Organizational design is the process of creating a system that helps your business run as smoothly and efficiently as possible. The aim is to align your organizational model with your strategy, systems, goals, resources, and management processes. That way, you can create an organization where all your business activities run as smoothly as possible, and you can continuously grow your business.
Despite its proven worth, not many companies understand the importance of including the design of their organization in their business strategies. In fact, according to research published by Harvard Business Review, only 10% of organizations are successful at aligning their strategy with their organizational design. Much of this is down to not understanding the purpose and principles behind the concept, and what effective alignment means in this context.
In this guide, we will answer questions including ‘What is organizational design?’, ‘What are organizational design principles?’, and ‘What stages of organizational development do I need to include in my strategy?’. We will also share a few organizational design examples to help you create and measure an organizational model that helps you reach your business goals.
TABLE OF CONTENTS
- What is organizational design?
- Organizational design principles
- Organizational design types
- Things that affect organizational design
- Stages of organizational design development
- Measuring organizational design effectiveness
- How to do organizational design for your company
- How organizational design impacts culture
- Create an org chart 🌐
What is organizational design?
So, what is organizational design, exactly?
Organizational design definition: A process used to align all of a company’s tangible and intangible assets with its overall strategy in order to create an organizational structure that nurtures growth and helps a business reach its goals. These assets include the skills of your workforce and leaders, your resources and internal control processes, your specialization, your chain of command, and your ability to innovate. Aspects including your culture, environment and employee lifecycle all have an impact on the quality of your organizational design. Essentially, it’s all about understanding that your organization is a direct reflection of your business strategy.
Your organizational effectiveness depends on your organizational hardware. This includes your structures, processes, technology, and governance systems. It also depends on your organizational software. This includes your values, norms, culture, leadership style, and employee skills and aspirations. All these aspects need to be coordinated and aligned with your overall business objectives.
This differs from more general HR strategies that are more focused on creating a people strategy that aims to attract, develop, retain, and generally inspire your workforce. Organizational design is more focused on the bigger picture: ensuring that the mechanics of your organization are optimized so that your business can perform as well as possible.
Organizational design principles
Generally speaking, organizational design (OD) is a fairly straightforward process, provided you follow the right framework and break the process down into clearly defined stages.
Let’s start with the framework.
Goold and Campbell propose five organizational design principles to guide the process of improving the design of your business structure and processes. The aim is to address all these principles and use them as the foundation of your OD strategy.
Let’s take a look Goold and Campbell’s five principles.
Specialization principle
Does your design take into account your sources of competitive advantage in each of your target markets? In other words, does the design of your organization align with your company’s market strategy?
It’s important to make sure that your organizational design is effectively channelled toward each of your market segments. This might mean creating processes that enable you to quickly launch new products on the market or using automated manufacturing processes, for example.
Coordination principle
Does your design help your executives coordinate with all areas of the organization and add value to your business?
Make sure you consider all roles and functions within your company. All your business units should be able to easily communicate and coordinate with each other so that your processes run as smoothly as possible. This will help you gain a competitive edge. We’ll look at different organizational structures and how they impact coordination and collaboration shortly.
Knowledge and competence principle
Does your design reflect the strengths, weaknesses, and motivations of your workforce?
This principle is all about ensuring that all roles and responsibilities within your company are assigned to the right people. If certain employees do not have the right skills and knowledge to fulfil these duties, then they should be assigned to someone else. Either that, or the right level of training and development should be offered to get the employees in question up to speed.
The aim of this principle is to create more autonomous business areas so that the CEO is not responsible for making all important decisions. It’s all about creating a system of delegation based on the knowledge and competencies of each employee. And this requires implementing the right development initiatives and building a culture based on cross-unit relationships.
Control and commitment principle
Have you taken into account any constraints that may prevent you from implementing your organizational design?
It’s important to consider all controls and constraints when you create your design. This includes legal constraints, but also any technological restrictions that might be preventing your organization from performing at its best. The sooner you identify these, the easier it will be to assess how they will impact your design.
The aim of this pillar is to find the right balance between control and commitment. For instance, you need to ensure legal and regulatory compliance, but you also need to allow for a certain degree of flexibility with other aspects that require less control.
Innovation and adaptation principle
Does your design facilitate the development of new strategies? Is it flexible enough for your organization to adapt to change?
As with the fourth pillar, this is all about ensuring that your structure and processes aren’t so rigid that they prevent flexibility and innovation. This is vital because, without innovation, you won’t be able to adapt to the evolving nature of the market. It’s also about having the right forecasting processes in place so that you are able to anticipate future changes and potential organizational roadblocks and react accordingly.
Organizational design types
Before you can implement the organizational design principles and the various stages of the process, you need to identify the best type of organizational structure for your business. This will depend on a number of elements including your sector, how your departments are structured, and your chain of command. It will also depend on how much control you assign to your managers, and how formal your structure is.
Generally speaking, there are 7 organizational structures, which we have detailed below. Identify which type of organizational design best suits your business.
Functional structure
Employees are grouped into different departments according to work specialization. Each department has a designated leader. These organizations usually follow a top-down decision-making process.
Divisional structure
Employees are organized according to geographical location, specific product lines, or targeted market segments. Corporate dictates major decisions, especially those relating to culture, but divisions can take smaller operational decisions independently.
Matrix structure
Employees are divided into departments and team members report to multiple supervisors. This structure allows for higher levels of collaboration and faster project delivery.
Team structure
Employees are divided into smaller teams that focus on a specific product or service. Teams can make organizational decisions independently and manage their own workloads. These structures are informal and highly flexible, and best suited to global companies and manufacturers.
Network structure
More of an external structure for organizations consisting of a network of smaller companies focused on delivering a single product or service. Usually consists of employees, freelancers, independent contractors, and vendors. These structures are better able to adapt to market changes.
Hierarchical structure
The most common organizational structure. A top-down approach with a direct chain of command from senior management down to general employees. Can be good for streamlining business processes and reducing conflict as there is no room for challenging authority. However, these structures can lead to slower decision-making processes and can impact employee motivation.
Flat organization structure
With this structure, most employees are at the same level and there are very few management roles. This structure requires less supervision and encourages increased employee involvement. Typically used by small organizations and startups.
Things that affect organizational design
As we already mentioned, there are a number of aspects that can have a direct impact on your organizational design. These include your business strategy, culture and environment, technology, the size of your organization, and your employee lifecycle.
By addressing these individual areas, you can improve each pillar in the OD model and boost your overall organizational effectiveness. This is because you improve your ability to access the resources you need, such as qualified staff and effective reporting channels.
Let’s take a look at these aspects in a bit more detail.
Strategy
Your overall business strategy and goals have a direct impact on your priorities as an organization. And this means that having a clear and well-defined strategy is vital for creating organizational effectiveness. Make sure you conduct a thorough audit of your strategy before you begin work on your OD. That way, you will understand which direction you need to take when you design your structure.
What is your USP? Do you compete through lower costs or by offering premium products to specific niche markets? Are you targeting multiple segments of the market? Have you clearly defined what your customer profile is?
A good tool for evaluating your strategy is Porter’s Competitive Strategies framework. This framework identifies four generic competitive strategies to help you determine which strategy aligns best with your business purpose and goals. These are cost leadership, cost focus, differentiation, and focused differentiation.
Environment
The environment you create in your organization also has a big impact on your OD, as well as your market positioning.
Ideally, you should aim to create a flexible environment so that you can quickly and efficiently adapt to market changes. However, your environment also needs to be stable so that external factors don’t have a negative impact on your business operations. This includes resource fluctuations as well as any potential impact from the media or negative associations with your brand.
Technology
The technology you invest in affects your ability to make decisions quickly. It also impacts your organizational design. For example, if you are building a hierarchical design, then you need to make sure you have the right systems in place so that approval can be granted in a timely fashion and all the necessary supporting data can be easily shared.
What’s more, the more technological tools you provide your employees with, the easier it will be for them to communicate and collaborate with each other, helping you to improve your overall organizational effectiveness. There’s a reason why Slack and Zoom became so popular during the pandemic and the increase in remote work, after all. The same goes for your HR processes and their impact on the overall employee experience.
Organizational size and employee lifecycle
The size of your organization will obviously have a big impact on your design. For one thing, the bigger your company, the more formal and structured your design will have to be so that departments can effectively communicate with each other through a clear chain of command. In contrast, if you run a smaller company, then it will be much easier for you to implement a less rigid, flatter hierarchical structure.
You also need to consider the impact of your employee lifecycle on your organizational design. Are there any specific points in the employee journey that are preventing your company from collaborating as efficiently as possible? Are there any process bottlenecks stopping you from achieving organizational effectiveness?
Culture
Finally, your work culture and organizational climate can have a huge impact on your OD. To the same effect, your OD can have a huge impact on your culture. Both aspects go hand in hand.
There are many types of organizational culture, and each company has its own unique style. This will depend on your values, beliefs, philosophy, accepted behaviors, language, and overall narrative, among other aspects. Plus, according to the Competing Values Framework, your culture is also influenced by your level of flexibility, stability, and internal and external focus.
Different cultures require different types of organizational designs. Make sure you analyze and fully understand yours before designing the best organizational structure for your business.
Stages of organizational design development
Once you have analyzed your business and done the groundwork, the next step is implementing your OD strategy.
There are 5 stages of organizational development that you need to apply to get the most from your strategy. Let’s take a look at these, together with a few organizational design examples to clarify each stage.
Organizational design entry
This is the initial stage of your OD strategy, where you explore your current design and identify what you need to change or improve. It’s all about establishing where you are now and what your expectations are. You also need to identify if there are any barriers or restrictions guiding your design (such as budgetary constraints).
For example, you might call a meeting with your senior managers to get a clearer understanding of what works well with your current organizational style, and what changes they might propose (such as facilitating decision-making processes).
Diagnosis & feedback
The next stage is all about fact-finding. This is a collaborative process designed to gather as much data as you can about your organizational structure. You, therefore, need to involve all your stakeholders here, including your shareholders and employees. This will help you understand what steps you need to take to improve your OD.
For example, you could conduct focus groups with employees from various departments. You could then ask questions like, ‘How effectively do you think our current chain of command works in terms of decision-making?’.
Solution
Once you’ve identified your problems, it’s time to find strategic solutions that will improve your OD. This stage is all about creating action plans with detailed measures for improving the design of your organization.
For example, you might implement initiatives to improve your performance management processes or offer your leaders training in organizational change.
Exit
This stage of the organizational design process is where you implement your identified solutions. In other words, this is where you restructure your organization so that every aspect of your business can run more smoothly and efficiently.
This stage might include developing certain roles or departments or completely re-designing your entire organizational structure. Obviously, the bigger your company is, the bigger the challenges will be.
You can support this stage by designing and sharing a number of detailed documents with your entire workforce, including:
- Communication and implementation plans explaining the changes that will occur
- A role-and-responsibility matrix
- Training and development plans together with a database of learning resources
- Risk management plans
- Change management plans
- An explanation of how you will measure and monitor the entire process.
It’s also a good idea to remind your workforce that you understand that change is difficult and that you are there to offer support at any time.
Organizational design evaluation
This final stage is all about monitoring your results in order to determine whether the changes that you have made are having the desired effect on the overall performance of your organization. Essentially, if you are meeting the goals you established at the start of the process.
Make sure you establish clear metrics here so that you can qualify and measure your progress and outputs. It’s also a good idea to collect feedback from every level of your organization through evaluation reports and surveys. That way, you can make the necessary adjustments to your organizational design and continuously improve it.
Measuring organizational design effectiveness
We just talked about the importance of evaluating your progress. So, let’s take a look at what measuring organizational effectiveness means in practical terms.
Put simply, organizational effectiveness is not easy to measure. This is because it is such a subjective concept that is unique to each organization. However, there are a few clues you need to look out for which will help you measure how effective your OD changes are and how they are impacting your business output.
For example, you could use a resource-based approach to identify whether your organization is using its resources more effectively. You could also look at the effectiveness of your internal processes and whether your new design is helping you reach your overall business goals. Another great tool is evaluating your culture and communication channels. Are business units collaborating better? Are employees happier? Is your culture nurturing a more innovative and cohesive working environment?
The key here is establishing clear KPIs and tracking them regularly to see how they evolve as your OD develops.
How to do organizational design for your company
Creating an organizational structure for a company involves several key steps. The process requires careful consideration of the company’s goals, functions, size, industry, and culture. Here’s a general guide to help you create an organizational structure:
1. Define Organizational Goals:
Clearly articulate the company’s mission, vision, and strategic goals. Understanding what the organization aims to achieve is crucial for designing a structure that supports those objectives.
2. Assess External Environment:
Consider external factors such as industry trends, market conditions, and regulatory requirements. A structure that aligns with the external environment enhances the company’s adaptability and competitiveness.
3. Identify Key Functions and Activities:
List the core functions and activities necessary for the company’s operations. This may include departments like marketing, sales, finance, operations, human resources, and others.
4. Determine Reporting Relationships:
Define reporting relationships to establish how employees and teams will communicate and collaborate. This includes deciding who reports to whom and the flow of information within the organization.
5. Choose an Organizational Structure:
Select the most appropriate organizational structure based on the company’s needs. Common structures include functional, divisional, matrix, team-based, and others. Consider the advantages and disadvantages of each structure in relation to the company’s goals and environment.
6. Design Departmental Groupings:
If using a functional or divisional structure, determine how departments or divisions will be grouped. For example, in a functional structure, marketing, finance, and operations might be separate departments.
7. Define Roles and Responsibilities:
Clearly outline the roles and responsibilities of each position or department. This helps prevent confusion and ensures that employees understand their contributions to the organization.
8. Consider Span of Control:
Determine the span of control, which refers to the number of subordinates a manager can effectively supervise. A narrow span of control implies more layers of management, while a wide span indicates fewer.
9. Integrate Flexibility:
Build flexibility into the structure to accommodate changes in the business environment. Consider adopting a structure that allows for easy adaptation to new opportunities or challenges.
10. Communicate the Structure:
Clearly communicate the organizational structure to all employees. Transparency helps create a shared understanding of how the company is organized and how individuals and teams contribute to its success.
11. Monitor and Adjust:
Regularly review and assess the effectiveness of the organizational structure. If the company evolves, experiences growth, or faces new challenges, be prepared to adjust the structure accordingly.
12. Seek Employee Input:
Involve employees in the process to gather insights and feedback. Their input can provide valuable perspectives on how the structure may impact daily operations and collaboration.
Remember that there is no one-size-fits-all approach to organizational structure, and the design should be tailored to the specific needs and context of the company. Regular reassessment and adjustments are key to maintaining an effective and efficient organizational structure over time.
How organizational design impacts culture
As we already discussed, your organizational design has a direct impact on your culture, and vice versa. And because culture is such a fluid concept, it’s important to regularly audit your OD and make changes where necessary so that you can adapt to evolving market forces.
So how does organizational design impact your culture exactly?
Essentially, the structure and design of your organization are the foundation of the environment you provide your employees. And this is a deciding factor in creating a culture where employees are happy, motivated, and productive.
The best way to ensure that your organizational design is a success is to get all your employees on board and provide them with the best possible culture and experience during their time at your company. Offer them the right training and support and keep them informed of all changes. That way, they will help you build a solid culture of collaboration and communication where each and every member of your organization can thrive.
