What's Best Next

You are here: Home / 4 - Management / Guiding Principles for Organizational Design

Guiding Principles for Organizational Design

by

The Basics of Organizational Design

The Nature of Organizational Design

General Principles

  1. Ultimate principle: Make it easy and motivating for people to collaborate, innovate, and achieve.
  2. “Organizational design is the means for creating a community of collective effort that yields more than the sum of each individual’s efforts and results. Organizational structures, processes, and practices channel and shape people’s behavior and energy. As a leader, you have the opportunity and responsibility to structure these relationships so that people find it easy to collaborate, innovate, and achieve” (Designing Dynamic Organizations).
  3. Organizational design is “the deliberate process of configuring structures, processes, reward systems, and people practices to create an effective organization capable of achieving the business strategy” (Designing Your Organization). It is to harness the efforts of individuals, although often it has been a barrier to them. One of its core purposes is to align individual interests with organizational interests, making it easy for employees to make the decisions that advance the organizational purpose.
  4. Organizational design is a competitive strategy and a hard-to-copy, and thus sustainable, source of competitive advantage.
  5. The six shapers of today’s and tomorrow’s organizations are: Buyer power, variety and solutions, the Internet, multiple dimensions, change, and speed.
  6. The business strategy should set the criteria necessary for determining the priority task to accomplish, and the organization should then be designed to meet those criteria. “Match what is required by the strategy to what is done best by the various structures to optimize the decision” (Designing Organizations).
  7. Every design has strengths and weaknesses. The weaknesses can be made up for through the proper implementation of lateral processes.
  8. Organizational design is more than organizational structure. There are five components: strategy, structure, processes, rewards, people. This enables you to overcome the negatives of any structure, because you can use the other components of the model to counter the negatives while achieving the positives.
  9. Consequences of a non-aligned organization (from Designing Dynamic Organizations):
    1. If strategy missing or unclear, confusion. People pulling in different directions, no criteria for decision making
    2. If structure not aligned to strategy, friction. Inability to mobilize resources.
    3. If processes and lateral capability is left to chance, gridlock. Lack of collaboration across boundaries, long decision and innovation cycle times.
    4. If the metrics and rewards don’t support the goals, internal competition. Wrong results, diffused energy, low standards, frustration and turnover.
    5. If people aren’t enabled and empowered, low performance. Effort without results, and low employee satisfaction.

Reconfigurable Design

  1. The organizational design needs to facilitate variety, change, speed, and integration.
  2. The environment changes rapidly and is turbulent. The company must be able to change as rapidly as the environment does. Therefore, “an organization must be designed from the outset to be more easily changeable” (Designing Organizations).
  3. Aligning with strategy can make an organization vulnerable, because the advantages of a specific strategy are often short lived as the competitors quickly copy it. But the problem is not alignment, but aligning around a nonsustainable advantage. Misalignment will cause conflict, friction, units working at cross-purposes, lack of clarity, and thus dissipation of organizational energy.
  4. What is needed is a new type of aligned organizational design: “structures and processes that are easily reconfigured and realigned with a constantly changing strategy” (Designing Organizations). This is the reconfigurable organization.
  5. The reconfigurable organization can these three capabilities:
    1. Formation of teams and networks across departments
    2. Use of internal prices and markets to coordinate the complexity of multiple teams
    3. Formation of partnerships to secure capabilities that it does not have.
  6. A dynamic organization: An organization that can be easily and proactively reconfigured to take advantage of market opportunities and that views organizational design as a competitive advantage. It can quickly combine and recombine skills, competencies, and resources across the enterprise to respond to changes in the environment. It is characterized by active leadership, knowledge management, learning, flexibility, integration, employee commitment, and change readiness.
  7. “A well-thought-out organization design empowers and enables employees to work in the highly interdependent, team-oriented environments that typify today’s business landscape. And the clearer the rationale for the design, the more quickly design decisions can be reassessed and modified to respond to external forces” (Designing Dynamic Organizations).

The Process of Organizational Design

  1. Organizational design is a continuous process, not a single event, because it is more than structure (and structure should be adjusted as needed as well). “Successful companies are continually evaluating and adjusting their organizations.”
  2. You need to follow a design process that builds commitment, because it takes both fit and commitment for a design to be effective.
  3. We often use our experience to design our organization. But this experience is limited and we can enhance it by blending it with the science of organizational design.
  4. In other words, many leaders make their organizational design decisions on the basis of their own experience and observation. But making sound decisions requires a framework that gives credence to one choice over another.
  5. Benefits of a framework are that you have a common language for articulating why one choice is better than another in objective terms, you are forced to make decisions on the basis of longer-term strategy rather than more immediate demands, you have a clear rationale for the choices considered, and you can more effectively evaluate outcomes, understand root causes, and make adjustments during implementation.
  6. When to redesign:
    1. You are starting up a new company or division
    2. You are planning to grow. Of 1999’s list of Fortune’s 100 fastest growing companies, about a fifth lost 60-90% of their value the next year, and almost half lost at least some value. Most suffered from not having the right infrastructure or people to support continued growth.
    3. You have just assumed a more senior position.
    4. Your strategy has changed.
    5. The organization has changed.
    6. There has been a major change in the external environment.
    7. Your organization isn’t delivering the performance expected.
  7. “Organizational design has to be rounded in an ‘ideal organization,’ that is, a conceptual framework. There has to be careful work on defining and delineating the structural principles. this work, in turn, must be grounded in the mission and purpose of the business, its objectives, its strategies, its priorities, its key activities.” (Peter Drucker, The Practice of Management, 599).

Design Principles

  1. Alignment is fundamental .“The more the structure, processes, rewards, and people practices reinforce the desired actions and behaviors, the better able the organization should be to achieve its goals. Just as important as initial alignment is the ability to realign as circumstances change” (Designing Your Organization).
  2. Keep the organization as clear and simple as possible.
  3. Bias toward centralizing support functions
  4. Similar roles should be standardized enterprise-wide.
  5. Organizing structure should parallel across the enterprise, as much as possible.
  6. Requisite complexity. Cannot avoid complexity, but can intelligently design and manage it.
  7. Complementary sets of choices. There are many choices, but once a strategic path is set the number of suitable choices for each point is reduced.
  8. Coherence, not uniformity.
  9. Active leadership. Leaders must clearly and continually communicate strategy and create the decision frameworks in which employees operate.
  10. Start with the lightest coordinating mechanism. “Always use the lightest touch when selecting what lateral form to use, choosing the least costly and least difficult process to meet the required objectives.”
  11. Make interfaces clear.
  12. “The basic rule in placing an activity within the organization is to impose on it the smallest number of relationships. At the same time, it should be so placed that the crucial relations, that is, the relationship on which depend its success and the effectiveness of its contribution, should be easy, accessible, and central to the unit. The rule is to keep relationships to a minimum but make each count” (Drucker, The Practice of Management, 545).
  13. Clarity: Each individual and manager needs to know where he belongs. Needs to have a clear home base.
  14. Economy: The minimum effort should be needed to manage and supervise and motivate. Organization structure should encourage self-motivation. The smallest number of people should have to devote time and energy to keeping the machinery going.
  15. Direction of vision: Organization structure should direct he vision of individuals and of managerial units toward performance rather than efforts. And thus toward results—the performance of the entire enterprise. “Performance is the end which all activities serve” (Drucker, The Practice of Management, 554).
  16. Understanding ones own task and the common task: Should enable each individual to understand his own task, and the task of the entire organization. And what each implies for the other.
  17. Decision-making. Needs to strengthen, not impede, the decision-making process.
  18. Stability and adaptability. The individual needs a home; no one gets much work done as a transiet in a railroad station waiting room. Stability is not rigidity—needs to be a high degree of adaptability. A totally rigid structure is not stable; it is brittle.
  19. Perpetuation and renewal.

The Power of Organizational Design to Mobilize Minds

  1. Companies have been constrained, unnecessarily, by the unproductive complexity of working in their own organizations. The massive opportunity is in the freeing of talented people from unproductive complexity, enabling them to use both hierarchy and collaboration more effectively. Large-scale collaboration, across the entire enterprise and enabled by digital technology, is the new element that opens the 21st century corporation to a greater potential to create wealth.
  2. Great financial impact can come from making organizational design the centerpiece of corporate strategy because most companies were designed for the 20th century manufacturing model which focused on tangible assets, where as today the greatest value comes from intangibles. “By remaking them to mobilize the mind power of the 21st century workforce, these companies will tap into presently underutilized talents, knowledge, relationships, and skills of their employees. This will open them up to new opportunities and vast sources of wealth.” (Mobilizing Minds)
  3. Companies need to mobilize mind power as well as capital, which comes from removing unproductive complexity while simultaneously stimulating the effective and efficient creation and exchange of intangibles.
  4. Intangibles are assets like brands, intellectual property, and proprietary networks that are unique to individual firms. With intangibles, you want to capture economies of scope. For ex, if investments in a brand can be shared across multiple products, you have economies of scope.
  5. Increase the number of productive interactions among your workers while reducing the number of unproductive interactions.
  6. Ideas for organizing in the digital age from Mobilizing Minds: Backbone line structure, one company governance and culture through partnership at the top, dynamic management (portfolio of initiatives separate from ongoing operational activities), formal networks, talent marketplaces, knowledge marketplaces, new financial measures (profit per employee becoming the primary metric for profitability, as it puts greater weight on returns on talent than returns on capital), role-specific performance management, and organizational design as strategy.
  7. The real engines of wealth creation in the 21st century are knowledge, relationships, reputations, and other intangibles created by talented people. Companies create wealth by converting raw intangibles into the institutional skills, patents, brands, software, customer bases, intellectual capital, and networks that increase profits per employee and returns on invested capital. These intangibles are true capital in the sense that they can produce real cash returns. A hindrance to this is that our financial performance measurements are geared to the industrial age, not the digital age. So in order to create wealth, companies first need to change their financial performance metrics so that they focus on returns on talent and not only returns on capital.

Our Situation

Organizational Capabilities

  1. Strengths-based organization
  2. Organizational health
  3. Synchronization with the New Marketing: Leverage scarce attention and create interactions among communities with similar interests. Every transaction is a form of media. Tell stories that spread because people want to share them, create remarkable products, gain permission to deliver messages directly to interested people. Ideas that spread through groups of people are far more powerful than ideas delivered at an individual.
  4. Optimization for industry collaboration and partnership
  5. Optimization for large-scale collaboration of constituents. Treat people with respect and connect them with one another.
  6. Big Think
  7. ROWE
  8. Deeds of mercy to illustrate and manifest what we proclaim
  9. Maximize our competence in Management as ministry.

Environmental Factors

  1. Google and the dicing of everything
  2. The long tail
  3. The need for an authentic story
  4. Direct communication between producers and consumers and consumers and consumers
  5. Infinite channels of communication
  6. The infinite shelf space of the web
  7. The triumph of big ideas
  8. The shifts in scarcity and abundance
  9. Shocks are the system –> change and speed
  10. The falling of interaction costs to almost zero through digital technologies that make large-scale collaboration possible

The Components of Organizational Design

Organizational design is more than organizational structure. There are five components: strategy, structure, processes, rewards, people. This enables you to overcome the negatives of any structure, because you can use the other components of the model to counter the negatives while achieving the positives.

Every design has strengths and weaknesses. The weaknesses can be made up for through the proper implementation of lateral processes.

Strategy

  1. Strategy is your high-level plan for success. It determines the direction of your company, and includes your mission, vision, long-term goals and short-term goals.
  2. Strategy is the cornerstone of the process. It “establishes the criteria for choosing among alternative organizational forms. Each form enables some activities to be performed well while hindering others. Strategy dictates which activities are most necessary, thereby providing the basis for making the best trade-offs in the organizational design” (Designing Organizations).
  3. Is based in part on organizational capabilities, which are the unique combination of skills, processes, technologies, and human abilities that differentiate the company.
  4. The business model is the “internal logic of a company’s method of doing business.” It includes the value proposition, target customers, distribution channels, revenue model, etc.
  5. The business portfolio sit he “set of product lines or business units that a firm manages.”
  6. The first step in connecting strategy to the design is to identify the most important organizational capabilities.

Structure

General Principles

  1. Structure is the way that authority is organized.
  2. There are four areas of structure:
    1. Specialization: The type and numbers of job specialties.
    2. Shape: The number of people in the departments (span of control).
    3. Distribution of power: Centralization and decentralization.
    4. Departmentalization: The formation of departments at each level.
  3. There are six principles of organization that can be used: functional, product, customer, geographic, work flow process, and front-back hybrid.

Structural Dimensions

Functional

  1. Functional structures organize around activity groups (functions).
  2. This structure is best for: Companies with a single line of business, are small, don’t have a diverse line of products, don’t compete based on speed of product development cycle times.
  3. Advantages of this structure are: Allows greater level of specialization, reduces duplication, higher economies of scale, higher standardization, allows people of one specialty to transfer ideas, knowledge, and contacts more easily.
  4. Disadvantages of this structure are: Can’t handle diversification and can create barriers between functions.

Product

  1. Product structures organize into divisions around products and/or product lines.
  2. This structure is best for: Companies that produce multiple products for separate market segments.
  3. Advantages of this structure are: Scales with diversification of product line, compresses development cycle, simple, broad operating freedom.
  4. Disadvantages of this structure are: Can result in duplication of resources and missed opportunities for sharing, with each division reinventing the wheel. This can be overcome by supplementing this structure with lateral processes. Economies of scale can be lost. Can overcome this by centralizing and sharing the functions that cannot be separated into the product units without a scale loss. Can create multiple points of contact for customer.

Customer

  1. Customer structures organize around customer segments, such as client groups, industries, or population groups.
  2. This structure is best for: Environments where buyers have strength and influence over the market, competition is based on rapid customer service and product cycle times, and the organization is large enough to achieve the scale required to duplicate functions.
  3. Advantages of this structure are: Customization, relationships, solutions.
  4. Disadvantages of this structure are: Divergence, duplication, scale.

Geographic

  1. Geographic structures are organized around physical location.
  2. This structure is best for: companies with a high cost of transportation for their products, who deliver services on-site, need to create perception that company is local, need to be close to customers for delivery and support.
  3. Advantages of this structure are: Local focus, possibly lower transportation costs.
  4. Disadvantages of this structure are: Mobilizing and sharing resources. When a customer needs a “global” solution requiring talent from multiple regions, slow response time. Cumbersome.

Front-Back Hybrid

  1. Front-back hybrid structures have the front-end organized by customer and the back-end by product. Gives customer one point of contact, while allowing for product excellence.
  2. This structure is best for: Companies that need to maximize both customer and product excellence and have managers skilled in managing complexity.
  3. Advantages: Single point of interface for customers, cross-selling, value-added systems and solutions.
  4. Disadvantages: Contention over resources, complex.

Workflow

These are not very interesting and don’t sound promising.

Choosing Structures

  1. The choice of structure must be based upon the company strategy. “Match what is required by the strategy to what is done best by the various structures to optimize the decisions” (Designing Organizations).
  2. The strategies best executed by each structure are (from Designing Organizations):
    1. Functional: Small size, single product line, undifferentiated market, scale or expertise within the function, long product development and life cycles, common standards.
    2. Product: Organization has a product focus, multiple products, short product development life cycle.
    3. Market: Important market segments, product or service unique to segment, buyer strength, customer has a knowledge advantage, rapid customer service and product cycles.
    4. Geographical: Cheaper transport costs, service is delivered on-site, need closeness to customers, need perception of the organization as local.
    5. Process: Alternative to functional.

Centralization vs. Decentralization

  1. Start with the premise of decentralization
  2. Then pull out compliance activities and centralize them
  3. Then pull out shared service opportunities and centralize them
  4. Identify the business performance improvement roles that might be played by the center (Designing Your Organization).
  5. “A decision should always be made at the lowest possible level and as close to the scene of action as possible. However, a decision should always be made at a level insuring that all activities and objectives affected are fully considered. The first rule tells us how far down a decision should be made. The second how far down it can be made” (Drucker, The Practice of Management, 545).

Organizational Roles

  1. An organizational role is a distinct organizational component defined by a unique outcome and set of responsibilities. may be a business unit, function, or type of job.
  2. Probably the most important design activity.
  3. Not simply a matter of defining the roles. Three steps: role definition, interface definition, boundary clarification.
  4. For role definition, define expected outcome and responsibilities for each role. Outcome is intended state to be achieved; responsibility is the tasks required to close that gap.
  5. Interface creation is defining the mutual expectations between roles that are interdependent and have a point of interface (handing off work, receiving work, providing a service, collaboration).
  6. Boundary clarification is identifying the boundaries between roles for decision-making and responsibility. Use a responsibility assignment matrix.

Leadership Roles

  1. Current trend is to delayer and flatten. Less layers of management can bring decisions and communication closer to customers, develop more autonomy and accountability lower in the org, and decrease costs.
  2. Conversely, more management positions gives people the opportunity to develop supervisory skills, provides for closer coordination of work output, and frees managers in levels above to concentrate on more strategic priorities.
  3. Rule is to develop the least possible number of management levels and forge the shortest possible chain of command.
  4. Workable executive teams are typically 5-10 people.

Core Business Activities

These are the core activities of any business. In a functional organization, these become the departments. In the other arrangements, these are sub-units within the departments (except for those functions which are shared).

  1. Finance: Controls the money. Makes sure company has the money it needs to operate. Helps departments do their budgets and consolidates them into one company budget. Works with senior management to set sales and profit goals for year and designs controls to keep finances in order.
  2. Accounting: Counts the money. Tracks the flow of money the company generates. Accounts receivable, accounts payable, and payroll al may be distinct sub-departments. Also credit and tax departments.
  3. Operations: Makes what the company sells. In manufacturing company, includes factory. Also includes departments such as shipping and receiving, purchasing, and back-office functions (such as check-processing at a bank). Often called the production Directly responsible for employee productivity, cost control, and quality.
  4. Marketing: Sells to groups. May also include market research, product development, public relations.
  5. Sales: Sells to individuals. May include customer service.
  6. Information systems: Runs the computer systems. Purchase, programming, maintenance, and security of the company’s computers, as well as using information for competitive advantage.
  7. Support functions: Do the rest. Human resources, legal, investor relations, facilities management.
  8. Each division is run by managers, who in turn report to vice presidents, who in turn report to the president and chief operating officer.

Lateral Processes

  1. All structures create silos, because every logic that can be used to group people has trade-offs.
  2. Lateral processes break down silos and coordinate activities across departments. They are information and decision processes that spread across units, enabling the decentralization of general management decisions and proper communication across departments.
  3. Lateral processes allow work to get done at the level it occurs, as people interact directly without having to go up the hierarchy and through their managers, and brings together the relevant players with the right perspectives to solve problems, make decisions, and coordinate work.
  4. Vertical processes concern whole-organization activities, such as strategic planning, budgeting, standards development, capacity management, etc.).
  5. Horizontal processes concern the workflow. Examples are new product development or the fulfillment of a customer order. These are becoming a primary vehicle for managing.
  6. Lateral processes are essential for being responsive on multiple dimensions. They are also the key to the reconfigurable organization. As strategy or the environment shifts, you don’t need to restructure; you just adapt your lateral processes. This is much quicker and more agile. In other words, the lateral structure is “more flexible and easily changed than the vertical. So a focus on its design will allow the company to respond quickly to shifts in strategy without having to restructure the entire organization” (Designing Your Organization).
  7. Lateral capability is the ability to bring the right people together quickly around risks or opportunities, and is the most powerful means of changing direction. It is the ability to build, manage, and reconfigure the various coordinating mechanisms to achieve strategic goals.
  8. You match the type and amount of lateral processes with the level of cross-functional coordination required by the business strategy.
  9. Six types of lateral processes are: networks, teams, lateral activities, integrating roles, and matrix organizations.
  10. The lateral capability is cumulative—you can’t have effective teams or integrating roles, let alone matrix structures, if you don’t have strong networks and well designed lateral processes beneath them.
  11. Lateral capability results in better return on management time, greater speed, higher flexibility, and employees thinking more broadly to understand other perspectives.

Networks

  1. Networks are voluntary processes. They occur spontaneously and thus are the least expensive and easiest to form and use. Organizational design can improve the frequency and effectiveness of them.
  2. People cooperate voluntarily when they have relationships with people in other departments and are comfortable working with them.
  3. Ways to enable the creation and flourishing of voluntary processes: define the key cross-departmental interfaces in each person’s role, interdepartmental events, co-location, communities of practice, annual meetings and retreats, rotational assignments, technology and e-coordination, mirror image departments, consistent reward and measurement systems.
  4. Training courses and conferences can be integral: “Voluntary processes also result from events such as training courses and conferences. Indeed, training budgets are as justified by their networking effects as by their developmental effects” (Designing Organizations, 49).
  5. Note that Steve Jobs found that creativity and collaboration suffered when people weren’t able to work in the same physical space. So he consolidated Pixar into one building in 2000, whereas before it was scattered among four sites.
  6. Principles for designing space to encourage interaction are: Provide communal space, create natural interaction hubs, and base design on function, not privilege. Note: Current trend to switch to totally open floor plans is less than optimally functional.

Teams

  1. Team, task force, or council. More costly than voluntary groups because they do not create naturally but are the creation of management.
  2. Can have different levels of formality, including creation of charters and goals. The charter defines the scope, mission, and authority of the group.
  3. Issue teams: Put together to solve a short-term specific problem.
  4. Work groups: Clusters of employees in same unit who do similar work and must coordinate their efforts.
  5. Cross-business teams: True integrative mechanisms. Pull together people across the departments.
  6. Manger’s role evolving: manager, team leader, facilitator, adviser.
  7. Conditions for successful teams include: Common purpose, team members influencing goals, clear priorities, right skill level and mix, team accountability, clear criteria for leadership positions, decision norms, information, performance measures and rewards.

Lateral Activities

  1. Typically 3-5 that are critical. Might include new product development, innovation management, and market research.

Integrative Roles

  1. These are formally created roles but without formal authority to coordinate work across units. Product managers, project managers, coordinator.

Rewards

General Principles

  1. People need to have a clear view of what success means. Reward systems define the expected behaviors and influence the likelihood that people will demonstrate them. They align the goals of the employee with the aims of the organization.
  2. The most important challenge is how to create incentives for collaborative behavior.
  3. Four components: Metrics, desired values and behaviors, compensation, reward and recognition (the nonmonetary component).
  4. Design of sound metrics rests on six principles:
    1. Bread: Not just financial.
    2. Criticality: Only what’s important. Too many overwhelm the system.
    3. Time orientation: Both lagging and leading. Leading to predict future trends, lagging to test accuracy. Measuring only lagging indicators is like trying to steer a boat only by its wake.
    4. Consequences: Beware of unintended consequences.
    5. Alignment: Avoid conflicting measures.
    6. Targets: Make challenging but not impossible.
  5. Balanced scorecard measures are: Financial, customer, internal business process, innovation and learning.
  6. Four dimensions of recognition: goals and results, values and behaviors, special achievement and effort, overall contribution. Shouldn’t reward one to exclusion of others. For example, reward only goals and results, and people can tend to focus on the end over the means. Reward only values and behaviors, and people can lose site of business results.

Compensation

  1. On compensation: “The trend in reward and compensation systems is to value people for their skills and knowledge they bring to the organization and how they use them rather than for their particular position they are currently filling. This shift from job focus to person focus helps build a reconfigurable organization. It changes the definition of success from moving up a job ladder to increasing skills and developing additional capabilities that are of value to the organization.” (Designing Your Organization, 191)
  2. Trends are:
    1. From a focus on salary to total compensation philosophy
    2. Predictable merit increases to variable compensation. Performance-based rewards that have to be re-earned each year and don’t permanently increase base salaries. Allows for differentiation in performance and yet holds down costs.
    3. Paying for time to paying for performance
    4. Valuing the position to valuing skills and knowledge
    5. Rewarding individuals to rewarding teams and business units
  3. “Traditional compensation methods value a job, regardless of who is in it. When jobs are well defined, stable, and provide little opportunity for development within the job boundaries, this system works well. What many companies have found is that it doesn’t work well in environments characterized by: integration of activities across many individuals, fluid tasks and responsibility definitions, high dependence on exchange of knowledge, interactions among multidisciplinary people.” (Designing Dynamic Organizations, 207)
  4. Do person-based, rather than job-based, pay. “Financial status and rewards in most organizations are based on the types of jobs people do. This approach is based on the assumption that job worth can be determined and that the person doing the job is worth only as much as the job itself is worth…. It is not clear that the worth of people can be equated with the worth of their job. This approach clearly does not fit with a company that depends on people for its competitive advantage. The alternative that is being increasingly adopted is person-based pay. It bases pay on each individual’s skills and competencies.” (Treat People Right) The benefit of person-based pay is in the kind of culture and motivate the system produces. Instead of being rewarded for moving up the hierarchy, people are rewarded for increasing their skills and developing themselves. This creates a learning culture in which personal growth and development are prized. So learning culture correlates with person-based pay.

People Practices

  1. People consists of the HR policies, including recruiting, selection, rotation, training, and development. These are the “collective human resource practices that create organizational capability from the many individual abilities resident in the organization” (Designing Dynamic Organizations).
  2. The purpose of HR policies is to “produce the talent required by the strategy and structure of the organization, generating the skills and mind-sets necessary to implement its chosen direction” (Designing Organizations).
  3. Dynamic, reconfigurable organizations are characterized by people practices that support learning and the development of strategically important capabilities. “Learning and development are key enablers for the organization.” (Designing Your Organization)

Other Structural Issues

Corporate Center

  1. The corporate center consists of the staff and activities that take place outside the operating units. The operating units are the profit centers, where the primary business activities take place.
  2. Corporate center activities general report to the CEO and provide support for all business units and the overall enterprise.
  3. Examples of activities are: enterprise-level management (CEO/COO), legal, financial reporting, payroll, HR, training, public relations, government relations, strategy, marketing, sales, distribution, IT, supply chain.
  4. Three primary roles: business performance improvement (creation and sharing of capabilities), shared services, and compliance.
  5. Typically organized into functions.

Management Levels

  1. Head of product divisions are general managers. (Product divisions develop well-rounded executive talent with the experience of running an end-to-end business.)
  2. Frontline drives performance, senior leadership drives strategic initiatives and cross-firm collaboration, and top management determines long-term health of the enterprise.
  3. Top management: The people held accountable by the board of directors for the performance of the entire firm.
  4. Senior management: Direct reports of top management, and is usually responsible solely for the business arenas and support functions it leads.

International Strategy

  1. Five types: export, partner, geographic (add units), multidimensional network (the geographic dimensions share power), transnational (all the firm’s units around the world play both leading and contributing roles in creating organizational capabilities).
  2. Adding geographic units and then collecting them into an “international division” reporting to the CEO is the most common way to move across borders.

Specific Cases

  1. Internet activities: Should be centralized in a single department because of the specific expertise needed.
  2. Knowledge management boundary-spanning integrative roles have come up recently. In this category are chief knowledge officer, chief learning officer, and chief innovation officer. Knowledge officers identify opportunities for knowledge creation that will create value for the company and coordinate knowledge sharing. See themselves as change agents, charged with overseeing the development of knowledge management systems and creating environment and culture that will stimulate knowledge sharing.
  3. “Social networks increase the opportunities for collaboration, as well as the effectiveness and value of that collaboration, by connecting parties with related knowledge and interests while reducing the search and coordination costs of both parties. They enable individuals and teams to mobilize knowledge and talent.” (Mobilizing Minds)

Implementation

  1. You have to build a process for building commitment into the design. For the success of the design depends not only on fit, but also on And if people do not feel that they were a part of the process, they will not be committed to it and you will have passive resistance.
  2. Part of this is interviewing employees in the planning stage. Another is testing alternatives in interviews with people. In these interviews, if someone dislikes an alternative, they need to propose a counter solution as well.

Related Business Concepts

Growth and Innovation

  1. An organization can grow in three ways: acquisition, organic sustained growth, organic breakthrough growth.
  2. Acquisition: Purchase another company.
  3. Sustained growth: Extend the core business through product improvements, extending product line, creating new generation of products.
  4. Breakthrough growth: A “more radical departure from the core business in which wholly new products are launched into new markets.” Organization must acquire the new capabilities while continuing to maximize its existing business.
  5. Both types of organic growth depend upon innovation: turning novel ideas into commercially viable products and services.
  6. Types of innovation, moving from sustaining innovations to breakthrough innovations: product improvement, line extension, next generation, new product, new technology, new business.
  7. “Breakthrough strategies require a higher degree of separation from the core business both during the development and the commercialization and launch phase” (Designing Your Organization).
  8. The degrees of separation, moving from integrated to separate, are: existing product unit, lightweight product team, heavyweight product team, separate unit.
  9. Err on the side of separation rather than having a new business housed within an existing business unit. If launch is successful, can integrate it back in, or if the business model is different, put it into its own division. Or form a joint venture, sell it, spin it off as separate, or shut it down.
  10. Instead of separating out new ventures ad hoc, can set up separate divisions to house and nurture the new products and opportunities. Called accelerators. Nokia has a ventures organization in addition to its handset and network businesses that does this. Tests and develops ideas that are beyond the scope of Nokia’s current businesses but within the overall company vision. After the new venture is established, it is integrated back into the core business, it becomes a new business unit, or it is sold.
  11. The unit ought to report directly to the executive level, regardless of its size, because otherwise it can be hampered by lack of attention and resources.
  12. Four general strategies for growth: sell more to the same base of carefully selected customers, systematically cook up new products or services, establish control of a market such that you grow as it grows, or grow by rethinking how you get your service or product to customers.

Business Portfolio

  1. Differing degrees of diversity: single business, integrated business, related business, mixed portfolio, conglomerate/holding company.
  2. Integrated: Variety of products but seek to sell as a package.
  3. Related: Strong similarities among business units, but products not sold as integrated solutions. Technology, resources, knowledge shared across lines of business, which the center facilitates.
  4. Mixed: There is a common theme among the businesses, but they have very different underlying business models. Ex is Disney, having a movie studio, theme parks, publishing, television networks, retail stores, and music.

Partnerships

Types of Partnerships

  1. There are various types of relationships that can be formed with other organizations: markets, contracts, sourcing and alliance, equity, and ownership. Each form is progressively greater in its coordination and dependence.
  2. Markets is a spot contract for specific projects and activities as needed.
  3. Sourcing involves a contract as well, but is a closer and longer-term relationship. Parties reveal their long-term plans and participate jointly in development. Or, producer can give more customization to the other party, who in turn provides more security to the producer through making them a sole or preferred supplier.
  4. Equity relationships involve a transfer of equity. There are three types: the network integrator takes a minority shareholding the suppler, each member takes a small share in the others, or a joint venture.
  5. In a joint venture, a separate company is created with its own equity, which is usually split evenly.
  6. Ownership provides more security, as in the equity model the relationship can still fall apart. So if the vulnerability is too great for one partner, or the opportunity for profit is too large to share, they will purchase the other.
  7. Thus, companies are driven to more complex forms of relationships because of coordination, vulnerability, and value capture.
  8. The first priority in selecting a partner is to understand their strategic intentions.

Partnership Structures

  1. For any of these, there are three types of partnership structure: operator model, shared model, and joint ventures where the joint venture is autonomous.
  2. Operator model: one partner takes the management responsibility for the joint activity.
  3. Shared model: management responsibility is shared between the two partners.
  4. Joint venture: the venture is autonomous, with its own board and decision-making.

Bibliography

Designing Organizations: An Executive Guide to Strategy, Structure, and Process, Jay Galbraith.

Desiring Your Organization: Using the Store Model to Solve 5 Critical Design Challenges, Amy Kates and Jay Galbraith

Designing Dynamic Organizations: A Hands-On Guide for Leaders at All Levels, Jay Galbraith, Diane Downey, and Amy Kates.

Organizational Design: A Step-by-Step Approach, Richard M Burton, Gerardine DeSanctis, and Borge Obel.

Mobilizing Minds: Creating Wealth from Talent in the 21st-Century Organization, Lowell Bryan and Claudia Joyce.

The Practice of Management, Peter Drucker.

The Ten Day MBA, Steven Silbiger

The Complete Idiot’s Guide to MBA Basics, Tom Gorman.

Meatball Sundae, Set Godin.

Managing Performance to Maximize Results, Harvard Business School Press.

Executing Strategy for Business Results, Harvard Business School Press.

 

Feedback to the Editor