10 Principles of Organization
Design
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.
2. 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.
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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
by Gary L. Neilson, Jaime Estupiñán, and Bhushan Sethi
Published: March 23, 2015 / Summer 2015 / Issue 79
https://www.strategy-business.com/article/00318?gko=c7329&utm_source=itw&utm_medium=20180123&utm_campaign=resp
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