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strategy+business

ISSUE 79 SUMMER 2015

10 Principles of
Organization Design
These fundamental guidelines can help you reshape your
organization to fit your business strategy.

BY GARY L. NEILSON, JAIME ESTUPIÑÁN, AND BHUSHAN SETHI

REPRINT 00318
ORGANIZATIONS & PEOPLE
essay organizations & people

One such trend, cited by 61 percent


of the respondents, was heightened
competition. The same proportion
of respondents foresaw changes in
customer behavior creating disrup-
tion. Fifty percent said they expect-
ed changes in distribution channels.
As CEOs look to stay ahead of these
trends, they recognize the need to
change their organization’s design.
But for that redesign to succeed, a
company must make its changes as
effectively and painlessly as possible,
1 in a way that aligns with its strategy,
invigorates employees, builds dis-
tinctive capabilities, and makes it

10 Principles of easier to attract customers.


Today, the average tenure for the

Organization Design
CEO of a global company is about
five years. Therefore, a major re-
organization is likely to happen only
once during that leader’s term. The
These fundamental guidelines can help chief executive has to get the reorg
you reshape your organization to fit your right the first time; he or she won’t
business strategy. get a second chance.
Although every company is dif-
by Gary L. Neilson, Jaime Estupiñán, That meant yet another reorganiza- ferent, and there is no set formula
and Bhushan Sethi tion, but this one would be differ- for determining the appropriate de-

A
ent. It had to go beyond shifting the sign for your organization, we have
global electronics manu- lines and boxes in an org chart. It identified 10 guiding principles that
facturer seemed to live would have to change the company’s apply to every company. These have
in a perpetual state of re- most fundamental building blocks: been developed through years of
organization. Introducing a new how people in the company made research and practice at PwC and
line of communication devices for decisions, adopted new behaviors, Strategy&, using changes in orga-
the Asian market required reorient- rewarded performance, agreed on nization design to improve perfor-
ing its sales, marketing, and sup- commitments, managed informa- mance in more than 400 companies
port functions. Migrating to cloud- tion, made sense of that informa- across industries and geographies.
based business applications called tion, allocated responsibility, and These fundamental principles point
for changes to the IT organization. connected with one another. Not the way for leaders whose strategies
Altogether, it had reorganized six only did the leadership team lack a require a different kind of organiza-
times in 10 years. full-fledged blueprint — they didn’t tion than the one they have today.
Suddenly, however, the com- know where to begin. 1. Declare amnesty for the
Illustration by Lars Leetaru

pany found itself facing a different This situation is becoming more past. Organization design should
challenge. Because of the new tech- typical. In the 18th annual PwC start with corporate self-reflection:
nologies that had entered its cat- survey of chief executive officers, What is your sense of purpose? How
egory, and a sea change in customer conducted in 2014, many CEOs will you make a difference for your
expectations, the CEO decided to anticipated significant disruptions clients, employees, and investors?
shift from a product-based business to their businesses during the next What will set you apart from others,
model to a customer-centric one. five years as a result of global trends. now and in the future? What differ-
essay organizations & people
entiating capabilities will allow you tify the design in place today or any made up of one tangible (or formal)
to deliver your value proposition organization designs of the past. It’s and one intangible (or informal)
over the next two to five years? time to move on. This type of pro- element. Decisions are paired with
For many business leaders, an- nouncement may sound simple, but norms (governing how people act),
swering those questions means go- it’s surprisingly effective for keeping motivators with commitments (gov-
ing beyond your comfort zone. You the focus on the new strategy. erning factors that affect people’s
have to set a bold direction, marshal 2. Design with “DNA.” Organi- feelings about their work), informa-
the organization toward that goal, zation design can seem unnecessar- tion with mind-sets (governing how
and prioritize everything you do ily complex; the right framework, they process knowledge and mean-
accordingly. Sustaining a forward- however, can help you decode and ing), and structure with networks
looking view is crucial. prioritize the necessary elements. (governing how they connect). By
We’ve seen a fair number of We have identified eight universal using these elements and consid-
organization design initiatives fail building blocks that are relevant to ering changes needed across each
to make a difference because senior any company, regardless of industry, complementary pair, you can cre- 2
executives got caught up in discuss- geography, or business model. These ate a design that will integrate your
ing the pros and cons of the old or- building blocks will be the elements whole enterprise, instead of pulling
ganization. Avoid this situation by you put together for your design (see it apart.
declaring “amnesty for the past.” Exhibit 1). You may be tempted to make
Collectively, explicitly decide that The blocks naturally fall into changes with all eight building
you will neither blame nor try to jus- four complementary pairs, each blocks simultaneously. But too

Exhibit 1: The Eight Elements of Organization Design


Grouped into complementary pairs (the four rungs),
these components can be combined into a design
relevant to any company. When initiating the redesign
of an organization, start with just four or five
changes.

FORMAL INFORMAL
Decisions Norms
How decisions are made How people instinctively act or take action
• Governance forums • Values and standards
• Decision rights • Expectations and “unwritten rules”
• Decision processes • Behaviors
• Decision analytics
Motivators Commitments
How people are compelled to perform How people are inspired to contribute
• Monetary rewards • Shared vision and objectives
• Career models • Individual goals and aspirations
• Talent processes • Sources of pride

Information Mind-Sets
How the organization formally processes data and knowledge How people make sense of their work
• Key performance indicators and metrics • Identity, shared language, and beliefs
• Information flows • Assumptions and biases
• Knowledge management systems • Mental models

Structure Networks
How work and responsibilities get divided How people connect beyond the lines and boxes
• Hierarchy and reporting relationships • Conversations and collaboration
• Roles and responsibilities • Teams and other working units
• Business processes • Organizational influence

Source: Strategy&
essay organizations & people

many interventions at once could In an org redesign, you’re not 4. Make the most of top tal-
interact in unexpected ways, lead- setting up a new form for the or- ent. Talent is a critical but often
ing to unfortunate side effects. Pick ganization all at once. You’re laying overlooked factor when it comes to
a small number of changes — five out a sequence of interventions that org design. You might assume that
at most — that you believe will will lead the company from the past the personalities and capabilities of
deliver the greatest initial impact. to the future. Structure should be existing executive team members
Even a few changes could involve the last thing you change: the cap- won’t affect the design much. But in
many variations. For example, the stone, not the cornerstone, of that reality, you need to design positions
design of motivators might need to sequence. Otherwise, the change to make the most of the strengths of
vary from one function to the next. won’t sustain itself. the people who will occupy them. In
People in sales might be more heav- We saw the value of this ap- other words, consider the technical
ily influenced by monetary rewards, proach recently with an industrial skills and managerial acumen of key
whereas R&D staffers might favor a goods manufacturer. In the past, it people, and make sure those leaders
3 career model with opportunities for had undertaken reorganizations that are equipped to foster the collabora-
self-directed projects and external focused almost solely on structure, tion and empowerment needed from
collaboration and education. without ever achieving the execu- people below them.
3. Fix the structure last, not tion improvement its leaders expect- You must ensure that there is a
first. Company leaders know that ed. Then the stakes grew higher: connection between the capabilities
their current org chart doesn’t nec- Fast-growing competitors emerged you need and the leadership talent
essarily capture the way things get from Asia, technological advances you have. For example, if you’re or-
ganizing the business on the basis of
innovation and the ability to respond
Too many interventions at once quickly to changes in the market,
could interact in unexpected ways, the person chosen as chief market-
ing officer will need a diverse back-
leading to unfortunate side effects. ground. Someone with a conven-
tional marketing background whose
core skills center on low-cost pricing
done — it’s at best a vague approxi- compressed product cycles, and and extensive distribution might
mation. Yet they still may fall into a new business models appeared that not be comfortable in that role. You
common trap: thinking that chang- bypassed distributors. This time, can sometimes compensate for a gap
ing their organization’s structure will instead of redrawing the lines and in proficiency through other team
address their business’s problems. boxes, the company sought to un- members. If the chief financial of-
We can’t blame them — after derstand the organizational factors ficer is an excellent technician but
all, the org chart is seemingly the that had slowed down its responses has little leadership charisma, you
most powerful communications in the past. There were problems may balance him or her with a chief
vehicle around. It also carries emo- in the way decisions were made operating officer who excels at the
tional weight, because it defines and carried out, and in how infor- public-facing aspects of the role,
reporting relationships that people mation flowed. Therefore, the first such as speaking with analysts.
might love or hate. But a com- changes in the sequence concerned As you assemble the leadership
pany hierarchy, particularly when these building blocks: eliminating team for your strategy, look for an
changes in the org chart are made in non-productive meetings (informa- optimal span of control — the num-
isolation from other changes, tends tion), clarifying accountabilities in ber of direct reports — for your se-
to revert to its earlier equilibrium. the matrix structure (decisions and nior executive positions. A Harvard
strategy+business issue 79

You can significantly remove man- norms), and changing how people Business School study conducted
agement layers and temporarily re- were rewarded (motivators). By the by associate professor Julie Wulf
duce costs, but all too soon, the lay- time the company was ready to ad- found that CEOs have doubled
ers creep back in and the short-term just the org chart, most of the prob- their span of control over the past
gains disappear. lem factors had been addressed. two decades. Although many ex-
essay organizations & people
ecutives have seven direct reports, — may be out of your control. But Exhibit 2: The Importance of
there’s no universal magic number. don’t get bogged down in trying to Accountability
For CEOs, the optimal span of con- change something you can’t change; Survey responses suggest that changes in
information flows and decision rights are twice
trol depends on four factors: the instead, focus on changing what you as powerful as changes in an organization’s
motivators or structure.
CEO’s tenure thus far, the degree can. For example, if your company
of cross-collaboration among busi- is a global consumer packaged goods Average Strength Index Score (out of 100)
ness units, the level of CEO activ- manufacturer, you might first favor
Information 54
ity devoted to something other than a single structure with clear decision
working with direct reports, and rights on branding, policies, and Decision rights 50
whether the CEO is also chairman usage guidelines because it is more
of the board. (We’ve created a C- efficient in global branding. But if Motivators 26
level span-of-control diagnostic to consumer tastes for your product
help determine your target span, at are different around the world, you Structure 25
strategyand.pwc.com/spanofcontrol.) might be better off with a structure 4
Source: Strategy& analysis of Org DNA Profiler survey
5. Focus on what you can con- that delegates decision rights to the
trol. Make a list of the things that local business leader.
hold your organization back: the 6. Promote accountability. De- of those dealers. This encouraged
scarcities (things you consistently sign your organization so that it’s ownership and high performance
find in short supply) and constraints easy for people to be accountable on both sides, and drew in critically
(things that consistently slow you for their part of the work without important but previously isolated
down). Taking stock of real-world being micromanaged. Make sure groups, like the manufacturer’s war-
limitations helps ensure that you can that decision rights are clear and ranty function. The company opera-
execute and sustain the new organi- that information flows rapidly and tionalized these new decision rights
zation design. clearly from the executive commit- by establishing the necessary budget
For example, consider the im- tee to business units, functions, and authorities, decision-making forums,
pact you might face if 20 percent departments. Our research under- and communications.
of the people who had the most scores the importance of this factor: When decision rights and moti-
knowledge and expertise in mak- We analyzed dozens of companies vators are established, accountability
ing and marketing your core prod- with strong execution and found can take hold. Gradually, people get
ucts — your product launch talent that among the formal building in the habit of following through on
— were drawn away for three years blocks, information and decision commitments without experiencing
on a regulatory project. How would rights had the strongest effect on formal enforcement. Even after it
that talent shortage affect your prod- improving the execution of strategy. becomes part of the company’s cul-
uct launch capability, especially if They are about twice as powerful ture, this new accountability must
it involved identifying and acting as an organization’s structure or its be continually nurtured and pro-
on customer insights? How might motivators (see Exhibit 2). moted. It won’t endure if, for exam-
you compensate for this scarcity? A global electronics manufac- ple, new additions to the firm don’t
Doubling down on addressing typi- turer was struggling with slow ex- honor commitments or incentives
cal scarcities, or what is “not good ecution and lack of accountability. change in a way that undermines
enough,” helps prioritize the changes To address these issues, it created a the desired behavior.
to your organization model. For matrix that could identify those who 7. Benchmark sparingly, if at
example, you may build a product had made important decisions in the all. One common misstep is looking
launch center of excellence to address past few years. It then used the ma- for best practices. In theory, it can
the typical scarcity of never having trix to establish clear decision rights be helpful to track what competitors
enough of the people who know how and motivators more in tune with the are doing, if only to help you opti-
to execute effective launches. company’s desired goals. Sales direc- mize your own design or uncover
Constraints on your business — tors were made accountable for deal- issues requiring attention. But in
such as regulations, supply shortag- ers in their region and were evaluated practice, this approach has a couple
es, and changes in customer demand in terms of the sales performance of problems.
essay organizations & people

First, it ignores your organiza- to follow, and of the indicators to cause the work is routine and heav-
tion’s unique capabilities system track and analyze, should line up ily automated. An enterprise soft-
— the strengths that only your exactly with the capabilities you ware implementation team, made
organization has, which produces prioritized in setting your future up of specialized knowledge work-
results that others can’t match. You course. For example, if you are ex- ers, would require a narrower span
and your competitor aren’t likely panding into emerging markets, of control, such as six to eight em-
to need the same distinctive capa- you might benchmark the extent to ployees. If people regularly take on
bilities, even if you’re in the same which leading companies in that re- stretch assignments and broadly
industry. For example, two banks gion give local offices decision rights participate in decision making, you
might look similar on the surface; on sourcing or distribution. might have a narrower hierarchy —
they might have branches next door 8. Let the “lines and boxes” fit more managers directing only a few
to each other in several locales. But your company’s purpose. For ev- people each — instead of setting up
the first could be a national bank ery company, there is an optimal managers with a large number of di-
5 catering to millennials, who are pattern of hierarchical relationship rect reports.
drawn to low costs and innovative — a golden mean. It isn’t the same 9. Accentuate the informal.
online banking features. The other for every company; it should reflect Formal elements like structure and
could be regionally oriented, serv- the strategy you have chosen, and it information are attractive to compa-
ing an older customer base and em- should support the critical capabili- nies because they’re tangible. They
phasizing community ties and per- ties that distinguish your company. can be easily defined and measured.
sonalized customer service. Those That means that the right struc- But they’re only half the story.
different value propositions would ture for one company will not be Many companies reassign decision
require different capabilities and the same as the right structure for rights, rework the org chart, or set
translate into different organization another, even if they’re in the same up knowledge-sharing systems —
designs. The national bank might industry. yet don’t see the results they expect.
be organized primarily by customer In particular, think through That’s because they’ve ignored
segment, making it easy to invest your purpose when designing the the more informal, intangible build-
in a single leading-edge technology spans of control and layers in your ing blocks. Norms, commitments,
that covers all regions and all mar- org chart. These should be fairly mind-sets, and networks are essen-
kets. The regional bank might be consistent across the organization. tial in getting things done. They
organized primarily by geography, You can often hasten the flow represent (and influence) the ways
setting up managers to build bet- of information and create greater people think, feel, communicate,
ter relationships with local leaders accountability by reducing layers. and behave. When these intangibles
and enterprises. If you benchmark But if the structure gets too flat, are not in sync with one another or
the wrong example, the copied your leaders have to supervise an the more tangible building blocks,
organizational model will only set overwhelming number of people. the organization falters.
you back. You can free up management time At one technology company, it
Second, even if you share the by adding staff, but if the pyramid was common practice to have mul-
same strategy as a competitor, who’s becomes too steep, it will be hard tiple “meetings before the meeting”
to say that its organization is a good to get clear messages from the bot- and “meetings after the meeting.” In
fit with its strategy? If your competi- tom to the top. So take the nature of other words, the constructive debate
tor has a different value proposition your enterprise into account. Does and planning took place outside
or capabilities system than you do, the work at your company require the formal presentations that were
using it as a comparison for your close supervision? What role does known as the “official meetings.”
own performance will be a mistake. technology play? How much collab- The company had long relied on its
strategy+business issue 79

If you feel you must bench- oration is involved? How far-flung informal networks because people
mark, focus on a few select ele- are people geographically, and what needed workarounds to many offi-
ments, rather than trying to be best is their preferred management style? cial rules. Now, as part of the rede-
in class in everything related to your In a call center, 15 or 20 people sign, the leaders of the company em-
industry. Your choice of companies might report to a single manager be- braced its informal nature, adopting
essay organizations & people
new decision rights and norms that bilities and supports your strategy
allowed the company to move more more effectively.
fluidly, and abandoning official Remaking your organization
channels as much as possible. to align with your strategy is a proj-
10. Build on your strengths. ect that only the top executive of a
Overhauling the organization is one company, division, or enterprise can
of the hardest things for a chief ex- lead. Although it’s not practical for
ecutive or division leader to do, es- a CEO to manage the day-to-day
pecially if he or she is charged with details, the top leader of a company
turning around a poorly perform- must be consistently present to work
ing company. But there are always through the major issues and alter-
strengths to build on in existing natives, focus the design team on the
practices and in the culture. Sup- future, and be accountable for the
pose, for example, that your compa- transition to the new organization. 6
ny has a norm of customer-oriented The chief executive will also set the
commitment. Employees are willing tone for future updates: Changes
to go the extra mile for customers in technology, customer preferences,
when called upon to do so. They and other disruptors will continu-
deliver work out of scope or ahead ally test your business model.
of schedule, often because they em- These 10 fundamental princi-
pathize with the problems custom- ples can serve as your guideposts for
ers face. You can draw attention to any reorganization, large or small.
that behavior by setting up groups Armed with these collective lessons,
to talk about it, and reinforce the you can avoid common missteps
behavior by rewarding it with more and home in on the right blueprint
formal incentives. That will help for your business. +
spread it throughout the company. Reprint No. 00318
Perhaps your company has
Gary L. Neilson
well-defined decision rights, where- gary.neilson@strategyand.pwc.com
in each person has a good idea of is a senior partner with Strategy& based in
Chicago. He focuses on operating models
the decisions and actions for which and organizational transformation.
he or she is responsible. Yet in your
current org design, they may not be Jaime Estupiñán
jaime.estupinan@strategyand.pwc.com
focused on the right things. You can is a partner with Strategy& based in New
use this strong accountability and York. He focuses on consumer strategic
redirect people to the right decisions transformation and organization for the
healthcare industry.
to support the new strategy.
Bhushan Sethi
bhushan.sethi@us.pwc.com
Conclusion is a partner with PwC Advisory Services.
A 2014 Strategy& survey found that Based in New York, he leads the PwC
42 percent of executives felt that network’s financial-services people and
change practice.
their organization was not aligned
with the strategy, and that parts of
the organization resisted it or didn’t
understand it. If that’s a familiar
problem in your company, the prin-
ciples in this article can help you
develop an organization design that
supports your most distinctive capa-
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