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Published:March23,2015

Organizations & People

10PrinciplesofOrganizationDesign
Thesefundamentalguidelines,drawnfromexperience,canhelpyoureshapeyourorganizationtofityourbusiness
strategy.
byGaryL.Neilson,JaimeEstupin,andBhushanSethi

Aglobalelectronicsmanufacturerseemedtoliveinaperpetualstateof
reorganization.AnewlineofcommunicationdevicesfortheAsianmarket
requiredreorientingitssales,marketing,andsupportfunctions.Migrationto
cloudbasedbusinessapplicationscalledforchangestotheITorganization.
Altogether,ithadreorganizedsixtimesin10years.
Suddenly,however,thecompanyfounditselffacingadifferentchallenge.Given
thenewtechnologiesthathadentereditscategory,andaseachangeincustomer
expectations,itneededanewstrategy.TheCEOdecidedtoshiftfromaproduct
basedbusinessmodeltoacustomercentricone.Thatmeantyetanother
reorganization,butthisonewouldbedifferent.Ithadtogobeyondshiftingthe
linesandboxesinanorgchart.Itwouldhavetochangeitsmostfundamental
buildingblocks:howpeopleinthecompanymadedecisions,adoptednew
behaviors,rewardedperformance,agreedoncommitments,managed
information,madesenseofthatinformation,allocatedresponsibility,and

IllustrationbyLarsLeetaru

connectedwitheachother.Notonlydidtheleadershipteamlackafullfledgedblueprinttheydidntknowwheretobegin.
Thisisanincreasinglytypicalsituation.Inthe18thannualPwCsurveyofchiefexecutiveofficers,conductedin2014,many
CEOsanticipatedsignificantdisruptionstotheirbusinessesduringthenextfiveyearsasaresultofexternalworldwide
trends.Onesuchtrend,citedby61percentoftherespondents,wasanincreasingnumberofcompetitors.Thesamenumber
ofrespondentsforesawchangesincustomerbehaviorcreatingdisruption.Fiftypercentsaidtheyexpectedchangesin
distributionchannels.AsCEOslooktostayaheadofthesetrends,theyrecognizetheneedtochangetheorganizations
design.Butforthatredesigntobesuccessful,acompanymustmakeitschangesaseffectivelyandpainlesslyaspossible,ina
waythatalignswithitsstrategy,invigoratesemployees,buildsdistinctivenewcapabilities,andmakesiteasiertoattract
customers.
Today,theaveragetenurefortheCEOofaglobalcompanyisaboutfiveyears.Therefore,amajorreorganizationislikelyto
happenonlyonceduringthatleadersterm.Thechiefexecutivehastogetthereorgrightthefirsttimeheorshewontgeta
secondchance.Althougheverycompanyisdifferent,andthereisnosetformulafordeterminingyourappropriate
organizationdesign,wehaveidentified10guidingprinciplesthatapplytoeverycompany.Thesehavearisenfromyearsof
collectiveresearchandpracticeatPwCandStrategy&,usingchangesinorganizationdesigntodramaticallyimprove
performanceinmorethan400companiesacrossindustriesandgeographies.Thesefundamentalprinciplespointthewayfor
leaderswhoseevolvingstrategiesrequireadifferentkindoforganizationthantheonetheyhavetoday.

Thechiefexecutivehastogetthereorgrightthefirst
timeheorshewontgetasecondchance.

1.Declareamnestyforthepast.Organizationdesignshouldstartwithcorporateselfreflection:Whatisyoursenseof
purpose?Howwillyoumakeadifferenceforyourclients,employees,andinvestors?Whatwillsetyouapartfromothers,
nowandinthefuture?Whatdifferentiatingcapabilitieswillallowyoutodeliveryourvaluepropositionoverthenexttwoto
fiveyears?
Formanybusinessleaders,answeringthosequestionsmeansgoingbeyondthecomfortzone.Youhavetosetabold
direction,marshaltheorganizationtowardthatgoal,andprioritizeeverythingyoudoaccordingly.Sustainingaforward
lookingviewiscrucial.Thatmeanslettinggoofthepast.
Weveseenafairnumberoforganizationdesigninitiativesfailtomakeadifferencebecauseseniorexecutivesgetcaughtup
indiscussingtheprosandconsoftheoldorganization.Avoidthissituationbydeclaringamnestyforthepast.You
collectively,explicitlydecidethatyouwillneitherblamenortrytojustifythedesigninplacetoday,oranyorganization
designsofthepast.Whetherornottheyservedtheirpurpose,itstimetomoveon.Thistypeofpronouncementmaysound
simplistic,butitssurprisinglyeffectiveforkeepingthefocusonthenewstrategy.
2.DesignwiththeDNA.Organizationdesigncanseemunnecessarilycomplextherightframework,however,canhelp
youdecodeandprioritizethenecessaryelements.Wehaveidentifiedeightuniversalbuildingblocksthatarerelevanttoany
company,regardlessofindustry,geography,orbusinessmodel.Thesebuildingblockswillbetheelementsyouputtogether
foryourdesign(seeExhibit1).

Theblocksnaturallyfallintofourcomplementarypairs,eachmadeupofonetangible(orformal)andoneintangible(or
informal)element.Decisionrightsarepairedwithnorms(governinghowpeopleact),motivatorswithcommitments
(governingwhattheyfeelabouttheirwork),informationwithmindsets(governinghowtheyprocessknowledgeand
meaning),andstructurewithnetworks(governinghowtheyconnect).Byusingtheseelementsandconsideringchanges
neededacrosseachcomplementarypair,youcancreateadesignthatwillintegrateyourwholeenterprise,insteadofpulling
itapart.
Youmaybetemptedtomakechangeswithalleightbuildingblockssimultaneously.Buttoomanyinterventionsatoncecould
interactinunexpectedways,leadingtounfortunatesideeffects.Pickasmallnumberofchangesfourorfiveatmostthat
youbelievewilldeliverthegreatestinitialimpact.Evenafewchangescouldinvolvemanyvariationsforexample,thedesign

ofmotivatorsmightneedtovaryfromonefunctiontothenext.Peopleinsalesmightbemoreheavilyinfluencedby
monetaryrewards,whereasR&Dstaffersmightfavoracareermodelwithopportunitiesforselfdirectedprojectsand
externalcollaborationandeducation.
3.Fixthestructurelast,notfirst.Companyleadersknowthattheircurrentorgchartdoesntnecessarilycapturetheway
thingsgetdoneitsatbestavagueapproximation.Yettheystillmayfallintoacommontrap:thinkingthatchangingtheir
organizationsstructurewilladdresstheirbusinesssproblems.
Wecantblamethem,astheorgchartisthemostseeminglypowerfulcommunicationsvehiclearound.Italsocarries
emotionalweight,becauseitdefinesreportingrelationshipsthatpeoplemightloveorhate.Butacompanyhierarchy,
particularlywhenchangesintheorgchartaremadeinisolationfromotherchanges,tendstoreverttoitsearlierequilibrium.
Youcansignificantlyremovemanagementlayersandtemporarilyreducecosts,butalltoosoon,thelayerscreepbackinand
theshorttermgainsdisappear.
Inanorgredesign,yourenotsettingupanewformfortheorganizationallatonce.Yourelayingoutasequenceof
interventionsthatwillleadthecompanyfromthepasttothefuture.Structureshouldbethelastthingyouchange:the
capstone,notthecornerstone,ofthatsequence.Otherwise,thechangewontsustainitself.
Wesawthevalueofthisapproachrecentlywithanindustrialgoodsmanufacturer.Inthepast,ithadundertaken
reorganizationsthatfocusedalmostsolelyonstructure,withouteverachievingtheexecutionimprovementitsleaders
expected.Thenthestakesgrewhigher:FastgrowingcompetitorsemergedfromAsia,technologicaladvancescompressed
productcycles,andnewbusinessmodelsthatbypasseddistributorsappeared.Thistime,insteadofredrawingthelinesand
boxes,thecompanysoughttounderstandtheorganizationalfactorsthathadsloweddownresponseinthepast.Therewere
problemsinthewaydecisionsweremadeandcarriedout,andinhowinformationflowed.Therefore,thefirstchangesinthe
sequenceconcernedthesebuildingblocks:eliminatingnonproductivemeetings(informationflows),clarifying
accountabilitiesinthematrixstructure(decisionsandnorms),andchanginghowpeoplewererewarded(motivators).Bythe
timethecompanywasreadytoadjusttheorgchart,mostoftheproblemfactorshadbeenaddressed.
4.Makethemostoftoptalent.Talentisacriticalbutoftenoverlookedfactorwhenitcomestoorgdesign.Youmight
assumethatthepersonalitiesandcapabilitiesofexistingexecutiveteammemberswontaffectthedesignmuch.Butin
reality,youneedtodesignpositionstomakethemostofthestrengthsofthepeoplewhowilloccupythem.Inotherwords,
considerthetechnicalskillsandmanagerialacumenofkeypeople,andmakesurethoseleadersareequippedtofosterthe
collaborationandempowermentneededfrompeoplebelowthem.
Youneedtoensurethatthereisaconnectionbetweenthecapabilitiesyouneedandtheleadershiptalentyouhave.For
example,ifyoureorganizingthebusinessonthebasisofinnovationandtheabilitytorespondquicklytochangesinthe
market,thepersonchosenaschiefmarketingofficer(CMO)willneedadiversebackground.Someonewithamore
conventionalmarketingbackgroundwhosecorecapabilitiesarelowcostpricingandextensivedistributionmightnotbe
comfortableinthatrole.Youcansometimescompensateforagapinproficiencythroughotherteammembers.IftheCFOis
anexcellenttechnicianbuthaslittleleadershipcharisma,youmaybalancehimorherwithachiefoperatingofficer(COO)
whoexcelsinthisareaandcantakeonthemorepublicfacingaspectsoftherole,suchasspeakingwithanalysts.
Asyouassembletheleadershipteamforyourstrategy,lookforanoptimalspanofcontrolthenumberofdirectreportsfor
yourseniorexecutivepositions.AHarvardBusinessSchoolstudyconductedbyassociateprofessorJulieWulffoundthat
CEOshavedoubledtheirspanofcontroloverthepasttwodecades.Althoughmanyexecutiveshavesevendirectreports,
theresnosinglemagicnumber.ForCEOs,theoptimalspanofcontroldependsonfourfactors:theCEOspositioninthe
executivelifecycle,thedegreeofcrosscollaborationamongbusinessunits,thelevelofCEOactivitydevotedtosomething
otherthanworkingwithdirectreports,andthepresenceorabsenceofasecondroleaschairmanoftheboard.(Wevecreated
aClevelspanofcontroldiagnostictohelpdetermineyourtargetspan.)
5.Focusonwhatyoucancontrol.Makealistofthethingsthatholdyourorganizationback:thescarcities(thingsyou
consistentlyfindinshortsupply)andconstraints(thingsthatconsistentlyslowyoudown).Takingstockofrealworld
limitationshelpsensurethatyoucanexecuteandsustaintheneworganizationdesign.

Forexample,considertheimpactyoumightfaceif20percentofthepeoplewhohadthemostknowledgeandexpertisein
makingandmarketingyourcoreproductsyourproductlaunchtalentweredrawnawayforthreeyearsonaregulatory
project.Howwouldthattalentshortageaffectyourproductlaunchcapability,especiallyifitinvolvedidentifyingandacting
oncustomerinsights?Howmightyoucompensateforthisscarcity?Doublingdownonaddressingtypicalscarcities,orwhat
isnotgoodenough,helpsprioritizethechangestoyourorganizationmodel.Forexample,youmaybuildaproductlaunch
centerofexcellencetoaddressthetypicalscarcityofneverhavingenoughofthepeoplewhoknowhowtoexecuteeffective
launches.
Constraintsonyourbusinesssuchasregulations,supplyshortages,andchangesincustomerdemandmaybeoutofyour
control.Butitsimportantnottogetboggeddownintryingtochangesomethingyoucantchangeinstead,focusonchanging
whatyoucan.Forexample,ifyourcompanyisaglobalconsumerpackagedgoods(CPG)manufacturer,youmightfirstfavor
asingleglobalstructurewithcleardecisionrightsonbranding,policies,andusageguidelinesbecauseitismoreefficientin
globalbranding.Butifconsumertastesforyourproductaredifferentaroundtheworld,thenyoumightbebetteroffwitha
structurethattendstodelegatedecisionrightstothelocalbusinessleader.
6.Promoteaccountability.Designyourorganizationsothatitseasyforpeopletobeaccountablefortheirpartofthe
workwithoutbeingmicromanaged.Makesurethatdecisionrightsareclearandthatinformationflowsrapidlyandclearly
fromtheexecutivecommitteetobusinessunits,functions,anddepartments.Ourresearchunderscorestheimportanceof
thisfactor:Weanalyzeddozensofstrongexecutioncompaniesandfoundthatamongtheformalbuildingblocks,information
flowsanddecisionrightshadthestrongesteffectonimprovingtheexecutionofstrategy.Theyareabouttwiceaspowerfulas
anorganizationsstructureoritsmotivators(seeExhibit2).
Aglobalelectronicsmanufacturerwasstrugglingwithslowexecutionandlackof
accountability.Toaddresstheseissues,themanufacturercreatedamatrixthat
wouldidentifywhohadmadeimportantdecisionsduringthepastfewyears.
Thenitusedthematrixtoestablishcleardecisionrightsandmotivatorsmorein
tunewiththecompanysdesiredgoals.Regionalsalesdirectorsweremade
accountablefordealersintheirregionandwereevaluatedintermsofthesales
performanceofthosedealers.Thisencouragedownershipandhighperformance
onbothsides,anddrewincriticallyimportantbutpreviouslyisolatedgroups,like
themanufacturerswarrantyfunction.Thecompanyoperationalizedthesenew
decisionrightsbyestablishingthenecessarybudgetauthorities,decisionmaking
forums,andcommunications.
Whendecisionrightsandmotivatorsareestablished,accountabilitycantake
hold.Gradually,peoplegetinthehabitoffollowingthroughoncommitments
withoutexperiencingformalenforcement.Evenafteritbecomespartofthe
companysculture,thisnewaccountabilitymustbecontinuallynurturedand
promoted.Itwontendureif,forexample,newadditionstothefirmdonthonor
commitments,orincentiveschangeinawaythatunderminesthedesired
behavior.
7.Benchmarksparingly,ifatall.Onecommonmisstepislookingforbestpractices.Intheory,itcanbehelpfultotrack
whatcompetitorsaredoing,ifonlytohelpyouoptimizeyourowndesignoruncoverissuesrequiringattention.Butin
practice,thisapproachhasacoupleofproblems.
Firstandforemost,itignoresyourorganizationsuniquecapabilitiessystemthestrengthsthatonlyyourorganizationhas,
producingresultsthatotherscantmatch.Youandyourcompetitorarentlikelytoneedthesamedistinctivecapabilities,
evenifyoureinthesameindustry.Forexample,twobanksmightlooksimilaronthesurfacetheymighthavebranchesnext
doortoeachotherinseverallocales.ButthefirstcouldbeanationalbankcateringtoMillennials,whoaredrawntolowcosts
andinnovativeonlinebanking.Theothercouldberegionallyoriented,servinganoldercustomerbaseandemphasizing
communitytiesandpersonalizedcustomerservice.Thosedifferentvaluepropositionswouldrequiredifferentcapabilities,
andtranslateintodifferentorganizationdesigns.Thetechleadingbankmightbeorganizedprimarilybycustomersegment,

makingiteasytoinvestinasingleleadingedgetechnologythatcoveredallregionsandallmarkets,forseamlessinterplay
betweenonlineandfacetofaceaccess.Theregionalbankmightbeorganizedprimarilybygeography,settingupmanagers
tobuildbetterrelationshipswithlocalleadersandenterprises.Ifyoubenchmarkthewrongexample,thenthecopied
organizationalmodelwillonlysetyouback.
Ifyoufeelyoumustbenchmark,focusonafewselectbenchmarksandtheappropriatepeersforeach,ratherthantryingto
bebestinclassineverythingrelatedtoyourindustry.Yourchoiceofcompaniestofollow,andoftheindicatorstotrackand
analyze,shouldlineupexactlywiththecapabilitiesyouprioritizedinsettingyourfuturecourse.Forexample,ifyouare
expandingintoemergingmarkets,youmightbenchmarktheextenttowhichleadingcompaniesinthatregiongivelocal
officesdecisionrightsonsourcingordistribution.
8.Letthelinesandboxesfityourcompanyspurpose.Foreverycompany,thereisanoptimalpatternoflinesand
boxesagoldenmean.Itisntthesameforeverycompanyitshouldreflectthestrategyyouhavechosen,anditshould
supportthemostcriticalcapabilitiesthatdistinguishyourcompany.Thatmeansthattherightstructureforonecompanywill
notbethesameastherightstructureforanother,eveniftheyreinthesameindustry.
Inparticular,thinkthroughyourpurposewhendesigningthespansofcontrol(howmanypeoplereportdirectlytoanygiven
manager)andlayers(howfarremovedamanagerisfromtheCEO)inyourorgchart.Theseshouldbefairlyconsistent
acrosstheorganization.
Youcanoftenspeedtheflowofinformationandcreategreateraccountabilitybyreducinglayers,butifthestructuregetstoo
flat,yourleadershavetosuperviseanoverwhelmingnumberofpeople.Youcanfreeupmanagementtimebyaddingstaff,
butifthepyramidbecomestoosteep,itwillbehardtogetclearmessagesfromthebottomtothetop.Sotakethenatureof
yourenterpriseintoaccount.Doestheworkatyourcompanyrequireclosesupervision?Whatroledoestechnologyplay?How
muchcollaborationisinvolved?Howfarflungarepeoplegeographically,andwhatistheirpreferredmanagementstyle?
Inacallcenter,15or20peoplemightreporttoasinglemanagerbecausetheworkisroutineandheavilyautomated.An
enterprisesoftwareimplementationteam,madeupofspecializedknowledgeworkers,wouldrequireanarrowerspanof
control,suchassixtoeightemployees.Ifpeopleregularlytakeonstretchassignmentsandbroadlyparticipateindecision
making,thenyoumighthaveanarrowerhierarchymoremanagersdirectingonlyafewpeopleeachinsteadofsettingup
managerswithalargenumberofdirectreports.
9.Accentuatetheinformal.Formalelementslikestructureandinformationflowareattractivetocompaniesbecause
theyretangible.Theycanbeeasilydefinedandmeasured.Buttheyreonlyhalfthestory.Manycompaniesreassigndecision
rights,reworktheorgchart,orsetupknowledgesharingsystemsyetdontseetheresultstheyexpect.
Thatsbecausetheyveignoredthemoreinformal,intangiblebuildingblocks.Norms,commitments,mindsets,andnetworks
areessentialingettingthingsdone.Theyrepresent(andinfluence)thewayspeoplethink,feel,communicate,andbehave.
Whentheseintangiblesarenotinsyncwitheachotherorthemoretangiblebuildingblocks,theorganizationdoesntworkas
itshould.
Atonetechnologycompany,itwascommonpracticetohavemultiplemeetingsbeforethemeetingandmeetingsafterthe
meeting.Inotherwords,theconstructivedebateandplanningtookplaceoutsidetheformalpresentationsthatwereknown
astheofficialmeetings.Thecompanyhadlongreliedonitsinformalnetworksbecausepeopleneededworkaroundsto
manyofficialrules.Now,aspartoftheredesign,theleadersofthecompanyembraceditsinformalnature,adoptingnew
decisionrightsandnormsthatallowedthecompanytomovemorefluidly,andabandoningofficialchannelsasmuchas
possible.
10.Buildonyourstrengths.Overhaulingyourorganizationisoneofthehardestthingsforachiefexecutiveordivision
leadertodo,especiallyifheorsheischargedwithturningaroundapoorlyperformingcompany.Buttherearealways
strengthstobuildoninexistingpracticesandintheculture.Looktothesestrengthswhetherformalorinformaltohelp
youfixthosecriticalareasthatyouveprioritized.Suppose,forexample,thatyourcompanyhasanormofcustomeroriented
commitment.Employeesarewillingtogotheextramileforcustomerswhencalledupontodoso,deliveringworkoutof
scopeoraheadofschedule,oftenbecausetheyempathizewiththeproblemscustomersface.Youcandrawattentiontothat

behaviorbysettingupgroupstotalkaboutit,andreinforcethebehaviorbyrewardingitwithmoreformalincentives.That
willhelpspreaditthroughoutthecompany.
Perhapsyourcompanyhaswelldefineddecisionrightseachpersonhasagoodideaofthedecisionsandactionsforwhich
heorsheisresponsible.Yetinyourcurrentorgdesign,theymaynotbefocusedontherightthings.Youcanusethisstrong
accountabilityandredirectpeopletotherightdecisionstosupportthenewstrategy.

Conclusion
A2014Strategy&surveyfoundthat42percentofexecutivesfeltthattheirorganizationswerenotalignedwiththeirstrategy,
andthatpartsoftheorganizationresisteditordidntunderstandit.Theprinciplesinthisarticlecanhelpyoudevelopan
organizationdesignthatsupportsyourmostdistinctivecapabilitiesandsupportsyourstrategymoreeffectively.
Remakingyourorganizationtoalignwithyourstrategyisaprojectthatonlythechiefexecutivecanlead.Althoughitsnot
practicalforaCEOtomanagethedaytodaydetails,thetopleaderofacompanymustbeconsistentlypresenttowork
throughthemajorissuesandalternatives,focusthedesignteamonthefuture,andbeaccountableforthetransitiontothe
neworganization.Thechiefexecutivewillalsosetthetoneforfutureupdates:Changesintechnology,customerpreferences,
andotherdisruptorswillcontinuallytestyourbusinessmodel.
These10fundamentalprinciples,whichwehaveobservedandcultivatedwhileworkingwithhundredsofdiverse
organizations,canserveasyourguidepostsforanyreorganization,largeorsmall.Armedwiththesecollectivelessons,youcan
avoidcommonmisstepsandhomeinontherightblueprintforyourbusiness.
AUTHORPROFILES:
GaryL.NeilsonisaseniorpartnerwithStrategy&basedinChicago.Hefocusesonoperatingmodelsandorganizationaltransformation.
JaimeEstupinisapartnerwithStrategy&basedinNewYork.Hefocusesonconsumerstrategictransformationandorganizationforthe
healthcareindustry.
BhushanSethiisapartnerwithPwCAdvisoryServices.BasedinNewYork,heleadsthePwCnetworksfinancialservicespeopleandchange
practice.