Five Questions Every Leader Should Ask About Organizational Design

A few years ago Dave Ulrich, a management thought leader from the University of Michigan, made a comment I found both insightful and profound: “Every leader needs to have a model of organization design.” Typically a graphic depiction of the organizational components to be addressed in a redesign (for example, McKinsey’s 7S model, which includes strategy, structure, systems, staff, skills, and so on), every consultant and his brother flogs an organization design model. Dave didn’t advocate any particular design model, just one the leader knows how to employ and one flexible enough to be applied to the range of organizational situations a leader faces in the course of a career.

Once upon a time, “organization design” meant bringing in a slew of consultants to oversee a large-scale organizational restructuring, most often intended to take out big chunks of cost during an economic downturn. Although that kind of redesign is still required periodically, leaders today are more typically confronted with the challenge of how to find cost efficiencies in certain parts of their organization to invest in other parts of the organization that drive growth. As a result, organization design is no longer just a big bang event. Rather it’s an on-going nipping and tucking of organizational resources to achieve both growth and efficiency at multiple levels: the company overall, the operating group level, and even within functional groups like human resources and information technology. So leaders at many different levels need to get in on the act.

If, as Dave suggests, there isn’t any ideal design model, then how does one choose an approach to designing an organization that is robust enough to address the dual goals of achieving efficiency and investing in growth at multiple levels of the organization?

The fundamental task of organization design is, as it always has been, helping a leader move from defining strategy to putting in place an organization that enables the strategy to be executed predictably. An effective organization design model guides a manager in answering five fundamental questions in a thoughtful and well-integrated way.

What is the business’s value proposition and it sources of competitive advantage? Business strategies are lofty, typically long-term oriented, and often aspirational. By contrast a compelling value proposition describes succinctly how the company will compete successfully against its competition—and implies the critical activities around which the organization should be designed. Are you competing on the basis of on-going product or technological innovation? Through low-cost sourcing and manufacturing?  By creating highly customized solutions for target customers? A clear, straightforward answer to this question provides a foundation on which you can design an organization.

Which organizational activities directly deliver on that value proposition—and, by contrast, which activities can the company afford to perform in a way equivalent to competition? When faced with an organization design challenge, many managers rush to grab a cocktail napkin—long the instrument of choice for reorganizing—and sketch out a high-level diagram of boxes and reporting relationships. In doing so, they implicitly accept the way organizational resources and costs are currently deployed and miss opportunities for more creative, effective design. A better course is devoting time to considering what organizational functions truly bring the value proposition to life. As Kreig Smith, founder of design consultancy AlignOrg Solutions, has pointed out, not all work is created equal. Certain activities are crucial to delivering on the value proposition. As a result, they should be owned by the company and given the greatest possible resources.

Conversely, there are functions and activities where an extra dollar of investment doesn’t help the company win in the marketplace. What’s important is to realize that both sets of activities vary with a company’s business strategy. For example, new product development may be the lifeblood of a consumer products company—and thus need to be cultivated and resourced carefully—while in a low-cost producer, or fast follower company, product development may be only a nice-to-have activity. “Get the wash out the door” activities, that is, those where being at par with competition is sufficient, are candidates for cost reduction whether by centralization, automation, outsourcing, or a shared service approach.

Which organization structure should we choose, and how do we overcome its inherent downsides? Many leaders fall in love with the organization structure they’re most familiar with, whether it’s organized according to function, geographic location, customer segment, or through a matrix. In the process they neglect to appreciate the pros and inherent cons of the structure and thus fail to take steps to mitigate the downsides. While a structure organized around customer groups is great for getting close to them and catering to their needs, for instance, it can be costly, and over time interest in product innovation may wane. What’s more, organization structures by definition create boundaries between one part of the organization and others. A successful organization design therefore, as Jay Galbraith of the Center for Effective Organizations pointed out years ago, includes linking or integrating mechanisms, such as an account management function to coordinate activities—creative, design, brand management, and so forth—on behalf of the client within an advertising agency.

What type of leadership and culture are required to achieve the value proposition? For all the table pounding that managers do about culture change, few fully consider the type of leadership and culture required to put a new organization design into gear. Clearly, a low-cost producer strategy demands a ruthless focus on controlling costs while a customer-focused organization needs to encourage deep customer knowledge and internal coordination aimed at creating customer-specific products and services. When a company adopts a significantly different organization design, a critical part of the implementation process needs to include putting in place leaders who lead in a way consistent with the new value proposition and who will take steps to strengthen corresponding cultural norms. For example, when a company moves from an efficiency-based strategy to a customer-focused one, members of the leadership team need to introduce a new reward system to promote a do-whatever-it-takes mentality in responding to customer needs throughout the organization.

Which organizational practices are required to reinforce the organizational intent? Many managers introduce a new strategy and organization structure and declare victory—often at their peril. The reason that cultures are so difficult to change is that cultural values are deeply woven into the policies and practices that govern how people work. As a result, when leaders launch a significantly new organization design, it’s imperative that they revise such practices — how performance objectives are set, the metrics and scorecards that signal success or failure, the type of people to be recruited, and how they are trained. Otherwise, they’ll put in place a shiny new organization structure — but find that people are behaving exactly as they did under the old regime.

As organization structures have become more fluid and organic, organization design is no longer the purview of a handful of senior executives supported by high-priced consultants. Leaders at many levels of the organization are increasingly called on to reallocate organizational resources and redesign their organizations to support more frequent shifts in company strategy. As a result, they need to have a trusty organization design model in their wallets—and know how to use it.

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