Organizational design is not simply about structure and the resulting organizational chart. It is about the relationships between people, work, formal structures and informal practices and behaviors. It is about the way in which an organization structures and coordinates its people and process so it can benefit from its unique capabilities over the long-term. It determines who makes decisions and how those decisions will be made. It changes the role of the leaders as they become less decision makers and more decision shapers. Through organizational design, leaders become the shapers of the organization’s decision-making process. Organizational design and the resulting capabilities are the last sustainable sources of competitive advantage.
Star Model of Organizational Design is a well-known model that has been used for decades to identify the key elements of an organization and focus on the issue of strategy and strategy implementation. Developed by Jay Galbraith, an American consultant and manager in the 1970s, Star Model of Organizational Design looks at how an organization’s framework can be used to guide decision-making and behavior. The star model is a widely accepted organizational design model because of the strategy approach that seamlessly links competitive advantage to strategy to structure, people, lateral processes and reward mechanisms.
- Strategy: Determine direction through goals, objectives, values and mission. The strategy specifically delineates the products or services to be provided, the markets to be served, and the value to be offered to the customer. It also specifies sources of competitive advantage. It also defines the criteria for selecting an organizational structure (for example functional or matrix). The strategy defines the ways of making the best trade-off between alternatives. Strategy dictates which activities are most necessary, thereby providing the basis for making the best trade-offs in the organization design.
- Structure: Determines the location of decision making power. Structure policies can be subdivided into: specialization: type and number of job specialties; shape: the span of control at each level in the hierarchy; distribution of power: the level of centralization versus decentralization; departmentalization: the basis to form departments (function, product, process, market or geography). In many respects, because these decisions are the fundamental building blocks of an organization, they must be closely articulated with strategy.
- Processes: The flow of information and decision processes across the proposed organization’s structure. Processes can be either vertical or horizontal. Vertical processes are usually business planning and budgeting processes. The needs of different departments are centrally collected, and priorities are decided for the budgeting and allocation of the resources to capital, research and development, training etc. Horizontal – also known as lateral – processes are designed around the workflow, such as new product development or the entry and fulfillment of a customer order.
- Reward Systems: Influence the motivation of organization members to align employee goals with the organization’s objectives. Managers should use rewards to motivate and provide incentives for the desired behavior of employees. The organization’s reward system defines policies regulating salaries, promotions, bonuses, profit sharing, stock options, and so forth. The reward system must be congruent with the structure and processes to influence the strategic direction. Reward systems are effective only when they form a consistent package in combination with the other design choices.
- People and Policies: Influence and define employee’s mindsets and skills through recruitment, promotion, rotation, training and development. Human resource policies – in the appropriate combinations – produce the talent required by the strategy and structure of the organization, generating the skills and mind-sets necessary to implement the chosen direction. Like the policy choices in the other areas, these policies work best when they are consistent with the other connecting design areas. Human resource policies also build the organizational capabilities to execute the strategic directions. Flexible organizations require flexible people. Cross-functional teams require people who are generalists and who can cooperate with each other.
The above five factors must be internally consistent to enable effective behavior. Fortunately, a design sequence exists whose starting point is the strategy definition. Strategy drives organisational structure. Processes are based on the organisation’s Structure. Structure and Processes define the implementation of reward systems and people policies.
When you take into account the interconnections in the Galbraith’s Star Model of Organizational Design, it becomes obvious that if you wish to make a significant change in an organization’s performance, all of the five elements must be examined and possibly changed, because a change in one element of the organization has implications for the rest. The challenge is to develop an approach to organizing that considers all five of the elements and how they fit together to create an organization with the strategy, competencies, and capabilities it needs to succeed.
An important principle of Galbraith’s Star Model of Organizational Design has been that organizational effectiveness is greatest when there is a fit among the points of the star. In particular, the emphasis has been designing processes, reward systems, structures, and people systems that produce the capabilities that are required for the implementation of the strategy. Fit is important according to the Star Model because it is required in order to produce the kind of capabilities that provide for competitive advantage. It occurs when all the points on the star are aligned in a way that support each other and in combination, support a particular business strategy.