As organizations transform their workforces into a combination of remote and in-office roles, executive leadership is reevaluating the effectiveness of organizational structures. A hybrid workforce changes the dynamics of communication, culture, and decision-making, and the structure must adapt accordingly.
Two fundamental guiding principles steer companies through the process of creating an optimal structure and drive how decision-making is delegated and distributed.
Following these two guiding principles, Trenegy has developed a comprehensive organization design and decision-making framework to optimize the organization structure.
The organizational structure has a direct impact on every aspect of an organization, including customer service, product or service quality, employee retention, and internal efficiencies. For example, depending on whether customer-facing decisions are centralized or decentralized, the customer experience will be quite different. Part of designing the right structure is getting back to the basics of the business model, core work processes, and competitive business drivers.
The core work processes of an organization are essential to fundamental operations. Ask: What overarching processes are essential to customer delivery? An example of core work processes for an organization could be as simple as Plan → Market → Engineer → Operate.
Each core work process can be assigned to an operational function. An example of corresponding operational functions includes: Marketing for Market, Engineering for Engineer, and Operations for Operate. The other functions offering support to each of the operational functions are known as support functions (HR, IT, Finance, etc.). Sub-processes performed under each core work process are known as organizational competencies. The competencies are simply a list of what the organization must do well to differentiate itself and compete.
Business drivers are core external drivers driving complexity and variability in an organization. Business drivers are typically geography, product/service line, function, and customer. Companies should analyze their business drivers to determine how and where decisions should be delegated and divided.
A company organized by geography coordinates structure, decision-making, and processes around physical locations. When business practices or product/service offerings vary greatly by location, this is a viable option for organizing the company’s operations.
Managing business operations across multiple locations adds complexity, particularly in areas with differing cultures, business practices, local laws and regulations, languages, climates, physical geography, and infrastructure. For example, a multinational service company may need to differentiate its market approach by geography to better concentrate efforts on needs presented by each location. Geographic differences limit the ability to standardize all local business operations and competencies into a one-size-fits-all format.
The disadvantage to organizing by geography is the difficulty of sharing resources across boundaries. The physical separation of resources leads to more complex logistics and increased wait time to contact needed personnel, receive documentation, and access raw materials/supplies/approvals/etc.
When business practices or product/service offerings vary greatly by product line, an organization may want to delegate decision-making to different product or service line leaders. Organizing by product line allows for faster product development.
The disadvantage to organizing by product line is a decrease in standardization, leading to more complex and differing standards, processes, and equipment. Allowing each product line to drive decisions results in fewer common equipment parts and materials used for production. This often causes a decrease in both buyer power and the ability to buy in bulk. It also given customers multiple points of contact to buy products or services which may cause confusion.
Although GE runs business activities all around the world with corporate offices, manufacturing plants, global investments, and operations in more than 100 countries, they organize primarily by product line. Operations under each business unit is empowered in their decision-making and has allowed necessary diversification across product lines. Support functions are shared across all business units under the GE global umbrella.
When companies organize around company internal functions, a centralized structure is typically implemented. A company organized by function operates when designed around activity groups or departments, such as Marketing, Finance, Production, and Research & Development. If other business drivers (product type, customer, geography) do not vary significantly, organizing by function may be most efficient. Many commodity-based businesses are organized by internal function.
A functionally organized company leads to increased knowledge sharing and economies of scale. Functions are able to build depth and support the implementation of standardized processes across the company. With a strong focus on a given function, a company is able to achieve economies of scale and leverage with vendors.
Aligning by function means the true integration of functions occurs at the leadership level. Functions operating in silos cause contention over cross-functional performance goals and shared resources. Organizing by function also creates difficulty in managing diverse products and customers due to less flexibility in making changes. With decision-makers concentrated at the top of the organization, employees are less empowered to make decisions based on diversified needs of the customer or a particular geography.
Organizing by customer provides the ability to customize products/services to meet certain customer segment needs. With increased focus on customer needs, personnel are empowered to build deep relationships, focus on customer loyalty, and bundle and cross-sell services to increase the quantity and range of services available. Organizing by customer prevents the commoditization of the company’s service offering. For example, many large professional service firms are organized by customer segments in the form of industry and account teams. Each market leader has accountability for managing all of the activities by a specific industry segment of customers (energy, public sector, retail, etc.).
The disadvantage is the divergence of standards between customers. This disparity in customer service could lead to challenges in manufacturing and service efficiency. Increased manufacturing customization and focus on the customer can lead to duplication of resources and increased overhead.
Organization structure is defined by how decisions are made versus where people sit geographically. Once the organization structure is defined around key work processes and business drivers, the delegation of decision-making can be addressed.
The three basic organizational structures are centralized, decentralized, and matrix.
The centralized structure is utilized when knowledge, information, and decision-making are concentrated at the top and filtered down to lower levels for implementation. The centralized model drives a vertical reporting structure most commonly implemented by companies requiring leaders to closely manage and attentively enforce decisions.
The key advantage of the centralized structure is heightened control over decision-making by top-level managers. Top-level managers have the power to shape organizational change, control expenses, and ensure change remains consistent with the organizational strategy. Large retail chains tend to have a centralized management structure where each store is expected to standardize and follow the “company way.”
Corporate leadership of a centralized organization must have an in-depth understanding of the complexities in which the company operates. A centralized company operating in multiple geographies may fail to recognize differing cultural, legal, and business practices across locations. It can be challenging to diversify operations in an effective manner using a centralized structure. With a strong dependency on a few top leaders for strategic decision-making, a company would be greatly impacted by the loss of a leader, whether temporary or permanent.
The decentralized structure is characterized by decision-making responsibilities distributed to lower levels or divisions within the organization. This structure is most commonly implemented by companies offering differentiated products and running service operations in multiple geographies.
The diversified nature of decision-making offered by decentralization increases participation and democracy across the organization. While managers and key decision-makers are spread out among the company, decentralization provides increased accountability and employee empowerment. Employees are able to better appreciate the results of their efforts. The decentralized model provides the organization with increased flexibility to respond to minor issues and changes that arise.
The diversified nature of the decentralized structure does not easily yield economies of scale and operational efficiencies. Standardization is difficult to achieve due to the changing needs of the customers and business operations across different geographies. Decision-makers may face conflicting or competing decisions and goals, creating role confusion and inconsistent direction for personnel. Additionally, the decentralized model offers less ability to control the consistency and quality of product/service offerings.
Johnson & Johnson considered decentralization with hundreds of business units that operate on their own. With operations in more than 100 countries, J&J has acquired companies and brands with their own market differentiators. While efficiency within the individual entities may be achieved, the decentralized model may not allow entity commonalities to be leveraged or lessons learned to be shared throughout the larger organization.
The matrix is a dual structure, combining both functional specialization and business product or project specialization. This structure theoretically takes the best of both centralized and decentralized structures and creates the ideal structural model intended to balance power between the two sides of the matrix.
A key advantage of the matrix is increased inter-departmental communications. The dual-reporting nature of this structure increases information flow through cross-functional communication channels. However, this can result in communication overload.
The dual-reporting relationships have proven disadvantageous by creating a lack of accountability for performance goals, resulting in unmet performance measures and delays in completing internal projects. Dual-reporting relationships may provide opposing directions, creating role conflict and ambiguity for personnel. Personnel may feel a loss of authority and control over their jobs. The matrix model produces increased costs as a result of the additional managerial and administrative personnel hired to support the complex structure. Matrix companies tend to be bureaucratic and decision-making can be overly complex. Texas Instruments is a prime example of a matrix-run organization where leadership is broken into groups and functions within the company.
In short, centralization is appropriate for the enforcement of internal controls and compliance while decentralization allows for diversification across geographies, customer segments, and product lines. The matrix structure is often the most difficult to efficiently sustain due to increased complexity.
Trenegy uses the following approach to help clients through the design process:
After a company goes through the redesign process, several considerations for implementation should be evaluated:
