This is the fifth and final post of the Why Organization Design Matters series. Part 1 of the series looked at the critical contribution of organization design to operationalizing strategy. Part 2 examined the essential importance of aligning the organization to its marketplace. Part 3 considered how design can help organizations to address and eliminate obstacles to success they have been continually unable to overcome. Part 4 explored how organization design shapes patterns of information processing in two dimensions.

This final entry offers two summary perspectives on why org design is important. The title of this entry names the first – the Organization Design Difference. The second is the Organization Design Effect.

The Organization Design Difference

In a company I worked for early in my career, the corporate officers would periodically “restructure” their functional organizations. They followed a ritual that I found fascinating.

They would engage in an armchair exercise to identify structural changes. This was usually done by the corporate officer in isolation but occasionally with the counsel of their HR manager or other trusted advisors. They would then write a one-page memorandum that offered a rationale for the organizational changes they intended to make along with a revised organization chart that appeared on a separate page. The memorandum often used language like “provide for greater control of…” or “result in closer oversight of…” or “reduce span of control…” Then they would send the memorandum to the CEO for review and approval before announcing the change and publishing the memo to the whole organization.

As I think back on this ritual now, I believe there were good intentions at work here and that the changes that were made had some degree of positive effect. However, they were narrowly focused on the exercise of oversight and control and nothing more fundamental changed. The functional organization largely remained the same and any improvement in performance was incremental at best.

Organization design, as it has been addressed throughout the series, is much more than the arrangement of boxes and placement of names on an org chart. Organization design is an enterprise-wide, deliberative approach involving broad engagement to systematically and carefully rethink and reshape an organization. This includes not only its structure – its skeletal system – but also its vascular system – how the organization interacts with its environment, how work and information move through the organization, how integration and coordination happen among units, how peoples’ efforts are directed and brought to bear in executing work consistent with the strategy, and how the entire effort is underpinned and supported to ensure that the system has what it needs to be successful. This is what I mean by the Organization Design Difference.

The process of design is driven by lots of inter-related decisions that are carefully considered at successive levels of content and detail. There are foundational decisions involving the overall architecture of the organization based on a single organizing principle or combination thereof. At deeper levels, the decisions add detail that flesh out the architecture and give it operational definition eventually down to the daily and weekly work system.

These guided, decision-driven deliberations enable leaders to consider thoughtfully where and how they want to focus the organization and the collective effort of their people. For example, in Part 2 of this series, Medical Devices concluded it needed a much more granular geographic structure to match the complexity and rapidly changing landscape of healthcare. The organization shifted from being headquarters-centric to being field-centric. The number of geographic regions was expanded from four to eleven. Parts of headquarters marketing were forward deployed to the field to provide front-line market analysis and strategy.

In Part 3, Digital Network Services decided it needed to organize into a product structure to focus development effort within product families to speed delivery to market. The product groupings were informed directly by the new strategy. Functional resources based on expertise and experience were distributed to the product groupings and cross-cutting functions such as Project Management, Engineering Services, Design Verification, etc., became lateral processes for integration and coordination.

The organization design difference described here provides leaders the ability to design or redesign their organization to create what is perhaps any organization’s last sustainable competitive advantage – uniting and optimizing the singular skills and talents of its workforce with the strength of its technical work system to produce a unique solution.

The Organization Design Effect: Focusing Organization and Member Effort

There are two more potent benefits inherent to organization design alluded to above and threaded throughout this series. I call these the Organization Design Effect.

Focusing the Organization

Organization design begins at what I choose to call the strategic level. This is the level at which the overall shape or, as it has been referred to here, architecture of the organization is set. It is based on one of the five pure organizing principles (function, product, customer, geography, and process) or some combination thereof and it establishes the major groupings of activity and member effort that will shape how the organization works overall.

This level of design is directed at two objectives. The first is to align the organization to the demands and requirements of its marketplace. The second is to operationalize its strategy. While marketplace demands and requirements should be apparent in the strategy, the marketplace – especially in today’s world – moves quickly and should be continuously monitored.

This is the first effect. Strategic design aims the organization at the most salient demands of its marketplace and its own expression of how it intends to be successful in it.

Focusing Member Effort

At successively deeper levels, there are a host of decisions that operationalize the strategic design. If, as we’ve said above, strategic design shapes the overall architecture of the organization, operational design decisions at two successive levels add the details.

These decisions involve the designation of units within the big groupings including unit purpose and function, task domain, the skills, knowledge, and abilities that must be resident in the unit, etc. Next come decisions about job design, staffing, changes to key business and work processes, mechanisms to coordinate and integrate differentiated effort and so on down to the level of detail that brings to life the daily/weekly work system.

As design progresses, design decisions increasingly focus on individual members and become the principal determinant of individual contribution. They establish the units and teams that individuals will become members of, determine reporting and peer relationships, specify the tasks and activities that comprise jobs and define individual contribution, set up paths of progression, and shape line of sight to outcomes. In so doing, these decisions tap into important social psychology dynamics such as social identity, affiliation, belonging, in-group/out-group dynamics, interdependence, and autonomy. Taken together, this is the second effect.

There is a related aspect of this that we will explore in a later post. The nature of these social psychology dynamics fundamentally influences organization culture. Organization culture, I submit, is the eventual, critical consequence of organization design and it is the cultural fortification of design that harnesses and animates the human organizational experience.

Closing Reflection

Throughout this series, we’ve looked at reasons why organization design matters and they are highly consequential. They range from operationalizing strategy, aligning an organization to the dynamics of its marketplace, surmounting difficult operational challenges, to shaping patterns of information processing. In this last entry, we’ve seen that it also possesses the ability to shape and focus organizational and individual effort in service of overall organizational effectiveness.

Future posts will look at how to prepare for organization design and how to go about it. I invite you to stay tuned.

The first post (Why Organization Design Matters: Part 1), posed two questions to tee up specific, tangible reasons why design matters.

• What’s the payoff for an organization that commits to deliberately and thoughtfully redesigning itself?
• What practical, impactful difference does it make?

Part 1 of the series looked at the critical contribution of organization design to operationalizing strategy. Why Organization Design Matters: Part 2 examined the essential importance of aligning the organization to its marketplace. Why Organization Design Matters: Part 3 considered how design can help organizations to address and eliminate obstacles to success they have been continually unable to overcome.

In this post, we’ll examine an often unrecognized or poorly understood function of organization design – how organization design shapes patterns of information processing.

Shaping patterns of information processing

A primary function of structure has long been (and continues to be for many organizations) managerial control. Whether the organization was deliberately designed, or its original structure morphed to its current form over time, any organization’s structure defines hierarchical levels of authority, reporting relationships, and, significantly, chain of command. Information, decisions, assignments, instructions, permission, etc. all flow along the chain of command indicated by the structure. This is especially useful if hierarchical command and control are the primary objective of an organization’s design. Historically, it was also a particularly good fit when external environments were uniform and stable, and markets moved more slowly.

As external environments became more complex and much faster-paced, an additional reason why organization design matters emerged and displaced managerial control as a primary function of structure. It is the ability of structure to shape patterns of information processing and there are two dimensions of this to consider.

Shaping Patterns in Two Dimensions

The first dimension has to do with the organization in relation to its external environment. Complexity, ambiguity, and a great deal of speed demand that organizations be able to scan, grasp, and act quickly on the demands, requirements, threats, and opportunities confronting it. The requirement for this capability poses a choice point for leadership. Either some mechanism to do this can be bolted onto the existing organization structure and its functionality can be integrated in some meaningful way OR the organization can be redesigned to match the complexity of the environment in which it operates and thereby do this more naturally and effectively.

The second dimension has to do with the internal flow of information and the degree to which the pattern of information processing matches the requirements of the work. How is information channeled and shared such that it moves fully and quickly to the point where it is needed for action and is unimpeded by boundary barriers?

The examples of Medical Devices (Why Organization Design Matters: Part 2) and Digital Network Solutions (Why Organization Design Matters: Part 3) from the previous two posts are illustrative of both points of organization design shaping patterns of information processing.

In the case of Medical Devices, the healthcare marketplace had become highly variable. Where the marketplace initially had been predominantly “fee for service” and chief surgeons were the key decision-makers and consequently the selling target, the penetration of managed care in various markets and the procurement changes that accompanied consolidated network dynamics created an environment that the headquarters marketing and sales organizations couldn’t easily comprehend and respond to.

Redesigning to make the sales and marketing organizations field-centric and expand the number of geographic regions from four to eleven to better align with the variation found in the market was a critical choice. Deploying important elements of marketing to the field provided front-line market intelligence that could be shared more quickly within a smaller region but also shared throughout the system.

The organization was far better positioned to scan, make sense of, and act on the nuances present in a highly variable external environment. Making each region a profit and loss center raised the level of accountability and underscored the importance of collecting and distributing market intelligence for quick action.

In the case of Digital Network Solutions (DNS), the speed of products to market was being inhibited by the inherent limitations of a functional organization. While function as an organizing principle has useful, practical advantages, the speed of information, work processes, and collaboration across functional boundaries tend not to be among them.

The product architecture that DNS settled on turned the organization 90 degrees. Instead of functions working on aspects of all products, product work resided in its own singular structure and the functional disciplines necessary to develop, design, and bring a product to market were embedded in these. Instead of flowing across functional boundaries, information and the collaborative exchange of ideas flowed within a unit that was focused on a product segment and could be used more easily by products within that segment. To balance the need to integrate and coordinate across product lines, “lateral” processes such as project management, engineering services, and engineering discipline were designed to ensure that information and matters needing to cross product lines were deliberately addressed.

Closing Reflection

In the previous two posts, I closed by summarizing how organization design mattered in relation to the two questions noted at the top of this post from the perspectives addressed in those posts. I refer you to the material payoffs and impactful differences in each of those cases.

In closing here, I want to underscore the benefits of organization design in helping to structure patterns of information processing. The first is to make an organization more knowledgeable and responsive to the trends, forces, events, and developments shaping its external environment. The second is being able to facilitate the distribution, flow, and use of information inside an organization. Both are critically important.

• How good is your organization’s market intelligence?
• How well does your organization align to the current and emergent demands of its marketplace?
• How easily does information move throughout your organization?
• Is it getting to where it is needed in a timely way to inform deliberations, decisions, innovation, creativity, and interdependence?

]]> https://pda.us.com/why-organization-design-matters-part-4/feed/ 0 https://pda.us.com/why-organization-design-matters-part-2/ https://pda.us.com/why-organization-design-matters-part-2/#respond Wed, 05 Jun 2024 16:09:02 +0000 https://pda.us.com/?p=638 This series on organization design targets readers unfamiliar with the subject, illustrating how intentional design enhances performance.

The previous post (Why Organization Design Matters: Part 1), posed two questions to tee up specific, tangible reasons why design matters.

• What’s the payoff for an organization that commits to deliberately and thoughtfully redesigning itself?
• What practical, impactful difference does it make?

Part 1 offered five responses to these questions and addressed the first – the critical contribution of design to operationalizing strategy. In this post, we’ll examine the second– aligning the organization to its marketplace.

Market Alignment: Designing to align with current and emerging demands

Organizations do not exist or operate in a vacuum. A discussion of open systems theory is beyond the scope of this post, but it is important to appreciate that all organizations operate in the context of a larger environment.

In the crudest sense, environment is everything outside of an organization’s boundary. However, not everything outside an organization’s boundary is relevant. The undifferentiated, external environment can usefully be narrowed to its most relevant aspects and three concepts help to do that.

The first is domain. Domain is the claim an organization establishes for itself in terms of range of products, population served, and goods or services rendered. For example, universities are not in the business of highway construction and maintenance and pharmaceutical companies are not in the business of oil and gas exploration and production. Organizations operate within their chosen domain.

The second concept is task environment. Task environment is those parts of the environment that are relevant to an organization’s goal setting and goal attainment. An organization’s interactions with these elements define its task environment.

The third concept is environmental dynamics. Environments are not stable. They are subject to undercurrents and upheavals that sometimes subtly and other times dramatically change the landscape.

• Trends: Slow-moving but steady impacts over time.
• Forces: Faster impacts than trends but not as sudden as events. Technical disruptions are prime examples.
• Events: Sudden impacts, such as the COVID-19 pandemic, which rapidly alter the landscape.
• Developments: Impacts that unfold over time, neither as slow as trends nor as sudden as events. The penetration of managed care into the healthcare industry and the acquisition and consolidation of independent hospitals into large national networks, as you’ll read in just a moment, are examples.

When domain, task environment, and environmental dynamics are combined, they help us define and characterize an organization’s “marketplace” – a more useful concept than environment as simply everything outside an organization’s boundaries.

Markets and organizations interact constantly. Organizations must regularly scan and understand their marketplace, learning and planning adaptively and proactively. Ignoring this dynamic interaction can be highly problematic. Here is one such story.

The Case of Medical Devices

I had the privilege of consulting with a medical devices company on a fundamental redesign of its sales and marketing organizations. Medical Devices (not its real name) not only designed and developed surgical devices and procedures but also trained physicians in procedures and the use of its devices. From the time of its founding, it experienced a meteoric early rise to $600 million in revenue by the end of year five. In year six, sales slumped.

Since the time of Medical Devices’ launch, the landscape of healthcare had begun to change dramatically and swiftly. Managed care had begun to penetrate much deeper into many more markets. A great deal of acquisition and consolidation had changed the face of the market, and large national networks had acquired independent hospitals. As the combination of managed care and national networks began to dominate, the sales target had shifted. Where it was once the chief surgeon who determined what procedures and what equipment would be used, increasingly those decisions were being made by procurement departments.

The market reality and associated assumptions upon which Medical Devices had been founded were changing rapidly and, in some cases, had vanished. The initial assumption of a homogenous market landscape was gone. Further, the marketplace was highly variable even within existing regions and headquarters marketing didn’t understand the nuances in the various geographies. The locus of control for decision-making had shifted – a huge break from the founding assumption. The clinical sales force that Medical Devices had been hired and trained to sell to chief surgeons was ill-equipped to sell to the procurement officers that had displaced them. In short, the organization didn’t align with the major marketplace characteristics that had evolved and were continuing to evolve quickly.

The Medical Devices leadership team, after much thoughtful discussion and reflection, concluded they didn’t know what they didn’t know and needed to get smart fast. They further concluded that the challenge ran deeper than operational fixes would address and determined that marketing and sales organizations must be redesigned to better align with the marketplace.

A thorough description of how leadership and the whole organization worked to get smart and position themselves for redesign will be addressed in depth in later posts when we look at the process of redesigning an organization.

The proposal for the sales and marketing redesign incorporated several key features (among many others):

• Shift to Field-Centric Focus: Moving emphasis from headquarters to the field to better address regional market needs
• Increase in Geographic Regions: Expanding from four to eleven regions to align with important geographic segments, allowing for more targeted strategies
• Profit and Loss Centers: Making each geography a profit and loss center to encourage local market scanning, learning, and adaptive planning
• Forward Deployment of Marketing: Placing parts of headquarters marketing in the field to provide front-line market analysis and strategy
• Market Development Function: Creating an organizational unit to work with managed care organizations, demonstrating how the company’s devices and procedures could improve patient outcomes and recovery times
• Sales Force Re-equipping: Training the sales force to sell to procurement officers in addition to chief surgeons

Implementation began with a prototype geography to test and refine the new approach. Full implementation was completed within 15 months.

The Value of Alignment to the Marketplace

At the beginning of this post as in the first post of this series, I posed two questions:

• What’s the payoff for an organization that commits to deliberately and thoughtfully redesigning itself?
• What practical, impactful difference does it make?

Consider the following:

In the second year following the redesign, with the features of the redesign in place across all the new geographies and the sales force retrained, top-line growth increased by $100 million on previous revenue of $600 million. In each of the next two years, that $100 million top-line growth was repeated. By the end of year four following the redesign, revenue approached $1billion.

Designing to align with the current and emergent demands of the marketplace can make a difference. Members of the Medical Devices organization certainly thought so.

• What about your marketplace has changed/is changing?
• Does your organization still reflect the founding assumptions that may very well no longer match the current marketplace conditions?
• Where does your organization’s marketplace seem to be headed and what needs to be done to have your organization meet it effectively in the future?