The Ultimate Guide to Organizational Design

When building a company from the ground up, more goes into the interpersonal way an organization communicates than you think. What we are talking about of course is organizational design, or in other words, how a company structures its people and employees and the way they communicate with one another.

Hiring plans, growth strategy and company culture are all just a few things that hinge on organizational design, and building a solid foundation early on can be the difference between a company that scales successfully, and one that falls apart.

In this comprehensive guide, we’ll cover:

• The basics of organizational design
• The most used organizational framework
• Why having solid org structure is important
• 9 concrete steps to start outlining your organization’s design

Let’s get started.

What is Organizational Design?

Organizational design is HR methodology for executing an organization's strategic plan with resources, training, workflows, processes, systems, and other work-related mechanisms that support growth while delivering high-quality products, services, and customer experiences.

One of the most fundamental questions (especially in small businesses and startups) organizational design answers is "who do we hire and when?" To answer this question, organizational designers must have a holistic business view.

As companies grow, organization design defines the strategy for entering new markets, setting up new offices, optimizing workflows, streamlining decision-making, building teams, eliminating silos, change management, and other critical growth factors.

In short, organizational design defines how a company will achieve its strategic goals from a human resources perspective.

What is the Goal of Organizational Design?

Organizational design aims to create a holistic executable plan with KPIs to grow the business in line with the company's goals. It outlines a clear path to realizing the company's vision efficiently by reducing the need to think about what to do next. Instead, decision-makers execute the growth strategy triggered by milestones and KPIs.

Another crucial goal for organizational design is identifying silos that hinder growth and decision-making. As organizational design expert Amy Kates says, "no matter how we put the work together, we will create silos. Finding the right points of intersection and where people need to collaborate is an important part of the design process."

Example outcomes of organizational design include:

• How the company will organize its functions, workflows, processes, locations, people, etc.
• Streamlining business processes to align with customer needs
• Standard operating procedures that align with the company's values and vision
• Enhancing collaboration while reducing silos
• Practices for organizing, allocating, and managing people
• KPIs to measure teams and departments
• Delegating decision-making and accountability
• HR activities for hiring, training, compensation, collaboration, etc.
• Defining an organizational structure that supports the company's activities and goals

What is the Most Used Organizational Design Framework?

Jay Galbraith's Star Model, developed in the 1960s, is one of the most commonly used organizational design frameworks. While there are several popular frameworks, many use the Star Model as a foundation with similar steps and principles.

The Star Model framework looks at five business categories:

1. Strategy
2. Structure
3. Processes
4. Rewards
5. People

1. Strategy

The first step is to define the organization's strategy. Many companies refer to this strategy as their North Star Metric (or simply North Star). A good strategy is usually customer-focused rather than defined by numbers or revenue.

Strategy is a crucial organizational design first step because if you don't know where you're going, you won't know how to get there! The strategy defines and prioritizes activities necessary to achieve a company's goals and objectives.

2. Structure

The organizational structure (visually represented using an org chart) defines an organization's authority and power in four key areas:

• Specialization: types of jobs and requirements to perform the work
• Shape: the number of people at each level of the org structure
• Distribution of power: how does the company make decisions and solve problems?
• Departmentalization: the departments at each level of the org structure, usually defined by functions, products, workflow processes, markets, customers, and geography

3. Processes

Processes define how a company functions vertically and laterally:

• Vertical processes: business planning and budgeting
• Horizontal or lateral processes: workflows that deliver outputs or fulfill customer needs, i.e., product development

Understanding a company's processes is crucial for identifying bottlenecks and shortfalls that stifle productivity while optimizing workflows to facilitate growth.

4. Rewards

Rewards are the incentives that motivate employees, including salaries, promotions, bonuses, profit sharing, stock options, etc. These rewards must promote growth in line with the company's vision.

5. People

People in organizational design represent the HR policies for recruitment, onboarding, training, team building, etc. HR can only define these policies once they know the company's strategy, structure, processes, and rewards.

Why Having Solid Org Structure is Important

Org structures significantly impact the work a company does and its outcomes, specifically the speed of delivering those outcomes. So, if the org structure doesn't align with the company's strategy, then organizational designers must fix it before they can address workflows and people management.

As we see from the Star Model, structure determines how designers approach processes, rewards, and people. It also has a significant impact on decision-making, which can have adverse effects on the company's goals and strategy.

Identifying Gaps

One of the key outcomes of organizational design is identifying the gaps between the company's current state and where they want to be. A clearly defined structure and org chart allow HR and decision-makers to visualize the company's capabilities and strategize accordingly.

For example, a UK-based food delivery startup wants to enter the European market within the next 12 months, starting with France. This expansion will require:

• French-speaking UX designers, product managers, and content designers able to understand French-speaking users
• Updating of policies to align with French and EU laws
• French-speaking salespeople to onboard restaurants
• French-speaking customer service agents
• Recruitment of local riders and drivers

The startup's org structure will determine how the company will build these new teams for the French market and whether they must restructure the organization to optimize for European expansion.

For example, in a hierarchical structure, the new French team members might be spread across various departments, whereas in a divisional structure, they might work together as a cross-functional French team. The latter will require a divisional head, team leader, and project manager, and the company might have to open a French regional office.

As we see from this example, organizational design doesn't only consider staffing gaps but workflows, structure, geography, skills, and more.

##Types of Reporting Structures There are six common reporting structures—two of which we've mentioned in the example above:

• Hierarchical or vertical
• Functional
• Divisional
• Flat or horizontal
• Matrix
• Holacracy

Hierarchical or vertical

A hierarchical or vertical is a traditional top-down org structure with the CEO at the top, followed by C-suite execs, management, etc. The hierarchy defines clear channels for communication and promotion.

Silos, bureaucracy, and lack of decision-making efficiency are among the biggest challenges organizational designers must overcome with hierarchical organizational structures.

Functional

A functional org structure organizes employees into departments based on their functions or skills, like design, marketing, sales, accounting, etc. The functional org structure allows decentralized decision-making, which is essential for producing goods and services at high volumes efficiently.

While a functional org is more efficient, it can present similar silo challenges to the hierarchical structure.

Divisional

Divisional org structures organize employees based on markets, products, or locations. The company will use an appropriate org structure within each division depending on its purpose or function.

The challenge with organizational design in a divisional model is that each division often has different teams, challenges, and priorities.

Flat

A flat org structure looks similar to a hierarchical one, but there are no formal channels, and the CEO interacts with everyone. This model works best for face-paced startups because employees have more autonomy while information, communication, and feedback follow freely.

While a flat structure is excellent for speed and innovation in startups and small teams, it limits growth, especially as the company moves into new markets.

Matrix

The matrix org structure organizes employees by function and product. Employees report to their functional manager and a product manager. For example, a UX designer will report to the UX leader regarding the company's UX strategy and roadmap and their product manager for product-specific day-to-day tasks.

The matrix is a typical org structure for large corporations with multiple products and teams. The idea is that a matrix structure reduces silos through departmental and cross-functional collaboration.

One of the biggest challenges with this model for organizational design is identifying and eliminating power struggles between functional managers and product leads that could create roadblocks.

Holacracy

A holacracy is a decentralized org structure and one of the least popular models. Teams are somewhat autonomous and responsible for most decision-making and conflict resolution.

A holacracy aims to eliminate bureaucracy and slow decision-making by giving employees and team leads more autonomy. The problem with this model is that it can create worse silo issues than other org structures, pulling the company in different directions.

Blogging platform Medium used the holacracy structure for three years before abandoning the model in 2016. In an article, team member Andy Doyle described some of the challenges of working in a holocracy was that it didn't scale, "...Holacracy, every team has a goal and works autonomously to deliver the best path to serve that goal. But for larger initiatives, which require coordination across functions, it can be time-consuming and divisive to gain alignment."

9 Steps to Design your Company Structure

It's important to note that company structures change as the business evolves. Startups will likely experience several org structure iterations as they scale from a handful of employees to a large company operating in several markets.

Amy Kates from Kates Kesler outlines a strategy for organizational design in a toolkit for HR. Amy refers to this as the "how" of organizational design. Completing this process will help define your company's structure and governance.

Step one: Strategic growth choices

Amy says you don't need to be a strategy expert in designing your company's strategic plan. These five questions can help startups define a strategy:

1. What are we going to accomplish? (goals & objections)
2. Who are we going to serve? (customers/users)
3. Where will we compete? (products, markets, countries, etc.)
4. What are the most important nodes of product, market, and function—where will future growth and profitability come from?
5. How are we going to win?

Step two: Capabilities and design criteria

Capabilities link the organization to its strategy. These are the skills, processes, and culture needed to achieve your company's goals and objectives. During this phase, you must also determine what capabilities will differentiate you and provide a competitive advantage.

For example, if you're developing an app, you must have strong engineering capabilities. Decision-makers must also consider capabilities that will give them a strong competitive advantage—i.e., excellent customer service.

Step three: Diagnostic

Once you understand where you're going and how to get there, you need to assess your company's current capabilities and the gap in achieving its goals and objectives.

The goal of this diagnosis is to understand: A baseline for your current state and the gap to future state Determine why those gaps exist—i.e., is it a lack of training or talent? Develop ideas and opportunities to bridge those gaps Engage with employees for input Identify potential resistance and roadblocks Create an open and transparent process

Step four: Organizational model

An organizational model shows how structure, people, and processes interact. There are several popular organizational models (we've described the Star Model in this article), each designed for different businesses and outcomes. The purpose of adopting an organizational model is to:

• Diagnose the company's current state
• Visualize a future state of success
• Establish your company's purpose, value, and culture

Amy Kates recommends that decision-makers explore various organizational models to find one suitable for the company's strategy.

For example, the Academy to Innovate HR recommends startups and disruptors use The Flexible Organizational Model for its "proven set of practices that innovators and lean startups use to disrupt markets."

Step five: Organizational chart and roles

Once you know how your company must interact to achieve its goals, you can define reporting relationships and layers by creating an org chart.

When Pamela Ayuso, CEO, and Co-Founder at Celaque, designed her org chart, she chose a flat structure to give employees more responsibility and create an environment for collaboration and innovation. Pamela also found, "A flatter structure has an advantage in that the information is as close to the user as possible."

Step six: Points of intersection and collaboration

Once you have created an org chart, you can identify points of intersection and collaboration. Amy Kates highlights three critical layers in your org structure:

• Enterprise direction: CEO & execs
• Business strategy: departmental leads
• Execution: managers and teams

Your company's organizational design must define vertical and horizontal integrations to minimize silos and align the company towards a shared vision and purpose.

Step seven: Decision rights

Define how your company makes decisions and the processes for resolving tensions and disputes. Amy Kates says your org design will always create tension, "The goal is not to avoid tension, but to surface it and then use it to extract value from high-risk and high-value decisions."

• Focus on critical high-risk/high-value decisions
• Design how leaders and stakeholders discuss these decisions rather than finding the "right answer"
• Create a "golden vote" system where decision-makers are unable to agree—i.e., the CFO has the final say when stakeholders can't agree on budgets

Step eight: Governance

Governance is crucial for designing the conversations that produce outcomes. It's about configuring forums, participation, agenda, and cadence for management meetings.

Step nine: Relationships and skills

Relationships and skills enable people to succeed in their roles. Companies can build and optimize these through training, coaching, workshops, and experiences.