What is Organizational Design?

Just as architecture has the concept that “form follows function,” business has the principle of organizational design. This principle holds that the structure of a company should be shaped to implement its strategic plan.

It sounds simple enough, except, just as no two buildings look exactly the same, there is no one correct way to design an organization.

Factors that influence organizational design

There are five main factors that influence organizational design, according to the Academy to Innovate HR:

  • Strategy — Is the company selling a mass-produced item that competes on cost? A niche or unique product that sells at a premium? Is it tightly focused on a single product or producing a range of products or services to appeal to multiple demographics?
  • Environment — Organizational design next looks at the company’s environment — is it complex, with heaps of regulations and multiple inputs of labor and supplies, or simple, like a small business with a narrow focus?
  • Technology — Technology can limit or empower what a company is capable of.
  • Size and life cycle — A young startup will have a different organizational design than a mature company employing thousands of people.
  • Culture — The company’s values manifest themselves in how the people organize themselves to do the work, whether flat and flexible or rigid and hierarchical.

Structure as a strength

While there is no one way to structure a company, plenty of research exists about organizational designs that work better than others. For example, startups are famously small and informal, often involving a tight team of personality-driven founders and talent who see themselves as rebels or trailblazers. They often view their loose, non-hierarchical structure as a competitive advantage and the source of their nimbleness and creativity.

However, three management professors studied 78 young California companies and found that those which established structured systems early in their growth grew three times faster and experienced less CEO turnover than their competitors, as reported by Stanford Business.

Often, the researchers found, this more structured organizational design was imposed on the startups by their venture capital investors, and was most needed once a startup had grown to between 50 and 100 employees, when no single founder, however forceful, could keep up with what everyone is doing.

Beyond organizational charts

Organizational design is a much bigger concept than an organizational chart, though an org chart of who reports to who could be one tool that comes out of the organizational design process.

According to Deloitte Insights, it’s a method of understanding what a business really does and how best to do it. And global research by this international financial services company finds that organizational design is both top of mind for businesses, and a challenge, as the way business is conducted has been evolving rapidly.

“Fully 88 percent of this year’s survey respondents believe that building the organization of the future is an important or very important issue,” reports Deloitte Insights. “Yet [o]nly 11 percent of survey respondents believe they understand how to build the organization of the future.”

One major shift it has noted is that “As networks and ecosystems replace organizational hierarchies, the traditional question ‘For whom do you work?’ has been replaced by ‘With whom do you work?’” as teams-based structures have become more dominant.

Forced revolution

Not surprisingly, the policy response to the Covid-19 pandemic, in which governments around the world sought to control the spread of the virus by tightly restricting business and commerce, forced businesses around the world to rethink their organizational design. Countless businesses had to jettison old ways of operating to survive and are now applying the lessons learned to their post-Covid-19 realities.

Peter Brodie, director of organizational design at The Orgworks, writes for Forbes, “The current Covid-19 pandemic has caused an ‘event horizon’ for all organizations and sectors. Executives will need to reorientate their organization in 2021. However, organization design is difficult, as it aims to take a complex entity, dissect and analyze it and then rebuild it so it functions better.”

Roots of organizational design

Efforts to consciously design the modern workplace date back to Frederick W. Taylor, who published “The Principles of Scientific Management” in 1911. Taylor, a mechanical engineer by training, had analyzed factory tasks to find the most efficient way to do them and established specific roles and responsibilities for management and labor. His work was hugely influential in early 20th century industrial companies.

Organizational design is the process of structuring a company in a way that supports the implementation of its strategic plan. A complex concept with roots in the early 1900s, organizational design principles continue to evolve to adapt to the needs of modern organizations.