Organizational structure: What is important for companies?
How to find the right organizational form and set up your company optimally.
Whenever people work together, there comes a point beyond a certain group size when spontaneous collaboration is no longer possible but must be regulated. In other words, there needs to be a clear division of labor that everyone involved is aware of, has an overview of, and supports. The simplest form of establishing a division of labor is an organizational structure in which clearly described tasks are assigned to specific parts of the organization. But what does that mean exactly and how can you optimize your company’s organizational structure? In this article you will find some answers from our consulting experience.
1. Organizational structure as an important basis of organizations
An organizational structure defines the framework within which the tasks of an organization are performed based on the division of labor. It regulates which tasks, competencies, authorities, and responsibilities lie with which organizational units. This achieves several important effects at once:
Efficiency gains through specialization
In an organizational structure, all the tasks that an organization must handle in order to achieve its goals are mapped out in organizational units. This enables specialization of employees in each organizational unit as well as continuous learning. In this way, efficiency gains are created. There are also advantages from the employees’ point of view: they can build up focused competence and have clearly defined tasks.
Functioning division of labor through clear interfaces
Defining clear areas of responsibility for each organizational unit also means that areas of responsibility are clearly described and equally clearly demarcated from one another. Rules for the interaction of organizational units must be defined at the interfaces. This creates clarity about the respective responsibilities and cooperation within the framework of the overarching division of labor.
Clear decisions in unambiguous management structures
The organizational plan also specifies the basic logic according to which decisions are made in the organization that are repeatedly required for the distribution of resources or with regard to the design of the division of labor itself. In organizational plans, management structures are clear about the hierarchical superiority and subordination of organizational units: For example, under departments hang individual teams that belong to that department. The department managers lead the team managers. The assignment of employees to organizational units usually also implies the leadership of these employees by the supervisor. In this way, decisions can be made effectively and ideally at the right level.
In sum, structural organization delineates tasks horizontally and creates clear management structures.
Structure creates clarity
Structural organizations are popular, so much so that they have become the very image of the organization. They are clear and easy to understand. The classic organization chart provides a quick overview for all parties involved, whether colleagues, superiors, other teams, departments or external parties. This leads to the fact that reorganizations often start and end with the definition of a new structural organization.
However, the clarity of structural organizations is usually only a supposed clarity. The complex reality of organizations is reduced to a two-dimensional mapping in structural organizations. In this respect, the definition of the structural organization (also called organizational structure) is not sufficient, especially in complex and large organizations, to regulate the interaction of all participants in a meaningful way. (The attempt to do so leads straight into a bureaucratic discussion of responsibilities, in which the necessary services of the organization for its customers are faded out and common goals are increasingly relegated to the background.)
2. The necessary addition of a process perspective
As soon as more is required in organizations than mere work and Tayloristic efficiency, structural organizations can only guarantee meaningful cooperation to a limited extent. In modern organizations, competitive advantages no longer arise from superior efficiency alone, but from capabilities such as customer orientation, flexibility, and innovative strength.
This raises the question of how successfully the various organizational units, with their tasks and internal functions, can be networked in overarching processes and aligned with common goals. A sensible structural organization is a necessary prerequisite for this in most cases, but it cannot replace the complementary process perspective. Structural and process organizations (or, to use an even more common nomenclature: structural and process organizations) are mutually dependent.
Thus, the organizational structure view of organizations must be complemented by a process organization view. A large organization typically has a large number of processes and sub-processes. Usually, one starts from the most important end-to-end processes that characterize the value creation of many companies. These include processes such as the innovation process (“Idea to product”), the production process (“Order to cash”) or the sales process (“Lead to order”).
In addition, it also makes sense to take a look at the so-called supporting processes, such as human resources or finance. However, the term “supporting” tends to be misleading. After all, depending on the company, raising capital or attracting talent may well be a strategic task.
The process view complements (and in turn does not replace) the structure view by helping to identify certain imbalances in the setup. In fact, in the “pure” doctrine, it tends to be the other way around: the structural organization of a company will in most cases be derived from a rough, possibly intuitive, understanding of processes. This understanding states how the most important tasks interlock to accomplish the organization’s intended performance: “Form follows function.” For this reason, it makes sense to look at how the organizational structure can best support the flow of key processes when designing it.
3. Ideal-typical organizational structures
Each organization in itself is unique. Nevertheless, it has proven useful to name organizations according to their dominant organizing principle.
Functional organizations are organized at the top level according to functional areas. These can be, for example, development, production, marketing, sales as well as cross-sectional functions such as finance and human resources. In this way, a functional organization maps the major steps of a value chain.
The decisive advantage of functional organizations is that existing synergy potential can be exploited at the value-adding stages. Examples of this are the utilization of production sites and procurement or the management of human and financial resources. The value chain is also mapped at the top level; it becomes clear which units must work together to achieve the organization’s goals.
The fact that the most important steps of the value chain are represented at the top level can at the same time also be a major disadvantage of functional organizations: Mapping the value chain can suggest a process orientation, but this usually takes place at too high a level of aggregation to be actionable in itself. This is because the interaction between sales and production, for example, would only be mapped at the management or board level. As a result, conflicts between functions will always have to be fought out at the top organizational level.
At the levels below, there will be great incentives to optimize the functions within themselves, which can already be a highly complex task: for example, in the production of an automobile manufacturer with tens of thousands of employees worldwide. In this respect, a functional organization in particular can encourage the emergence of (functional) silos and make overarching interaction more difficult.
A second, hardly less relevant disadvantage is that functional organizations tend to be less market-oriented. Thus, marketing and sales, and possibly also the development department, can quickly become isolated in their efforts to bring customer and market perspectives into the organization. Particularly in capital-intensive industrial companies, the production function can therefore quickly take on a determining role. Flexibility and adaptability to customer requirements are not advantages from this perspective, but quickly become disruptive factors for an efficient production process.
Divisional organizations, also known as product line organizations or divisional organizations, have emerged as a reaction to these disadvantages. They are structured at the top level according to product and/or customer groups (e.g., private customer business vs. corporate customer business).
The key advantage of divisional organizations is their proximity to the market. They are focused on markets and subordinate their mode of operation to this primacy. At the top organizational level, products or customer groups have advocates in the circle of top executives who manage the divisions. These are in a position to organize the interaction of functions (typically then at the level below) in such a way that the organization’s performance for its customers (and hopefully also its economic success) is maximized.
However, this advantage is matched—in mirror image—by disadvantages that should not be present in a functional organization. It is in the logic of divisional organizations to duplicate functional tasks in their consistent focus on markets and customers. Economies of scale are not exploited (or are much more difficult to exploit). The functional silo in the functional organization corresponds to the product silo in the divisional organization.
A variant of the divisional organization can be regional forms of organization, which are structured according to regional customer markets instead of global products or customers. This form of organization is particularly useful when the relevant markets are highly specific to a region or country. One example is most professional service firms, whose dominant organizational axis must be regional or national for regulatory reasons alone.
Matrix organizations have emerged from the attempt to combine the advantages of the functional and divisional organization: Functional synergies are to be exploited, while at the same time there is a clear focus on markets or products and customer groups.
In order to exploit these advantages, the various divisions must work together as smoothly as possible: Responding to customer requirements while at the same time tapping functional synergies requires permanent coordination. If everyone involved has the right attitude, this can promote the joint search for solutions and help to find the best way forward.
However, if this does not succeed, considerable disadvantages arise: Permanent, at worst ineffective and fruitless coordination leads to delays and sluggishness. Instead of clarity and the joint struggle for the best solutions, responsibility can quickly diffuse. Which scenario is more likely has less to do with the chosen organizational structure, the design of the matrix or its governance (although mistakes are of course possible here); it is often more soft factors that determine success or failure. What is needed here is clear alignment on common goals, action in the overriding interest, and the right leadership that emphasizes what is common and is equally willing to take responsibility for its own contributions.
The advantages and disadvantages of the various ideal types of organizations show that the one optimal setup does not exist. Nevertheless, there are scenarios in which a particular organizational principle is closer than others. In this case, the decisive factor for organizational functionality is not only the smooth running of central processes, but also adaptability in the face of the permanent change to which organizations are exposed.
4. Structural organizations in times of VUCA and agile approaches
How does the surrounding VUCA-World, which is characterized by volatility, uncertainty, complexity, and ambiguity, influence the positioning of organizations? Increasing customer expectations, as well as new competitors in dynamic markets, means that flexibility and the ability to adapt quickly are becoming even more important for the success of an organization than they were 20 years ago. There is also pressure for change from within: employees are looking for more self-efficacy and want more holistic tasks as well as more responsibility—as if they wanted to escape once again from the alienation postulated by Karl Marx for early capitalism through increasing division of labor.
As a result of these changes, new, more flexible forms of collaboration are emerging that are increasingly overhauling traditional organizational charts. Strong leadership, a common focus on overarching goals, and a permanent orientation toward adding value for the company’s customers can help organizations become more agile, even in classic organizational forms, and thus continue to be successful.
Organizations with a strong collaborative culture and leaders acting together can more easily make the necessary adjustments and operate more successfully even in agile organizational models. Conversely, the introduction of customer-centric or agile approaches alone will not be enough to break down strong organizational silos, i.e., the extreme form of a structural organization.
The radical basic idea: In today’s VUCA world, fixed organizational structures no longer work. Above all, they make organizations cumbersome and prevent them from reacting appropriately and quickly to new developments. What is needed instead is dynamic self-organization within the framework of jointly defined rules. To prevent this from ending in chaos, discipline and transparency are essential.
The focus of agile working is on the result of the collaboration. The necessary steps along the way determine the cooperation within the organization.
But as much as agile principles have been celebrated in recent years, they are not always the right solution and certainly not a panacea.
Scaling agile methods in particular remains a major challenge. Often, at this point, it takes recourse to the classic division of labor and elements of the traditional organizational structure. This combination has led to the emergence of more and more hybrid organizations in recent years, in which traditional organizational structure and agile elements overlap.
5. Beyond structure: Our view of organizations
We strongly believe that the right organizational structure must work together with the right processes. Both make up the formal side of an organization, in which the setup, processes and also the essential decision rules are defined.
Equally important, we believe, are informal issues such as quality of leadership and collaboration, trust and shared alignment, which have just been brought back into focus from an agile perspective.
In addition, organizations are not ends in themselves, but always serve an overarching strategic ambition. In our view, it is essential to always keep the performance ambition in mind when making any organizational changes. “What should be improved?” is the core question par excellence at the beginning of any organizational change—and not always easy to answer. Nevertheless, a clear improvement target is necessary, because the quality of organizations is ultimately measured by their ability to deliver the required performance in the best possible way. By performance, we mean here the value contribution both externally (in the markets and with the company’s customers) and internally (for the employees). In the long term, market and employee success go hand in hand.
6. How we develop organizational structures and organizations: Case study
An example of how we develop new organizational structures while using agile approaches is the fundamental transformation that a financial services company mastered with our help. The company was originally divided into highly entrepreneurial national subsidiaries that were barely integrated. With our support, the company has given itself a uniform organization across Europe with optimally integrated functions and product lines.
The company’s previously developed new strategy contained ambitious goals for growth and profitability, which could not be implemented in the traditional structure of less integrated national companies. Instead, an organization had to be developed that would enable functioning, cross-divisional collaboration between strong, pan-European product lines on the one hand and likewise pan-European integrated functions (tech/IT, sales) on the other, which in turn required the development of powerful digital platforms.
The result is a hybrid organizational form that combines both classic and agile methods: On the one hand, functions have been created that are integrated across Europe and are linked within a matrix organization with the BUs (product lines), which also operate across Europe. Cross-functional teams with flat hierarchies have been created at the critical interfaces, which work together using agile approaches. In this way, maximum flexibility and adaptability were achieved. This applies in particular to the critical interface between IT or tech and the BUs, which is one of the deciding factors in the success of a company that increasingly wants to develop digital platforms for digital business models.
This completely new organizational structure was developed as part of a transparent and participatory process. Top management worked closely with the top 50 employees in the process.
The most important phases along the way
Phase 1 (duration: 1 month)
Together with the client, we formulated the design principles for the new structural organization based on the top management strategy. The choice fell on a matrix organization with cross-functional teams.
From this, we derived the basic logic of a three-dimensional matrix together with the client. The decisive axes in this matrix were functions and BUs.
Phase 2 (3 months)
On this basis, we then took care of the individual design of the BUs and FUs. For regulatory and labor law reasons in particular, the previous national companies remained in place, but were more organizational shells than business-relevant organizational units. In the first step, we developed an MVP (minimum viable product) of the new organization: an organization that already works but needs further detailed refinements and adjustments. This allowed us to reduce complexity, keep the pace high, and enable practical learning in the real operation of the MVP (instead of investing further time in ultimately theoretical concept clarifications).
Especially important here: the clear logic in detailing the “unit profiles”, starting with the BUs. In addition, the BUs (and then the country units) were empowered to define their organization accordingly.
To make setting up new structures as simple as possible, we clarified important interfaces with the stakeholders during the process. In this way, we created the first step toward implementation. The final step was controlled by top management.
Phase 3 (6 months)
After personalization, i.e., assigning employees to the newly created or redesigned organizational units, the structured optimization of the MVP took place. Work on details and rework was done in a targeted manner and in close consultation with the client’s top management.
With our guidance, the latter transformed business units and culture, laying the foundation for a new organization that can respond flexibly and appropriately to future challenges.
Conclusion: What can this mean for you?
- Structural organizations are an indispensable component even in modern organizational forms.
- The simple representation of an organization as a structural organization (“organization chart”) is helpful but should not be misunderstood as an exhaustive picture.
- The structure view and the process view complement each other—the intelligent confrontation of both perspectives helps to design more efficient organizations (for example, in the clear design of their interfaces).
- An integrated structure and process view, i.e., the rule-based view of organizations, should also be complemented by the no less important behavioral view of organizations. Organizations are not machines; they are social contexts.
- In our experience, agile approaches can be very effective in supplementing these traditional approaches and increasing the adaptability of organizations, but they are not in themselves a patent remedy.
The quality of organizations is one of the factors that determines whether intelligent strategies can be successfully implemented and create added value for customers as well as employees. Significant changes in a company’s markets often require new strategies—and always organizational changes and adjustments.
Shaping one’s own organization is probably one of the most complex and challenging tasks for a company. We would be happy to support you in this process.
Axel Sauder, partner in our Berlin office, is at your disposal with his comprehensive organizational expertise. Contact us or book an appointment directly. We look forward to meeting you!