What is the Right Organization Design?
Introduction
A start-up company in Florida, called World Response Group (WRG), developed an unusual woven mat for the horticulture industry that was made from all-natural fibers. Horticulture growers in the U.S. produce hundreds of millions of potted plants each year. The product, called SmartGrow, dramatically reduced weed growth in potted plants and simultaneously provided important nutrients – all with no chemicals. SmartGrow raw materials and manufacturing expertise were available in China and India. As the company grew, the managers and board members talked frequently about organization structure. Two schools of thought emerged. One group wanted to import raw materials into the U.S. for manufacturing by WRG and thereby have direct control over manufacturing, marketing, and sales. These functions would be departments within WRG. The second group wanted to import already manufactured and packaged products from overseas, outsource marketing to an agency, and hire a horticulture distribution company to handle sales. The second group pushed the concept that no one within the company would ever touch the product. Nor would there be functional departments for manufacturing, marketing, and sales.
That discussion of structure within WRG would not have occurred 30 years ago when Robert Duncan published his seminal article, “What is the Right Organization Structure?” in Organization Dynamics in 1979. At that time, organizations were thought to be self-contained, and structure defined the reporting relationships among internal functional departments. Duncan's article provided important insights about the conditions under which different internal arrangements would achieve a company's mission. His insights are still referenced in management textbooks today.
The purpose of this article is to present key developments in organization structure and design that have occurred since Duncan's article and describe when each can be used for greatest effect. We will briefly review the important structural designs from 30 years ago and then describe key developments since that time. The concepts are organized into three eras, which reflect substantive changes in management thinking from vertical organization to horizontal organizing to open boundaries via outsourcing and partnering.
Section snippets
Era 1: self-contained organization designs
The first era of organizational design probably took hold in the mid-1800s, and was dominant until the late 1970s. In Era 1, the ideal organization was self-contained. It had clear boundaries between it and suppliers, customers or competitors. Inputs arrived at the organization's gate, and after a transformation process, left as a completed product or service. Almost everything that was required during the transformation process was supplied internally. Design philosophies from this era
Era 2: horizontal organization design with team- and process-based emphasis
The second era of organizational design started in the 1980s. As the world grew increasingly complex, organizations of Era 2 experienced the limits of traditional designs. Coordination between departmental silos within the organization became more difficult, and vertical authority-based reporting systems often were not effective in creating value for customers. At the same time, information processing capacity of organizations improved greatly, due to the availability of personal computers and
Era 3: organizational boundaries open up
The third era of organizational design came into its own in the mid-1990s, with rapid improvements in communication technology in the form of the Internet and mobile phones. Era 3 also coincides with the rise of emerging economies such as China and India, where there is a great pooled of skilled expertise in performing very specific tasks such as low-cost manufacturing and software development. The external and internal boundaries of the organization opened up as never before. Managers became
Hollow organization
The biggest trend in the design of organizations in Era 3 has been, without doubt, the outsourcing of various pieces of work done internally to outside partners. The phenomenon became most noticeable in the shifting of the manufacturing function from the U.S. to cheaper areas of production in Asia. In 1986, a Business Week article noted that a number of industries – including auto, steel, machine tools, consumer electronics, and semiconductor chips – were shifting their production elsewhere,
Modular organization
The modular organization was another design that was popularized in the early 1990s. The image that it presents of the organization is one of a collection of Lego bricks that can snap together or be hived off as necessary. The design is similar to the hollow organization in its use of outsourcing. Crucially, however, what is different and distinctive about this form is that outsourcing conforms to pieces of the product rather than outsourcing organizational processes (e.g., human resources,
Virtual organization
Few of today's companies can go it alone under a constant onslaught of international competitors, changing technology, and new regulations. Organizations around the world are embedded in complex networks of relationships: competing fiercely in some markets while collaborating in others. Collaboration or joint ventures with competitors usually takes the form of a virtual organization – a company outside a company created specifically to respond to an exceptional market opportunity that is often
New demands on managers and organizations
The shifting emphasis from vertical designs to horizontal designs to partnership designs has reshaped the roles of managers. The biggest change has been from having direct control over resources required for performance toward dependence on others over whom there is no direct control. Even with more dependence and less control under newer structural designs, managers are still responsible for performance outcomes. For a manager who is used to a traditional top-down approach, it is hard to let
Conclusion
After much debate, the managers at WRG, the start-up horticulture supply company referred to at the beginning of this article, decided to adopt a hollow rather than a functional organization design. It was a learning process for managers and board members because the team's experience had been in traditional structures. A manager and board member made trips to India and China to meet and build personal relationships with suppliers. The product had to be supplied in bulk for horticulture
Selected bibliography
Robert Duncan's original article titled “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,” Organizational Dynamics, 1979 (winter), 59–80, provides a brief overview of functional, divisional, and matrix structures. Stewart A. Clegg's book Modern Organizations (Sage, 1990) traces the evolution from traditional to contemporary organization designs. The classic reference on divisional structures is Strategy and Structure (MIT Press, 1962) by Alfred Chandler.
N. Anand is a professor of organizational behavior at IMD, Lausanne. He has also taught at London Business School, Tanaka Business School (Imperial College, London), the Indian School of Management, and the Owen Graduate School of Management (Vanderbilt University). Anand's current research examines new forms of organization design, knowledge-based innovation in professional service firms, and social networking in organizations. His work appears in journals such as Academy of Management Journal
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N. Anand is a professor of organizational behavior at IMD, Lausanne. He has also taught at London Business School, Tanaka Business School (Imperial College, London), the Indian School of Management, and the Owen Graduate School of Management (Vanderbilt University). Anand's current research examines new forms of organization design, knowledge-based innovation in professional service firms, and social networking in organizations. His work appears in journals such as Academy of Management Journal, Annual Review of Sociology, Organizational Dynamics, Organization Science, and Personnel Psychology. He consults as a management educator for a global list of corporations including HSBC, Credit Suisse Financial Corporation, and Mc-Graw Hill (e-mail: [email protected]).
Richard L. Daft holds the Brownlee O. Currey, Jr. Chair in the Owen Graduate School of Management, Vanderbilt University, where he studies and teaches leadership, high-performance cultures, and change management. Daft has authored 12 books, including his best selling textbook, Organization Theory and Design, 9th ed. (Thomson, 2007). Daft also co-authored Fusion Leadership: Unlocking the Forces that Change People and Organizations (Berrett-Koehler, 2000), and has published dozens of scholarly articles. He has been involved in management development and change consulting for many organizations, including Bridgestone/Firestone, the National Academy of Science, American Banking Association, Bristol-Myers Squibb, Allstate Insurance, Pratt & Whitney, and State Farm Insurance (email: [email protected]).