KMCG Organizational Design

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Organizations are typically structured in conjunction with its management’s value system. Management usually equate organizational design with its structure and use terms like “lean”, “flat” or “hierarchical” to describe organizational design as well as its structure. Organizational design encompasses much more than just structure; it is the process of aligning an organization’s structure with its mission. This means looking at the complex relationship between tasks, workflow, responsibility and authority, and making sure these all support the objectives of the business.

Good organizational design enables communication, productivity, and innovation. It creates an environment where people can work effectively. Productivity and performance issues have been traced back to poor organizational design. A company can have a great mission, great people, great leadership, etc. and still not perform well because of poor design.


Organizations are not designed, they evolve.


Take the example of a company whose sales department and production department both work well as separate units. Yet they need to communicate about customer needs and have not been organized to do so – company performance suffers as a result. Then take the example of a company that wants to grow by acquiring new customers, yet its sales team is rewarded for customer retention instead; company performance is compromised as a result.


How work is done, business processes, information sharing and how people are incentivized; all of these directly affects how well the organization performs. These factors are facets of the organization's design and each facet is important to the organization's success.


Without proper planning, an organization's design often takes on a hierarchical structure. This structure is common because business executives and managers are often reluctant to relinquish control. However, such structures can lack flexibility, soak up resources and under-use key people and skills. When it comes to good organizational design, it's a question of getting the right balance – getting the right controls, the right flexibility, the right incentives; and getting the most from people and other key resources.

Types of Organizational Structure

Most organizations evolve to have elements of both hierarchy and more flexible, organic structures within. Organic structures are more informal, less complex and more “ad-hoc” than hierarchical structures. They rely on people within the organization using their initiative to change the way they work as circumstances change.

Before looking at some of the common types of organizational structures, its worth looking at what characterizes a hierarchical structure and how it contrasts with an organic structure. One type of structure is not intrinsically better than another. Rather, it’s important to make sure that the organizational design fits the organization’s purpose, the people and the culture.


Hierarchical structure

Organizations that have evolved to a hierarchical structure typically break the company down into functional structures and divisional structures. While these structures enable a relative easy reporting model to follow, they represent internal complexities for exposing issues that ultimately impact the company’s mission. Hierarchical models incorporate defined lines of control and responsibility to help determine accountability, unfortunately this structure supports, and may encourage, political posturing and empire building. The impact of this is poor participation by the critical staff members in decision making and a degradation in communication.

Functional Structure

Functions (accounting, marketing, HR etc) are quite separate; each led by a senior executive who reports to the CEO. The advantage can be efficiency and economies of scale where functional skills are paramount. The main disadvantage is that functional goals can end up overshadowing the overall goals of the organization.

Divisional Structure

The company is organized by office or geographical location. Each division is autonomous and has a divisional manager who reports to the company CEO. Each business unit is typically structured along functional lines. The advantage here relates to local results, as each division is free to concentrate on its own performance. The disadvantage is that functions and effort may be duplicated. For example, each division may have a separate marketing function, and so risk being inefficient in its marketing efforts. Moreover, this structure impacts an organization’s cohesive market message resulting in the degradation of both brand perception and value proposition.


Organic structure

Simple Structure

Often found in small businesses, the simple organization is a flat organization. It may have only two or three levels; employees tend to work as a large team with everyone reporting to one person. The advantages are efficiency and flexibility, and responsibilities are usually clear. The main disadvantage is that this structure can hold back growth when the company gets to a size where the founder or CEO cannot continue to make all the decisions.

Matrix Structure

In a matrix structure, people typically have two or more reporting lines. A matrix organization may combine both functional and divisional lines of responsibility. For example, a marketing manager may report to the functional marketing director and the country director of the division he or she works in. The advantage is that the organization focuses on divisional performance whilst also sharing functional specialist skills and resources. The downside is its complexity – effectively with two hierarchies, and the added complexity of tensions between the two.

Lean Structure

In a lean structure, there are central, core functions that operate the strategic business. It outsources or subcontracts non-core functions which, depending on the type of business, could include manufacturing, distribution, information technology, marketing and other functions. This structure is very flexible and often can adapt to market volatility more effectively than other structures. The disadvantage is inevitable loss of control, dependence on third parties and the complexity of managing outsource and sub-contract suppliers.

Making Organizational Design Decisions

Given the many choices of structure, how do you go about making an organizational design decision for your business? Different organizational structures have different benefits in different situations. What matters is the overall organizational design and how its aligned with the business strategy and the market environment in which the business operates. It must then have the right business controls, the right flexibility, the right incentives, the right people and the right resources.

Here are just some of the many things that you can consider when thinking about the structure of your organization.


The organizational design must support your strategy. If your organization intends to be innovative then a hierarchical structure will not work. If however, your strategy is based on low cost, high volume delivery then a rigid structure with tight controls may be the best design.


The design must consider the size of your organization. A small organization could be paralyzed by too much specialization. In larger organizations, on the other hand, there may be economies of scale that can be gained by maintaining functionally specialist departments and teams. A large organization has more complex decision-making needs and some decision-making responsibilities are likely to be devolved or decentralized.


If the market environment you work in is unpredictable or volatile, then the organization needs to be flexible enough to react to this.


What level of control is right in your business? Some activities need special controls (such as customer service and trouble ticket severity levels in technology companies or supply chain in manufacturing companies) whilst others are more efficient when there is a high degree of flexibility.


Incentives and rewards must be aligned with the business’s strategy and purpose. When these are misaligned, there is a danger that units within the organization become self-serving. Using the earlier example of a company that wants to grow by acquiring new customers, the sale team is incentivized on customer retention, and therefore is self-serving rather than aligned with the business purpose.


Poor organizational design and structure results in a confusing mess of contradictions: confusion within roles, a lack of accountability and coordination among functions, failure to share ideas, slow decision-making, unnecessary complexity, stress and conflict. Often those at the top of an organization are oblivious to these problems or worse, pass them off as challenges to overcome or opportunities to develop leaving middle management and staff to drift rather than discover, define and develop the structure best suited for growth.

Organizational Design, when done regularly/annually, will position your business for growth while capitalizing on market volatility.


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