Factors to Consider in Organizational Design

Considering the Environment

Considerations of the external environment—including uncertainty, competition, and resources—are key in determining organizational design.

Learning Objectives

Identify the inherent complexities in the external environment that influence the design of an organization’s structure

Key Takeaways

Key Points

  • Organizational design is dictated by a variety of factors, including the size of the company, the diversity of the organization ‘s operations, and the environment in which it operates.
  • According to several theories, considerations of the external environment are a key aspect of organizational design. These considerations include how organizations cope with conditions of uncertainty, procure external resources, and compete with other organizations.
  • A company in a highly uncertain environment must prioritize adaptability over a more rigid and functional strategy. In contrast, a company in a mature market with limited variability and uncertainty should pursue more structure.
  • A company with a low-cost strategy relative to its competition may benefit from a more simplistic and fixed structural approach to operations, while a company pursuing differentiation must prioritize flexibility and a more diversified structure.

Key Terms

  • strategy: A plan of action intended to accomplish a specific goal.
  • differentiation: A strategy focused on creating a unique product for a particular population.

Overview

Organizational design is dictated by a variety of factors, including the size of the company, the diversity of the organization’s operations, and the environment in which it operates. Considerations of the external environment are a key aspect of organizational design. The environment in which an organization operates can be defined from a number of different angles, each of which generates different structural and design strategies to remain competitive.

Complexity

Complexity theory postulates that organizations must adapt to uncertainty in their environments. The complexity theory treats organizations and firms as collections of strategies and structures that interact to achieve the highest efficiency within a given environment. Therefore, companies in a highly uncertain environment must prioritize adaptability over a more rigid and functional strategy. Alternatively, a fixed and specific approach to organizational design will capture more value in a mature market, where variability and uncertainty are limited.

Resource Dependence

Another perspective on organizational design is resource dependence theory—the study of how external resources affect the behavior of the organization. Procuring external resources is important in both the strategic and tactical management of any company. Resource-dependence theory explores the implications regarding the optimal divisional structure of organizations, recruitment of board members and employees, production strategies, contract structure, external organizational links, and many other aspects of organizational strategy.

Competition

Another environmental factor that shapes organization design is competition. Higher levels of competition require different organizational structures to offset competitors’ advantages while emphasizing the company’s own strengths. A company that demonstrates strength in differentiation relative to the competition benefits from implementing a divisional or matrix strategy, which in turn allows the company to manage a wide variety of demographic-specific products or services. Alternatively, a company that demonstrates a low-cost strength (producing products cheaper than the competition) benefits from employing a structural or bureaucratic strategy to streamline operations.

Identifying External Factors

In considering organizational design relative to the environment, managers may find it helpful to employ two specific frameworks to identify external factors and internal strengths and weaknesses:

  • SWOT analysis : In this particular model, a company’s strengths and weaknesses are assessed in the context of the opportunities and threats in the business environment. A SWOT analysis enables a company to identify the ideal structure to maximize its internal strengths while capturing external opportunities and avoiding threats.
  • Porter’s five-forces analysis: This analysis identifies factors of the industry’s competitive environment that may substantially influence a company’s strategic design. The five forces include power of buyers, power of suppliers, rivalry (competition), substitutes , and barriers to entry (how difficult it is for new firms to enter the industry). Understanding these varying forces gives the company an idea of how adaptable or fixed the organizational structure should be to capture value.
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Porter’s five-forces model: Porter’s five-forces analysis identifies five environmental factors that can influence a company’s strategic design: power of buyers, power of suppliers, competition, substitutes, and barriers to entry.

Smaller, more agile companies tend to thrive better in uncertain or constantly changing markets, while larger, more structured companies function best in consistent, predictable environments. Understanding these tools and frameworks alongside the varying external forces that act upon a business will allow companies to make strategic organizational decisions that optimize their competitive strength.

Considering Company Size

The size and operational scale of a company is important to consider when identifying the ideal organization structure.

Learning Objectives

Explain how the size of a company helps determine the organizational structure that optimizes operational efficiency and managerial capacity

Key Takeaways

Key Points

  • Company size plays a substantial role in determining the ideal structure of the company: the larger the company, the greater need for increased complexity and divisions to achieve synergy.
  • Companies may adopt any of six organizational structures based on company size and diversity in scope of operations: pre-bureaucratic, bureaucratic, post-bureaucratic, functional, divisional, and matrix.
  • Smaller companies function best with pre-bureaucratic or post-bureaucratic structures. Pre-bureaucratic structures are inherently adaptable and flexible and therefore particularly effective for small companies aspiring to expand.
  • Larger companies usually achieve higher efficiency through functional, bureaucratic, divisional, and matrix structures (depending on the scale, scope, and complexity of operations).
  • Understanding the varying pros and cons of each structure will help companies to plan their organization design and structure in a way that optimizes resources and allows for growth.

Key Terms

  • economies of scale: Processes in which an increase in quantity will result in a decrease in average cost of production (per unit).
  • Homogeneous: Having a uniform makeup; having the same composition throughout.
  • economies of scope: Strategies of incorporating a wider variety of products or services to capture value through the ways in which they interact or overlap.

Company Size and Organizational Structure

Organizational design can be defined narrowly as the strategic process of shaping the organization’s structure and roles to create or optimize competitive capabilities in a given market. This definition underscores why it is important for companies to identify the factors of the organization that determine its ideal structure—most specifically the size, scope, and operational initiatives of the company.

Company size plays a particularly important role in determining an organization’s ideal structure: the larger the company, the greater the need for increased complexity and divisions to achieve synergy. The organizational structure should be designed in ways that specifically optimize the effort and input compared to output. Larger companies with a wider range of operational initiatives require careful structural considerations to achieve this optimization.

Types of Organizational Structure

Companies may adopt one of six organizational structures based upon company size and diversity of scope of operations.

Pre-bureaucratic

Ideal for smaller companies, the pre-bureaucratic structure deliberately lacks standardized tasks and strategic division of responsibility. Instead, this is an agile framework aimed at leveraging employees in any and all roles to optimize competitiveness.

Bureaucratic

A bureaucratic framework functions well in large corporations with relatively complex operational initiatives. This structure is rigid and mechanical, with strict subordination to ensure consistency across varying business units.

Post-bureaucratic

This structure is a combination of bureaucratic and pre-bureaucratic, where individual contribution and control are coupled with authority and structure. In this structure, consensus is the driving force behind decision making and authority. Post-bureaucratic structure is better suited to smaller or medium-sized organizations (such as nonprofits or community organizations) where the importance of the decisions made outweighs the importance of efficiency.

Functional

A functional structure focuses on developing highly efficient and specific divisions which perform specialized tasks. This structure works well for large organizations pursuing economies of scale, usually through production of a large quantity of homogeneous goods at the lowest possible cost and highest possible speed. The downside of this structure is that each division is generally autonomous, with limited communication across business functions.

Divisional

A divisional structure is also a framework best leveraged by larger companies; instead of economies of scale, however, they are in pursuit of economies of scope. Economies of scope simply means a high variance in product or service. As a result, different divisions will handle different products or geographic locations/markets. For example, Disney may have a division for TV shows, a division for movies, a division for theme parks, and a division for merchandise.

Matrix

A matrix structure is used by the largest companies with the highest level of complexity. This structure combines functional and divisional concepts to create a product-specific and division-specific organization. In the Disney example, the theme park division would also contain a functional structure within it (i.e., theme park accounting, theme park sales, theme park customer service, etc.).

Strategic Organizational Design

Structure becomes more difficult to change as companies evolve; for this reason, understanding which specific structure will function best within a given company environment is an important early step for the management team. Smaller companies function best as pre-bureaucratic or post-bureaucratic; the inherent adaptability and flexibility of the pre-bureaucratic structure is particularly effective for small companies aspiring to expand. Larger companies, on the other hand, achieve higher efficiency through functional, bureaucratic, divisional, and matrix structures (depending on the scale, scope, and complexity of operations).

McDonald’s fast-food restaurants departmentalize varying elements of their operation to optimize efficiency. This structure is divisional, meaning each specific company operation is segmented (for example, operations, finance/accounting, marketing, etc.).

Considering Technology

Technology impacts organizational design and productivity by enhancing the efficiency of communication and resource flow.

Learning Objectives

Recognize the intrinsic structural value of the ever-evolving technological environment

Key Takeaways

Key Points

  • Organizations use technological tools to enhance productivity and to initiate new and more efficient structural designs for the organization. These uses of technology become potential sources of economic value and competitive advantage.
  • An example of an organizational structure emerging from newer technological trends is what some have called the “virtual organization,” which connects a network of organizations via the internet.
  • A network structure is another kind of organizational structure that is heavily reliant upon technology for communication.
  • More traditional organizational structures also benefit greatly from the advance of technology. Managers can communicate and delegate much more effectively through using technologies such as email, calendars, online presentations, and other virtual tools.

Key Terms

  • supply chain: A system of organizations, people, technology, activities, information, and resources involved in moving a product or service from the supplier to the customer.
  • network: Any interconnected group or system.

Organizational design can be defined narrowly as the strategic process of shaping an organization’s structure and roles to create or optimize capabilities for competition in a given market.

Technology is an important factor to consider in organizational design. Modern organizations can be treated as complex and adaptive systems that include a mix of human and technological interactions. Organizations can utilize technological tools to enhance productivity and to initiate new and more efficient structural designs for the organization, thereby adding potential sources of economic value and competitive advantage.

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Technology: Technology has opened doors to incorporating new and advanced forms of organizational design. This is most notably seen through rapid global communications and the ability to constantly and economically be in contact.

Technological Organizational Structures

An example of an organizational structure that has emerged from newer technological trends is what some have called the “virtual organization,” which connects a network of organizations via the internet. Over the internet, an organization with a small core can still operate globally as a market leader in its niche. This can dramatically reduce costs and overhead, remove the necessity for an expensive office building, and enable small, dynamic teams to travel and conduct work wherever they are needed.

A similar organizational design that is heavily reliant upon technological capabilities is the network structure. While the network structure existed prior to recent technologies (i.e., affordable communications via internet, cell phones, etc.), the existence of complex telecommunications networks and logistics technologies has greatly increased the viability of this structure.

Technology and Traditional Structures

Technology can also affect other longstanding elements of an organization. For example, information systems allow managers to take a much more analytic view of their businesses than before the advent of such systems. Managers can communicate and delegate much more effectively through using technologies such as email, calendars, online presentations, and other virtual tools.

Technology has also impacted supply chain management —the management of a network of interconnected businesses involved in the provision of product and service packages required by the end customers in a supply chain. Supply chain management now has the capacity to track, forecast, predict, and refine the outbound logistics, contributing to a wide variety of logistical advantages (such as minimizing costs from warehousing, fuel, negative environmental impacts, or packaging).

Technology simplifies the process of managing reports, collecting communications, and keeping in touch, enabling management in more formal structures to take on more workers. Increases in technology have essentially allowed organizations to scale up their companies through more effective and efficient teams.

Considering the Organizational Life Cycle

The life cycle of an organization is important to consider when determining its overall design and structure.

Learning Objectives

Describe the way in which life cycles influence an organization’s overall design and structure

Key Takeaways

Key Points

  • From an organizational perspective, the ” life cycle ” can refer to various factors such as the age of the organization, the maturation of a particular product or process, or the maturation of the broader industry.
  • In organizational ecology, the idea of age dependence is used to examine how an organization’s risk of mortality relates to its age. Richard L. Daft outlines different patterns of age dependence in his four stages model.
  • The idea of the Enterprise Life Cycle in enterprise architecture argues for a life cycle concept as an overarching design strategy —a dynamic, iterative process of changing the enterprise over time by incorporating, maintaining, and disposing of new and existing elements of the enterprise.
  • Companies must understand clearly where they are in their life cycle and what influence this will have on their optimal organizational structure.

Key Terms

  • life cycle: The useful life of a product or system; the developmental history of an individual, group or entity.
  • assessment: An appraisal or evaluation.
  • strategy: A plan of action intended to accomplish a specific goal.

Organization design can be defined narrowly as the strategic process of shaping organizational structure and roles to create or optimize capabilities for competition in a given market. The life cycle of an organization, industry, and/or product can be an important factor in organization design.

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The life cycle of a business: Organizations must always be striving to sustain their position in a given competitive environment. This often requires structural evolution and rapid iterations in the feedback loop of disruption, growth, refinement, and renewal.

Overview of the Life Cycle

From an organizational perspective, “life cycle” can refer to various factors such as the age of the organization itself, the maturation of a particular product or process, or the maturation of the broader industry. In organizational ecology, the idea of age dependence is used to examine how an organization’s risk of mortality relates to the age of that organization. Generally speaking, organizations go through the following stages:

  1. Birth
  2. Growth
  3. Maturity
  4. Decline
  5. Death

The Enterprise Life Cycle

The Enterprise Life Cycle is a model that underlines the way in which organizations remain relevant. The Enterprise Life Cycle is the dynamic, iterative process of changing an enterprise over time by incorporating new business processes, technologies, and capabilities, as well as maintaining, using, and disposing of existing elements of the enterprise.

Richard L. Daft’s Four Stages

Richard L. Daft theorized four stages of the organizational life cycle, each with critical transitions:

  1. Entrepreneurial stage → Crisis: Need for leadership
  2. Collectivity stage → Crisis: Need for delegation
  3. Formalization stage → Crisis: Too much red tape
  4. Elaboration stage → Crisis: Need for revitalization

Structural Implications of the Life Cycle

The life cycle of an organization is important to consider when making decisions about the organization’s structure and design. Richard L. Daft’s model underlines critical problems within each stage of an organization’s life cycle that can often be solved through intelligent structural design.

Daft first notes that the entrepreneurial (or startup) stage of an organization requires leadership. In this situation, decision-making must be enabled and bureaucracy should be minimized. This lends itself well to pre-bureaucratic stuctures in which everyone involved is empowered to take the reins and employ their creativity and innovation.

In the collectivity stage, momentum has been created and expansion is required. This is where functional or divisional strategies may begin to emerge, enabling managers to build teams and delegate tasks.

Companies continue to expand in the formalization stage, requiring increased bureaucracy and more levels of authority to approve a given decision. In this stage they grow large enough to accommodate functional, divisional, or even matrix structures in order to produce at scale. Organizations in this stage must be careful not to fall too strongly into rigid structures that inhibit or disrupt efficiency, communication, or decision-making.

The Enterprise Life Cycle comes strongly into play in the elaboration stage. During this stage the organization must retain its relevance in the industry through reinforcing competitive advantages and/or creating new products to fill changing consumer needs. This requires a great deal of organized creativity and exploration of new markets, which may justify team or divisional structures within the broader organizational structure. Such structures allow small teams to experiment and react quickly as they try new entrepreneurial strategies while the larger organization maintains operative efficiency in established markets.