The focus of this test is to make sure the organizational design is tailored to support these roles. The propositions might involve narrow tasks—for example, managing government relations—or broad coordination roles, such as maintaining strong research capabilities across all units.
Or they might entail specific initiatives, such as implementing a company-wide ERP system. To be effective, parent units need to think through the ways in which they can create value or add value to the rest of the organization.
The parent unit creates value by acquiring units or people for less than they are worth or disposing of activities for more than they are worth. The parent unit helps units expand their size and scope of activity by, for example, helping with globalization or product extensions. The parent unit helps units improve costs, quality, or profitability by, for instance, setting stretch targets or providing benchmarks.
The parent unit helps units work together in ways they would find difficult if left to themselves. For example, it might centralize activities or alter incentives. The parent unit finds ways to exploit a central resource, such as a brand, a relationship, a skill, or a patent, in new markets or new businesses. Next, determine whether the design gives sufficient attention to these value-adding tasks and initiatives.
If the units are located in different divisions, it may make sense to change the design so that they become members of the same division, making collaboration much easier.
Sometimes, this test will highlight difficult trade-offs that need to be made. The parenting advantage test can help companies see more clearly the organizational implications of their strategies, as agriculture giant Cargill recently discovered. When top management viewed the organization in this light, it saw that certain fundamental changes were needed.
The exercise enabled Cargill to more clearly define its parenting propositions and create an organization that supported them. The People Test. Does your design reflect the strengths, weaknesses, and motivations of your people?
If an organization is not suited to the skills and attitudes of its members, the problem lies with the design, not the people. For this test, first look at your key players—the members of the top management team and other individuals deemed critical to the business. For each, ask whether the design provides the appropriate responsibilities and reporting relationships and wins their commitment.
Now look at the pivotal jobs in the design—the positions that will need to be staffed by highly talented people if the organization is to work well.
Typically, these will include the heads of all key business units and the managers of all functions involved in critical cross-unit relationships. Do you have outstanding people to staff these jobs today? Do you have the career paths and development initiatives needed to create and retain new talent for tomorrow? If you had to find replacements outside, would you be able to attract and hire them? A design that cannot be staffed with competent managers should be abandoned.
All redesigns create losers, and losers can turn cynical and resistant, becoming roadblocks to change. You need to make two difficult judgments. First, determine which of the losers are influential. Then decide how to deal with them—either buying their support through added compensation or neutralizing their influence by changing their roles or letting them go. The Feasibility Test. Have you taken account of all the constraints that may impede the implementation of your design?
All companies have constraints on their ability to act. Some constraints, such as laws, are external. Others, such as information systems, are internal. Because they can impede or even block certain organizational changes, such constraints need to be identified and assessed early in any design effort. Look, in particular, at four categories:.
The Specialist Cultures Test. Does your design protect units that need distinct cultures? In most companies, there are certain units that should maintain distinct cultures. They need to think and work in ways that are different from the prevailing organizational norms.
Examples might include new-product development teams, e-business groups, or functional service units. Look, in particular, at sister units and the parent unit to which the specialist culture unit reports.
So when the company reorganized, it grouped all the specialty chemicals units in a new division, separating them from the bulk chemicals units. When you find a specialist culture that is at risk, first look for ways to protect it without changing the basic structure. You might, for example, put a high-ranking corporate executive in charge of the unit, giving it the standing necessary to resist external influences. Or you might grant the unit greater autonomy, freeing it, say, from corporate human-resources policies.
Or you might try to solve the problem through communication—educating the rest of the company about the unique goals and requirements of the specialist unit. The Difficult-Links Test. Does your design provide coordination solutions for the unit-to-unit links that are likely to be problematic? These cultures are best summarized in the competing values framework. This framework proposes that there are a number of competing values in an organization: flexibility vs.
The values compete, meaning that it is not possible to be both stable and flexible, or both internal and external focused. Different cultures lead to different organizational structures. An internally focused organization will have more collaboration, while an externally focused organization will have more customer-facing project groups and business units.
Similarly, a highly stable organization has clearly defined business units while a flexible organization has much more market-focused horizontal overlay units that use different specialists to create customer value. Once you have created an organizational design appropriate for the five factors we mentioned earlier, the result is an effective organization.
This means an organization that is able to reach its mission and goals. Organizational effectiveness is hard to measure. However, when we understand it well, the signals in the organization can provide us with input on improvements for the organization. The approaches correspond with different phases of the production process. This is an input — process — output IPO model. At each step, organizational effectiveness can be measured.
To learn more about the finetuning of organizational effectiveness, check out our guide on organizational development. To illustrate this, let me share this case study about a coffee bean production company. This company occasionally struggles to supply the coffee beans required for production.
This leads to supply problems and after the company had missed its latest quarterly sales targets, an inquiry is launched. It turns out that there is a misalignment between the increasingly unstable political landscape of the coffee production countries, leading to disruptions in supply, and the fixed organizational structure.
Further inquiry into decision-making processes, shows that decisions to switch supply lines have to be approved at C-level, leading to a delay in decision making capabilities. These hiccups are the main reason the quarterly sales targets were missed. To fix this, the organization decides to put the responsibility for parts of the supply chain management and procurement departments lower in the organization. This leads to faster decision-making, hence making the organization more flexible to respond to changes in the external environment.
In this case study, we saw symptoms at all three levels: the input, the process, and the output. In an ideal system, you will want to recognize these symptoms at the input or process level before they will affect the outcome. This can be done by implementing safeguards and creating an early warning system. And that wraps up this article about organizational design, in which we reviewed the five key principles of organizational design, which are coordination, specialization, knowledge and competence, control and commitment, and innovation and adoption.
There are a series of factors influencing these principles. These factors exert pressure on the different organizational design principles. The configuration of these five principles determines what the organization will look like. An organization high in coordination will be highly connected but at the cost of specialization. An organization high on control and commitment will be losing out on innovation and adoption.
In the end, organizational design and structure are about making balanced decisions that will give the organization a competitive edge and that will help it reach its objectives. It is impossible to cover everything in this guide. Then the stakes grew higher: Fast-growing competitors emerged from Asia, technological advances compressed product cycles, and new business models appeared that bypassed distributors.
This time, instead of redrawing the lines and boxes, the company sought to understand the organizational factors that had slowed down its responses in the past.
There were problems in the way decisions were made and carried out, and in how information flowed. Therefore, the first changes in the sequence concerned these building blocks: eliminating non-productive meetings information , clarifying accountabilities in the matrix structure decisions and norms , and changing how people were rewarded motivators.
By the time the company was ready to adjust the org chart, most of the problem factors had been addressed. Make the most of top talent. Talent is a critical but often overlooked factor when it comes to org design. But in reality, you need to design positions to make the most of the strengths of the people who will occupy them. In other words, consider the technical skills and managerial acumen of key people, and make sure those leaders are equipped to foster the collaboration and empowerment needed from people below them.
You must ensure that there is a connection between the capabilities you need and the leadership talent you have. Someone with a conventional marketing background whose core skills center on low-cost pricing and extensive distribution might not be comfortable in that role. You can sometimes compensate for a gap in proficiency through other team members. If the chief financial officer is an excellent technician but has little leadership charisma, you may balance him or her with a chief operating officer who excels at the public-facing aspects of the role, such as speaking with analysts.
As you assemble the leadership team for your strategy, look for an optimal span of control — the number of direct reports — for your senior executive positions. A Harvard Business School study conducted by associate professor Julie Wulf found that CEOs have doubled their span of control over the past two decades.
Focus on what you can control. Make a list of the things that hold your organization back: the scarcities things you consistently find in short supply and constraints things that consistently slow you down. Taking stock of real-world limitations helps ensure that you can execute and sustain the new organization design. For example, consider the impact you might face if 20 percent of the people who had the most knowledge and expertise in making and marketing your core products — your product launch talent — were drawn away for three years on a regulatory project.
How would that talent shortage affect your product launch capability, especially if it involved identifying and acting on customer insights? How might you compensate for this scarcity? For example, you may build a product launch center of excellence to address the typical scarcity of never having enough of the people who know how to execute effective launches.
Constraints on your business — such as regulations, supply shortages, and changes in customer demand — may be out of your control. For example, if your company is a global consumer packaged goods manufacturer, you might first favor a single structure with clear decision rights on branding, policies, and usage guidelines because it is more efficient in global branding.
But if consumer tastes for your product are different around the world, you might be better off with a structure that delegates decision rights to the local business leader.
Promote accountability. Make sure that decision rights are clear and that information flows rapidly and clearly from the executive committee to business units, functions, and departments.
Our research underscores the importance of this factor: We analyzed dozens of companies with strong execution and found that among the formal building blocks, information and decision rights had the strongest effect on improving the execution of strategy. A global electronics manufacturer was struggling with slow execution and lack of accountability. To address these issues, it created a matrix that could identify those who had made important decisions in the past few years.
Sales directors were made accountable for dealers in their region and were evaluated in terms of the sales performance of those dealers. The company operationalized these new decision rights by establishing the necessary budget authorities, decision-making forums, and communications. When decision rights and motivators are established, accountability can take hold.
Gradually, people get in the habit of following through on commitments without experiencing formal enforcement. Benchmark sparingly, if at all. At some point, everybody has had a boss they could never get hold of. When this happens on a wide scale, the lack of direction can be disastrous. Businesses often wrongly assume it comes down to poor time management or a lack of effort. In reality, this issue usually goes far deeper than individual leadership practices.
Usually, the underlying issue is managers and leaders who have too many direct reports. This leaves insufficient time to build strong relationships with each team member, or even provide basic direction.
For teams to run effectively, the number of direct reports to each leader must be based on two factors: the type of work and the amount of coordination that work requires. Sales and marketing are common culprits. Misaligned metrics pull teams in different directions towards conflicting goals.
Over time, the resentment that builds up can lead to poisonous behaviors and a lack of cooperation. Your employees are asked to devote a significant proportion of their life to their work. And along the way, your employees should be deeply gratified by knowing their work makes a difference.
Ensuring both of these organizational design elements are met requires clear and deliberate planning. To find out more about how Navalent can help you assess, redesign, and regenerate your business to focus on its core purpose, visit here.
Skip to content. What is Organizational Design? Table of Contents. Organizational Design Explained. What is Organizational Design Used For? Reinforce Positive Outcomes. Faster execution of your strategy Better customer service Increased profitability and reduced operating costs Greater agility Greater efficiency and faster outputs A culture of committed and engaged employees Lower turnover and absenteeism A clear management and growth strategy.
Address Negative Outcomes. Inefficient workflows and redundant processes Lack of customer focus Lack of system, process, or outcome ownership Delayed or ineffective decision making Poorly defined or misattributed KPIs and incentives Mistrust between colleagues, teams, and leaders Lack of effective problem solving.
What does that mean? Businesses have two main components:. Technical systems that concern how work is done, workflow, structures, and technologies Social systems that concern business culture, leadership, people and their skill sets.
Organizational Design Principles. Start with a clearly defined strategy. The design answer is in the room. Organizational fit and integrity matter. Principle 2: Start with a clearly defined and understood strategy. Principle 3: The design answer is in the room. So, what do you need experts for? Principle 4: Organization fit and integrity matter. For this to be possible, you must focus simultaneously on micro and macro considerations: At the micro level, you must deliberately make trade-offs and mitigate their downsides.
And doubled their bottom-line in 4 years. Read the Case Study. The Organization Design Process. Traditional organizational design used a two-step process to plan and implement major changes: Hire management consultants to diagnose problems and design a solution; and, Hire a change manager to plan and oversee implementation.
Step 1: Design context and diagnosis. Establish leadership buy-in and direction. Step 2: Strategic mandate.
Set strategic priorities. Set operational priorities. Step 3: Strategic organization design. Current state alignment. Develop and explore alternative models. Locate work and categorize resource implications. Evaluate and select the best-fit model. Develop groupings and linkages.
Translate grouping to top-level org charts. Design a detailed governance framework.
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