Every organization has a structure, but not every organization has a design. The way tasks, duties and authority are assigned in your business is the organizational structure_._ This can happen without deliberate implementation just by doing "whatever works". Organizational design is a conscious choice.
TL;DR (Too Long; Didn't Read)
Organizational structure refers to the way power and responsibility are distributed around your company. Organizational design is an intentional effort to rearrange that distribution to improve your structure. Design requires decisions about centralization, departmentalization and the chain of command.
Organization Structure vs. Organizational Design
Simply by existing, an organization acquires a structure. It doesn't require any deliberate decisions or someone making organizational structure and design notes. It only requires day-to-day business operations.
For example, suppose you launch your business with you as owner-manager and two or three employees under you. This is what business books refer to as a simple structure: no departments, no hierarchy — just you giving orders and your team carrying them out. It's still a structure rather than anarchy, with you at the top and your employees handling the duties you assign them.
Now, suppose your business takes off, grows and becomes more complex. You have 20 employees — five of them work as a management team, and 15 work under them. Letting your organization grow bigger and improvising structure is less effective than designing the right structure. That's the key to the clash of organizational structure vs. organizational design.
What Makes a Structure
Even if you never made a conscious decision about design, you'd have an organizational structure. It grows out of the tasks you and your team perform, such as sales, marketing, finance and engineering. The structure defines the purpose of each business division, department and role, and spells out accountability.
For example, if you have your sales team in one department answering to the sales manager, the manager becomes accountable for everyone under him. If there's a problem, you turn to the manager. If there's a new sales initiative, you pass it down through the manager to the front-line troops.
There are many organizational structures, such as simple, functional, multidivisional and matrix organizations. All of them have three universal components: someone with authority to make the decisions, a division of labor and a set of rules by which the organization operates.
What Organizational Structure Isn't
Every business has a legal structure, but an organizational structure isn't the same thing. A sole proprietorship and a one-person S corporation have different legal structures, but they can have the same structure for making decisions and carrying out tasks. Conversely, all sole proprietorships have the same legal structure, but their organizational structures may be very different.
There's also a difference between an organizational chart and organizational structure. Organizational structure is about function and responsibility, while the org chart is about titles and positions. Your org chart may change whenever you appoint a new vice president of human resources or the like, but that doesn't affect the underlying structure.
Structure and Design: Key Elements
Organizational structure and design notes and reference books list several elements common to all structures. If you're looking at designing or redesigning your structure, you need to keep them in mind.
- Work specialization. Tasks are divided between different people and teams. As your business grows, you may simply assign them to whoever looks best suited for the gig. One of the organizational structure vs. organizational design differences is that in organizational design, you have to think about specializations.
- Departmentalization. Many companies divide employees among different departments based on their specializations. Others do it based on catering to different customer groups or different steps in the production process.
- Chain of command. Who has authority and to do what? To whom do they delegate power? In a small business where you're the only source of authority, these questions may not matter. In an international corporation, they matter a great deal.
- Span of control. How many employees can make direct reports to the same manager? If someone on your management team has two dozen reports with which to deal, you may be able to just relocate some of them on the org chart to other managers with less work. Then again, it may be necessary to redesign your structure to relieve the stress.
- Centralization/decentralization. Most entrepreneurs start with a model where all the decision making is centralized in themselves. In larger businesses, designing the structure to decentralize authority often improves decision making. A CEO in New York, for instance, may not understand much about the pressures on the company branch in Mumbai.
- Formalization. In a formalized structure, individual jobs have very precise responsibilities, and employees have little discretion in what they do or how they do it. A less-formal structure gives them more freedom.
Design and Redesign
When you sit down to design or redesign your business, remember the difference between organizational chart and organizational structure. The structure is the reality with which you and your team work every day. The chart is an approximation of reality that changes every time a position goes vacant or gets filled. By the time you finish your redesign, it may be out of date.
The org chart is irrelevant when you're dealing with the clash of organizational structure vs. organizational design. When you begin your design work, don't think about who's in each position. Think about how you want power and responsibility distributed through the organization regardless of who has the job. For example, would you be comfortable decentralizing if you didn't have faith in your current C-suite team?
It's worth taking the time because your design shouldn't change frequently. Once you come up with a design that works for your business, it should stay stable until you have a major change in strategy or operations.
Design and Solutions
Along with balancing organizational structure vs. organizational design, it's important to remember that not all problems are caused by bad structure, and they can't all be fixed by design.
Suppose your R&D division is bogging down because of too many time-wasting meetings. If you make redesigning the organization your priority, that may not help. Whoever is in authority may just do things the way they've always been done, so the meetings will continue.
The solution is to cut back the number of meetings and only then focus on the organizational design.
Principles of Design
When you think about organizational design, there are several principles to keep in mind.
- Don't worry about the past. Nostalgia for the days when you could make all the decisions yourself doesn't help you decide how much your business needs to decentralize.
- Take your time. It may be better to make multiple small changes to the structure rather than imposing your new design in one fell swoop.
- Promote accountability. You don't want your employees enduring micromanagement, but you do want them held accountable for their work.
- Acknowledge your individuality. Even if your competitors work very well with a centralized, controlled business organization, that doesn't mean it's right for your business.
- Balance hierarchy with flexibility. A hierarchy with too many layers makes it impossible to gather information or make fast decisions. A company with no layers can saddle managers with far too much responsibility.
- Be conscious of company culture. Most businesses develop unwritten codes of how to do things alongside the formal ones. An organizational design that tramples on informal rules may run into resistance.
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com