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10PrinciplesofOrganizationDesign

Published:March23,2015

Organizations & People

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

Aglobalelectronicsmanufacturerseemedtoliveinaperpetualstateof
reorganization.AnewlineofcommunicationdevicesfortheAsianmarketrequired
reorientingitssales,marketing,andsupportfunctions.Migrationtocloudbased
businessapplicationscalledforchangestotheITorganization.Altogether,ithad
reorganizedsixtimesin10years.
Suddenly,however,thecompanyfounditselffacingadifferentchallenge.Giventhe
newtechnologiesthathadentereditscategory,andaseachangeincustomer
expectations,itneededanewstrategy.TheCEOdecidedtoshiftfromaproduct
basedbusinessmodeltoacustomercentricone.Thatmeantyetanother
reorganization,butthisonewouldbedifferent.Ithadtogobeyondshiftingthelines
andboxesinanorgchart.Itwouldhavetochangeitsmostfundamentalbuilding
blocks:howpeopleinthecompanymadedecisions,adoptednewbehaviors,
rewardedperformance,agreedoncommitments,managedinformation,madesense
ofthatinformation,allocatedresponsibility,andconnectedwitheachother.Notonly

IllustrationbyLarsLeetaru

didtheleadershipteamlackafullfledgedblueprinttheydidntknowwheretobegin.
Thisisanincreasinglytypicalsituation.Inthe18thannualPwCsurveyofchiefexecutiveofficers,conductedin2014,manyCEOs
anticipatedsignificantdisruptionstotheirbusinessesduringthenextfiveyearsasaresultofexternalworldwidetrends.One
suchtrend,citedby61percentoftherespondents,wasanincreasingnumberofcompetitors.Thesamenumberofrespondents
foresawchangesincustomerbehaviorcreatingdisruption.Fiftypercentsaidtheyexpectedchangesindistributionchannels.As
CEOslooktostayaheadofthesetrends,theyrecognizetheneedtochangetheorganizationsdesign.Butforthatredesigntobe
successful,acompanymustmakeitschangesaseffectivelyandpainlesslyaspossible,inawaythatalignswithitsstrategy,
invigoratesemployees,buildsdistinctivenewcapabilities,andmakesiteasiertoattractcustomers.
Today,theaveragetenurefortheCEOofaglobalcompanyisaboutfiveyears.Therefore,amajorreorganizationislikelyto
happenonlyonceduringthatleadersterm.Thechiefexecutivehastogetthereorgrightthefirsttimeheorshewontgeta
secondchance.Althougheverycompanyisdifferent,andthereisnosetformulafordeterminingyourappropriateorganization
design,wehaveidentified10guidingprinciplesthatapplytoeverycompany.Thesehavearisenfromyearsofcollectiveresearch
andpracticeatPwCandStrategy&,usingchangesinorganizationdesigntodramaticallyimproveperformanceinmorethan400
companiesacrossindustriesandgeographies.Thesefundamentalprinciplespointthewayforleaderswhoseevolvingstrategies
requireadifferentkindoforganizationthantheonetheyhavetoday.

Thechiefexecutivehastogetthereorgrightthefirsttime
heorshewontgetasecondchance.
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1.Declareamnestyforthepast.Organizationdesignshouldstartwithcorporateselfreflection:Whatisyoursenseof
purpose?Howwillyoumakeadifferenceforyourclients,employees,andinvestors?Whatwillsetyouapartfromothers,now
andinthefuture?Whatdifferentiatingcapabilitieswillallowyoutodeliveryourvaluepropositionoverthenexttwotofive
years?
Formanybusinessleaders,answeringthosequestionsmeansgoingbeyondthecomfortzone.Youhavetosetabolddirection,
marshaltheorganizationtowardthatgoal,andprioritizeeverythingyoudoaccordingly.Sustainingaforwardlookingviewis
crucial.Thatmeanslettinggoofthepast.
Weveseenafairnumberoforganizationdesigninitiativesfailtomakeadifferencebecauseseniorexecutivesgetcaughtupin
discussingtheprosandconsoftheoldorganization.Avoidthissituationbydeclaringamnestyforthepast.Youcollectively,
explicitlydecidethatyouwillneitherblamenortrytojustifythedesigninplacetoday,oranyorganizationdesignsofthepast.
Whetherornottheyservedtheirpurpose,itstimetomoveon.Thistypeofpronouncementmaysoundsimplistic,butits
surprisinglyeffectiveforkeepingthefocusonthenewstrategy.
2.DesignwiththeDNA.Organizationdesigncanseemunnecessarilycomplextherightframework,however,canhelpyou
decodeandprioritizethenecessaryelements.Wehaveidentifiedeightuniversalbuildingblocksthatarerelevanttoany
company,regardlessofindustry,geography,orbusinessmodel.Thesebuildingblockswillbetheelementsyouputtogetherfor
yourdesign(seeExhibit1).

Theblocksnaturallyfallintofourcomplementarypairs,eachmadeupofonetangible(orformal)andoneintangible(or
informal)element.Decisionrightsarepairedwithnorms(governinghowpeopleact),motivatorswithcommitments(governing
whattheyfeelabouttheirwork),informationwithmindsets(governinghowtheyprocessknowledgeandmeaning),and
structurewithnetworks(governinghowtheyconnect).Byusingtheseelementsandconsideringchangesneededacrosseach
complementarypair,youcancreateadesignthatwillintegrateyourwholeenterprise,insteadofpullingitapart.
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Youmaybetemptedtomakechangeswithalleightbuildingblockssimultaneously.Buttoomanyinterventionsatoncecould
interactinunexpectedways,leadingtounfortunatesideeffects.Pickasmallnumberofchangesfourorfiveatmostthatyou
believewilldeliverthegreatestinitialimpact.Evenafewchangescouldinvolvemanyvariationsforexample,thedesignof
motivatorsmightneedtovaryfromonefunctiontothenext.Peopleinsalesmightbemoreheavilyinfluencedbymonetary
rewards,whereasR&Dstaffersmightfavoracareermodelwithopportunitiesforselfdirectedprojectsandexternal
collaborationandeducation.
3.Fixthestructurelast,notfirst.Companyleadersknowthattheircurrentorgchartdoesntnecessarilycapturetheway
thingsgetdoneitsatbestavagueapproximation.Yettheystillmayfallintoacommontrap:thinkingthatchangingtheir
organizationsstructurewilladdresstheirbusinesssproblems.
Wecantblamethem,astheorgchartisthemostseeminglypowerfulcommunicationsvehiclearound.Italsocarriesemotional
weight,becauseitdefinesreportingrelationshipsthatpeoplemightloveorhate.Butacompanyhierarchy,particularlywhen
changesintheorgchartaremadeinisolationfromotherchanges,tendstoreverttoitsearlierequilibrium.Youcansignificantly
removemanagementlayersandtemporarilyreducecosts,butalltoosoon,thelayerscreepbackinandtheshorttermgains
disappear.
Inanorgredesign,yourenotsettingupanewformfortheorganizationallatonce.Yourelayingoutasequenceofinterventions
thatwillleadthecompanyfromthepasttothefuture.Structureshouldbethelastthingyouchange:thecapstone,notthe
cornerstone,ofthatsequence.Otherwise,thechangewontsustainitself.
Wesawthevalueofthisapproachrecentlywithanindustrialgoodsmanufacturer.Inthepast,ithadundertakenreorganizations
thatfocusedalmostsolelyonstructure,withouteverachievingtheexecutionimprovementitsleadersexpected.Thenthestakes
grewhigher:FastgrowingcompetitorsemergedfromAsia,technologicaladvancescompressedproductcycles,andnewbusiness
modelsthatbypasseddistributorsappeared.Thistime,insteadofredrawingthelinesandboxes,thecompanysoughtto
understandtheorganizationalfactorsthathadsloweddownresponseinthepast.Therewereproblemsinthewaydecisionswere
madeandcarriedout,andinhowinformationflowed.Therefore,thefirstchangesinthesequenceconcernedthesebuilding
blocks:eliminatingnonproductivemeetings(informationflows),clarifyingaccountabilitiesinthematrixstructure(decisions
andnorms),andchanginghowpeoplewererewarded(motivators).Bythetimethecompanywasreadytoadjusttheorgchart,
mostoftheproblemfactorshadbeenaddressed.
4.Makethemostoftoptalent.Talentisacriticalbutoftenoverlookedfactorwhenitcomestoorgdesign.Youmightassume
thatthepersonalitiesandcapabilitiesofexistingexecutiveteammemberswontaffectthedesignmuch.Butinreality,youneed
todesignpositionstomakethemostofthestrengthsofthepeoplewhowilloccupythem.Inotherwords,considerthetechnical
skillsandmanagerialacumenofkeypeople,andmakesurethoseleadersareequippedtofosterthecollaborationand
empowermentneededfrompeoplebelowthem.
Youneedtoensurethatthereisaconnectionbetweenthecapabilitiesyouneedandtheleadershiptalentyouhave.Forexample,
ifyoureorganizingthebusinessonthebasisofinnovationandtheabilitytorespondquicklytochangesinthemarket,the
personchosenaschiefmarketingofficer(CMO)willneedadiversebackground.Someonewithamoreconventionalmarketing
backgroundwhosecorecapabilitiesarelowcostpricingandextensivedistributionmightnotbecomfortableinthatrole.Youcan
sometimescompensateforagapinproficiencythroughotherteammembers.IftheCFOisanexcellenttechnicianbuthaslittle
leadershipcharisma,youmaybalancehimorherwithachiefoperatingofficer(COO)whoexcelsinthisareaandcantakeon
themorepublicfacingaspectsoftherole,suchasspeakingwithanalysts.
Asyouassembletheleadershipteamforyourstrategy,lookforanoptimalspanofcontrolthenumberofdirectreportsfor
yourseniorexecutivepositions.AHarvardBusinessSchoolstudyconductedbyassociateprofessorJulieWulffoundthatCEOs
havedoubledtheirspanofcontroloverthepasttwodecades.Althoughmanyexecutiveshavesevendirectreports,theresno
singlemagicnumber.ForCEOs,theoptimalspanofcontroldependsonfourfactors:theCEOspositionintheexecutivelife
cycle,thedegreeofcrosscollaborationamongbusinessunits,thelevelofCEOactivitydevotedtosomethingotherthanworking
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withdirectreports,andthepresenceorabsenceofasecondroleaschairmanoftheboard.(WevecreatedaClevelspanof
controldiagnostictohelpdetermineyourtargetspan.)
5.Focusonwhatyoucancontrol.Makealistofthethingsthatholdyourorganizationback:thescarcities(thingsyou
consistentlyfindinshortsupply)andconstraints(thingsthatconsistentlyslowyoudown).Takingstockofrealworldlimitations
helpsensurethatyoucanexecuteandsustaintheneworganizationdesign.
Forexample,considertheimpactyoumightfaceif20percentofthepeoplewhohadthemostknowledgeandexpertisein
makingandmarketingyourcoreproductsyourproductlaunchtalentweredrawnawayforthreeyearsonaregulatoryproject.
Howwouldthattalentshortageaffectyourproductlaunchcapability,especiallyifitinvolvedidentifyingandactingoncustomer
insights?Howmightyoucompensateforthisscarcity?Doublingdownonaddressingtypicalscarcities,orwhatisnotgood
enough,helpsprioritizethechangestoyourorganizationmodel.Forexample,youmaybuildaproductlaunchcenterof
excellencetoaddressthetypicalscarcityofneverhavingenoughofthepeoplewhoknowhowtoexecuteeffectivelaunches.
Constraintsonyourbusinesssuchasregulations,supplyshortages,andchangesincustomerdemandmaybeoutofyour
control.Butitsimportantnottogetboggeddownintryingtochangesomethingyoucantchangeinstead,focusonchanging
whatyoucan.Forexample,ifyourcompanyisaglobalconsumerpackagedgoods(CPG)manufacturer,youmightfirstfavora
singleglobalstructurewithcleardecisionrightsonbranding,policies,andusageguidelinesbecauseitismoreefficientinglobal
branding.Butifconsumertastesforyourproductaredifferentaroundtheworld,thenyoumightbebetteroffwithastructure
thattendstodelegatedecisionrightstothelocalbusinessleader.
6.Promoteaccountability.Designyourorganizationsothatitseasyforpeopletobeaccountablefortheirpartofthework
withoutbeingmicromanaged.Makesurethatdecisionrightsareclearandthatinformationflowsrapidlyandclearlyfromthe
executivecommitteetobusinessunits,functions,anddepartments.Ourresearchunderscorestheimportanceofthisfactor:We
analyzeddozensofstrongexecutioncompaniesandfoundthatamongtheformalbuildingblocks,informationflowsanddecision
rightshadthestrongesteffectonimprovingtheexecutionofstrategy.Theyareabouttwiceaspowerfulasanorganizations
structureoritsmotivators(seeExhibit2).
Aglobalelectronicsmanufacturerwasstrugglingwithslowexecutionandlackof
accountability.Toaddresstheseissues,themanufacturercreatedamatrixthatwould
identifywhohadmadeimportantdecisionsduringthepastfewyears.Thenitused
thematrixtoestablishcleardecisionrightsandmotivatorsmoreintunewiththe
companysdesiredgoals.Regionalsalesdirectorsweremadeaccountablefordealers
intheirregionandwereevaluatedintermsofthesalesperformanceofthosedealers.
Thisencouragedownershipandhighperformanceonbothsides,anddrewin
criticallyimportantbutpreviouslyisolatedgroups,likethemanufacturerswarranty
function.Thecompanyoperationalizedthesenewdecisionrightsbyestablishingthe
necessarybudgetauthorities,decisionmakingforums,andcommunications.
Whendecisionrightsandmotivatorsareestablished,accountabilitycantakehold.
Gradually,peoplegetinthehabitoffollowingthroughoncommitmentswithout
experiencingformalenforcement.Evenafteritbecomespartofthecompanys
culture,thisnewaccountabilitymustbecontinuallynurturedandpromoted.Itwont
endureif,forexample,newadditionstothefirmdonthonorcommitments,or
incentiveschangeinawaythatunderminesthedesiredbehavior.
7.Benchmarksparingly,ifatall.Onecommonmisstepislookingforbest
practices.Intheory,itcanbehelpfultotrackwhatcompetitorsaredoing,ifonlytohelpyouoptimizeyourowndesignor
uncoverissuesrequiringattention.Butinpractice,thisapproachhasacoupleofproblems.
Firstandforemost,itignoresyourorganizationsuniquecapabilitiessystemthestrengthsthatonlyyourorganizationhas,
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producingresultsthatotherscantmatch.Youandyourcompetitorarentlikelytoneedthesamedistinctivecapabilities,evenif
youreinthesameindustry.Forexample,twobanksmightlooksimilaronthesurfacetheymighthavebranchesnextdoorto
eachotherinseverallocales.ButthefirstcouldbeanationalbankcateringtoMillennials,whoaredrawntolowcostsand
innovativeonlinebanking.Theothercouldberegionallyoriented,servinganoldercustomerbaseandemphasizingcommunity
tiesandpersonalizedcustomerservice.Thosedifferentvaluepropositionswouldrequiredifferentcapabilities,andtranslateinto
differentorganizationdesigns.Thetechleadingbankmightbeorganizedprimarilybycustomersegment,makingiteasyto
investinasingleleadingedgetechnologythatcoveredallregionsandallmarkets,forseamlessinterplaybetweenonlineand
facetofaceaccess.Theregionalbankmightbeorganizedprimarilybygeography,settingupmanagerstobuildbetter
relationshipswithlocalleadersandenterprises.Ifyoubenchmarkthewrongexample,thenthecopiedorganizationalmodelwill
onlysetyouback.
Ifyoufeelyoumustbenchmark,focusonafewselectbenchmarksandtheappropriatepeersforeach,ratherthantryingtobe
bestinclassineverythingrelatedtoyourindustry.Yourchoiceofcompaniestofollow,andoftheindicatorstotrackandanalyze,
shouldlineupexactlywiththecapabilitiesyouprioritizedinsettingyourfuturecourse.Forexample,ifyouareexpandinginto
emergingmarkets,youmightbenchmarktheextenttowhichleadingcompaniesinthatregiongivelocalofficesdecisionrights
onsourcingordistribution.
8.Letthelinesandboxesfityourcompanyspurpose.Foreverycompany,thereisanoptimalpatternoflinesand
boxesagoldenmean.Itisntthesameforeverycompanyitshouldreflectthestrategyyouhavechosen,anditshouldsupport
themostcriticalcapabilitiesthatdistinguishyourcompany.Thatmeansthattherightstructureforonecompanywillnotbethe
sameastherightstructureforanother,eveniftheyreinthesameindustry.
Inparticular,thinkthroughyourpurposewhendesigningthespansofcontrol(howmanypeoplereportdirectlytoanygiven
manager)andlayers(howfarremovedamanagerisfromtheCEO)inyourorgchart.Theseshouldbefairlyconsistentacross
theorganization.
Youcanoftenspeedtheflowofinformationandcreategreateraccountabilitybyreducinglayers,butifthestructuregetstooflat,
yourleadershavetosuperviseanoverwhelmingnumberofpeople.Youcanfreeupmanagementtimebyaddingstaff,butifthe
pyramidbecomestoosteep,itwillbehardtogetclearmessagesfromthebottomtothetop.Sotakethenatureofyourenterprise
intoaccount.Doestheworkatyourcompanyrequireclosesupervision?Whatroledoestechnologyplay?Howmuchcollaboration
isinvolved?Howfarflungarepeoplegeographically,andwhatistheirpreferredmanagementstyle?
Inacallcenter,15or20peoplemightreporttoasinglemanagerbecausetheworkisroutineandheavilyautomated.An
enterprisesoftwareimplementationteam,madeupofspecializedknowledgeworkers,wouldrequireanarrowerspanofcontrol,
suchassixtoeightemployees.Ifpeopleregularlytakeonstretchassignmentsandbroadlyparticipateindecisionmaking,then
youmighthaveanarrowerhierarchymoremanagersdirectingonlyafewpeopleeachinsteadofsettingupmanagerswitha
largenumberofdirectreports.
9.Accentuatetheinformal.Formalelementslikestructureandinformationflowareattractivetocompaniesbecausetheyre
tangible.Theycanbeeasilydefinedandmeasured.Buttheyreonlyhalfthestory.Manycompaniesreassigndecisionrights,
reworktheorgchart,orsetupknowledgesharingsystemsyetdontseetheresultstheyexpect.
Thatsbecausetheyveignoredthemoreinformal,intangiblebuildingblocks.Norms,commitments,mindsets,andnetworksare
essentialingettingthingsdone.Theyrepresent(andinfluence)thewayspeoplethink,feel,communicate,andbehave.When
theseintangiblesarenotinsyncwitheachotherorthemoretangiblebuildingblocks,theorganizationdoesntworkasitshould.
Atonetechnologycompany,itwascommonpracticetohavemultiplemeetingsbeforethemeetingandmeetingsafterthe
meeting.Inotherwords,theconstructivedebateandplanningtookplaceoutsidetheformalpresentationsthatwereknownas
theofficialmeetings.Thecompanyhadlongreliedonitsinformalnetworksbecausepeopleneededworkaroundstomany
officialrules.Now,aspartoftheredesign,theleadersofthecompanyembraceditsinformalnature,adoptingnewdecision
rightsandnormsthatallowedthecompanytomovemorefluidly,andabandoningofficialchannelsasmuchaspossible.
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10.Buildonyourstrengths.Overhaulingyourorganizationisoneofthehardestthingsforachiefexecutiveordivision
leadertodo,especiallyifheorsheischargedwithturningaroundapoorlyperformingcompany.Buttherearealwaysstrengths
tobuildoninexistingpracticesandintheculture.Looktothesestrengthswhetherformalorinformaltohelpyoufixthose
criticalareasthatyouveprioritized.Suppose,forexample,thatyourcompanyhasanormofcustomerorientedcommitment.
Employeesarewillingtogotheextramileforcustomerswhencalledupontodoso,deliveringworkoutofscopeoraheadof
schedule,oftenbecausetheyempathizewiththeproblemscustomersface.Youcandrawattentiontothatbehaviorbysettingup
groupstotalkaboutit,andreinforcethebehaviorbyrewardingitwithmoreformalincentives.Thatwillhelpspreadit
throughoutthecompany.
Perhapsyourcompanyhaswelldefineddecisionrightseachpersonhasagoodideaofthedecisionsandactionsforwhichheor
sheisresponsible.Yetinyourcurrentorgdesign,theymaynotbefocusedontherightthings.Youcanusethisstrong
accountabilityandredirectpeopletotherightdecisionstosupportthenewstrategy.

Conclusion
A2014Strategy&surveyfoundthat42percentofexecutivesfeltthattheirorganizationswerenotalignedwiththeirstrategy,
andthatpartsoftheorganizationresisteditordidntunderstandit.Theprinciplesinthisarticlecanhelpyoudevelopan
organizationdesignthatsupportsyourmostdistinctivecapabilitiesandsupportsyourstrategymoreeffectively.
Remakingyourorganizationtoalignwithyourstrategyisaprojectthatonlythechiefexecutivecanlead.Althoughitsnot
practicalforaCEOtomanagethedaytodaydetails,thetopleaderofacompanymustbeconsistentlypresenttoworkthrough
themajorissuesandalternatives,focusthedesignteamonthefuture,andbeaccountableforthetransitiontothenew
organization.Thechiefexecutivewillalsosetthetoneforfutureupdates:Changesintechnology,customerpreferences,and
otherdisruptorswillcontinuallytestyourbusinessmodel.
These10fundamentalprinciples,whichwehaveobservedandcultivatedwhileworkingwithhundredsofdiverseorganizations,
canserveasyourguidepostsforanyreorganization,largeorsmall.Armedwiththesecollectivelessons,youcanavoidcommon
misstepsandhomeinontherightblueprintforyourbusiness.
AUTHORPROFILES:
GaryL.NeilsonisaseniorpartnerwithStrategy&basedinChicago.Hefocusesonoperatingmodelsandorganizationaltransformation.
JaimeEstupinisapartnerwithStrategy&basedinNewYork.Hefocusesonconsumerstrategictransformationandorganizationforthe
healthcareindustry.
BhushanSethiisapartnerwithPwCAdvisoryServices.BasedinNewYork,heleadsthePwCnetworksfinancialservicespeopleandchange
practice.

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