You read this title I bet and just thought “BORING”. I hope to convince you otherwise in this article among other objectives for it.
Recently there have been several blog length articles on organizational structure change on LinkedIn and other places. To begin with, think of your firm’s organization chart as part of the depiction of organizational structure. In my view, many of the articles have value but they are missing some critical points. The most important discussion from my experience is that of the competitive strategy-organizational structure linkage.
Years ago, the venerated consulting firm McKinsey had the view that organizational structure is ‘competitive strategy’. By this, they meant that if the firm could be divided into the correct number and kinds of “strategic business units” (SBUs) and “strategy support units” (SSUs) then filled with the right kind of good people, a competitive strategy would emerge on its own. I do not know if many strategy professionals subscribe to this view today. I certainly do not, but I do firmly believe that there are certain organizational structures that are more accommodating to different competitive strategies. As I mention above, for organizational structure first think of your firm’s organization chart. However, organizational structures are much more than the static picture of who reports to whom. I actually like the phrase “organizational form” better than organizational structure for reasons I hope you agree with below.
Two key points that have been missed by the authors of the recent articles mentioned above are:
- Larger firms on average change their organizational forms about every five to seven years. The reason for the change? A current organizational form is hindering effective and efficient interfaces with customers. We will discuss this more below. This change in form can be small or incremental to a whole scale re-structuring with huge change.
- Any time organizational forms are changed, except for very minor changes, power bases among executives are re-shuffled. This almost always causes at least mild heartburn to outright mutiny with offended executives seeking employment elsewhere if they can get it. If they are not mobile and cannot leave the firm, they can work disgruntled with chips on their shoulders. I can attest from experience that these executives are not fun to work with.
5 Major Structural Forms for Organizations
Let’s briefly review the major structural forms. The order presented is the typical order of how organizational forms change, as the firm is successful and grows to become bigger and more complex. For more background on this typical change pattern, see Larry Greiner’s classic Harvard Business Review article from 1965, “Evolution and Revolution As Organizations Grow”. Yes 1965 but still valid today in my view.
- Simple structure form – the owner who is usually president and everyone else.
- Functional structure form – the organization is divided into the classic functions like Sales, Marketing, Production, Customer Service and support units like Chief Financial Officer, Head of Human Resources, etc.
- Divisional structure form – here is the introduction of separate stand-alone businesses as profit-centers for the first time. Options include division by products, customers, technologies or geographies. Here we find the position of President of the divisional forms as direct reports to the corporate office and overall company CEO. Notice duplication begins to show up as each division usually has its own functional leaders.
- Matrix structure form – complexity really starts to show up in this form. Why? In the divisional form, all of the separate functions and their leaders can begin to demonstrate the “not invented here” syndrome with each division taking on a life of its own. Here a person can have two bosses, the divisional CEO and now also a corporate level functional leader to unite all of the separate functions in the divisions. For example, a VP of Sales in one division will also report to the SVP of sales at the corporate level. And you thought organization structure was boring!
- Network structure form – now things really begin to look crazy if you draw an organization chart. Here there is the corporate office or “center” with the divisions as “strategic business units” (SBUs) and the functional entities as “strategy support units” (SSUs). The change in this form though is any impetus for strategy change or improvement, in general, can come from anywhere in the “network”. Change does not have to start with the corporate headquarters or center. And here is where we also saw the emergence in about 1990 of the “shared service” model. Excellence is found where it naturally occurs. So say as SBU develops the best accounts receivable process. This unit would be beefed up and “serve” all other SBUs, SSUs and the corporate center. The network form can appear like the simple form but on steroids.
Wow. Firms like Hewlett-Packard would have a major structural change every seven or so years to try to align better with customer needs and to generally just “shake things up”. But how do we align structural form to changes in competitive strategy?
Steps to Realign A Firm’s Organizational Strategy to its Competitive Strategy
Here are the steps from my experience in five major re-structuring projects over the years to help align organizational form with the firm’s competitive strategy. By the way, I am assuming the firm has already moved from the simple form to the functional form.
- Decide if the firm should be broken down into SBUs and SSUs. I am currently working with a firm whose organization chart looks to be functional, but it doubled its size in one year and is about to need some form of divisional structure.
- If yes, decide if the SBUs will, for the most part, be Low-Cost Providers or Differentiators (the classic Dr. Michael Porter decision).
- Analyze customer demands, needs, “pain points” and such things as how fast the external environment is moving. Also, analyze its level of hostility among competitors and the like.
- Derive a list of “Design Criteria” for eventual choice of the new structural form. One of the criteria is always to consider if the structure should accommodate Centralization over De-centralization of authority and responsibility.
- Test each possible new structural form against the Design Criteria.
- Make a decision on the new structural form and plan a huge change management project if the change is large (like going from functional to say division by customer group).
Aligning structural form change to competitive strategy change is hard work. But it must be done almost every time change of competitive strategy is called for. Hopefully, this work can be made a little easier if this article rings true with your experience.
This article is part of a series on what causes a firm’s value to increase.
Dr. William Bigler is the founder and CEO of Bill Bigler Associates. He is a former Associate Professor of Strategy and the former MBA Program Director at Louisiana State University at Shreveport. He was the President of the Board of the Association for Strategic Planning in 2012 and served on the Board of Advisors for Nitro Security Inc. from 2003-2005. He is the author of the 2004 book “The New Science of Strategy Execution: How Established Firms Become Fast, Sleek Wealth Creators”. He has worked in the strategy departments of PricewaterhouseCoopers, the Hay Group, Ernst & Young and the Thomas Group. He can be reached at firstname.lastname@example.org or www.billbigler.com.