Bureaucracy. Conflicting communications. Countless emails. Duplicated efforts. Many companies lack the lean, efficient operations they desire. Large companies find themselves with excess organizational layers, complicated procedures, unmotivated people, and unclear lines of communication.
Urgent decisions cannot be made quickly because people are afraid to take a stand and endorse a decision. Instead, countless meetings are scheduled to gain consensus, which delays decisions and spreads the blame when something goes wrong. Moreover, employees justify their paychecks through self-generated busy work. Supervisors request ad-hoc reports which quickly become institutionalized processes. A simple mistake is solved by adding a department or function responsible preventing the same error in the future. As a result, companies fall into a cycle of complacency and mediocrity.
It’s never too late to break the cycle of mediocrity and stimulate an organizational revival. There are two fundamental guiding principles to steer companies through the process of creating an optimal structure and drive how decision making is delegated and distributed.
First, competitive business drivers should ultimately drive how an organization is structured. Second, the distribution of decision making can be defined by the external product, geographic, and customer complexities faced when competing. Following these two guiding principles, Trenegy has developed a comprehensive organization design and decision making framework that has been used to revitalize many companies.
Trenegy has found that most companies do an ample job of addressing the rewards and people components of their human resource strategy. However, these companies continue to struggle with organizational structure.
Organizational structure issues arise out of poorly executed mergers, poor hiring decisions, and legacy practices.
Part of designing the right structure is getting back to the basics of the business model, core work processes, and competitive business drivers.
Core Work Processes
The core work processes of an organization are essential to fundamental operations. Ask: What major 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 should be tied to an operational function. An example of corresponding operational functions is Marketing for Market, Engineering for Engineer, and Operations for Operate. The functions that offer 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 and Organization Design
Business drivers are core external drivers that drive 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 the 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. A multinational company may need to differentiate its market approach to better concentrate efforts on needs presented by each location. Geographic differences limit the ability to standardize all 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 often increased wait time to contact needed personnel, receive documentation, and access raw materials, supplies, approvals, etc.
2. Product type
When business practices or product/service offerings vary greatly by product type, an organization may want to delegate decision-making to different product or service line leaders. Organizing by product type allows for faster product development.
The disadvantage to organizing by product type is a decrease in standardization, leading to more complex and differing standards, processes, and equipment. With product customization resulting in fewer common equipment parts and materials comes a decrease in both buyer power and the ability to buy in bulk. Furthermore, a customer may now have multiple points of contact with which to interface.
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 type and secondarily by geography. Operations under each business unit is empowered in their decision-making and allowed necessary diversification across product types and geographies. Support functions are shared across all business units under the GE global umbrella.
Organizing by customer provides the ability to customize products/services. With increased focus on customer needs, personnel are empowered to build deep relationships and focus on customer loyalty. Personnel are also empowered to bundle and cross-sell services, increasing the quantity and range of services available. Organizing by customer helps avoid the commoditization of the company’s service offering.
The disadvantage to organizing by customer is the divergence of standards between customers. This disparity in customer service could lead to challenges in manufacturing. Increased manufacturing customization and focus on the customer can lead to duplication of resources and increased overhead.
When companies organize around function, a centralized structure is typically implemented. If the other business drivers (product type, customer, geography) do not vary significantly, then organizing by function may be most efficient.
A company organized by function operates when designed around its activity groups or departments, such as Marketing, Finance, Production, and Research & Development.
A functionally-organized company leads to increased knowledge sharing and economies of scale. Functions are able to build depth and specialize. This structure supports the implementation of standardized processes. 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 that 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.
Types of Organizational Structures
Once the organization structure is defined around the key work processes and business drivers, the delegation of decision-making can be addressed.
Organization type is about where decisions are made versus where people sit geographically. A geographically dispersed company can be run in a centralized fashion and vice versa. Large retailers are a prime example where all decisions (staffing, merchandising, layout, pricing) are made centrally while most of the personnel are in the stores. As the structural needs of a company are assessed, the operations and support functions should be considered independently.
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 that require leaders to closely manage decisions and attentively enforce those 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 and ensure change remains consistent with the organizational strategy.
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 and countries. It is difficult to diversify operations in an effective manner with use of the 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 of the same organization. This structure type 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 in decision making across the organization. Managers and key decision makers are spread across the organization and the reporting structure can be relatively flat. This provides increased accountability and employee empowerment across the organization. Employees are better able to see 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 come to conflicting or competing decisions and goals, creating role confusion and inconsistent direction for personnel. Finally, the decentralized model offers less ability to control the consistency and quality of product/service offerings.
Weatherford International would be considered a relatively decentralized organization with various separate entities/business units, operating under the Weatherford International organizational umbrella. With operations in more than 100 countries, Weatherford has acquired a large quantity of smaller entities and located authority closer to the customer. While efficiency within the individual entities may be achieved, the decentralized model may not allow for commonalities among entities to be leveraged or for lessons learned to be shared across 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 the centralized and decentralized structures and creates the ideal structural model, intended to balance the power between the two sides of the matrix.
Key advantages of the matrix structure are characterized by the capitalization of intercompany communication. The dual-reporting nature of this structure increases information flow through cross-functional communication channels.
The dual-reporting relationships of the matrix structure can prove disadvantageous by creating a lack of accountability for performance goals, resulting in unmet performance measures or uncompleted important tasks. Dual reporting relationships may provide conflicting directions, creating role conflict and ambiguity for personnel. Personnel may feel a loss of prestige, authority, and control over their conventional roles. 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.
In sum, centralization is appropriate for the assured enforcement of internal controls and compliance while decentralization allows for diversification across geographies. Due to the increased complexity of the matrix structure, it is often the most difficult structure to implement with proven efficiency.
Trenegy uses the following approach to help our clients through the design process:
- Define key leadership roles. This starts with defining the key leadership team underneath the CEO. Executive leadership can outline the company’s core work processes and translate them into the key executive roles.
- Define division of responsibility. This means deciding how the organization’s operations will be segmented. The company should examine the degree of complexity and impact each business driver (product, customer, geography) has on the company. For example, organizations with a high degree of differences across product lines should divide organization responsibilities between product lines.
- Define delegation of decision making. This means defining the level of centralization and decentralization of decision making. The company should take a look at the organization’s core processes and decide where accountability should be delegated. Customized processes requiring specialization may be delegated or decentralized while repetitive decisions may be kept centralized.
- Define specific roles. Based upon leadership roles, division of responsibility, and delegation of decision making, the company should define the manager and supervisory roles. This includes identifying knowledge, skills, and abilities required for each position.
- Execute action planning. Once the design is finalized, the company should define what other considerations need to be implemented as a part of the new organizational structure. This includes identifying changes to processes, rewards, and performance management processes.
After a company goes through the process of redesigning their organization, several considerations for implementation should be evaluated:
- Develop organization charters (roles and responsibilities). Compile relevant information for justification and assign owners to ensure committed sponsorship of each action item.
- Prioritize supporting process improvements. Define the process improvements needed to ensure a smooth transition to the future state.
- Identify employees. Define the roles and responsibilities needed for the new organization and fill positions with the right people.
- Develop a communication plan. Set a clear timeline for the implementation plan. Determine how you will effectively present and promote these changes to the internal and external stakeholders of the company. Identify and empower key personnel throughout the organization who are strong opinion leaders and will help to advance the efforts of the transition among their peers.
- Finalize the roadmap. Ensure that the plan is well-defined, achievable, measurable, and has executive leadership buy-in.
- Implement the new structure. Define how the executive team will operate once changes are realized and remain actively involved and invested in the transition process. Listen to affected personnel along the way and manage expectations while refining the implementation plan.