Fundamental Organizational Design Principles

In their book “Organization by Design: Theory and Practice,” Jelinek, Litterer and Miles identified four issues as key concerns that should be addressed when designing any organization, including an emerging company.  First, the structure should relate well to the strategic plan of the organization.  Second, the structure should facilitate the technology on which the organization who relies.  Third, jobs should be designed in a way that not only achieves the goals of the organization but which also motivates the employees.  Fourth, the design should fit well with the overall environment of the organization including competitors, suppliers, government agencies and the like.  One of the main responsibilities of top management of an emerging company is to continuously monitor how the organizational structure of the company is addressing each of these concerns and make sure that all necessary changes to the structure are carefully designed and implemented on a timely basis. 

During the start up stage it is common for companies to organize themselves along functional lines.  The main advantage of this approach is that it allows the company to develop the specialized functional skills and resources that are essential for the development of any business.  In addition, a function-based structure is probably the easiest way for the CEO to retain an overall picture of the business and thus effectively exercise his or her role as the primary decision maker.  There are, however, disadvantages to a function-based structure that ultimately lead to changes as the company grows.  For example, departments organized by function tend to focus on internal goals as opposed to the broader goals and objectives of the company7.  This “tunnel vision” is fostered by a lack of communication with other business units and establishment of reward systems that are based on functional objectives and achievements as opposed to collaboration with groups in other parts of the company.  As a result, conflicts begin to arise when coordination among business units is required and it becomes necessary for senior management to devote a significant amount of time and effort to making sure that the various functions learn to work together for common goals.

Eventually, the problems with a functional-based structure lead to emerging company toward a new structure built around products or markets as the primary axis.  This has the immediate advantage of dividing the business into organizational units that are more closely related to its competitive environment and also makes it easier for the company to align its rewards and incentives with the overall performance goals established by senior management for the company as a whole.  In addition, a product- or market-focus organizational structure reduces the problems that arise when attempts are made to coordinate activities across functions and CEO is able to delegate decision-making responsibility to senior product or market managers and then evaluate their performance using objective criteria.  Of course, there are certain disadvantages associated with the new structure that must be considered.  The most important is probably the danger that the specialist skills of the company will be eroded which may adversely impacted what had previously been a competitive advantage of the company.  In addition, launching and maintaining separate organizational units for each product and/or market may result in duplication of functional resources in each unit, a problem that is sometime eventually addressed by creation of central resource units that offer certain functional services to two or more business units within the company.  Also, while not necessarily a disadvantage, the transition to a new structure means that the CEO must adapt to new ways of tracking the progress of the organization.  The former CEO habit of relying on direct knowledge based on detailed involvement in day-to-day decisions must give way to the use of written reports and trust in the judgment, skills and abilities of other managers.  In order for the structure to be effective, it must be understood and operated by managers that are highly skilled and committed to the goals and objectives set by the CEO.

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