An Introduction to Organization Design

This is the first post in a series on the subject of organization design.

The Quest for Competitive Advantage

Achieving competitive advantage in business has always been a relentless quest.  Any advantage a company can develop and sustain translates into winning and retaining more customers and generating more wealth.  Historically, companies have relied on proprietary technology, a stable, loyal workforce, exclusive access to capital, and control of local markets to create competitive advantage.

The last four decades provide an interesting montage of the parade of strategies companies have tried to differentiate themselves from their competitors.  In the early 1980s, diversification was a strategy of choice.  Companies acquired dissimilar enterprises in an effort to extend their reach and demonstrate their competence as well as buffer themselves from market instability in their core businesses.  

From the middle 1980s into the early 1990s, total quality was the rage.  As customers recognized that they need not settle for mediocre quality, the quest for distinctive quality became the advantage-building agenda.  This was true not only for hard goods, but also for customer service.  If distinctive quality was the quest, the Deming and Baldridge awards were the badges of ultimate achievement. 

A little later in the 1990’s, the emphasis shifted.  Process re-engineering and lean thinking became the new battle cry of competitive advantage.  The advantage, according to conventional wisdom, belonged to those who had lean and streamlined work processes.

Over the last 20 years, the emphasis has shifted again. Approaches like IT innovations that drive proprietary capabilities, big data analytics, and strategic partnerships and alliances have emerged as advantage-building strategies. 

Looking back over the last 40 years, each successive wave of advantage-building strategy had its merit.  Demonstrated competence fosters general market confidence that continues to attract and retain customer loyalty.  Quality is and always will be an important hallmark of products and services.  Lean, efficient work processes will indeed save money and serve customers well.  However, hindsight also makes it clear that the lead enjoyed with each successive wave of advantage-building strategy lasted only as long as it took others to catch up.  The advantages achieved by the companies engaging in these strategies were temporary.  Were they worth the effort?  The answer is yes.  However, they became table stakes in the marketplace; nothing less, but also nothing more.

In a highly competitive, global marketplace where the advantage of proprietary, innovative technology is, at best, brief, where a stable, loyal workforce has been replaced by worker “free agency” and migration, and where investors with cash are clamoring for choice investment opportunities, what can a company do to differentiate itself from the competitors in its market domain?  

If the strategies of the recent decades have failed to create sustainable, differentiating advantage, what then is left?  I believe the late David Nadler and co-author Michael Tushman had it right when they wrote, “… the last remaining source of truly sustainable competitive advantage lies… in the unique ways in which each organization structures its work and motivates its people to achieve clearly articulated strategic objectives.”  Said another way, perhaps the last sustainable competitive advantage any organization has is its ability to design and redesign itself in unique ways that unite and optimize the singular skills and talents of its workforce with its technology to reflect and respond to the dynamic demands of its market.

What Is Organization Design?

Before answering the question, it is important to acknowledge that there are other terms that tend to be used interchangeably with organization design but don’t at all mean the same thing. Two of these are “re-organization” (or “re-org”) and “restructuring.”

Re-organization is a term commonly applied to a re-alignment of organizational units, management responsibilities, and people. Re-orgs are done for reasons such as integration of acquired entities, consolidation of units with similar or complementary functions, separation and realignment of dissimilar functions, emphasizing certain capabilities, achieving operational economies, etc. Re-orgs have a practical purpose. They are, however, typically not frame-breaking activities. They occur within the framework of existing organizational arrangements, and they don’t fundamentally change the whole organizational system.

Restructuring is broader. Corporate restructuring is the process of changing a company’s management, finances, and operations to improve efficiency and effectiveness. Changes are aimed at increasing productivity, improving product or service offerings as well as quality, and reducing cost. Merger or consolidation, acquisition, downsizing, downscoping, recapitalization, change in corporate identity, etc., are common restructuring strategies. Restructuring likely includes the re-alignment of organizational units and therefore often incorporates re-organization. 

To make matters fuzzier, not only are these two terms used interchangeably for organization design, but they are also often used interchangeably for each other. Organization design, while sharing the objective of improving organizational performance and sustainability overall, is very different. 

For many, organization design is an org chart exercise. Move some boxes around, change some names, and there you have it. When “organization design” is approached in this way, it is little more than cosmetic and becomes solely about structure and hierarchy. Organization design, as is intended here, is much more than boxes and names on an org chart.  

Organization design is a comprehensive, systemic approach intended to rethink and reshape an organization, including its structure, processes, social system, and support system elements, to achieve its goals effectively.

Organization design has several qualities and characteristics that differentiate it from re-org and restructuring.

1. First, organization design proceeds in successive levels of content and detail. Consider building a house as an analogy. Construction begins with laying a foundation followed by framing. These establish the skeletal form the house will take. Next, successive structural elements are added to the exterior and interior. These result in the definition of spaces and relationships as well as the infrastructure to make the house work as intended. Ultimately, finishes are applied to the interior and it is furnished to assume its final intended design.

Organization design follows the same progression. The stages are designated as some variation of strategic, operational, and detailed design. Strategic design addresses the “architecture” of the organization. It is based on core organizing principles or hybrids thereof and gives the organization its form. Operational design elaborates the strategic design and builds out the structural elements that more fully define unit functionality, relationships, and business and work processes. Detail design describes how teams of people will work within the operating units.  Team goals, roles, and procedures are defined and committed to by those who will do the work. 

2. Second, organization design explicitly considers an organization’s unique challenges. Every organization faces unique challenges based on its core business products or services, the diversity of products or services, the number of competitors in the market, and competitive pressures concerning cycle time, technical features, innovation, price, etc. When these challenges are framed as design requirements (statements of “specification” to which the design must respond), they become the primary reference points for making decisions at each level of design. Defining the design requirements helps to ensure that an organizational response to the unique challenges are baked into the design solution.

3. Third, it addresses what is the most important function of any organization – information processing. Organization design enables information processing patterns that most closely match the information processing requirements of the organization’s environment and its work. What information needs to be where and when in order to inform deliberations, decisions, and actions?

4. Fourth, it is continuous. There is no “one best way” to design an organization. Organization design is a set of trade-offs. The art of design is to optimize the tradeoffs to address key challenges in the moment and consider it the best current response until changes in the marketplace require adjustments. Design, therefore, is an iterative, action-learning process that is never static.

There is much about organization design to understand and the task requires more than a single post. In the next entry (and several that follow), we’ll take a look at the practical, material reasons why organization design matters. Subsequently, we’ll explore how one gets started, what groundwork must be laid to help ensure success, and how one goes about actually designing an organization.  Please stay tuned.