Organization design- Moving from a hierarchical to a flatter structure

By Human Resource Advisory, 3rd Eye Advisory®
Organization design- Moving from a hierarchical to a flatter structure

In today's VUCA world where companies are at a risk of becoming obsolete, there is a need for companies to reinvent their strategy according to changing scenarios. Environment in the industry leads to development of strategy of a company which is essential for creation of action plans that company needs to achieve in short and long term. Strategy leads to development of organization structure. Organizations are increasingly becoming flatter for ease of management, increased productivity, improved efficiency and effective resource utilization.

It is often considered that the organization structure precedes strategy. Many organizations do not change the organization structure which stays same even though the strategy keeps changing. The companies are not open to reshuffling the positions, teams, communication mechanisms, creating new positions or eliminating redundant positions according to the growth strategy of the organization. The result is inefficient organization with sub-optimal resource utilization.

Organization structure and its alignment with strategy is gaining importance in the contemporary world. Recent changes in organization structure of TATA Motors, Toyota, Google, Starbucks etc. are some examples which reinforce the need for efficient structure.

To overcome Bounded rationality which is limitation of individuals to perform tasks and take decisions due to limited information, cognitive capacity and time constraints, it is imperative to utilize the capacity and capability of the organization to achieve sub-system optimization by re-designing organization structure.

Companies need to examine their current organization structure along three axes of Complexity, Formalization and Centralization. Complexity of organization structure has to be viewed in terms of Horizontal (Division of labor, specialization, departmentalization), Vertical (Hierarchy, line of authority, reporting relationships) and spatial (Geographic dispersion) differentiation. Formalization is standardization of tasks, services, customer experience and Centralization is how the decision making is concentrated in the organization. Organization structure has to be developed according to complexity, formalization and centralization of organization.

Factors influencing organization structure are Strategy, Size, Technology, and Power Control and Value discipline of organization (Cost leadership, product leadership, customer centricity). Leadership and HR have to ensure that factors influencing organization structure are taken into consideration in organization structure design. Organization structure establishes responsibilities,Environment Strategy Structure System/Process accountabilities, reporting relationships, communication mechanisms, organizational boundaries and legitimate basis of authority which are in tandem with the strategy of organization.

Organizations also have to be sensitive to changing needs of workforce with respect to autonomy in work, specialized skill-set, pursuit of challenging roles, focus on performance and work-life balance. This is also exerting pressure on the management to change the existing systems/processes which are result of organization structures in place.

Flatter organizations open the line of communication, increase collaboration, decentralize decision making, remove the levels in hierarchy and empower employees at lower levels of organization. Large organizations can become flatter organizations by undergoing organization wide change management process to transition to a flatter structure.

Organizations follow either of two economic concepts of reducing average costs which are economies of scale or economies of scope in redesigning organization structure. This decision will depend upon trade-offs in terms of spatial differentiation, scale of operations, resource availability and complexity of work which will have impact on organization structure.

Organization structure can be classified according to Mintzberg`s Organization structure types which are Entrepreneurial (Simple structure), Professional Bureaucracy, Machine Bureaucracy, Divisional (Diversified) and Adhocracy (Innovative). Various frameworks of organization structure design which are extensively used in industry are Jay Galbraith`s Star Model, BCG`s Building Blocks Framework, Booz Allen Hamilton`s Natural Business Units, McKinsey 7S, Balanced Scorecard: Tradeoffs between centralized and decentralized and Goold and Campbell's Fit and Good design tests.

Companies are progressively hiring external consultants to reorient their organization structures to transition from a tall hierarchy to a flatter structure which is essential to execute the strategy of organization. Consultants facilitate diagnosis of existing organization structure, provide recommendations and facilitate change management process.

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Article by: Human Resource Advisory, 3rd Eye Advisory®