A principal pillar of strategy execution is having clear, effective organisational structure. Structures can act as great enablers or they can obstruct and frustrate work. So what is the ‘right’ organisational design?
A historical context on this topic is provided in an article ‘What is the Right Organisation Design?’ (Anand and Daft, Organisational Dynamics, Vol 36, No4 pp 329-344, 2007). The authors argue that until the late 1970s, organisations were self-contained with clear boundaries separating them from suppliers, customers and competitors. Structural design reflected the need to control the distribution of work through vertical chain of command.
By the 1980s, vertical structures were reaching their limits. At the same time, technological change was revolutionising access to information. Design philosophies began to highlight the need to reshape internal organisational boundaries. This took the form of the ‘horizontal organisation’, reflecting workflow processes that linked business capabilities to customers and suppliers.
This form of structure moved away from traditional functional mindset. Advantages included speed of communication among diverse team members, encouragement of problem-solving ability, broadening of the skill base, and empowered decision making. While not covering all circumstances, it could create customer value through enhanced flexibility and responsiveness.
Organisational boundaries really opened up in the mid-1990s with rapid improvements in communication technology and the surge of globalisation. At the forefront of this was the outsourcing phenomenon both locally and offshore, often typified by the shift in local manufacturing to cheaper sources of production in Asia. This led to the ‘hollow organisation’ model, where value creation centred on intellectual capital functions such as design and marketing. Few industries have been untouched by this trend.
On the downside, hollow organisations may find they have reduced capacity to innovate and run the risk of being supplanted by smart suppliers who create markets for themselves.
The ‘modular organisation’ also came to the fore in the 1990s, with its distinctiveness based on products being broken down into modular chunks that could either be insourced or outsourced. For instance, Nissan outsources car parts such as the frame and seats, but remains responsible for overall assembly. This modular development has given it greater efficiencies and more rapid response. Aircraft manufacturers have gained similar benefits.
Increasingly, organisations are embedded in complex networks or relationships, competing strongly in some markets while collaborating in others. The collaboration or joint-venture response often takes the form of ‘virtual organisation’. This design is to meet an exceptional market opportunity, aggressively or defensively.
Virtual organisations are prevalent in the high-tech sector but there are other examples, eg Air NZ’s establishment of Freedom Air to combat entry of discount airline on the trans-Tasman route. When it had served its purpose, the virtual entity was dissolved.
These new demands are requiring mindset shift from direct control over resources to dependence on others. This is totally different proposition and success requires:
• The right partner. Are the priorities synchronised?
• People who have skills to work with others across the organisation. Soft skills dominate hard skills in new organisational designs. It’s all about influence.
• Seeking clarity, not control.
Other recent thinking influencing structural design includes:
• Simplification Richard Runelt, chair in business and society at Anderson School of Management, UCLA, argues that the more complex an organisation gets, the more likely that inefficient and unproductive businesses accumulate. Such businesses become subsidised by their profitable counterparts. There is bias against shutting things down. That’s why highly diversified companies tend to be less profitable. Organisations need focus to succeed.
• Separation This model is discussed in an article, ‘The 21st Century Organisation’ (Bryan and Joyce, The McKinsey Quarterly, No 3, 2005). It proposes the separation of near-term and long-term parts of the business, so that each can provide the focus required to achieve the best results.
• Identification of ‘A’ positions Structure has tended to emphasise positions, function and processes. In ‘The workforce scorecard: Managing human capital to execute strategy’, authors Huselid, Beatty and Becker argue that there should be single-minded focus on identifying strategically critical jobs. Then businesses should invest disproportionately to ensure the best people – doing the right things – are in those positions.
There is no ‘right’ structure. But businesses now have vastly expanded range of design choices available. Each has advantages and disadvantages. Boards should be aware of the options and ensure that the organisation’s structure is fit for purpose and strongly aligned to the strategic direction they are committed to.
Simon Hart is principal of Sheffield.
