Organization Design

Designing organizations is a complex exercise. Organization Design involves making choices about how to group individuals and structure their tasks. According to Harvard Business School professor Robert Simons, in his article “How Risky is your Company?”, organization design must take into account the company’s strategy, competitive environment, stage of the life-cycle and various other factors. In short, it is a fine balancing act.

Organization Design

In the early days of an organization, organization design receives little attention. But over time, problems emerge as the charisma of the founders becomes insufficient to manage a larger enterprise. Systems and processes become important. This is when a functional structure is typically chosen. After some time, the functional structure becomes inadequate to respond to the needs of the market place because of centralized decision making. At that point, a divisional structure becomes necessary. But with time, a divisional structure leads to fiefdoms. Coordination becomes difficult, resources are wasted, knowledge sharing does not happen effectively and profitability declines. At this time, headquarters may take control. But this leads to red tape and decision making slows down. The pressure builds for simplifying the organization, divesting non core businesses and removing red tape. In short, organization design is a dynamic concept. The design should change in line with the company’s circumstances.

Designing organizations that can adapt over time, effectively means learning to reconcile the tensions between:

  • Strategy and Structure: Managers must design organizations to implement the current strategy and also allow new ideas to flow that will feed into tomorrow’s strategies. Structure determines how information from the market is processed and acted upon. Thus structure determines strategy and strategy determines structure in an interdependent fashion.
  • Accountability and Adaptability: Accountability is at the heart of organization design. While, people must be answerable for performance on some measured dimension, they should not be discouraged from experimenting and working on new ideas.
  • Ladders and Rings: An effective organization structure must not only take into account the ladders (vertical hierarchy) but also the rings (horizontal networks).
  • Self-interest and Mission Success: Human behavior is a critical design variable. Organization design must promote the kind of behavior that strikes the right balance between employee aspirations and organizational needs.

The basic building blocks of any organization structure are market facing units and operating core units. Market facing units gather market data about customers, competitors, opportunities and threats. Responsiveness must drive the design of market facing units. This responsiveness must be balanced by efficiency elsewhere. It is the job of the back office functions to do just that. Managers of these functions are responsible for standardizing work processes, applying best practices to the firm’s internal operations and ensuring efficiency through economies of scale and scope. The scarce resources must be distributed optimally between the market facing and operating core units.

Till recently, organization design has essentially amounted to a trade off between responsiveness and efficiency. Information Technology (IT) is facilitating higher efficiency with an acceptable level of responsiveness. IT can forge very close links with customers.

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