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Additional Featured Organizations: Literature Review and Fact Brief


HR’s Role in Determining
Organizational Structure
Key Questions:

What factors affect organizational structure?

Interview with Michael Goold, Ashridge What are the most prevalent organizational structures?
Strategic Management Centre
What are the key steps in developing and implementing a new
organizational structure?

Institution Industry Employees Revenues Structure Shift Change Driver


Decentralized to
A Chemicals 2,000 – 10,000 $500M – $2 billion Slow growth and rising costs
centralized
B Beverages 20,000 – 50,000 $500M – $2 billion Centralized to hybrid Drop in market share and profits
$5 billion – $10 Decentralized to Weak business performance and
C Manufacturing 20,000 – 50,000
billion hybrid earnings per share
Professional Decentralized to
D 20,000 – 50,000 More than $10 billion Sale of non-core businesses
Services hybrid

ISSUE OVERVIEW: HR’S ROLE IN ORGANIZATIONAL STRUCTURE SUCCESS


Table of Contents
Change in strategy drives reevaluation of structure…
Governing Body 3
Shifting consumer trends, tighter regulatory environments, and global markets
Framework for Analysis 4 continuously challenge organizational strategies, testing their limits and forcing change.
To survive and thrive, organizations constantly evaluate their core mission and business
Implementation 7 strategies to identify opportunities for improvement. When significant shifts occur,
1,2
organizational structure often must adapt to enable success.
Measurement and Review 8
Research reveals the cyclical nature in structural changes, with organizations shifting
Research Methodology 9
between decentralization and centralization to spur innovation or control costs. Council
Appendix A member experience demonstrates that organizations are savvy in finding a balance in
their structures, a balance that allows the organization to limit redundancies of
3,4
Prevailing Models 11 processes, enable innovation, and fully leverage economies of scale.

Emerging Characteristics 16 Increasingly, HR plays a crucial role in the selection and implementation of a
structure…
Appendix B 17 Institutional history and benchmarking offer little guidance for organizational design.
Given that there is no “best practice,” it is critical for organizations to design a framework
that enables a thorough analysis of both external and internal factors to help find and
implement an effective structural fit. Council member experiences show that companies
are asking Human Resources to play a much larger role in determining and implementing
5
new organizational structures.

HR will play a key role in both the upfront analysis as well as the significant change
management required for implementing a new organizational structure. This research
outlines the steps required in the process to continuously evaluate, design, and
implement organizational structures, as well as provides an understanding of
organizational structures.
HR’S ROLE IN DETERMINING ORGANIZATIONAL STRUCTURE PAGE 2
APRIL 2005

Executive Summary: HR’s Role in Developing Organizational Structures

Organizational structure is a continual and evolving process. This research guides readers through HR’s role in the key facets of
organizational design and provides examples for their examinations. However, each organization must select the structure that
best aligns with its current goals in order to achieve success in the marketplace.
Figure 1: Steps to Develop an Organizational Structure

Measure and
Review the Form a
Effectiveness Governing
Body

Implement a
New Develop a
Organizational Framework
Structure for
Analyzing
Structure

The following pages describe these four steps in greater detail:

Step #1: Form a Governing Body: Companies create a governing body to assign oversight and governance of the process.
Common participants are the CEO, CFO, Senior Vice President of HR, and the organizational development function. The role of
HR specifically in organizational design frequently includes talent development and movement, awareness of corporate culture,
and communication and facilitation of change.
Step #2: Develop a Framework for Analyzing Drivers and Structure: A framework examining the fit of a structure with
external influences, the company’s strategy, talent pool, and current environment assists companies with determining the need
for restructuring. Upon completing the assessment of fit, companies can determine the need for adjustments to current structure
or design a new structure.
Step #3: Implement a New Organizational Structure: HR’s role in the implementation involves communication, people,
processes, and systems. To implement the structure, companies highlight the need to communicate the change, demonstrate
leadership support for the change, and augment staff for the change.
Step #4: Measure and Review the Effectiveness of the Structure: To ensure the continued effectiveness of the structure,
companies may audit the structure. While few companies have a formalized audit process, companies may examine key
performance indicators such as market share, productivity, and revenue growth. These reviews may occur irregularly or on a set
basis, ranging from six to 18 months. For example, the assessment of structure may be a key component of an organization’s
talent review.

Specifically, interviewed individuals report that organization development is an increasingly important part of HR. As such, HR
typically has the following roles during a restructuring decision:

HR’s Role in the Restructuring Decision

• Talent Development and Movement—In order for a structure to succeed, the company must ensure that the roles and
competencies are adequately defined, and that the proper people are in place to carry out the roles. Within the
restructuring process, HR provides the perspective of talent development and movement within the company.
• Awareness of Corporate Culture—HR understands the values and culture across the business, as employees often
consider it to be a neutral third party. As such, the HR department can bring an understanding of this culture to decisions
around structure.
• Communicating and Facilitating Change—HR translates the overall business strategy into HR strategy for the
company and then communicates this to decision-makers. When restructuring, HR plays an important role in
communicating the change and obtaining buy-in from employees.

The interviewed individual at Company C notes that the organizational design process has become more engaging
for HR recently. At corporate level HR, the department is very involved and partners with the company throughout
the creation of the strategic management system. At the business unit level, the engagement of HR in the process
varies based on the skills of both business unit and HR leaders.

 2005 Corporate Executive Board


HR’S ROLE IN DETERMINING ORGANIZATIONAL STRUCTURE PAGE 3
APRIL 2005

Step #1: Form a Governing Body

An important aspect of examining organizational structure is to assign oversight and governance to a group of employees
and to understand how this group interacts with others in the organization, as this section outlines.

Past Council research and interviewed individuals indicate that the following people or groups commonly maintain
6
responsibility for decisions regarding the design of the corporate structure:

• Chief Executive Officer (CEO)


• Chief Financial Officer (CFO)
• Senior Vice President of HR
• Organizational development function

The HR participants in structural examinations at profiled organizations are as follows:

• Company A includes corporate HR as well as HR employees working in the business units to


understand how the business units align with corporate strategies. Company A is in the midst of
increasing the number of people in HR with organizational development skills.

• The two CEOs and the HR and development function at Company B maintained primary responsibility
for assessing the current structure, designing the future structure, and defining the functions and roles
within this new structure. In addition, as one of the company’s goals was to increase speed to various
markets, regional directors provided input regarding the structural changes.

• Company C conducts organizational leadership reviews, one facet of which is organizational structure.
Each sector has a dedicated Talent Manager; this person works to move high-potential employees
throughout the organization and facilitate cross-sharing of talent.* Furthermore, Company C operates
an internal consulting group that is available to provide educational or consultative support; this group
uses a charge back model for its services.

*Similarly to Company C, Frost Company (a pseudonymed U.S.-based multinational telecommunications company, $10+ billion in annual
revenue, 100,000+ employees) uses a headquarters-based broker responsible for overseeing, accelerating development of small set of
midcareer high-potential employees; the broker facilitates movement of these individuals to fill relevant openings across the corporation.
To learn more about this practice, please read The Next Generation: Practice #5: HIPO Broker, available at the Council’s Web site
(www.corporateleadershipcouncil.com).

 2005 Corporate Executive Board


HR’S ROLE IN DETERMINING ORGANIZATIONAL STRUCTURE PAGE 4
APRIL 2005

Step #2: Develop a Framework for Analyzing Drivers and Structure

External Forces Initiate Change Figure 2: External Forces that Drive Changes to
Organizational Structure
Significant external forces, such as those described to the right,
Nature of
trigger changes to organizational strategy and affect the Industry
organizational structure. Literature indicates that “the problems
arise when reorganizations are undertaken for the wrong reason,
are poorly implemented or fail to understand particular
constraints of either the company or the market in which it
7
operates.” Therefore, it is important for organizations to Company Regulatory
Technology and
consider the external forces that initiated changes in a Structure
Legislative
framework to ensure change occurs for the correct reason. Environment

Internal Factors Influence Change

In addition to the relationship a company has with the external Shareholders


Consumers
environment, companies must be fully cognizant of their own
characteristics that influence and result from the chosen structure.
John Paul MacDuffie, co-director of Wharton’s Jones Center for
Management Policy, Strategy, and Organization, states that “the resource capabilities view of strategy says it ought to grow
organically out of a clear-eyed perception of what the company’s capabilities are and how readily they can be developed, as
opposed to strategy-making occurring in a vacuum or from an externally focused competitive analysis that is naïve about how
8
malleable the organization is to change.” As such, HR should recognize the following internal factors when weighing
9
structural decisions:

• Culture—When redesigning an organizational structure to merge formerly separate parts of a business, companies should
consider the aspects of company culture it desires to preserve in the new structure. For example, at Company A, various lines of
business have distinct cultures. In creating a unified corporate culture in the new centralized structure, Company A seeks to
maintain cultural aspects that achieve growth in customer goals. Company A accommodates these various cultures through an
effort with a third-party firm to conduct interviews and identify desired cultural aspects.
• Communication—The degree of centralization, the number of managerial layers, and the use of technology can affect the quality,
consistency, and dissemination of information throughout an organization.
• Facilitate Sharing of Talent—Company A developed a more centralized approach when it moved away from being a holding
company. Each business unit was held responsible for developing talent internally, and the company experienced difficulty in
encouraging cross-breeding of talent because managers were not rewarded for doing so. The company strives to develop more
enterprise-wide leaders, and the central group assists this effort by highlighting silos and removing internal barriers. This central
oversight provides Company A with a better ability to get the right people with the right skills in the right place. During the HR
review process, function and operating heads join together with the Head of HR and CEO to review people.

• Define Roles and Competencies—After redefining the structure, HR at Company B defined the necessary roles and
competencies to align with this structure. Across much of 2004, HR assessed key positions (20 key positions in each market
yields an assessment of approximately 1,000 people). Currently, Company B is creating profiles for these positions and
comparing current performance with the profile expected for that position. The company has established a process for gap
analysis and plans to make further decisions based on the results.

 2005 Corporate Executive Board


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APRIL 2005

Step #2: Develop a Framework for Analyzing Drivers and Structure (continued)

Analyze Fit and Design of Structure

Given that there is “no universal, ‘one best’ way to organize” in response to certain external and internal factors, companies
10
should identify and utilize a framework to assess and overcome the challenges of restructuring. Michael Goold and
Andrew Campbell of the Ashridge Strategic Management Centre note that while “most executives can sense when their
organizations are not working well…few know how to correct the situation.” Therefore, they present a framework organized
around the company’s strategy, talent pool, and situation. Goold and Campbell suggest that organizations use two types of
tests to balance “the right amount of hierarchy, control, and process—enough for the design to work smoothly but not so
11
much as to dampen initiative, flexibility, and networking.”

Goold and Campbell outline nine of these tests; of these nine, HR plays a critical role in providing analysis of the following six:

“Fit” Tests
“Fit” tests provide an initial screen for design alternatives, revealing
whether the structures support the company’s strategy, talent pool, and
situation.

The Parenting Advantage Test involves defining the corporate-level or


PARENTING “parent” activities that add value to the entire organization and therefore
ADVANTAGE
TEST should be allocated to the corporate center (e.g., managing government
relations, broadly maintaining key organizational capabilities) and evaluating
DOES THE DESIGN HELP THE CORPORATE PARENT whether the design supports these propositions.
ADD VALUE TO THE ORGANIZATION?

The People Test considers the key players in the organization and
determines whether “the design provides the appropriate responsibilities and
PEOPLE reporting relationships and wins their commitment.” The test has two
TEST
components:

DOES THE DESIGN REFLECT THE STRENGTHS, 1. Determines whether the structure defines roles and
WEAKNESSES AND MOTIVATIONS responsibilities such that employees leverage their strengths
OF EMPLOYEES? and interests—Are there “losers” (individuals displaced or
disempowered) in the new structure? Has the organization
managed them appropriately?
2. Assesses staffing needs—Have pivotal positions within the new
structure been appropriately identified?

The Feasibility Test considers the context in which the organization


FEASIBILITY
TEST
operates, including both external forces and intrinsic internal qualities.

The test identifies barriers to success due to any of the following constraints:
HAVE ALL OF THE CONSTRAINTS THAT MAY IMPEDE • Corporate culture
THE IMPLEMENTATION OF THE DESIGN BEEN
CONSIDERED? • Government regulations
• Interests of a company’s stakeholders
• Limitations of information systems

 2005 Corporate Executive Board


HR’S ROLE IN DETERMINING ORGANIZATIONAL STRUCTURE PAGE 6
APRIL 2005

Step #2: Develop a Framework for Analyzing Drivers and Structure (continued)

“Good Design” Tests

“Good design” tests help refine a chosen design by addressing potential


problem areas, including the balance between empowerment and control.

The Specialist Cultures Test controls for the effect of a new design on
groups where performance is contingent on their ability to operate outside
SPECIALIST
CULTURES the prevailing corporate culture (e.g., IT, product development). The test has
TEST two components:
1. Identifies specialist cultures—Which groups “need to think and
DOES THE DESIGN PROTECT UNITS THAT NEED work in ways that are different from the prevailing organizational
DISTINCT CULTURES? norms” to achieve maximum performance?
2. Assesses vulnerability—Are these groups significantly different
from and therefore at risk for domination by the units to which
they report?
The Difficult Links Test identifies structural deficiencies that lead to the
organization’s inability to achieve coordination across business units
DIFFICULT through any of the following:
LINKS • Coordinated strategies
TEST
• New business creation
• Pooled negotiating power
• Shared knowledge
DOES THE DESIGN PROVIDE COORDINATION
SOLUTIONS FOR UNIT-TO-UNIT LINKS THAT ARE • Shared tangible resources
LIKELY TO BE PROBLEMATIC? • Vertical integration

The Accountability Test ensures that each unit, especially if decentralized,


ACCOUNTABILITY has appropriate controls over its performance and that these controls meet
TEST
the following three criteria:
• Are economical to implement
DOES THE DESIGN SUPPORT
EFFECTIVE CONTROLS?
• Motivate managers
• Suit the unit’s responsibilities
To perform this test, companies should identify units with shared
responsibilities or whose performance is difficult to measure that require
additional oversight to ensure appropriate performance controls.

Upon examining the fit of the organizational structure, Goold and Campbell suggest that companies may first want to
evaluate steps that involve only minor design change to correct gaps; if these are not successful, then companies may have
12
to make fundamental changes to the design. These steps are as follows:

Table 1: Steps for Improving Organizational Design


Minor Design Changes Major Design Changes

Modify without Changing the Units


• Refine the allocation of responsibilities Make Substantial Changes in the Units
• Refine reporting relationships and processes • Make major adjustments to unit boundaries
• Refine lateral relationships and processes • Change unit roles (for example, turn functional units into business
units or shared services)
• Refine accountabilities
Redefine Skill Requirements and Incentives • Introduce new units or merge units
• Modify criteria for selecting people
Change the Structure
• Redefine skill development needs
• Change reporting lines
• Develop incentives
• Create new divisions
Shape Informal Context
• Clarify the leadership style needed
• Define norms of behavior, values, or social context

 2005 Corporate Executive Board


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APRIL 2005

Step #3: Implement a New Organizational Structure

Companies should select the structure that maps bests to their organizations and implement the new structure, as this
section discusses.

HR’s Role in the Implementation

When implementing a new organizational structure, companies should consider the following aspects of HR’s role in
13
implementation:

• Communications—Research suggests companies provide effective communication during a transition either


through the creation of an “integration manager” or consideration of the psychological effects of change; the
HR department may serve as the driving force behind change management and communication.
• People—Perhaps more than any other responsibility, HR plays a vital role in the retention of talent during
transitions through staffing prioritization, retention strategies, and severance allotments.
• Processes—Research reveals that HR working teams and transition teams maintain jurisdiction over human
capital decisions after a restructuring. HR provides staffing, training, and process support to these teams.
• Systems—When implementing a new organizational structure, companies should consider the capabilities of
the technology system and any necessary integrations, such as in HRIS, performance management, or
benefits systems.

Communicate the change—The interviewed individual at Company A notes that communication is an important factor in
implementing a structure successfully. It is essential that employees understand the company’s actions and the rationale for
change, through written and in-person communication. To communicate the change to employees, Company A used the
following methods, fostering a two-way flow of information:

Table 2: Communicating the Change in Organizational Structure


Method Description
Company A holds quarterly town hall meetings that coincide with the quarterly earnings
Town hall meetings release. The CEO delivers a message simultaneously to employees around the world with
Web-enabled technology, followed by open question and answer sessions.

The company offers skip-level meetings, where senior leaders travel around the world and
Skip-level meetings
meet with people more than one level below them.

Written The corporate level reviews written announcements to ensure that they adequately
announcements communicate the company’s goals (e.g., growth and customer focus).

Demonstrate leadership support for the change—The interviewed individual at Company C emphasizes the need for agile
leaders at both the executive and management levels to cross the gaps between organizational structures. These leaders
take responsibility for achieving the organization’s goals, at times through undocumented steps. In order to obtain buy-in for
the structure change from leaders, the company shares information at the annual reviews as well as emphasizes hiring the
right people who are dedicated and committed to doing the job to the best of their ability.

Augment staff for the change—Company A plans to engage a consulting firm in 2005 because the HR department does not
have enough employees to support the organizational change.

 2005 Corporate Executive Board


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APRIL 2005

Step #4: Measure and Review the Effectiveness of the Organizational Structure

To ensure the continued effectiveness of organizational structure or to redesign a new structure, companies may undertake
the process of auditing the structure, as this section discusses. Yet, according to Michael Goold and Andrew Campbell of
Ashridge Strategic Management Centre, “For most companies, organization design is neither a science nor an art; it’s an
oxymoron. Organizational structures rarely result from systematic, methodical planning. Rather, they evolve over time, in fits
14
and starts, shaped more by politics than by policies.”

Frequency of Audits

Many companies profiled in Council research indicate that they do not use formal reviews of the structure because structure
continually evolves. Similarly, the interviewed individual at Company B notes that evaluation of the structure is a “continual,
but not periodic, process.” To ensure effective operations, some adjustments to the structure occur each year as evaluation
of the structure is ongoing and reactive to business circumstances.

HR can play a crucial role in the review of organizational structure. For example, at Company A, the Human Resource
Review serves as the main forum for addressing the implications of organizational structure on talent and in turn, business
success. Other profiled companies review organizational structure on a routine basis, as follows:

Table 3: Regular Reviews of Organizational Structure


Frequency Process
Company A conducts a semi-annual Human Resource Review, modeled after GE’s Session C. The first review is
timed to coincide with the business strategy session. After having examined the broad business strategy, the company
Semi-annual is able to follow up with a meeting to assess the capability of the organization to accomplish those strategies.
Company A relies heavily on the HR review as a time to discuss the organizational structure and how that structure
either helps or hinders business success.
A previously profiled company reviews its shared services group annually. Internal customer boards examine the
Annual group’s ability to address customer needs, services provided, and service level, as well as the results of corporate
redesign projects that the group facilitates.
At a previously profiled company, the corporate CEO prepares for a meeting to discuss succession planning and
Every 18 months strategy with the board of directors. Preparation for the meeting, as well as the discussion during the meeting, often
constitutes a review of the organization and the effectiveness of the structure.

Company C conducts an annual current state assessment, in which a committee examines the talent, positions, and structure
of the company. This assessment analyzes the design and future state necessary to drive the organization’s strategy
(presented prior to the current state assessment). The emphasis on talent precedes the discussion of structure, as the
interviewed individual at Company C notes that the company does “not create the structure absent from the talent pool.”

Key Performance Indicators of Design Success

Companies report that developing key performance indicators of an entire structure can be difficult, due to the presence of
many confounding factors. Council research suggests that as structure is nearly always evolving, the company’s financials
may determine the effectiveness of the structure. In the absence of formal methods for evaluating the effectiveness of
corporate structure designs, previously profiled companies extract corporate structure performance indicators from the
15,16
following processes:

• Measure individual business unit and functional group performance in areas such as market share,
profitability, and revenue growth (sales per employee)
• Obtain feedback from internal and external functional group customers to determine their levels of
satisfaction
• Examine productivity and speed to market

 2005 Corporate Executive Board


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APRIL 2005

THE RESEARCH PROCESS IN BRIEF

Research The Corporate Leadership Council conducted a comprehensive search of published


Methodology materials regarding the subject of corporate organizational structure, drawn from previous
Corporate Executive Board research, trade press journals, other research organizations,
and the Internet. Council staff then interviewed human resources professionals at four
organizations. This report represents the findings from secondary and primary sources.

Project Aims 1. What parties examine corporate organizational structure, and why?
2. What is the role of HR in this examination of organizational structure, and what
perspectives does HR bring to the examination?
3. How long has the current structure been in place? To what forces do companies
respond in implementing its organizational structure (e.g., globalization, downsizing,
merger/acquisition, market changes)? How did these forces affect the choice of
organizational structure?
4. What internal factors do companies consider when determining organizational
structure (e.g., centralization, business focus [product, customer, region], company
culture, succession planning)?
5. Do companies consider their goals for HR processes such as career development
and compensation in determining the company’s approach to organizational structure
(e.g., creating a structure that is conducive to providing upward or cross-functional
development opportunities, aligning structure with compensation bands)?
6. Do companies conduct a routine examination of the organizational structure? If so,
how frequently do companies do so?
7. What are companies’ process and timeline for assessing the organizational structure?

8. What model/type of organizational structure do companies use? How do companies


label the structure (centralized, decentralized, matrix, etc.)?
9. What goals do organizations seek to achieve through their organizational structure
(e.g., alignment with business strategy, increased customer focus)?
10. What advantages and disadvantages have companies realized from these structures?
How are companies’ structures effective in achieving their goals?
11. What are some success factors for designing and implementing an effective
organizational structure?
12. What are the key features of these structures? Please provide an overview of the
top-level reporting relationships. What titles comprise the executive committee (those
who report to the CEO)?
HR’S ROLE IN DETERMINING ORGANIZATIONAL STRUCTURE PAGE 10
APRIL 2005

THE RESEARCH PROCESS IN BRIEF (CONTINUED)

Guide to Tables and Figures Table 1: Steps for Improving Organizational Design Page 6
Table 2: Communicating the Change in Organizational Structure Page 7
Table 3: Regular Reviews of Organizational Structure Page 8
Table 4: Centralized Structure Page 11
Table 5: Decentralized Structure Page 12
Table 6: Matrix Structure Page 13
Table 7: Hybrid Structure Page 14

Figure 1: Steps to Develop an Organizational Structure Page 2


Figure 2: External Forces that Drive Changes to Organizational Structure Page 4

Case Example 1: Company A’s Shift from Holding Company to Centralized


Structure Page 11
Case Example 2: Deutsche Bank’s Shift from Decentralized to Matrix
Structure Page 13
Case Example 3: Company B’s Shift from Centralized to Hybrid Structure Page 14
Case Example 4: Company C’s Shift from Decentralized to Hybrid Structure Page 15
Case Example 5: Company D’s Shift from Decentralized to Hybrid Structure Page 15
Case Example 6: Nokia’s Shift from Product-Centric to Customer-Centric
(Solutions) Structure Page 16

 2005 Corporate Executive Board


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APRIL 2005

APPENDIX A
This section describes the structure and its advantages and disadvantages and provides examples of companies using it
successfully for the following four types of structures:
• Centralized • Matrix
• Decentralized • Hybrid

Understand Organizational Structures—Centralized


17,18
Table 4: Centralized Structure
Structure

CEO

SVP Operations SVP HR SVP Finance

Manager, Benefits Manager, Training Manager, OD

Description

The organization forms departments with separate functions that specialize in that and only that area.
Each department is centrally coordinated.

Advantages Disadvantages

• Engender common culture and values • People fail to coordinate with other departments
• Maintain accountability for standards such as risk
management and ethical behavior
• Restrictive layers of bureaucracy
• Provide links between otherwise insular groups when • Slower market reactions
cross-functional coordination is required
• Realize cost savings from economies of scale

Companies may select a centralized structure for reasons such as reducing costs, driving growth and productivity, and
increasing customer focus. The following case examples demonstrate shifts that Company A made to a centralized structure
(please see an additional case example in Appendix B):

Case Example 1: Company A’s Shift from Holding Company to Centralized Structure

Company A Challenge:
Company A responded to the following drivers for its restructuring:
Industry: • Growth—Through benchmarking with CLC and Saratoga, the HR department at
Chemicals Company A realized that the cost of its functions relative to industry peers was
Employees: high. By centralizing and reducing costs, the company increases opportunities for
2,000 – 10,000 growth.
Revenue: • Productivity—By moving to a corporate center for functions such as finance, IT,
$500 million – $2 billion HR, and supply chain, Company A is able to reduce redundant effort and duplicate
functions. This yields cost savings and improved productivity.
Please see Appendix B • Customer focus—With centralized groups, operations can focus on customer and
for a sample technical service. Corporate groups decide on IT platforms, for example, freeing up
organizational chart. the business leaders to focus on reaching customers rather than processes.

Action:
After operating as a holding company for 145 years, Company A integrated its operating model
between 1999 and 2004 to centralize functions in a corporate center.

Result:
Company A’s structure and number of management layers have little variation. The leader of
the company was a firm believer in parallel construction amongst business units, but lately he
realized that “a little messiness is a good thing.” These variations among business units are
driven by the need to align business strategy with the market.

 2005 Corporate Executive Board


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APPENDIX A (CONTINUED)
Understand Organizational Structures—Decentralized
19,20,21,22
Table 5: Decentralized Structure
Structure

CEO

BU 1 BU 2

HR Finance HR Finance

Description

In a decentralized structure, each business unit has its own functional operations. Businesses for which intimate customer
knowledge and rapid response to changing conditions are critical benefit from decentralized structures.

Advantages Disadvantages

• Stable environments do not require frequent intervention by • Units may compete for scarce corporate resources
the CEO to reap coordination benefits • Looser controls yield riskier decision-making
• Offer close proximity between business lines and markets • Duplication of functions
• Foster cultures of agility, speed, and empowerment

Literature reveals that companies select a decentralized structure in order to facilitate decision-making and be closer to the
market. For example, AOL recently announced that it would split the company into four divisions and give each responsibility for
its own operations and financial performance. The decentralized structure aims to facilitate faster decision-making and faster
implementation of initiatives. In addition, Citigroup uses dispersed headquarters, locating responsibility in the geographic location
that has the leading edge in a particular activity. For example, Citigroup’s foreign exchange business is in London, while private
23,24
banking is in Zurich, and derivatives in New York City.

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APPENDIX A (CONTINUED)
Understand Organizational Structures—Matrix
25,26,27,28
Table 6: Matrix Structure
Structure

CEO

Business Unit VP SVP HR Business Unit VP

HR Manager HR Manager

Description

Matrix structures are often a combination of functional and product organization structures, in which employees may report
to both a functional and product leader.
Advantages Disadvantages

• Project or product leadership structure separate from • Structure may be difficult to understand
departmental structure • Having elements of both functional and divisional structures
• Benefits business activities that are highly collaborative or may be conflicting
interactive such as R&D • Reporting to multiple people
• Understands that horizontal reporting relationships are just as • Specifying what people are rewarded for, as this will determine
important as the traditional reporting relationships their focus
• More aware and agile in reacting to changes in the marketplace • Challenging career development and appraisal processes
or business • Must have integrative systems that overcome silos

29,30
Case Example 2: Deutsche Bank’s Shift from Decentralized to Matrix Structure

Deutsche Bank Challenge:


AG Deutsche Bank faced the following changes in the financial services industry:
• Increasing globalization of financial markets with multinational corporations as
Industry: customers
Financial Services • Increasing competition from non-banks offering financial services
Employees: • Balancing low-cost standardized products for general banking with customized
67,682 products for companies and wealthy individuals
Revenue: • Increasing scrutiny of banks’ control mechanisms and risk management
$54 billion
Action:
Deutsche Bank desired to balance the relationship between the company’s geographic structure
and its divisional structure. As such, the relationship moved from one with a decentralized
regional emphasis to one with a centralized matrix between business divisions and geographies.
This structure has the following features:
• A managing director supervises each geographic region. Strategic and
policy-related matters relevant to the lines of business emanate from the responsible
managing director at corporate headquarters.
• Domestically, regional division managers report to the managing director who heads
the respective division; as such, the emphasis is on the divisional side.
• Internationally, the head of large territories reports to the managing director of the
region. The head of the territory supervises local managers of the business
divisions, who also report to their divisions at headquarters.

Result:
The company believes that the matrix structure provides the advantages of specialization,
customer focus, flexibility, and entrepreneurship. However, Deutsche Bank still struggles to
balance the relationship between the global and local account managers.

Possible Solution to Overcome Difficulties of a Matrix Structure—A structured network design may overcome the traditional problems of a
matrix structure. Organizational units retain considerable autonomy, but collaborate extensively through voluntary networking between units.
The objective is to obtain the benefits of interdependence that are designed into a typical matrix, but without sacrificing clear responsibilities,
managerial initiative and accountability, speed of decision-making, and lean hierarchy.29

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APPENDIX A (CONTINUED)
Understand Organizational Structures—Hybrid
31,32
Table 7: Hybrid Structure
Structure

CEO

SVP HR SVP Finance BU 1 BU 2

Sales Sales

Description

Research suggests that companies maintain hybrid structures that often rely on shared services to leverage economies of
scale while leaving customer-facing and entrepreneurial functions decentralized.

Advantages Disadvantages

• Realize economies of scale by pooling resources for • Some redundancies may remain
functional, non-customer-facing areas • Certain knowledge trapped in business units
• Permit business units to be responsive to needs of local
markets and customers

Balancing the need of customer-facing functions to be closer to market with the efficiencies of centralization, companies may
choose to implement a hybrid structure. For example, American Express acquired two competitors and transitioned from a
product-focused structure to a hybrid structure. The company realized improvement in the following areas from its hybrid
33
structure: communication, customer focus, and metrics. Three of the four profiled companies also selected hybrid structures,
as outlined below:

Case Example 3: Company B’s Shift from Centralized to Hybrid Structure

Company B Challenge:
Company B responded to the following drivers for its restructuring:
Industry: • Lack of synergies in administrative work—All regional units were completing
Beverages their own administrative work.
Employees: • Need to react to local markets—In the past, the central headquarters coordinated
20,000 – 50,000 all processes, without taking into account the needs of the local markets to reach
Revenue: their customers.
$500 million – $2 billion
Action:
Please see Appendix B In order to maintain efficiencies yet react more quickly to local market concerns while improving
for a sample profits, the CEOs and HR at Company B shifted from a centralized structure to a hybrid one,
organizational chart. leveraging shared services. Headquarters functions are centralized, including accounting and
HR; this central shared services center completes most administrative work. Some
administrative work remains in regional units, but the interviewee estimates that it is
15 to 20 percent of what the business units did in the past. In the hybrid structure, the central
headquarters dictates pricing, branding, and the product portfolio through guidelines for each
market to build its own strategy. The regional units then design a sales program to reach their
markets effectively and quickly.
Result:
In addition to administrative work, the role of the corporate headquarters is to enable the units to
reach the markets efficiently, through the provision of methods, systems, and training.
By focusing all efforts on the customer (through headquarters enabling the regional units to tailor
strategies to local markets), the company has improved profits and reversed a ten-year decline
in market share.

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APPENDIX A (CONTINUED)

Understand Organizational Structures—Hybrid (continued)

While Company B moved away from a centralized structure to its hybrid structure, Company C and Company D both added an
element of centralization to their hybrid structures. This centralization drove increased efficiencies within functions, as the case
examples below describe:

Case Example 4: Company C’s Shift from Decentralized to Hybrid Structure

Company C Challenge:
Company C responded to the following drivers for its restructuring:
Industry: • Low earnings per share—Typically, financial markets value integrated
Manufacturing conglomerates more highly than holding companies.
Employees: • Acquisitions—Recent acquisitions increased the number of products and
20,000 – 50,000 employees the company was managing.
Revenue: • Lack of synergies—Company C did not leverage relationships, market
$5 billion – $10 billion opportunities, spending power, and talent across units.

Please see Appendix B Action:


for a sample
During the company’s leadership review conducted by HR and business unit leaders,
organizational chart.
Company C moved from decentralized autonomous business units to a hybrid structure in order
to drive financial performance (earnings per share and operating income).

Result:
The interviewed individual indicates that the structure has been successful in encouraging
businesses to interact as well as in driving financial performance. Within the hybrid structure, the
company does not have consistent structure across business units; it is more concerned with
alignment with business strategy. While partially a result of the highly autonomous history of the
units, the varying structures also allow flexibility to best serve each unit’s customers.

Case Example 5: Company D’s Shift from Decentralized to Hybrid Structure

Company D Challenge:
Company D responded to the following drivers for its restructuring:
Industry: • Lack of synergies in business and operations processes—Company D sold its
Professional Services non-core businesses, yielding three major remaining businesses. All of them could
Employees: be considered stand-alone businesses, yet all of them are interrelated.
20,000 – 50,000
Revenue: Action:
More than $10 billion Moving from a decentralized to a hybrid structure permitted Company D to take advantage of
efficiencies in operations, while allowing the focus on revenue generation to remain with the
business units that are closer to the customers. Company D accomplished this by creating a
shared services center for operations activities, including HR, legal, IT, and finance.

Result:
Company D has a hybrid structure with a shared services center and three business lines.
The introduction of the shared services organization was a substantial change for the
organization, but it provides the following benefits:
• Increased ability to monitor activities
• Increased horizontal communication of best demonstrated practices
• Revenue generation from increased synergies and cost-savings

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APPENDIX A (CONTINUED)

Understand Organizational Structures—Emerging Characteristics

As companies face more diverse challenges in the marketplace, their organizational structures adopt characteristics to improve
performance. Due to changes in technology, an emphasis on accountability, and a focus on serving customers throughout a
relationship, organizational structures are becoming flatter and solutions-oriented, as described below.

Solutions/Platform Orientations
A recent trend in business strategy is to offer end-to-end solutions to customers instead of stand-alone products. A company
must add a customer-centric component to its organization and then integrate that component with its product-based structure.
This requires front-end units to develop and deliver integrated solutions, back-end units to adapt products for solutions, and a
34,35
strong management center to mediate between the two groups, as demonstrated by Nokia in the case example below:

Case Example 6: Nokia’s Shift from Product-Centric to Customer-Centric (Solutions) Structure

Nokia Challenge:
Nokia previously sold stand-alone products to large telecommunications companies that
Industry: possessed their own networks. However, with deregulation of the wireless telecommunications
Telecommunications industry, smaller operators entered the business and turned to Nokia to build networks.
Employees:
55,505 Action:
Revenue:
$39 billion
In response to these new business opportunities, Nokia created groups focused on
implementing, educating, and consulting on products. In order to be successful with this new
model, Nokia aligned strategy with structure, while also considering rewards and employees’
skills.

Result:
Nokia’s structure contains back-end product-centric units and front-end customer-centric units.
The structure requires strong leadership to coordinate the products with the services.

Flat Structures
Research by the National Bureau of Economic Research suggests that companies are becoming flatter, as evidenced by more
direct reports to the CEO and fewer layers. Flattening of organizations, decentralization of decision-making authority, and the
elimination of middle-management layers are organizational responses to technological and environmental change. For example,
literature illustrates that BP flattened its structure for clearer accountability, narrowly defined responsibilities, and direct reporting
to top management for business unit leaders, while Shell recently announced plans to move to a flatter structure to provide
36,37,38
clearer lines of responsibility and faster decision-making.

Although most management experts agree that successful companies have relatively simple structures with few management
layers, they ultimately disagree over the most effective number of management layers. When considering the appropriate number
of management layers, companies should examine the following advantages and disadvantages of flatter organizational
structures:

39,40,41,42,43
Advantages
• Creates development opportunities—through wider spans of control and increased delegation of responsibilities
• Expedites decision making—by permitting managers to adjust to changing market demands
• Improves communication—with faster dissemination of information across fewer management layers

44,45
Disadvantages
• Increased need for high-performing managers—to better handle greater spans of control
• Increased workload for superiors—that can result in “bottlenecking”
• Lack of upward mobility—due to fewer number of layers and higher positions
• Less control over individuals by managers—due to a lack of people resources

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APPENDIX B

Below are sample organizational charts of profiled companies.

Company A’s Centralized Structure:


Industry: Chemicals
Employees: 2,000 – 10,000
Revenue: $500 million – $2 billion

CEO

President of President of Chief Financial Head of HR VP of Operations General Counsel Chief


Operations, Operations, Officer Administrative
Business Unit 1 Business Unit 2 Officer

General Manager Corporate Center IT Corporate Center


HR Administrative

BU Finance

BU HR

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APRIL 2005

APPENDIX B (CONTINUED)

Company B’s Hybrid Structure:


Industry: Beverages
Employees: 20,000 – 50,000
Revenue: $500 million – $2 billion

Commercial
CEO Operational
CEO

Regional Commercial Administrative VP of Finance and Strategic Public HR and


Directors (9) Development Development Manufacturing Administrative Planning Relations Development
Director Director

Stores Stores Stores Manufacturing IT Organization/ HR


Plants (6) Compensation Administrative

Salesman Salesman Salesman

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APRIL 2005

APPENDIX B (CONTINUED)

Company C’s Hybrid Structure:


Industry: Manufacturing
Employees: 20,000 – 50,000
Revenue: $5 billion – $10 billion

CEO

Chairman Legal CFO SVP of HR President, Business President, Business President, Business President, Business
Sector 1 Sector 2 Sector 3 Sector 4

President, Shared CIO Heads of P+L Units


Services (32)

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PROFESSIONAL SERVICES NOTE


The Corporate Leadership Council (CLC) has worked to ensure the accuracy of the information it
provides to its members. This project relies upon data obtained from many sources, however, and the
CLC cannot guarantee the accuracy of the information or its analysis in all cases. Furthermore, the CLC
is not engaged in rendering legal, accounting, or other professional services. Its projects should not be
construed as professional advice on any particular set of facts or circumstances. Members requiring
such services are advised to consult an appropriate professional. Neither Corporate Executive Board
nor its programs are responsible for any claims or losses that may arise from any errors or omissions in
their reports, whether caused by Corporate Executive Board or its sources.

1
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2
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3
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4
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5
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6
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7
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8
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9
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10
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12
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13
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(September 2004).
14
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15
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16
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17
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(January 1999). (Obtained through Factiva).
18
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19
Aimin Yan and Meryl Reis Louis, "The Migration of Organizational Functions to the Work Unit Level."
20
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21
Nick Sternberg and Scott Heil, ed., Organization Charts.
22
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23
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24
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(Obtained through http://www.washingtonpost.com). [Accessed 30 March 2005].
25
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26
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(Obtained through EBSCO).
27
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28
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29
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30
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31
Corporate Leadership Council, Organisational Structure Methodology and Decision Rules.
32
Corporate Leadership Council, Rationale Behind Organizational Structure.

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APRIL 2005

33
Author Unknown, "Going Horizontal: Case Studies on Process-Based Organizations," Chief Executive (May 1996).
(Obtained through Lexis-Nexis, a division of Reed Elsevier, Incorporated).
34
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(Obtained through EBSCO).
35
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McKinsey Quarterly (2001). (Obtained through EBSCO).
36
Raghuram G. Rajan and Julie Wulf, "The Flattening Firm: Evidence from Panel Data on the Changing Nature of
Corporate Hierarchies," National Bureau of Economic Research (April 2003).
(Obtained through http://www.nber.org/papers/w9633). [Accessed 30 March 2005].
37
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38
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39
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40
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41
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42
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43
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(1993). (Obtained through Factiva).
44
George Hattrup and Brian Kleiner, "How to Establish the Proper Span of Control for Managers."
45
Author Unknown, "Handling Reorganization."

 2005 Corporate Executive Board