Organization Design

Simplifying complex systems

Nicolay Worren

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351383639
• Edition: 2
• Topic: Business
• Subtopic: Business generale
• Index: Business

A well-designed organization is an effective organization. Decisions about organization design determine the shape and form of the organization – not only the reporting structure and authority relations, but also the number and size of sub-units and the interfaces between the sub-units. Indirectly, such decisions affect individual productivity as well as the organization's ability to attain strategic goals.

Organization Design equips the reader with advanced tools and frameworks, based on both research and practical experience, for understanding and re-designing organisations. Particular emphasis is placed on how one can improve effectiveness by simplifying complex roles, processes, and structures. This updated second edition includes a new chapter about traditional organizational forms, and is complemented by a companion website.

Students will find thorough conceptual explanations combined with case studies from different industries. This textbook will be essential reading for students, scholars, and practitioners.

1
Why design matters

Chapter overview

Background	• Organization design is part of every manager’s job. • Empirical research confirms the potential impact of organization design on the functioning and performance of organizations. • Four foundational concepts in the literature are hierarchical decomposition, task uncertainty, coordination cost, and alignment between strategy and structure.
Challenges	• Business schools have historically placed little emphasis on organization design. • Management education has generally focused on decision making as opposed to the creation of decision alternatives (i.e., design). • With the exception of some economics-based theories, academic research has generally failed to influence the actual design of organizations. • Well-known business “gurus” have also downplayed the role of formal structure in creating effective organizations.
Key question	• How can the discipline of organization design be revitalized in order to ensure that it has stronger impact on managerial practice – without losing academic rigor?
Proposed approach	• Reaffirm the strategic importance of design. • Adopt a “design attitude” as a complement to the “decision attitude.” • Use organizational architecture as the overarching concept. • Incorporate an explicit focus on purpose and functional requirements. • Develop prescriptive knowledge to bridge the gap between research and practice.

Introduction

A sales unit has grown to more than 25 people. The manager responsible for the unit feels that she spends too much time on administration and supervision of employees. She concludes that there needs to be two or three teams, each led by a manager that can be responsible for handling day-to-day responsibilities. On the other hand, she is not sure how they should be subdivided. Should they be grouped according to geography, with one team for each main region, or by product, with one team for each main product category?

A project manager is recruited to the corporate staff of a large divisionalized firm to run a project charged with the implementation of a new IT system. During the first week in the new role, he discovers that there are three other IT projects, at the divisional level of the firm, that are configuring software solutions that will deliver functionality that partly overlaps with functionality that his project is supposed to deliver. He is pondering how the projects could be aligned with each other. As a first step, he draws a simple diagram that he intends to show to his manager to illustrate how the three projects interrelate.

The CEO of an oil company asks his leadership team to consider how to organize its drilling teams. The company consists of several operating units, each responsible for the operations on a particular oil field. Each unit has its own drilling team, which is called on when new oil wells need to be drilled. Several members of the leadership team argue that this organization is inefficient, as it is difficult to utilize capacity effectively across assets: At times, drilling teams in one unit have been idle while there have been insufficient resources to perform the work required in other units. The CEO challenges his team to come up with an alternative model.

What these stories have in common is that they portray managers who, for various reasons, find themselves in the role of organizational designer: attempting to make sense of, and improve, the functioning of complex organizations through the creation or adjustment of roles, processes, and structures. This is also the topic of this book, which will review concepts and frameworks for re-designing complex organizations. This introductory chapter introduces some key concepts that will serve as a foundation for the remaining chapters. It also reviews the status of organization design – as a field of research and as a practical discipline – both its achievements, and some of its challenges and limitations. It then discusses how we can develop the field further to ensure that it provides research-based and useful knowledge that contributes to enhance the effectiveness of organizations.

As the stories above suggest, organization design is part of every manager’s job. In fact, most managers are faced with organization design challenges on an almost daily basis. Managers constantly design and re-design individual roles, define new projects (including their structure and reporting relationships), and contemplate better ways to coordinate organizational processes with multiple internal stakeholders. Periodically they may also make more fundamental changes to the structure of sub-units or entire organizations, or participate in adapting and implementing high-level designs developed by others.

Many, if not most, professionals engage in design activities: Engineers design products. Architects design buildings. Art directors design advertising campaigns. The main difference is the “materials” by which one designs – in designing organizations, managers create, or re-define, roles, processes, and structures. Unlike products, buildings, and ad campaigns, the outputs of organization design processes are abstract and invisible artifacts (Kennedy, 2002). Nonetheless, they are real enough for the people that work in the organizations and that are being affected. Choices made during organization design processes may to a large extent define people’s roles and responsibilities, determine who they will collaborate with, and either broaden or limit the career paths available to them.

Design is, as Romme (2003) formulated it, “inquiry into systems that do not yet exist” (p. 558). The starting point is usually a problem or opportunity for which there is no self-evident solution, which triggers a process of search, aimed at identifying or developing a new solution that will work in the specific case that one is confronted with. For a manager, the problem or opportunity may have emerged as the result of external events (e.g., a merger) or may be the result of internal events (e.g., a decision to expand the business). The basic condition is that the manager, or a group of stakeholders, perceives that there is a potential for improvement, and initiates a design process to change the existing situation into a preferred one (Simon, 1996).

At times, organization design and organization theory are treated as synonymous to each other. However, it may be useful to draw a distinction between the two. Organization theory is essentially a descriptive field of study. Organizational theorists build theories to understand organizational functioning and carry out empirical research to test the validity of the theories (for example, examining whether the adoption of a certain corporate structure has an effect on the financial performance of firms). The term organization design, on the other hand, more often refers to a body of prescriptive (or normative) knowledge – knowledge about what one should do in different situations in order to attain a given objective (Romme, 2003). The goal for many of those working in this field is to develop tools and frameworks that are pragmatically valid – that is, usable by practitioners attempting to create new organizations or re-design existing organizations (Worren, Moore, & Elliott, 2002).

Despite these differences, organization design and organization theory are certainly closely related. Indeed, there are several ideas developed by organizational theorists that have gained widespread acceptance, and that also inform organization design methodology and practice. In the following we will briefly review three concepts that are central to both organization theory and organization design: Hierarchical decomposition, task uncertainty, coordination cost; and fit or alignment (between strategy, environment, and structure).

Foundational concepts

Hierarchical decomposition

In designing organizations, one sub-divides the organization into, for example, divisions, departments, teams, or roles. The basic process of dividing a system, composed of interacting elements, into units and sub-units is called decomposition. In this process, one decides which tasks, roles, or processes should be grouped together in the same unit, and implicitly separates other tasks, roles, and work functions. Depending on how far one decomposes the organization, one also creates a hierarchical structure (Figure 1.1). One may choose to define a relatively flat structure (with many units at the same level, but few levels between the top and bottom) or may create a more pyramidal form (few units at the same level, but many levels between the top and bottom).

Decomposition creates several effects. The most immediate effect is division of labor, or specialization. The basic idea of division of labor was first introduced by Smith (1776/1977), who described it as a key condition for increasing productivity. Smith explained that a worker who carries out one specific task repeatedly will likely develop greater skill, and perform the task faster, than a worker who switches between different tasks that he or she is not accustomed to performing. The same is true for sub-units of the organization that focus on one functional area or one particular activity in a work process. Over time, specialization allows the sub-unit to build up knowledge pertaining to the specific functional area or activity in the work process that it is responsible for. It may also spur innovation, if the sub-unit has been granted the necessary operational autonomy to introduce changes to improve the performance of its work processes (Sanchez, 1995; Jacobides, 2006).¹

Figure 1.1 Hierarchical decomposition of an organization.

There is another, related term used in the literature: Grouping (e.g., Galbraith, 2002; Nadler & Tushman, 1997). Compared to the term decomposition, one here takes the “bottom up” perspective: Instead of focusing on how one sub-divides a large systems into smaller parts, grouping involves the aggregation of parts (e.g., roles) that have already been defined into larger units. For example, one may define a set of roles, focused, on say, marketing, and decide that these should be grouped together in a new unit called “the marketing department.” Another set of roles, related to sales, may be g...

Table of contents

• Cover
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• Preface
• About the author
• Acknowledgments
• 1 Why design matters
• 2 Organizational complexity
• 3 Traditional organizational forms
• 4 Designing multidimensional organizations
• 5 Designing sub-units
• 6 Defining the vertical structure
• 7 Configuring interfaces
• 8 Managing the organization design process
• 9 Resolving organization design dilemmas
• Appendix: Glossary
• Index