Over 100 executives attended an IMD Discovery Event to explore how organization design can support a high performance organization. Participants were taken on a journey through the evolution of organization design from its inception centuries ago until the beginning of the current millennium. Case studies on Deloitte and P&G served to highlight the design changes undertaken by those organizations and an interactive discussion provided participants with key insights on how to successfully implement organization redesign.
The design of an organization serves to align the organization’s capabilities with the demands made by its environment. The rate and pace of change, restructuring, globalization, and the move from a product- to a service-driven business model often involve redefining the logic of the organization design in a way that is compelling for employees. In the past, an organization structure – once mapped – could remain intact for decades. Nowadays, it is essential to continuously restructure to protect the core business and adapt to new opportunities. This is because employees increasingly have to deal with the complexities that come from oscillating between centralization and decentralization, exerting influence without authority, operating with virtual teams and so on. To cope and thrive in such dynamic environments, an organization needs to apply distinctive design criteria. Professor Denison pointed out that while no organization seeks complex solutions, companies do first have to understand the complexity before they try to reduce it by making the key design choices clear. In general, organization design can be categorized in three ways:
- Anchored on an internal control system (like a skeleton). Traditionally, this has been the most common mechanism, where the number of hierarchical levels, geographic regions, products, industry verticals and functions are well defined and fixed. The organization chart highlights how people are controlled through reporting relationships. However, it does not reveal how value is created in the organization.
- As a process flow (like a river) that creates value. The process-based organization is led by the process paradigm, which focuses on the horizontal view of business activities and aligns organizational systems with business processes. Emphasis has been increasingly placed on process- based organization designs to eliminate the inefficiencies of traditional functional and divisional structures.
- As a network of external relations (like an exoskeleton). In this case the design is not within the organization but outside – in distribution systems, supply chains, user groups, market segments or social networks. Thus, the external organization structure encloses dynamic and interconnected internal systems that respond to the changes outside the organization.
To succeed, these three design perspectives must be supported by an organization culture that acts as the glue that holds everything together. “You cannot make an organizational change without a complementary change in culture. The mindset, underlying principles, values, assumptions and behavior all influence the way in which the organization structure evolves over time,” Professor Denison stressed.
Evolution of organization design
Professor Narasimhan asked what high performance means to different organizations. Participants offered a variety of responses, including overachieving objectives, delighting customers sustainably over time, consistent value creation, agility in responsiveness and empowering employees to consistently challenge themselves. While agreeing that these functionalities are currently being expected from the design, form or structure of the organization, he pointed out, “Diverse demands made on today’s organizations are not replacing one another, rather they are building upon one another. And design is often perceived as the only option for managing conflicting priorities – flexibility vs. consistency or internal alignment vs. responsiveness.”
Professor Narasimhan went on to provide an in-depth overview of the evolution of organization design over the centuries, starting in 3000 bc, when the first written evidence of organization design was recorded during the era of King Den of Egypt who ruled via command and control and motivated subjects through punishment. The next evolution was seen in 2500 bc in the first city known to humans – Ur in Mesopotamia (Iraq) – when there was predictable and reliable generation of surplus. The Standard of Ur placed the king at the top of the social structure, followed by different classes of people in descending hierarchical order, thus formalizing the system of division of labor. In 550 bc in Anshan, Iran, Cyrus the Great built the largest empire that the world had yet seen. Cyrus administered the vast kingdom through Satraps (governors) who were selected and instituted based on their competencies. The design was fundamentally about delegating authority and this went on to serve as a blueprint of the future Greek and Roman empires.
In the first century ad, Caesar Augustus (the successor of Julius Caesar) marked the beginning of acquisition and assimilation as he embarked on an ambitious growth strategy that involved acquiring more and more territory, which was ruled through standardization. Then, in China in 618 ad under the Tang dynasty, a formal state machinery was established with the creation of offices and the appointment of highly qualified Mandarins to nine different ranks. This design brought structural stability and the formation of a high performance bureaucracy. Professor Narasimhan stated, “Mandarins had to be qualifi through merit based examinations to occupy a role. Compare this with the situation today when the grand-nephew of a founder takes up a key position – we are not following the structures that were established way back in 618 ad!” He went on to illustrate subsequent organization design evolutions up to the turn of the current millennium (refer toTable1).
