A simple explanation of the fundamental process of designing an organization and it's structure.

Organization Design

An organization’s design comprises of two fundamental dimensions, the first step is to understand the different contexts’ under which the organization is intended to perform.  The second step is to apply the parameters of the context to various structural parameters and formulate a new or changed organizational model.

The following design method is derived from various works of Richard Hall (1991), D.S. Pug (1991), Michael E Porter (1980), Raymond Miles, Charles Snow (1978) and presents a more practical, easy and innovative method.

Contextual Dimension

1. Purpose: The purpose of organization is defined by the leadership; it articulates the vision and the mission of the organization.
   1. Differentiation: The organization intends to create a radically different and innovative product or service that is clearly differentiated from others in the industry. 
   2. Efficiency: The organization intends to offer existing product or services at lower cost, perhaps through better manufacturing process, management, cost-cutting, restructuring etc. The strategy is to gain the market shares of existing suppliers, while not taking risk of developing new product. Even if a differentiating competitor emerges, the organization will be the last to be affected.
   3. Focus: The organization targets a small focused group of customers with very specific needs. It intends to compete in the narrow domain with either differentiation or efficiency.
2. External Environmental: The organization has to devise strategies to cope with the changes external to the organization; there are 4 possible approaches as described below.
   1. Innovate: The organization tries to follow the risky and unknown path of innovation through investing in research and promoting collaboration across its various components.
   2. Survive: The organization doesn’t take the risk of investing in new products, but rather tries to hold on to its current market position by boosting its internal efficiency and promotes its position on quality & reliability.
   3. Balance: The organization tries to put its primary focus on survival while initiating innovation in the background. Thus it tries to have a balanced approach that not only defends it from the current competition but ensures that it emerges as a stronger organization.
   4. Reactive: The organization solves the external environmental changes as they emerge in a ad-hoc manner, it fails to analyze the extent of external changes and lacks any definitive strategy. Reactive approach is only successful when the external changes are for shorter duration and does not lead to subsequent changes. However, in most cases, it is the primary reason for failed leadership and demise of the organization.
3. Technology: It is the core utility that is used to produce the product or the output of the organization. The technology used by the organization is dependent upon the type of products it produces.
   1. R&D:  Organization’s core business is in research & development of innovative products or technologies; it needs to obtain resources both as intellectual property and specialists.
   2. Service: The organization that provides service focuses on the efficiency, cost-effectiveness and internal processes to be competitive.
   3. Manufacturing: The organization produces products that require mass production with infrequent changes; again this is very much a process oriented organization.
4. Culture: It is the unwritten norms, rules and values that are shared between all employees. The culture of the organization indicative of its holistic health; it’s a direct measure of the internal effectiveness.
5. Size: It is simply the total number of employees it takes to sustain and grow the organization. The size greatly influences how the organization is structured or requires restructure; the only thing simple about size is its measurement. 

Structural Dimensions

1. Formalization: It is the amount of written documents in the organization.
   1. Processes: It is the description of the routine or repeatable functions of the organization, like hiring, performance review, expense reporting, software engineering process etc.
   2. Regulations: These are written policies regarding various legal and other procedures of the organization.
2. Task Division: It is the degree to which a task is sub-divided into smaller tasks. If the tasks are divided into narrow job functions, the skill an employee requires is less and it’s easy to hire and train a new employee. If the task division is shallow, each employee performs a wide range of tasks; the employees’ skill level is relatively high.
3. Reporting & Control: The hierarchy structure that determines how tasks are delegated and tracked. It primarily deals with project management aspects of the organization, the positional power is limited and does not extend to issues of overall job satisfaction, compensation etc.
4. Decision Authority: It is the level in the organization hierarchy that has the decision making power. It determines what kinds of decisions are “centralized vs. de-centralized”. For example, a manager has authority to take decisions regarding the prioritization of tasks but might have no authority to take any business or financial decisions regarding customers or team budgets. 
5. Skill/Experience: It is the amount of formal education and experience the employees require to fulfill their job responsibilities.
6. Personnel ratios: It is the ratio of core-employees to their supporting staff. It can be managers’ vs. employees’ in the organization’s hierarchy, human resource dept vs. manufacturing department etc.

Relationship between Contextual and Structural Dimensions

As one can intuitively concur that there exists a strong relationship between the two design dimensions.  Suppose an organization has the following contextual parameters, it wants a differentiated product that is more innovative than competitors, it plans a research & development based core teams that are built on collaboration and learning. It expects the size of the organization to be small. Clearly such an organization will be low on formalization; each member might have wide job responsibilities, a very shallow reporting structure. The decision authority will be rather distributed and employees will have high skills, personnel ratios will be small.

The Design Method

The method of design is to evaluate all the contextual parameters and then judge how they affect the different structural design requirements. Due to so many dimensional variations, the organization design is a complex process and as much an art as it is science. The organization’s leader must also keep in mind that both internal and external contexts keep changing, thus any solution is rather temporary unless it is easy extendable to the changes. A frequent change in organization structure or leadership is counterproductive exercise and should be resisted; it brings a lot of frustration to the employees and the stakeholders.