Every organization has a hierarchy of people and job functions whether it is organic or intentional. For a business to operate efficiently and systematically, it needs a planned structure that fits the style, size and operations of the organization. According to the Food and Agriculture Organization of the United Nations Corporate Document Repository, structure provides “guidelines on hierarchy, authority of structure and relationships, linkage between different functions and coordination with environment.”
Reference for Business defines an organizational structure as “the way that an organization arranges people and jobs so that its work can be performed and its goals can be met.” Small groups can make decisions democratically and be productive in an unstructured arena, but larger groups must delegate authority and jobs in order to run efficiently. Different sized organizations with differing goals and a continual need to increase productivity gave rise to a plethora of structure types.
Significance And Function
Organizational structure defines to character of an organization: how it thinks and how it will react. As a business grows, employee responsibilities detach from specific people, and are instead, assigned to specific positions or departments regardless of who holds that job. The relationship between all these different positions, their departments and the hierarchical management structure make up your organization’s structure.
Three main components comprise an organization’s structure: complexity, formalization and centralization. According to FAO Corporate Document Repository, centralization refers to “the degree to which activities within the organization are differentiated.” Differentiation can be horizontal: differences between departments including education, training, tasks and members; vertical: the number of management levels; and spatial: the geographical distribution of personnel and facilities. Formalization describes how specialist each position is. The degree of centralization shows how much of the decision-making and authority concentrates in one place.
Organizational evolution shows four important principles: specialization, coordination, departmentalization, and decentralization or centralization. “Specialization facilitates division of work into units for efficient performance,” reports FAO Corporate Document Repository.
Coordination is the way all specialized units and employees fit into a cohesive whole to reach company goals. Departmentalization clusters different activities and job functions at the same authority level. Decentralization is when lower levels of the hierarchy have decision-making authority, whereas centralization is when you group authority at higher levels.
Structure comes in one of three types: classical, functional, divisional or matrix. Classical structure is common with very small businesses, it is very centralized, has few general functions and some specialists in critical positions as needed. Functional organization divides employees into units based on job function and succeeds in large companies that produce large amounts of low price products or services. A step more complex, division structure takes functional units and divides them into divisions that have their own resources and can function completely independent of other divisions. Matrix organizations split their employees into teams based on their function and the product or service they work with, and uses each team to complete a specific task.
Organizational structure refers to the way companies arrange their departments and reporting authority. Some companies build their organizations around various functions such as marketing and finance to combine knowledge and skills. Other companies, such as retailers, use product organizational structures to better focus on specific product lines. Whatever the case, every type of organizational structure contains certain common key elements or characteristics.
A company’s hierarchy or height in its organization is largely contingent upon size. Organizational structure is depicted with boxes that represent various employee titles. Employees that are on the same level, such as marketing and brand managers, represent the width of an organization. The hierarchy refers to the vertical aspect of the company. Executives are usually at the top of the organization while, in order of rank, directors, managers and coordinators are one to three levels down, respectively. An employee will generally report to the person who is directly above him. Companies accomplish better coordination and communication through a hierarchy, according to the Food and Agriculture Organization of the United Nations.
Span of Control
Span of control in organizational structure refers to the number of people who report to a particular executive or manager. For example, a vice president of finance may have a finance director and analyst reporting to her. Consequently, her span of control would be two. However, even in small organizations, plant managers or supervisors may be in charge of dozens of employees. As with schoolteachers and students, most companies limit span of control to a level that supervisors can effectively manage.
Work specialization pertains to the degree to which work is divided. Very small companies may have one person performing a certain job. However, most department employees specialize in a specific area. For example, a company marketing research department may include a research director, research manager and research analyst. The research director may be in charge of assigning projects and ensuring the department meets all deadlines. The research manager may specialize in hiring agencies to field various surveys and writing reports. Additionally, the research analyst may stay in daily contact with the agency and create special graphs for the report.
Companies may need to decentralize various functional areas, such asfield marketing or finance. For example, a company may place a field marketing and finance person in each of six different regions. One reason for decentralization is that customer tastes may vary per region. Restaurants often decentralize their management functions to better serve their customers locally. Additionally, companies often divide their sales department into various regions to better service customers. Consequently, support people such as marketing managers may be needed for sales support functions.
Organizational design is a step-by-step methodology which identifies dysfunctional aspects of work flow, procedures, structures and systems, realigns them to fit current business realities/goals and then develops plans to implement the new changes. The process focuses on improving both the technical and people side of the business.
For most companies, the design process leads to a more effective organization design, significantly improved results (profitability, customer service, internal operations), and employees who are empowered and committed to the business. The hallmark of the design process is a comprehensive and holistic approach to organizational improvement that touches all aspects of organizational life, so you can achieve:
- Excellent customer service
- Increased profitability
- Reduced operating costs
- Improved efficiency and cycle time
- A culture of committed and engaged employees
- A clear strategy for managing and growing your business
By design we’re talking about the integration of people with core business processes, technology and systems. A well-designed organization ensures that the form of the organization matches its purpose or strategy, meets the challenges posed by business realities and significantly increases the likelihood that the collective efforts of people will be successful.
As companies grow and the challenges in the external environment become more complex, businesses processes, structures and systems that once worked become barriers to efficiency, customer service, employee morale and financial profitability. Organizations that don’t periodically renew themselves suffer from such symptoms as:
- Inefficient workflow with breakdowns and non value-added steps
- Redundancies in effort (“we don’t have time to do things right, but do have time to do them over”)
- Fragmented work with little regard for good of the whole (Production ships bad parts to meet their quotas)
- Lack of knowledge and focus on the customer
- Silo mentality and turf battles
- Lack of ownership (“It’s not my job”)
- Cover up and blame rather than identifying and solving problems
- Delays in decision-making
- People don’t have information or authority to solve problems when and where they occur
- Management, rather than the front line, is responsible for solving problems when things go wrong
- It takes a long time to get something done
- Systems are ill-defined or reinforce wrong behaviors
- Mistrust between workers and management
Although adaptable to the size, complexity and needs of any organization, the design process consists of the following steps.
Charter the design process
As senior leaders, you come together to discuss current business results, organizational health, environmental demands, etc. and the need to embark on such a process. You establish a charter for the design process that includes a “case for change,” desired outcomes, scope, allocation of resources, time deadlines, participation, communications strategy, and other parameters that will guide the project.
(At times, senior teams may go through either a strategic planning process or an executive team development process prior to beginning a redesign initiative, depending on how clear they are about their strategy and how well they work together as a team.)
Assess the current state of the business
You don’t want to begin making changes until you have a good understanding of the current organization. Using our Transformation Model, we facilitate a comprehensive assessment of your organization to understand how it functions, its strengths and weaknesses, and alignment to your core ideology and business strategy. The assessment process is astounding in the clarity it brings an organization’s leaders and members, not only regarding how the organization currently works but how the various parts are interrelated, its overall state of health and, most importantly, what needs to be done to make improvements.
Design the new organization
The senior team (and/or others who have been invited to participate in the process), look to the future and develop a complete set of design recommendations for the “ideal future.” At a high level, the steps in this process include the following:
- Defining your basic organizing principle. (Will you organize primarily around functions, processes, customer-types, technologies, geographies, etc.?)
- Streamlining core business processes—those that result in revenue and/or deliverables to customers.
- Documenting and standardizing procedures.
- Organizing people around core processes. Identifying headcount necessary to do core work.
- Defining tasks, functions, and skills. What are the performance metrics for each function/team? How are they evaluated and held accountable?
- Determining facility, layout and equipment needs of various teams and departments throughout the organization.
- Identifying support resources (finance, sales, HR, etc.), mission, staffing, etc. and where should these should be located.
- Defining the management structure that provides strategic, coordinating and operational support.
- Improving coordinating and development systems (hiring, training, compensation, information-sharing, goal-setting, etc.).
At some point the design process morphs into transition planning as critical implementation dates are set and specific, concrete action plans created to implement the new design. And a key part of this step includes communicating progress to other members of the organization. A communications plan is developed that educates people in what is happening. Education brings awareness, and everyone’s inclusion brings the beginning of commitment.
Implement the design
Now the task is to make the design live. People are organized into natural work groups which receive training in the new design, team skills and start-up team building. New work roles are learned and new relationships within and without the unit are established. Equipment and facilities are rearranged. Reward systems, performance systems, information sharing, decision-making and management systems are changed and adjusted. Some of this can be accomplished quickly. Some may require more detail and be implemented over a longer period of time.
The first chart illustrates the tendency of most people within organizations to think in terms of silos and organize people according to the similarity of their functions.
The second chart illustrates how the company redefined structural boundaries to become much more cross-functional on the front end of their business. They combined people from a number from a number of departments into teams that took full responsibility for managing customer orders. The company was able to improve their total billings of a major product line by 50% and increase their margins by 25%.
Of course, this chart greatly simplifies all of the design decisions which included improvements in workflow and system support, and the role of leaders and other support functions in the new organization. But this gives you an idea of the kinds of integration and improved collaboration that can result from organizational design.