Organizational Design 101: What to Know Before Attempting Your Own
Evolving technologies, continued globalization, and shifting social norms are just a few of the challenges facing modern organizations. Businesses must either quickly adapt to change or be overtaken by their more agile competitors. And to be frank, adaptation often necessitates a complete organizational redesign.
But as you’ve either guessed or experienced yourself, a successful org redesign is a pretty hefty undertaking. And according to research from McKinsey & Company, less than 25% of organizational redesigns succeed.
If your business is on the cusp of such an endeavor, this article will cover everything to know before you begin. We’ll address exactly what org design is and why it’s important, the most common models and frameworks, and the biggest challenges you’ll face in organizational design.
- What is Organizational Design?
- Why is it Important?
- Common Org Design Models
- Organizational Design Challenges
What is Organizational Design?
On the most basic level, organizational design is a systematic process for establishing the principles and structures that guide a business or organization toward achieving its goals.
Successful organizational designs should incorporate these elements:
- Strategy – Why a business exists and what advantage it has over competitors
- Structure – How people are organized hierarchically
- Systems – The processes for submitting departmental reports, rewarding employees, or allocating resources, for example
- Processes – The methods and technologies people use to get their work done
- People – The type of talent that should be hired across departments in order to meet company-wide goals
- Culture – Communication, collaboration, or managerial styles
Keep in mind that this isn’t an exhaustive list, and you’ll address various topics depending on the methodology or model your org chooses to follow.
And, more often than not, you’ll hire a design firm or consultant to help establish the right processes and org structure. Firms are good at taking the principles and models developed by decades of research and tailoring them for your business.
Why is Organizational Design Important?
Ineffective, nonexistent, or outdated org structures often lead to:
- Rigid silos caused by too much structure and not enough systems or cultural practices to counterbalance them.
- A culture where people don’t feel empowered to take responsibility, resist doing tasks outside their job descriptions, or defer decision-making for fear of stepping on someone else’s toes.
- Inefficient production and redundancies caused by poorly designed systems.
- Reduced customer satisfaction, which happens when an org structure doesn’t include customer feedback as one of the key elements, leading to products or services that no one really wants.
- A less profitable business, the natural result of disempowered employees, redundant efforts, and products that don’t delight customers.
But here’s the good news. Companies that rethink and redesign their org structure can see these high-level benefits:
- Increased innovation supported by a holistically designed org structure, efficient resource allocation, and a culture of collaboration.
- Increased profitability thanks to customer-centric innovations combined with faster production cycles.
- Happier and more engaged employees who thrive in a culture of collaboration and feel their efforts aren’t wasted on inefficient processes.
- A clear vision and roadmap for the business’s future, which is understood by everyone at every level of the organization.
Luckily, leading researchers and experts have developed several organizational redesign models that allow companies to enjoy these benefits.
Common Org Design Models
There are a plethora of approaches to organizational design, but there are a few that stand out and are adopted more often than others.
1. McKinsey’s 7S Design Model
The 7S model is one of the most referenced for organizational design. It was developed by Robert H. Waterman, Jr. and Tom Peters for McKinsey & Company in the 1980s, and it focuses on the seven “S”s inherent in most organizations:
This design is described as having both hard and soft elements—that is, those that are tangible and those that are more intangible.
The hard elements are strategy (the business plan), structure (how people are organized), and systems (reporting, rewards, and resource allocation). The soft elements are shared values (company culture), skills (core abilities), staff (the talent), and style (how managers lead).
The 7S model also attempts to illustrate how these elements align with and build on each other. Understanding how the different “S”s interact is key to anticipating what will happen across the organization when changes are made.
The limitation of this design is that it doesn’t have a clear point of view about how to enact proposed changes. It also neglects external inputs, like customer satisfaction, and how they might play a role in how the company organizes.
2. Jay Galbraith’s Star Model
Of the most common models, Jay Galbraith’s is the oldest. The late organizational theorist developed the Star Model in the 1960s and honed it throughout his career.
The five components of the Star Model encompass many of the hard and soft elements detailed in the 7S model, but with less of a focus on company culture and more attention paid to employee incentives, rewards, or compensation.
Like the 7S model, the Star Model doesn’t account for external influences and inputs. It also doesn’t consider the role of outputs and how customer response to a product should influence an organization’s design.
3. The Center for Organizational Design’s Transformation Model
The Transformation Model is a framework created and used by the Center for Organizational Design. It focuses on eight main variables and seeks to address the limitations of the 7S and Star models. Here’s what it looks like:
In addition to some of the hard and soft elements seen in the 7S and Star models (strategy, systems, structure, etc.), this model pays attention to environmental inputs. These inputs are things like changing customer tastes, new technologies, competition, or laws.
The model also incorporates results of production, such as sales metrics and customer feedback. Having a firm grasp of a company’s current performance indicates what needs to be changed or improved at any given moment. This makes the Transformation Model theoretically better suited for organizational adaptability.
Observe the before and after of the org structure below. With the Transformation Model applied, the sales, engineering, and production control departments work together to respond to customer desires. By deconstructing silos and including customer feedback in the org design, the company is better prepared to adapt to changing customer tastes with each production cycle.
The example above is a real design implemented by a company in the aluminum industry. With the help of these high-level changes, the company increased sales of a product line by 50% and increased margins by 25%.
Strategy&’s DNA Approach
Strategy&, a global strategy consulting team, guides org design with their proprietary “DNA” approach.
Many of the components in this model are similar to elements found in the first three models, but with different names. For example, “Rewards” has become “Motivators” and “Culture” has become “Mind-Sets”.
Another key difference is that Strategy& recognizes that each element is part of a complementary pair. Instead of elements being “hard” or “soft,” they are instead seen as being two sides of the same coin.
For example, the pair at the top of the chart describes how decisions are made. On the formal side, established processes influence how decisions are made, and on the informal side, human values and expectations play a role.
The point made by the pairs in the DNA approach is that for an org to change decision-making processes, it must consider methods for changing the written rules as well as the behavioral norms. This creates a more holistic picture of how an organization functions.
BCG’s Smart Design Approach
The 7S, Star, and Transformation models all assume that hard and soft components of an organization drive results. BCG, a management consulting firm, contends that business results are not directly influenced by hard and soft components at all. See if you can spot the difference in their organizational design model:
According to BCG, behaviors are the main force of any business. Hard and soft components only influence outputs indirectly. BCG’s model focuses on how hard and soft components impact human behavior, which in turn drives results.
When leading an org redesign, the Smart Design approach takes three main steps:
- Establish the reason for the reorganization, i.e. what the company would like its performance to be compared to what its performance is now
- Zero in on the employee behaviors that will close the gap between current and desired performance
- Determine what needs to happen to encourage those behaviors
BCG’s approach includes many options for how to encourage certain behaviors. These range from organizational structures tailored to reflect a company’s priorities (for example, fewer layers of leadership to facilitate faster decision-making) to employee assessment processes that focus less on assigning blame for shortcomings and more on rewarding cooperative behaviors.
Organizational Design Challenges
Even when you apply any of the models above, there will still be some challenges. Here are just a few of the most common challenges that make org redesign models and frameworks less than perfect:
All models need some degree of customization
Organizations are complex entities, each with their own goals, resources, constraints, and environmental inputs. Not only do companies need to be selective about which model they base their redesign on, but they also need to think carefully about how to personalize the model to better fit the needs of their organization.
This is where an outside firm comes in. A redesign expert helps company leaders understand the best ways to customize a model for their situation, as he or she has likely seen which changes work and which don’t for similar organizations.
20th-century models attempt to solve 21st-century challenges
Many of the most accepted organizational design models came about from research done in the 1960s, 70s, and 80s. While they’ve been refined over the years by researchers and consultants, they’re still rooted in work that happened during a different era. It’s not hard to imagine why the challenges facing businesses today are in many ways very different from the challenges of 50 years ago.
Organizations focus too much on hierarchy during the design process
Too often, people hear the word “organizational design” and assume it means shuffling around boxes on a company’s organizational chart. While the structure of an org’s employee hierarchy is certainly important, it’s only one part of organizational design.
A 2015 article from McKinsey Quarterly summed this up with a striking metaphor: “Many leaders tend to ignore the other structure, process, and people elements that are part of a complete redesign, thereby rearranging the deck chairs but failing to see that the good ship Titanic may still be sinking.”
How, where, and when people work is evolving
Remote employees, consultants, and new communications technologies no doubt have an impact on an org design. Design models should leverage new methods of collaboration and leave a little wiggle room for incorporating future innovations.
Ready to Launch an Org Redesign?
Organizational redesign is complex, but no one knows your business as well as your leadership team. To get support, start by finding an outside expert who values your knowledge of the organization and shows a willingness to tailor frameworks to account for external and internal developments.
Forward-thinking firms like The Center for Organizational Design, Strategy&, and BCG are reimagining design models and prioritizing personalization for their clients. Even if your company can’t work with these specific firms, consider consultants with a similar philosophy of innovation and customization.
Pingboard is an organizational chart maker that can help you visualize new org structures. Use it to draft organizational structures influenced by the org design model of your choice, then invite others to view your proposed designs.
With the right model, consultants, and tools in place, your company is sure to be one of the 25% who emerge victorious from a tough but rewarding org redesign process.