Designing Organization Structure

What is organizational design?

The way an organization is set up to carry out its strategic plan and accomplish its objectives is referred to as its organizational design. In reality, it’s more complicated because human labor is performed by teams using resources including information, tools, systems, procedures, and one another. What varieties exist in organizational design? What are the benefits and drawbacks of each kind?

With the help of this comprehensive guide, you will gain a thorough understanding of organizational design and its principles.

This article explains the primary kinds of organizational structures, as opposed to the vast topic of organizational design. This includes:

• How the design configurations were created
• What works and what doesn’t
• Why they can fail

There is no ideal approach, just as there are no good or bad organizational design styles. Rather, it is up to each organization to decide what suits them the best. Thus, a single company may have certain components of all design structures.

Over the last few decades, organizational designs have undergone tremendous transformation, mostly due to the acceleration of change. Things that used to take ten years or longer now take place in a matter of weeks or months. The retail sector accomplished a 10-year transformation in 3 months over the pandemic. Consequently, only forward-thinking, nimble companies have taken advantage of the chances they generated.

Structures can be categorized into classic and modern styles.

Traditional businesses

Basic structure

Small enterprises in the modern period function largely as they have for thousands of years. An entrepreneur assigns workers to complete the duties and keeps an eye on each one of them.

What we define as a basic structure is:

• No or minimal departmentalization
• Minimal or no regulation in terms of a set structure
• A chief authority—typically the firm owner—and a vast span of management

These companies run extremely well up until they hire more people and can no longer maintain control. At that time, they typically start to act as structures—the first step toward hierarchical design.

Independent hierarchies

The second industrial revolution, which lasted from the end of the 19^th century to World War I, saw the United States and Europe overtake Britain as the world’s leading industrial powers.

A new industrialist elite emerged due to the shift, and they established enormous corporations to oversee their businesses. These were constructed based on the social classes’ hierarchical structure.

By World War I, the hierarchical structure had established itself as the most successful way to produce industrial output that was both effective and efficient.

Up until the close of the 1970s, self-contained designs were the norm.

The business maintained distinct borders with its suppliers, consumers, and rivals. After arriving, materials underwent a number of steps to become a finished good or service.

The pyramid or hierarchy remains the most popular type of organizational design due to its distinct chain of command, as well as its ease of creation and management.

A hierarchy restricts the range of authority. Companies want to keep managers’ supervising responsibilities to a minimum so they have time for other tasks.

The work, the supervisor’s skill level, and the knowledge and proficiency of the individuals under supervision are some of the variables that determine the optimal span of control.

First-level managers may have broad authority in production-related jobs.

With 30 agents, the customer support operation has the largest span that we have observed.

The work is standardized, strictly regulated, and closely observed. Performance indicators are shown in real time on a dashboard for supervisors.

Benefits

• Offers clear career and advancement opportunities
• Encourages specialized careers
• Gives one a feeling of inclusion
• Authority and duty are defined explicitly in the structure.
• Scaling defined organizational structures is simple

Drawbacks

• The bureaucracy produced by the hierarchy hinders creativity and change adaption
• Silos within an organization can lead to rivalry and a fight for resources among departments
• It discourages moving outside of the professional group and promotes talent hoarding

Practical layout

Hierarchies are primarily organized around functional areas like sales, marketing, and human resources. They were initially divided into sections for management, secretarial work, and production. As organizations developed, they divided into more focused roles, bringing with them all the benefits and drawbacks of hierarchy.

The divisional layout

Companies frequently split into divisions as they started producing different products, buying out other businesses, or expanding into other regions. Every division has a division president who answers to the CEO, as well as a separate profit-and-loss statement (P&L).

Thanks to the split, everyone, even investors, can see how each segment is performing. This implies that a segment’s failure has no impact on other areas of the company.

A division is not a subsidiary; it is an independent entity. Workers in a subsidiary are not part of the parent company, which is one way a division is different than a wholly-owned subsidiary.

Keep in mind that the business entities could be departments or other business units rather than divisions with their own P&L.

These organizational design styles don’t have to conflict with one another. Companies frequently possess all three.

1. Market-focused divisions

Market-based divisions are suitable for businesses that have identified and thoroughly understood their distinct market groups. For instance, a lot of car brands cater to a certain type of consumer. These businesses need to modify their offerings to suit the preferences of their target market.

By adding a personal touch, sales managers at companies such as car dealerships can build strong relationships with their consumers. Consumers react by remaining faithful to the brand.

Fiat Chrysler’s organizational structure before its separation into Ferrari as a distinct business serves as an example.

Based on the kind of vehicle, each brand might have sub-brands that appeal to distinct consumer affinities.

Ferrari, for example, includes organizational components supporting sporting events and motorsports, as well as a Brand Diversification Division.

2. Product-focused divisions

Product divisions can be beneficial if they provide chances for individuals with innovative company concepts.

Every division can benefit from a competitive atmosphere when it comes to innovation. However, if they have to fight for resources and assistance, it could result in rivalry.

Product-focused divisions are frequently found within the same overarching industry. Honda Motor, for instance, has distinct divisions for cars, motorcycles, and aviation.

3. Geographical divisions

A company can customize its goods and services according to the needs, preferences, and cultural norms of their location in which it operates by operating geographical business units.

Controlling and coordinating can be difficult. However, decision-makers who are well-versed in the customs and preferences of the populace can overcome that.

The benefit is that the business can serve the clients and vendors in the host nation while growing its brand recognition internationally. Johnson & Johnson has had great success using regional procurement hubs to keep costs down and quality high.

Benefits

• In order to respond to local developments or client needs more quickly, local autonomy fosters independence.
• It might be embraced more easily by companies and local government.

Drawbacks 

• Autonomy may result in resource duplication.
• A company may end up competing with itself if there is a lack of communication.

A division or a subsidiary?

A company’s decision to operate a geographical division or a foreign subsidiary is largely influenced by the legal and tax climate of the proposed location.

A subsidiary business may not be bound by the decisions made by its parent company, which the business must also take into account. Another consideration is if a business wishes to continue having a single, worldwide corporate culture. It is considerably more challenging in a subsidiary.

Horizontal organizational design

One way companies can avoid the coordination and communication problems that occur with traditional vertical companies is to create a horizontal overlap of links across the organization’s components.

Between roughly 1980 and the mid-late 1990s, teams arranged themselves around entire workflow procedures instead of tasks, which resulted in flatter designs and teams with multiple functions. The rise of Six Sigma and the quality movement fueled the new team structure and inspired novel kinds of organizational design.

The horizontal structure has over time evolved into team-based, flexible, and virtual organizational design subtypes.

Benefits

• Greater autonomy and freedom lead to higher employee satisfaction.
• High degrees of coordination amongst many departments.
• Prioritizing innovation aids in preserving and expanding market positions.
• Improved reporting and communication.

Drawbacks

• Inability to manage autonomous, cross-functional teams.
• It is necessary for management to give up some control and establish a peer-to-peer rapport with subordinates.

Matrix organization

A company may organize cross-functional teams for specific tasks. A person may be employed by a project manager as well as a department manager.

Upon completion of the project, the person returns to the department or accepts a new assignment.

Many different kinds of businesses, including engineering and construction enterprises, rely nearly exclusively on this matrix structure paradigm.

Benefits

• Enables project managers to select people based on a project’s requirements.
• Encourages workers to apply their abilities outside of their designated responsibilities.
• It increases the organization’s flexibility and dynamic nature.

Drawbacks

Managers of departments and project managers may clash over competing demands.

Team-based organization

When organizational design entered its second phase in 2004, the majority of companies had not yet developed into the “teams of teams” that General Stanley McChrystal had envisioned.

From his experience in taking down Al Qaeda, he learned that decentralized planning was significantly less successful than autonomous operations units. Like commanders in the great battles that came before them, he brought the lessons learned in combat into the corporate world.

Teams collaborate to accomplish their objectives rather than having a boss set them and make sure they are met. Therefore, team leaders place much more value on teamwork and group problem-solving than supervisory abilities.

The selection of the team is crucial. Organizations must therefore select people according to their beliefs and driving forces in order to foster a blend of independence, structure, and creativity.

Teams must regularly evaluate their facilitation and effectiveness to identify and address disputes that could impede the mission.

Benefits

• Group projects allow for far greater creative possibilities than solo endeavors.
• The freedom and cooperative working style may be inspiring.
• Team members become more capable as they grow in trust.

Drawbacks

• It takes time to establish team structures. People need time to become used to the independence and accountability of making their own decisions.
• Establishing a mission focus and a collaborative work style requires intensive training and coaching.
• Conflict between people can potentially destroy a team or divide it into rival groups.

Learning organization

The learning organization is a specific kind of team structure that has evolved to learn, change, and adapt constantly. Employees at such a company are free to adjust to changing consumer needs. It calls for a robust culture and dedication to shared objectives.

Benefits

• Businesses that acquire knowledge and creativity through learning have a distinct advantage over their rivals.

Drawbacks 

• Knowledgeable staff members who are eager to impart and use their knowledge are essential to the organization.
• It calls for strong leadership and team design.

Modular structure

An independent body that can reorganize and collaborate with several departments as needed makes up a modular organization.

Companies split themselves into smaller strategic divisions that concentrate on particular aspects of their mission. Their defining traits are strong flexibility and low dependence. The GNU Health Modular Design is one such example.

Benefits

• Increases an organization’s ability to restructure as necessary.
• The company can react to market demands fast.
• A modular unit that functions independently within the overall structure may allow the organization to meet its own demands. Many shared services operations could be described in that way.

Drawbacks 

• Intellectual property hazards can arise from loose coupling.
• A lack of relationships might hamper successful communication.

Virtual companies

A new kind of structure emerged in 1990: a digital cooperation network rather than an organization. Like with Uber and Airbnb, the corporate offices may be the only brick-and-mortar portion of the company. These companies manage extensive networks of autonomous operators. Amazon, Nike, Reebok, Dell, and Puma are a few more businesses that use online teams.

These days, organizations use virtual structure variations where jobs, positions, and even entire projects are outsourced.

Benefits

• The digital network and headquarters location are the only organizational overheads.
• The business avoids the responsibilities associated with the employer/employee relationship, with the exception of states like California where the practice is strictly prohibited by law.

Drawbacks

• Quality control issues can arise. Businesses manage that through data related to service calls and customer satisfaction ratings.
• Participants are free to withdraw from the agreement at any moment. Due to drivers quitting, Uber recently encountered serious service problems in some places.

Project-based structure

A project-based virtual organization has existed since the early days of the internet. The industry is called human capital technology. It is comparable to other vendor groups for ERP.

The budget cycle drives the seasonal nature of the work. Because of this, businesses end up having to pay for installation experts who might not be needed during slow periods.

These businesses contract with subcontractors and independent partners to handle their operations in order to share the workload.

The partners are project-based, virtual organizations. One inventive method they employ to fill the idle time is to hire consultants to create software services and products.

Benefits

• It is a rapid method for creating extremely intricate product systems.
• It makes control, implementation, and planning easier.
• Creates powerful teams that are goal-focused in their work.

Drawbacks

• Demands careful consideration of quality control as determined by client input.
• Needs comprehensive project tools and assistance.

Network structure

An alliance of individuals, groups, organizational units, or organizations that collaborate to accomplish a common objective is known as a network organization. Their only shared interest is cooperating for their mutual benefit.

They use a variety of networking and collaboration tools, like Microsoft Teams, to work together and manage their connections through contracts.

“The ‘on demand’ and ‘on tap’ talent markets were making it harder for companies to manage their workforce,” according to a 2015 Deloitte Human Capital Trends study. Later, in 2021, CEOWORLD Magazine projected that by 2030, freelancers would make up eighty percent of the workforce.

Benefits

• Without having to run one, individual entities can profit from what big organizations have to offer.
• Establishing a partnership can help entities reduce some of their marketing workload.

Drawbacks

• Redundancies may be necessary to reduce supply chain interruptions.
• Demands careful consideration of liabilities and hazards.

Modern organizational design

Organizations are changing into empowered, purpose-driven, flexible, and market-driven networks. Still, the transformation is far from finished, and we aren’t anticipating a quickening of its pace.

These groups operate under the following five guiding principles:

• The Specialization Principle: States that in order to promote specialized skills free from cultural influence, boundaries must be set.
• Principle of Coordination: Activities should be planned within a unit to avoid cross-border coordination.
• The Competence Principle and Knowledge: The individual or group most suited to handle certain tasks should be assigned those tasks.
• Principle of Control and Commitment: Control procedures are necessary to balance engagement and effective supervision properly.
• Principle of Innovation and Adaptation: Organizational structures ought to be sufficiently adaptable to change with the times.

These three ideas are part of the future organization:

• The Holonic Enterprise Model: A group of cooperative entities where each individual is an autonomous, cooperative holon. It can adjust to any change, whether internal or external.

• The McMillan Fractal Web: A structure that enables an organization to develop naturally by copying successful adaptations in a fractal paradigm.

• Ken Wilber’s AQAL Model: Integrating disparate paradigms to create “The Theory of Everything,” a network of complementing methods. It takes into account developmental psychology within the context of the entire person. This blueprint aims to construct a sustainable future.

One last thing

Every style of organizational design has advantages and disadvantages. All of them are equally important, and an organization’s structure needs to be updated on a regular basis to meet new and evolving demands. Under the correct circumstances, even the humble hierarchical functional model can be advantageous.

The purpose of this post is to educate you on the many approaches of organizing and expanding a company. You’ll be able to understand potential benefits and problems better as yours refashions itself.