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10 Principles of Organization Design

Jun 24, 2020 | Organization Effectiveness

These fundamental guidelines, drawn from experience, can help you reshape your organization to fit your business strategy.

A global electronics manufacturer seemed to live in a perpetual state  of re-organization. Introducing a new line of communication devices for  the Asian market required reorienting its sales, marketing, and support  functions. Migrating to cloud-based business applications called for  changes to the IT organization. Altogether, it had reorganized six times  in 10 years.

Suddenly, however, the company found itself facing a different  challenge. Because of the new technologies that had entered its  category, and a sea change in customer expectations, the CEO decided to  shift from a product-based business model to a customer-centric one.  That meant yet another reorganization, but this one would be different.  It had to go beyond shifting the lines and boxes in an org chart. It  would have to change the company’s most fundamental building blocks: how  people in the company made decisions, adopted new behaviors, rewarded  performance, agreed on commitments, managed information, made sense of  that information, allocated responsibility, and connected with one  another. Not only did the leadership team lack a full-fledged blueprint —  they didn’t know where to begin.

This situation is becoming more typical. In the 18th annual PwC survey of chief executive officers,  conducted in 2014, many CEOs anticipated significant disruptions to  their businesses during the next five years as a result of global  trends. One such trend, cited by 61 percent of the respondents, was  heightened competition. The same proportion of respondents foresaw  changes in customer behavior creating disruption. Fifty percent said  they expected changes in distribution channels. As CEOs look to stay  ahead of these trends, they recognize the need to change their  organization’s design. But for that redesign to succeed, a company must  make its changes as effectively and painlessly as possible, in a way  that aligns with its strategy, invigorates employees, builds distinctive  capabilities, and makes it easier to attract customers.

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.

Although every company is different, and there is no set formula for  determining the appropriate design for your organization, we have  identified 10 guiding principles that apply to every company. These have  been developed through years of research and practice at PwC and  Strategy&, using changes in organization design to improve  performance in more than 400 companies across industries and  geographies. These fundamental principles point the way for leaders  whose strategies require a different kind of organization than the one  they have today.

  1. Declare amnesty for the past.Organization design  should start with corporate self-reflection: What is your sense of  purpose? How will you make a difference for your clients, employees, and  investors? What will set you apart from others, now and in the future?  What differentiating capabilities will allow you to deliver your value  proposition over the next two to five years?

For many business leaders, answering those questions means going  beyond your comfort zone. You have to set a bold direction, marshal the  organization toward that goal, and prioritize everything you do  accordingly. Sustaining a forward-looking view is crucial.

We’ve seen a fair number of organization design initiatives fail to  make a difference because senior executives got caught up in discussing  the pros and cons of the old organization. Avoid this situation by  declaring “amnesty for the past.” Collectively, explicitly decide that  you will neither blame nor try to justify the design in place today or  any organization designs of the past. It’s time to move on. This type of  pronouncement may sound simple, but it’s surprisingly effective for  keeping the focus on the new strategy.

  1. Design with “DNA.”Organization design can seem  unnecessarily complex; the right framework, however, can help you decode  and prioritize the necessary elements. We have identified eight universal building blocks  that are relevant to any company, regardless of industry, geography, or  business model. These building blocks will be the elements you put  together for your design 

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The blocks naturally fall into four complementary pairs, each made up  of one tangible (or formal) and one intangible (or informal) element.  Decisions are paired with norms (governing how people act), motivators  with commitments (governing factors that affect people’s feelings about  their work), information with mind-sets (governing how they process  knowledge and meaning), and structure with networks (governing how they  connect). By using these elements and considering changes needed across  each complementary pair, you can create a design that will integrate  your whole enterprise, instead of pulling it apart.

You may be tempted to make changes with all eight building blocks  simultaneously. But too many interventions at once could interact in  unexpected ways, leading to unfortunate side effects. Pick a small  number of changes — five at most — that you believe will deliver the  greatest initial impact. Even a few changes could involve many  variations. For example, the design of motivators might need to vary  from one function to the next. People in sales might be more heavily  influenced by monetary rewards, whereas R&D staffers might favor a  career model with opportunities for self-directed projects and external  collaboration and education.

  1. Fix the structure last, not first.Company  leaders know that their current org chart doesn’t necessarily capture  the way things get done — it’s at best a vague approximation. Yet they  still may fall into a common trap: thinking that changing their  organization’s structure will address their business’s problems.

We can’t blame them — after all, the org chart is seemingly the most  powerful communications vehicle around. It also carries emotional  weight, because it defines reporting relationships that people might  love or hate. But a company hierarchy, particularly when changes in the  org chart are made in isolation from other changes, tends to revert to  its earlier equilibrium. You can significantly remove management layers  and temporarily reduce costs, but all too soon, the layers creep back in  and the short-term gains disappear.

In an org redesign, you’re not setting up a new form for the  organization all at once. You’re laying out a sequence of interventions  that will lead the company from the past to the future. Structure should  be the last thing you change: the capstone, not the cornerstone, of  that sequence. Otherwise, the change won’t sustain itself.

We saw the value of this approach recently with an industrial goods  manufacturer. In the past, it had undertaken reorganizations that  focused almost solely on structure, without ever achieving the execution  improvement its leaders expected. 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.

  1. Make the most of top talent.Talent is a critical  but often overlooked factor when it comes to org design. You might  assume that the personalities and capabilities of existing executive  team members won’t affect the design much. 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. For example, if you’re  organizing the business on the basis of innovation and the ability to  respond quickly to changes in the market, the person chosen as chief  marketing officer will need a diverse background. 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. Although many executives have seven direct reports, there’s no  universal magic number. For CEOs, the optimal span of control depends on  four factors: the CEO’s tenure thus far, the degree of  cross-collaboration among business units, the level of CEO activity  devoted to something other than working with direct reports, and whether  the CEO is also chairman of the board. (We’ve created a C-level span-of-control diagnostic to help determine your target span.)

  1. 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? Doubling down on addressing typical scarcities, or  what is “not good enough,” helps prioritize the changes to your  organization model. 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. But don’t  get bogged down in trying to change something you can’t change; instead,  focus on changing what you can. 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.

  1. Promote accountability.Design your organization so  that it’s easy for people to be accountable for their part of the work  without being micromanaged. 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. They are about twice as powerful as an  organization’s structure or its motivators

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. It then used the matrix to establish clear decision rights  and motivators more in tune with the company’s desired goals. Sales  directors were made accountable for dealers in their region and were  evaluated in terms of the sales performance of those dealers. This  encouraged ownership and high performance on both sides, and drew in  critically important but previously isolated groups, like the  manufacturer’s warranty function. 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. Even after it  becomes part of the company’s culture, this new accountability must be  continually nurtured and promoted. It won’t endure if, for example, new additions to the firm don’t honor commitments or incentives change in a way that undermines the desired behavior.

  1. Benchmark sparingly, if at all.One common  misstep is looking for best practices. In theory, it can be helpful to  track what competitors are doing, if only to help you optimize your own  design or uncover issues requiring attention. But in practice, this  approach has a couple of problems.

First, it ignores your organization’s unique capabilities system —  the strengths that only your organization has, which produces results  that others can’t match. You and your competitor aren’t likely to need  the same distinctive capabilities, even if you’re in the same industry.  For example, two banks might look similar on the surface; they might  have branches next door to each other in several locales. But the first  could be a national bank catering to millennials, who are drawn to low  costs and innovative online banking features. The other could be  regionally oriented, serving an older customer base and emphasizing  community ties and personalized customer service. Those different value  propositions would require different capabilities and translate into  different organization designs. The national bank might be organized  primarily by customer segment, making it easy to invest in a single  leading-edge technology that covers all regions and all markets. The  regional bank might be organized primarily by geography, setting up  managers to build better relationships with local leaders and  enterprises. If you benchmark the wrong example, the  copied organizational model will only set you back.

Second, even if you share the same strategy as a competitor, who’s to  say that its organization is a good fit with its strategy? If your  competitor has a different value proposition or capabilities system than  you do, using it as a comparison for your own performance will be a  mistake.

If you feel you must benchmark, focus on a few select elements,  rather than trying to be best in class in everything related to your  industry. Your choice of companies to follow, and of the indicators to  track and analyze, should line up exactly with the capabilities you  prioritized in setting your future course. For example, if you are  expanding into emerging markets, you might benchmark the extent to which  leading companies in that region give local offices decision rights on  sourcing or distribution.

  1. Let the “lines and boxes” fit your company’s purpose.For every company, there is an optimal pattern of hierarchical  relationship — a golden mean. It isn’t the same for every company; it  should reflect the strategy you have chosen, and it should support the  critical capabilities that distinguish your company. That means that the  right structure for one company will not be the same as the right  structure for another, even if they’re in the same industry.

In particular, think through your purpose when designing the spans of  control and layers in your org chart. These should be fairly consistent  across the organization.

 

You can often hasten the flow of information and create greater  accountability by reducing layers. But if the structure gets too flat,  your leaders have to supervise an overwhelming number of people. You can  free up management time by adding staff, but if the pyramid becomes too  steep, it will be hard to get clear messages from the bottom to the  top. So take the nature of your enterprise into account. Does the work  at your company require close supervision? What role does technology  play? How much collaboration is involved? How far-flung are people  geographically, and what is their preferred management style?

In a call center, 15 or 20 people might report to a single manager  because the work is routine and heavily automated. An enterprise  software implementation team, made up of specialized knowledge workers,  would require a narrower span of control, such as six to eight  employees. If people regularly take on stretch assignments and broadly  participate in decision making, you might have a narrower hierarchy —  more managers directing only a few people each — instead of setting up  managers with a large number of direct reports.

  1. Accentuate the informal.Formal elements like  structure and information are attractive to companies because they’re  tangible. They can be easily defined and measured. But they’re only half  the story. Many companies reassign decision rights, rework the org  chart, or set up knowledge-sharing systems — yet don’t see the results  they expect.

That’s because they’ve ignored the more informal, intangible building  blocks. Norms, commitments, mind-sets, and networks are essential in  getting things done. They represent (and influence) the ways people  think, feel, communicate, and behave. When these intangibles are not in  sync with one another or the more tangible building blocks, the  organization falters.

At one technology company, it was common practice to have multiple  “meetings before the meeting” and “meetings after the meeting.” In other  words, the constructive debate and planning took place outside the  formal presentations that were known as the “official meetings.” The  company had long relied on its informal networks because people needed  workarounds to many official rules. Now, as part of the redesign, the  leaders of the company embraced its informal nature, adopting new  decision rights and norms that allowed the company to move more fluidly,  and abandoning official channels as much as possible.

  1. Build on your strengths.Overhauling the  organization is one of the hardest things for a chief executive or  division leader to do, especially if he or she is charged with turning  around a poorly performing company. But there are always strengths to  build on in existing practices and in the culture. Suppose, for example,  that your company has a norm of customer-oriented commitment. Employees  are willing to go the extra mile for customers when called upon to do  so. They deliver work out of scope or ahead of schedule, often because  they empathize with the problems customers face. You can draw attention  to that behavior by setting up groups to talk about it, and reinforce  the behavior by rewarding it with more formal incentives. That will help  spread it throughout the company.

Perhaps your company has well-defined decision rights, wherein each  person has a good idea of the decisions and actions for which he or she  is responsible. Yet in your current org design, they may not be focused  on the right things. You can use this strong accountability and redirect  people to the right decisions to support the new strategy.

Conclusion

A 2014 Strategy& survey  found that 42 percent of executives felt that their organization was  not aligned with the strategy, and that parts of the organization  resisted it or didn’t understand it. If that’s a familiar problem in  your company, the principles in this article can help you develop an  organization design that supports your most distinctive capabilities and  supports your strategy more effectively.

Remaking your organization to align with your strategy is a project  that only the top executive of a company, division, or enterprise can  lead. Although it’s not practical for a CEO to manage the day-to-day  details, the top leader of a company must be consistently present to  work through the major issues and alternatives, focus the design team on  the future, and be accountable for the transition to the new  organization. The chief executive will also set the tone for future  updates: Changes in technology, customer preferences, and other  disruptors will continually test your business model.

These 10 fundamental principles can serve as your guideposts for any  reorganization, large or small. Armed with these collective lessons, you  can avoid common missteps and home in on the right blueprint for your  business. 

 

 

 

Original Article  by Strategy+Business/ Gary L. Neilson/ Jaime Estupiñán/ Bhushan Sethi / 2018

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