2. • Five factors affecting organizational design
• There are five factors that greatly impact organizational design. These factors are:
• Strategy. Strategy dictates the strategic priorities of an organization. This is the most i
mportant influencing factor of organizational structure and design.
• Environment. The environment a company operates in influences its strategy but also
dictates how it positions itself. In a rapidly-changing environment, the organization has t
o design for more flexibility, or adaptability, while in a stable environment the organizati
on can optimize for efficiency.
• Technology. Information technology is a key enabler for decision making. The state of
IT impacts organizational design as well. When systems are in place and decision maki
ng is based on data, the organizational structure and design – including the potential fo
r hierarchical control – will be different from an organization where most of the data is st
ored in unorganized Excel sheets.
• Size & life cycle. The organizational size and life cycle also impact the organizational
structure and design. A 20-person company has very different challenges when it come
s to design compared to a 200,000-person company.
• Culture. The organizational culture is another key element that impacts organizational
structure and design – and, vice versa, design also impacts culture.
3. • Specialization principle. This principle st
ates that boundaries should exist to encou
rage the development of specialist skills. T
he test here is if any specialist cultures, wh
ich are entities that have to be different fro
m the rest of the organization, have suffici
ent protection from the influence of the do
minant culture.
4. • Co-ordination principle. This principle states that acti
vities that are done should be coordinated in a single u
nit. This unit can be a business unit, business function,
(horizontally coordinating) overlay unit, sub-business,
core resource unit, shared service unit, project unit, or
parent unit. The test here is if there needs to be coordi
nation between departments that is hard to do. These ‘
difficult links’ are links where normal networking will no
t provide coordination benefits. In that case, coordinati
on should be made easier, or responsibility should be
put in within a single unit. There are many different unit
s that can be used in organizational design, as we will
show below.
5. • Knowledge and competence principle. This prin
ciple states that responsibilities should be allocate
d to the person or team best fit to do them. This m
eans that tasks are retained by higher levels base
d on their knowledge and competitive advantage. I
f this is not the case, they should be positioned lo
wer in the organization.
This means that the CEO should not be involved i
n every decision – especially not decisions that inv
olve specialists with much more subject-matter kn
owledge. The CEO is there for the big picture and
to balance complex decisions that impact the orga
nization and strategy.
6. • Control and commitment principle. This principl
e is about having effective control on the one hand
while maintaining engagement and commitment o
n the other hand. This is always a balance. The te
st here is to have a control process that is aligned
with the unit’s responsibility, cost-efficient to imple
ment, and motivating for the people in the unit.
This means that the CEO is not giving the ‘go’ on t
he purchase decision for a $30 keyboard – this wo
uld be highly demotivating and control on such sm
all expenditures should be put lower in the organiz
ation to be adaptive anyway.
7. • Innovation and adaptation principle. This p
rinciple states that organizational structures s
hould be sufficiently flexible to adapt to an ev
er-changing world. The test here is that the or
ganizational design will help the development
of new strategies and to adapt to future chan
ges. Later in this article, we will give a case st
udy of an organization that was unable to ada
pt to a rapidly changing environment, hurting i
ts internal processes and bottom line.
8. • Start Free Assessment
• Similarly, sales and marketing are business units. They have different, cooperative, horizon
tally coordinating overlay units under them – e.g. branding and sponsorships, digital market
ing, public relations, video/multimedia. These units are highly collaborative with each other
and are constantly in touch with the market, leading to high coordination. Specialists have
high responsibility and although there is a formal sign-off procedure for marketing campaig
ns, many of the campaigns happen in decentralized project teams that consist of people fro
m multiple overlay units that communicate with each other frequently as the market is a nic
he market in which marketing needs to be well-coordinated.
• Compare this to a low-cost, broad target cost leadership strategy. We take a soap producti
on company as an example. They produce hundreds of soaps – and although they do som
e marketing and sales to retail stores for a few of their lines, most of the soaps are produce
d for external brands. The organizational setup is highly siloed and not expected to change
.
• When we apply this to the five organizational design principles, there is: (1) high specializat
ion between production and sales, (2) low coordination is required, (3 & 4) knowledge and
control lie relatively high in the organization and there is (5) little collaboration required bet
ween departments. Indeed, when a new soap line is introduced, the specifics are communi
cated to the production department and after a few test runs, the company is set to produce
that soap for years to come.
