The back-end business is anything hidden from the eyes of customers. Things like the key activities and resources an organization has in place to make its product and service valuable in the eyes of its customers.
The operating model is a visual representation and mapping of the processes and how the organization delivers value and, therefore, how it executes its business model. Therefore, the operating model is how the whole organization is structured around the value chain to build a viable business model.
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