Organization Design

Organization design is the process of structuring the organization in a way that facilitates employee productivity and supports the organization in reaching its goals. The basic building blocks of organizational structure are division of labor, centralization of authority, and formalization. The organization can also be departmentalized functionally or divisionally. However, the requirements of today's electronically-enabled organizations have resulted in changes in the way that some organizations are structured. Matrix, network, and even virtual approaches are becoming more common. Organization design is an iterative process, however. As the organization grows and changes, the design may need to be reconsidered in order to keep the organization competitive.

Not every organization is created equally. Universities have formal organizational structures at the top of the hierarchy, but individual professors are given the authority to evaluate students and assign grades. Banks are run by strict rules and the individual tellers must follow strict procedures for fund disbursement, record keeping, and other tasks. Engineering firms are often run as teams that direct their own activities, with each person reporting both to a functional or departmental manager (e.g., programming department) and to a project manager (e.g., widget development project).

Depending on what they are trying to accomplish -- e.g., encourage creativity, mass produce products, provide services -- different types of organizations need to be structured differently. These structures include how labor is divided among employees, how communication flows both down and up the organizational hierarchy, and how formal power is consolidated or distributed. The design of the organization is the structure through which it is organized to conduct its business. Organization design sets limits on how work can be accomplished. An appropriate organization design can support employees in meeting organizational goals by giving them the freedom or the structure necessary to perform their tasks. For example, a team-based structure often works well for creative tasks where employees working together can experience the synergy that results in an outcome that is greater than they could have developed as individuals. An inappropriate organization design, on the other hand, can hinder the employees in their tasks and keep the organization from reaching its goals. For example, giving employees too much freedom in a bank could lead to bad or inconsistent decisions about lending, poor record keeping, and a resultant lack of profits for shareholders.

The design of an organization involves consideration of several things, including the division of labor and concomitant patterns of coordination of work activities, centralization and the structure of power relationships, and the degree of formalization of the organization. Division of labor is the way that work in the organization is divided into separate jobs. The more that work is subdivided, the greater the degree of specialization the individual employee needs to be able to do the job well. The development of a simulator to teach aircraft mechanics how to maintain and repair a fighter jet, for example, would require the inputs of numerous types of employees, including the subject matter experts who know what tasks are involved in these tasks, the training specialists who determine the best way to teach these tasks to students, the engineers who know how to turn the trainers' requirements into a piece of equipment that can be used to teach these tasks, the computer programmers who write the programs that run the simulator and present the information to students, and the production workers who actually put together the equipment for delivery to the customer. In addition to the workers performing the tasks, there are usually supervisors for each type of job. These individuals understand the nature of the work to be done, can support the employees in their tasks and make sure that the needs of the organization are met.

When jobs are divided in this way, they also need to be coordinated so that the work done by the individual employees or groups will fit together to create the work product needed by the organization. There are several general ways to coordinate work. Every organization uses informal communication when employees share information about tasks they are working on or when they form mutual ways to coordinate their work activities. Although informal communication can be quick and easy, it tends to work best when the organization is small and there are few barriers to communication. The mom-and-pop grocery store on the corner, for example, is more likely to use informal communication to coordinate the activities of workers than they are to have a formal set of procedures that cover every possible task. No matter the size of the organization, however, informal communication can occur directly (e.g., Harvey tells Chuck that he needs him to close out the cash register for the day) or through liaison or integrator roles (e.g., the project leader of the simulator development team encourages the various work groups to communicate with each other and coordinate their activities). Coordination can also be done through a formal hierarchy, where formal organizational power is given to an individual who directs work and allocates resources. This often is done through direct supervision (e.g., George's boss tells him to finish the report by the end of the day) or through the corporate structure (e.g., the head of the Zenda operation of the organization coordinates the work for the organization in that country). Coordination can also be accomplished through standardization of skills, processes, or outputs. In this approach to coordination, the organization sets policies and procedures for dealing with various common activities. This is helpful in routine situations (e.g., the receiver in each of the organization's stores enters information into the computer in the same format), but is not so helpful when unusual circumstances arise.

The power structure within the organization is determined by its span of control and degree of centralization. Span of control is the number of employees that report directly to a supervisor in the next level up in the organization. At one time it was thought that a narrow span of control of 20 employees or less was the best approach to structuring an organization. Research has found, however, that in today's environment, the average span of control in effective organizations is 31. The most appropriate span of control will depend on what the organization is trying to accomplish and what types of people it employs. Larger spans of control are harder to supervise. However, when the employees self-manage (either as professionals or as self-managing work teams), this task becomes easier.

Another characteristic of an organization's structure is the degree to which formal decision-making power is centralized or carried out by a small group of people. In a centralized organization, a very limited number of individuals -- usually at the top of the organizational hierarchy -- have the power to make decisions. This is particularly true in smaller or emerging organizations where the founder or CEO tends to make most, if not all, of the decisions. However, as an organization grows, one person (or even a small group of people) is no longer able to make all the decisions, so the authority is distributed throughout the organization. For example, in a multinational firm it is logical to have some of the decisions made at a local level. Similarly, decisions about various activities can be made at a departmental or operational level.

Finally, organizations differ on the degree to which they formalize behavior through the imposition of rules, policies, practices, procedures, or formal training. Formalization can help employees know how to do their jobs. It can also help customers know that they are getting the same product no matter which of the organization's stores they patronize. A franchise coffee shop, for example, may specify the temperature to which the coffee is kept heated, how frequently the coffee is brewed, how much milk is added to a latte, and so forth. Formalization is more effective in organizations where employees' tasks are routine. So, for example, it is easier to formalize an organization such as a fast food franchise than it is to formalize a think tank. Although formalization can make an organization's processes more efficient, it can have the opposite effect when an unusual situation arises and a variance from the normal procedure is needed.

Although very small or emerging companies can function effectively with a simple structure, as the organization expands and grows it is useful to group employees together to perform common tasks. This facilitates supervision of employees and coordination of their work, helps in resource allocation, and provides common goals and measures of performance. There are several traditional ways to organize employees. The functional structure organizes employees around their knowledge or skills (e.g., the engineering department, the production department). This approach to structuring an organization makes supervision easier and can help foster professional identity. However, the functional approach to organizational structure can also result in a situation where the goals of the unit are given priority over the goals of the organization. The very intra-unit cohesiveness fostered by functional structuring can also lead to increased conflict and communication difficulties with other departments. Another way to structure an organization is through the creation of divisions. Divisions can be created based on geographic location (e.g., the US division vs. the Zenda division), clients (e.g., the hospital division vs. the consumer division), or products (e.g., the widget division vs. the gizmo division). Like functional structures, divisional structures can encourage a feeling of camaraderie and belongingness within the group. In addition, such divisional structures support growth and increased complexity better than do functional structures. However, this approach to organizational structure also creates the requirement for duplicate knowledge (e.g., each division needs a human resources function). As with functional structures, the divisional structure also results in more communication problems across groups.

Another type of organization that is used in many complex organizations -- particularly those that work on time-limited contracts -- is the matrix structure. This approach to organizational structure combines the features of the functional organization and the divisional organization. In a matrix structure, employees typically are hired for a functional department (e.g., programming, engineering, production). They are brought together on a temporary basis, however, as functional teams (e.g., the widget contract) or as part of a division. This means that each employee actually reports to two bosses: the functional boss (e.g., the programming department head) and the divisional boss (e.g., the widget project manager). Matrix structures have the advantage of efficient deployment of talent throughout the organization. This approach to organization design also can help the organization to be more flexible and efficient. However, this approach requires more coordination than the simpler approaches of functional or divisional structures. The dual-reporting relationship can be difficult to manage and the very fluidity of the design that is attractive to the organization can be stressful to the employee.

Applications

Organization design for the 21st Century

Globalization, e-commerce, the ability to telecommute, and the high tech nature of many jobs have changed the way that many organizations do business. This fact, in turn, impacts the way that the organizations need to be structured in order to best support the high performance of the employees and the success of the organization. The strict military model of command and control that was often used in the past does not work as well for today's organizations comprised of highly creative or highly educated employees. As a result, new paradigms for organizational structure are emerging.

Team-based structures (also called lateral, cluster, or circle structures) are departmentalized with a flat span of control and little formalization. The work in these organizations is performed by self-directed work teams -- cross-functional groups that work without typical management supervision. When teams work well, they can achieve synergy, producing products or ideas that are greater than those that could have been accomplished by the individuals alone. An increasing number of organizations are finding the team-based structure to be a flexible way to respond to the needs of the organization and to reduce the levels in the managerial hierarchy and their concomitant costs. Since self-directed work teams have more independence and self-determination than other types of groups in an organization, they can respond more quickly to the needs of the organization or process and make better informed decisions. However, team-based structures also require increased interpersonal communication skills and training. In addition, teams cannot merely be created by fiat: It takes time to develop a team that works well together. Further, the very flexible nature of team-based structures can also lead to role ambiguity, increased conflict, and more stress for the team members.

Organizations can also be structured around a network of affiliates that together create a product or serve a client base. For example, a network structure (also called a modular or lattice structure) may comprise an accounting firm, marketing firm, product development firm, and manufacturing firm that all work together. In the network structure, the emphasis is on creating value for the organization, focusing on customer-centered activities that enhance the value of processes and products rather than on management-induced activities that do not. The various units in the network organization form alliances or partnerships to meet organizational needs. Communication in the network organization flows not only vertically along the lines of command, but horizontally between the work units. This approach to organizational structure is particularly appropriate in multinational companies that do a significant amount of communication electronically.

Another contemporary approach to organization design in the 21st Century is the virtual organization. The virtual organization is actually an association of multiple organizations that are allied for the purpose of product development or serving a client. For example, large government contracts such as ship design and development are often bid by such alliances, since it is difficult for any one organization to have all the skills necessary to develop a complex weapons system from cradle to grave. By joining together to form a product team, however, normally separate engineering, ship building, and training companies (among others) can create a temporary organization that will meet all the customer's needs. Virtual organizations usually consist of a prime contractor that performs most of the work and leads the team, and a number of subcontractors that may change as the needs of the project demand.

Redesigning the Organization

A running joke in many organizations is that when management does not know how to solve its problems, they reorganize. Sometimes reorganization is merely the business equivalent of rearranging the deckchairs on the Titanic: a way to look like one is doing something while ignoring the bigger, harder problem. However, reorganization also can be a legitimate effort. The goals and operations of organizations change as does the marketplace in which they operate. In order to stay competitive, there are occasions when the organization needs to reinvent itself and reorganize itself in order to be more competitive in the marketplace. For example, when adding operations in a different country, a very hierarchical, centralized structure more than likely will need to be changed. In such situations, managers on the ground need the empowerment to make decisions appropriate to the new location without first asking permission from a corporate headquarters located in a country with a different culture and legal and economic systems.

However, reorganization is not something to be taken lightly. It is a costly undertaking not only in terms of the time it takes to design and implement the new structure, but in terms of the impact on employees and their ability to perform and contribute to the success of the organization. In most re-organizations, there are losers: those whose jobs were downsized, from whom power was taken, or who are now forced to form a new work team. This can result not only in a situation where the employees must learn a new way of doing something or where they need to bond into a new work team, but also can result in employee dissatisfaction or a non-supportive work environment. The pros and cons of any contemplated reorganization must be carefully considered and weighed to determine whether or not a re-organization is appropriate.

Before embarking on the process of reorganization, the management team should consider several things. First, reorganization should be done as part of the organization's on-going strategic planning process. Reorganization should not be attempted unless it would significantly improve the organization's competitive edge. However, different market segments such as separate product lines or operations in different countries frequently benefit from being structured so that they receive sufficient management attention and do not compete with each other. For example, a company manufacturing two products might want to organize itself around the two product lines rather than having each in the same reporting structure. Similarly, it may be strategically advantageous to have different reporting structures for operations that are located in different countries. Organizational redesign should be structured so that the corporate headquarters supports the various operations of the organization rather than makes their tasks more difficult by imposing unreasonable reporting structures or not giving them sufficient management attention to support their success in the marketplace.

The design of an organization should exploit the strengths of its human capital. For example, an organization that employs a significant number of professional workers involved in a creative process (e.g., engineers) should take care not to impose too many strictures on their ability to do their jobs. Such employees need to be able to make decisions on the local level rather than going through a complex chain of command. On the other hand, it is also important that each function within the organization is manageable. If one cannot find competent managers for a given function in a proposed reorganization scheme, the system probably needs to be redesigned. Other constraints that may affect the feasibility of an organizational redesign include the interests of the organization's stakeholders, the ability of the information systems to support the structure, government regulations (including international regulations that may affect a multinational organization), and the organizational culture. Such variables should all be considered carefully before a redesign is attempted.

Once the problems facing the organization have been sufficiently analyzed and it has been determined that redesigning the organization will solve them, there are several considerations for the actual redesign process. One consideration is whether or not there are any groups within the organization with special cultures that need to be separated from the other groups. For example, although marketing functions can fall within product lines, they often are a separate function because of their different tasks and attitudes. Similarly, a new product development laboratory might need to be put in as a separate function so that it is not influenced by the way current products are designed. A related consideration concerns the ease of coordination between groups within the organization. For example, if coordinating the functions of a given product line that has operations in two separate countries is too difficult, it might make more sense to separate them organizationally and not just geographically.

Another consideration that needs to be taken into account, particularly in decentralized organizations, is whether there is sufficient accountability built into the organization design. In particular, it is important to look at the proposed organizational structure to determine if multiple groups have shared responsibilities. In such instances, it is easy for problems to arise when one group assumes that the other will accomplish the task or blames the other group for its own failure. In addition, it is important to determine how groups whose performance is difficult to measure will be held accountable. For example, it is not necessarily reasonable to expect a new product development group to create 20 viable new product ideas a quarter. On the other hand, it is important to ensure that the group is doing its best to produce new ideas.

Finally, the organization design should be flexible enough to accommodate the organization's needs in the future. An organizational structure that cannot do so is not going to be useful for supporting organizational effectiveness and success in the long run. However, molding the structure of an organization can be a continuing process as the needs of the organization and the marketplace change. For the organization to continue to meet the challenges of the future, it is important that the structure be adapted to support those needs as necessary.

Terms & Concepts

Centralization: The degree to which formal power in the organization is consolidated or distributed throughout the organization. In a centralized organization, the power is held by a small group of people, usually at the top of the organization. In a decentralized organization, power is distributed throughout the organization so that decisions can be made by those who best understand the situation.

Division of Labor: The way in which work is divided into separate jobs assigned to different people within an organization.

Divisional Structure: An approach to organization design that groups employees together based on clients, products or services, or geographic location.

Formalization: The degree to which an organization standardizes behavior through the imposition of rules, polices, practices, procedures, or formal training.

Functional Structure: An approach to organization design that groups employees together based on their specific knowledge, skills, or other resources.

Human Capital: The value of an organization's employees, including knowledge, skills, abilities, training and education.

Matrix Structure: An approach to organization design in which employees report both to a functional or departmental supervisor and a project supervisor.

Network Structure: A loosely aligned group of organizations that work together to provide a service or develop a product.

Organizational Structure: The design of an organization including its division of labor, delegation of authority, and span of control.

Span of Control: The number of people who directly work for a person on the next level of the organizational hierarchy.

Team-Based Structure: An approach to organizational structure based on self-directed work teams.

Virtual Organization: An association of multiple independent organizations that are allied for the purpose of product development or serving a client.

Bibliography

Csaszar, F. A. (2013). An efficient frontier in organization design: Organizational structure as a determinant of exploration and exploitation. Organization Science, 24(4), 1083-1101. Retrieved October 31, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=89424518&site=ehost-live

Friesen, G. B. (2005). Organization design for the 21st century. Consulting to Management, 16(3), 32-51. Retrieved April 3, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=17951111&site=bsi-live

Goold, M. & Campbell, A. (2002). Do you have a well-designed organization? Harvard Business Review, 80(3), 117-124. Retrieved April 3, 2007 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=6327095&site=bsi-live

Hearn, S., & Choi, I. (2013). Creating a process and organization fit index: An approach toward optimal process and organization design. Knowledge & Process Management, 20(1), 21-29. Retrieved October 31, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=85652503&site=ehost-live

McShane, Steven L. & Von Glinow, Mary Ann. (2003). Organizational behavior: Emerging realities for the workplace revolution (2nd ed). Boston: McGraw-Hill/Irwin.

Miozzo, M., Lehrer, M., DeFillippi, R., Grimshaw, D., & Ordanini, A. (2012). Economies of scope through multiunit skill systems: The organization of large design firms. British Journal of Management, 23(2), 145-164. Retrieved October 31, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=75061676&site=ehost-live

Worren, N. (2011). Hitting the sweet spot between separation and integration in organization design. People & Strategy, 34(4), 24-30. Retrieved October 31, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=70939319&site=ehost-live

Suggested Reading

Brusoni, S. & Prencipe, A. (2006). Making design rules: A multidomain perspective. Organization Science, 17(2), 179-189. Retrieved April 3, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=20451811&site=bsi-live

Child, J. & McGrath, R. G. (2001). Organizations unfettered: organizational form in an information-intensive economy. Academy of Management Journal, 44(6), 1135-1148. Retrieved April 3, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=5887960&site=bsilive

Dunbar, R. L. M. & Starbuck, W. H. (2006). Learning to design organizations and learning from designing them. Organization Science, 17(2), 171-178. Retrieved April 3, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=20451812&site=bsi-live

Harris, M. & Raviv, A. (2002). Organization design. Management Science, 48(7), 852-865. Retrieved April 3, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=7209662&site=bsi-live

Muchinsky, P. M. (2003). Psychology applied to work: An introduction to industrial and organizational psychology (7th Ed). Belmont, CA: Thomson/Wadsworth.