Organizational Design: Essential Principles and Processes for Managers
In today’s challenging and volatile environment, organizational design is a mandatory condition for businesses to adapt to constant change and secure a firm foothold in the market. However, organizational design is a complex and challenging process, requiring leaders to understand core principles and implementation methods to ensure the business apparatus operates effectively without disrupting current business processes. So, what factors should be considered when designing a corporate organizational structure? Let’s find out with 1Office in the following article.
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1. Definition of Organizational Design
1.1. What is organizational design?
Organizational design is the process of building and shaping an organizational structure that aligns with the business strategy and actual environmental conditions of the organization, aiming to optimize the operational apparatus to achieve goals in the best possible way. Designing an organizational structure covers the most fundamental aspects of an organization, such as operational objectives, functions and duties of departments, scope of authority, operational methods, and professional standards for each job title,…
This task requires the implementer to have a comprehensive mindset regarding systems, structure, people, performance metrics, processes, culture, and skills.
1.2. The Importance of Organizational Design
According to a study by Deloitte, organizational design is a top concern for 90% of senior leaders because it plays a crucial role in the survival and development of a business. This can be explained by two aspects:
- As businesses grow, old processes, structures, and systems are no longer capable of meeting the scale and operational demands. Therefore, organizational restructuring is a necessary task to improve and upgrade the operational apparatus, creating momentum for the business to break through.
- The rapid changes in the market, with breakthrough developments in technology and new trends, make traditional business models obsolete. If a business is not prepared to adapt promptly by innovating itself, it will sooner or later be eliminated. Therefore, designing an organizational structure has strategic significance that determines the survival of the business in the market.
2. The Nature of Corporate Organizational Structure Design
A study from McKinsey & Company revealed that less than 25% of companies succeed in organizational redesign, 44% “run out of steam” shortly after implementation, and one-third fail to achieve their business objectives and improve overall performance.
The main reason for the failure of most of these companies stems from their approach. Typically, during the reorganization process, businesses focus only on technical systems, most notably restructuring the hierarchy—the organizational chart.
This is a correct, but incomplete, approach to organizational design. In essence, the structural design of a complete organization needs to be determined from a holistic, multi-dimensional perspective and includes two main components:
- Structural component: Technical systems related to how work is done, workflows, structure, and technology
- Human component: Social systems related to business culture, leadership, people, and their skill sets.
Therefore, to achieve long-term success and effectiveness, businesses must pay equal attention to both the structural and human components during the design and operation of the organization.
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3. 5 Golden Principles in Corporate Organizational Design
3.1. The Principle of Specialization
This principle requires clarity and precision in defining the functional roles of the organization. Each department will undertake a specific role and function within the organization’s operational apparatus, such as marketing, human resources, production, etc. Ensuring specialization allows members to focus on the areas they do best, while also ensuring the organization operates at peak efficiency as professional skills and knowledge are expertly executed.
3.2. The Principle of Coordination
The organizational design must ensure connectivity between departments. This principle allows individuals and teams from different departments to coordinate smoothly and easily communicate and share information in specific activities.
For some organizations, the method of coordination is determined by a set of pre-established standards. For others, it is flexible, based on projects or job requirements.
3.3. Principle of Suitability
This principle states that tasks should be assigned to the person or group best suited to perform them.
This means the CEO does not necessarily have to be involved in every decision – especially those related to the specialized knowledge of a departmental unit. The CEO will focus on the big picture and balance complex decisions that impact the entire organization and strategy.
3.4. Principle of Control and Commitment
This principle addresses the need for an organization to balance effective control with maintaining employee engagement and commitment. This means that managers will be responsible for directing, coordinating activities, and monitoring the work progress of their staff. On the other hand, team members will be responsible for tasks within their scope and ensure commitment to the results.
3.5. Principle of Innovation and Adaptation
The organizational structure must be flexible enough to adapt to a changing environment. Therefore, during the organizational design process, leaders need to identify which parts are fixed and which can be flexible to adapt to change. Typically, the “fixed” part will be the leadership level, and the cross-functional coordination teams will have the most flexibility to change.
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4. A-Z Organizational Design Process for Businesses
Step 1: Define Context and Diagnose
To begin the organizational structure design process, managers need to define the context and environment in which the organization operates. This provides an overall perspective and assessment to identify the challenges, opportunities, and limitations of the current organizational structure model. Two aspects to consider in this step include:
- Assess the external environment
This includes any changes in customer needs, the legal landscape, competitor analysis, etc. The PESTEL model is an ideal tool to help identify all external factors affecting the business.
- Assess and diagnose the internal environment
Here, managers need to highlight aspects where people, systems, or processes are not aligned with the strategy, and identify the root causes of the problems the business is facing.
Step 2: Define Strategic Tasks
- Set strategic priorities
Strategic priorities will determine how the business will achieve its mission. Typically, strategic priorities focus on delivering benefits and value to customers.
- Set operational priorities
Decide how the organizational structure and internal resources will operate to achieve the company’s overall strategic goals.
After completing this step, the business can also assemble a design team and establish the team’s standards and operating methods.
Step 3: Strategic Organizational Design
- Direct the change
Determine how the company’s current organizational structure needs to change to meet new strategic and operational priorities.
- Develop and explore alternative models
Work with internal resources to find viable organizational structure models and experiment with different working methods. Each operating model will have its advantages and limitations depending on the size and characteristics of each business.
>> Learn about the 8 most popular types of business organizational structures in the world
- Define job positions and classify resources
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- List all the jobs necessary to meet the competitive needs and strategic goals of the organization
- Define the roles of functional departments and the resources needed to complete each work item.
Step 4: Design the Organizational Chart
Only after all strategic design decisions have been made is it time to consider creating the organizational chart.
- Develop teams and linkages
Group roles into teams and departments, and identify key points of contact to ensure smooth coordination between divisions. These points of contact can be team leaders, department heads, or a designated member.
- Design a detailed governance framework
Structure and define management and leadership roles throughout the enterprise, including the responsibilities, authority, and accountability of each level.
Step 5: Implement the organizational structure transition
Once all the foundations have been laid, it’s time to plan and implement the new organizational structure.
- Prepare for risks
During the organizational structure transition, there will certainly be obstacles and risks arising from the enterprise-wide change. Therefore, for the transition to be successful, managers must anticipate potential threats that could hinder operations and prepare solutions to address them.
- Develop a transition plan
After identifying all the obstacles, the manager and the design team need to create a master plan to transition business operations from the current model to the new organizational structure model.
- Build a communication strategy
Typically, people will be wary or feel threatened by change. This can create a sense of insecurity and uncertainty among the staff. In such cases, a comprehensive communication strategy is essential to get everyone on board and ensure a smooth transition.
In the article above, 1Office has provided readers with an overview of organizational design and a guide to the most detailed and optimal process. For a consultation and a trial of the market-leading management software, please contact us using the information below:
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