Organizational Design for Business Executives

November 9, 2023

Changes in organizational design are influential and best undertaken with careful thought and due diligence.

By design or by accident, every organization has a structure. According to the organizational design website Target Teal, the process of deliberately designing, defining, or adapting this structure is called organizational design. The process generally tries to address questions such as who is responsible for specific functions; who has authority; what the limits of this authority may be; who reports to whom; who controls which resources; and how information flows in the organization. Familiar elements such as an organizational chart, written job descriptions, and chains of command are part and parcel of a company’s organizational design.

Although a company’s design may seem to be set in stone through years or decades of tradition, it is not. In fact, organizational structure is very much up for change. C-suite executives, particularly the CEO, can and often do mandate changes both sweeping and small to an organization’s design. Such changes can completely change a company’s course for the better—or for the worse.

Because changes in organizational design can be so influential, they are best undertaken with careful thought and due diligence. The knowledge of organizational design principles that will help in making such changes can be obtained through programs such as Washington State University’s Executive Master of Business Administration Online. An online Executive MBA degree provides a grounding not only in organizational design, but in myriad areas of knowledge necessary for success in the executive world.

Types of Organizational Design

Before embarking on radical changes, executives should first understand the essentials of organizational design. According to Cliffs Notes, companies have 5 basic structures they can adopt:

Functional structure. In this type of structure, positions are grouped into work units where all employees have similar responsibilities. For example, a publishing company might have an art department, an editorial department, a marketing department, and so on. It may also have departments related to operations rather than output, such as finance and human resources.

The functional structure is the simplest and probably the most popular type. It has the advantage of well-defined channels of authority and communication. But it also has some downsides, such as slow decision making at top levels. Because employees are in “silos,” they may also have narrow perspectives and fail to understand other employees’ points of view.

Divisional structure. In a divisional structure, parts of an organization with very different functions operate as solo entities. An example might be a retail company with 3 very popular stores. Each store might get its own operation, independent of the other 2.

A divisional structure allows managers to better focus their time and resources. However, it can lead to duplication of effort, as many employees are carrying out similar functions.

Matrix structure. In a matrix structure, employees have 2 bosses. Typically, 1 boss oversees products and the other oversees processes. Workers might have 1 boss critiquing their specific work and another making sure that schedules are met.

Handled well, a matrix structure can lead to better cooperation and problem solving and increased flexibility. However, it also has some drawbacks, including potential task confusion and power struggles between bosses.

Team structure. In a team structure, the organization is split into teams. Each team works toward a specific goal and has broad leeway to decide how it will operate.

If employees on a team get along and work well together, a team structure can bring huge gains in efficiency and effectiveness. If they do not, it can fall flat.

Network structure. In this type of structure, companies depend on outside providers for services such as payroll, accounts receivable/billing, customer service, and so on. Outsourcing these services can reduce overhead and organizational “bloat.” However, the price is a loss of control. Companies must be very careful when adopting a network structure to determine how they will oversee and have input into the areas they outsource.

Principles of Organizational Design

No matter what structure your company currently has, or what you would like to switch to, the change process can be tricky. But getting it right is essential. As the website strategy+business points out, “Today, the average tenure for the CEO of a global company is about five years. Therefore, a major re-organization is likely to happen only once during that leader’s term. The chief executive has to get the reorg right the first time; he or she won’t get a second chance.”

To maximize the chances of success, strategy+business recommends following several guiding principles that can help companies to reorganize effectively:

Declare amnesty for the past. People can easily get caught up in discussing the pros and cons of the old organization. Don’t do it! Take the position that you will neither blame nor try to justify the design in place today; just move on. Focus on the new strategy rather than dwelling on the past.
Fix the structure last, not first. Changing your org chart will not address your business’s core problems. Lay out a sequence of interventions that will lead your organization from the past to the future. Structure is the final and crowning element of the sequence, not the beginning.
Make the most of top talent. This factor is often overlooked when it comes to org design. Consider the technical skills and managerial talents of your key people. Then design positions that make the most of those strengths.
Focus on what you can control. There are lots of things you cannot control. Make a list of the things that hold you back, such as things that are often in short supply and things that constantly slow you down. Account for them in your organizational design.
Promote accountability. People must be accountable for their work without being micromanaged. To make this happen, have clear decision rights and make sure information flows rapidly from the C-suite on down. With these changes in place, you will find that accountability takes hold. People will get into the habit of following through on commitments without undue supervision.
Benchmark sparingly, if at all. Executives find tracking competitors helpful, but only to a point. Your organization has unique capabilities that change your equation. Also, if a competitor has a different value proposition or capabilities than you do, a direct comparison can be meaningless. Evaluate what others are doing, yes, but then tweak things to suit your circumstances and approach.
Think carefully about your hierarchy. How many people will report to each supervisor? How many layers of management will there be? The ideal answer is different for each company and depends upon what you do and the critical capabilities of your organization.
Accentuate the informal. Formal elements like structure can be easily defined and measured. But they’re only part of the story. Your company also has norms, mindsets, commitments, and networks that affect the way people work and get things done. Make sure these intangibles are in sync with the formal building blocks, or else the organization will falter.
Build on your strengths. In every company, some things are done well. Focus on these and build them into your organizational design.

Examples of Success

Organizational change is scary. But as Laura Troyani of TINYpulse says, “Often it is the only way to truly shake opportunity loose, whether a company is struggling or looking to maintain its momentum. A reorg requires vision and flawless execution—or at least as close to that as is realistically possible—but when it works, it’s a thing to behold.”

Troyani offers 3 examples of companies that embarked upon ambitious redesigns and got it right.

In 2014, new Microsoft CEO Satya Nadella completely restructured the company to do away with destructive internal competition. The change gave employees a fresh sense of engagement and purpose and boosted Microsoft’s production.
By the early 2000s, Google had gotten so huge that it was hard to manage. CEO Larry Page broke the company into individual operating units under 1 big umbrella called Alphabet. This change enabled employees to focus on their particular task without worrying about the company as a whole.
In 1981, British Airways CEO Lord King saw that operations were inefficient. He laid off 20,000 people and consolidated operations. Within 10 years, the airline went from the bottom of the heap to the most profitable airline in the industry.

These success stories show that although organizational change is difficult and risky, it can also be just what the doctor ordered. When companies grow stale, massive change can make things fresh again—if the leaders responsible for the change are confident, knowledgeable, and thoughtful.

About WSU’s Executive Master of Business Administration Online Program

Washington State University’s Carson College of Business delivers one of the top-ranked Executive MBA programs in the nation. WSU offers an Executive MBA curriculum designed to equip students with the tactics, knowledge, skills, strategies, and other MBA resources utilized by today’s high-profile business leaders. For more information, visit WSU’s Executive MBA Online website.

Sources:

Definition of organizational design – Target Teal

Types of organizational design – CliffsNotes

Principles of organizational design – strategy+business