“In all chaos there is a cosmos, in all disorder a secret order.” ~ Carl Jung
“Expect chaos, be ready for chaos, and learn to lead in chaos.”
~ Bob Schoultz, retired Navy SEAL
“In the midst of chaos, there is also opportunity.” ~ Sun Tzu
“Only the paranoid survive.” ~ Andy Grove
When I say the phrase organizational structure, what comes to your mind? Do you think org charts, hierarchies, and pecking order? While these are certainly valid responses, we must nonetheless realize that they represent the surface or visible manifestations of what we call “the organization.” The “secret order” of organizational effectiveness is organizational design which provides the sinews that link the organization’s strategy, structure, processes, rewards, and people.
How can you create this “secret order” and how can it to help you to master the chaos that is our current milieu? Perhaps more than at any time in the postmodern era, organizational leadership is critically needed in the global workplace. Strategic leaders must design organizational structures that facilitate competitive advantage. Let us take a look into what organizational design is and how it is being applied by benchmark organizations who are mastering the chaos of our global business environment. First, some operational definitions are in order:
Organizational structure consists of activities such as task allocation, coordination and supervision, which are directed towards the achievement of organizational aims (Pugh, 1990, p.10.). An organization’s structure is a critical determinant of organizational effectiveness and in most cases needs to be altered when an organization’s strategic intent changes (Lawler & Worley, 2006, p. 88).
Organizational design involves decisions about the configuration of the formal organizational arrangements, including the formal structures, processes, and systems that make up an organization (Nadler & Tushman, 1997). Organizational design is a continuous process, not a single event (Galbraith, 2002). Organizational designs are effective when they achieve a strategic fit. A strategic fit occurs when all the policies in the Star Model (more to follow, below) are aligned with the strategy and reinforce one another. Organization design will have to keep changing to ensure that the organization remains aligned with its strategy (Galbraith, 2002).
On November 22, 1994, the Tuesday before Thanksgiving, Andy Grove, CEO of Intel Corp., was alerted that a CNN crew was coming to interview him about a flaw in the new Pentium chip. CNN subsequently broadcast a critical story and the issue hit the proverbial fan. Within days, consumers were demanding a recall of the flawed chip, and Intel’s biggest customer, IBM, stopped shipment of all Pentium-based computers. Says Grove, “All hell broke loose. It became clear that we had to make a major change” (Grove, 1996, pp.14-15). Intel announced a policy change to replace any customer’s part who wanted it replaced, and stood up a major division to deal with the returns and consumers. This experience became to Grove what he called a strategic inflection point. “We embarked on a whole new way of doing business. What happened here? Something big, something different, something unexpected” (Grove, 1996, p. 16). Intel changed their paradigm from focusing on selling to computer makers to selling to computer users. Said Grove, “I was one of the last to understand the implications of the Pentium crisis. It took a barrage of relentless criticism to make me realize that something had changed – and that we needed to adapt to the new environment” (Grove, 1996, p. 22).
Thomas Kuhn, the late physicist and science historian, would call what Grove experienced – his strategic inflection point – a paradigm shift. Such a paradigm shift, said Kuhn, is revolutionary and is born of chaos and failure:
Because it demands large-scale paradigm destruction and major shifts in the problems and techniques of normal science, the emergence of new theories is generally preceded by a period of pronounced professional insecurity. As one might expect, that insecurity is generated by the persistent failure of the puzzles of normal science to come out as they should. Failure of existing rules is the prelude to a search for new ones. (Kuhn, 1996, pp. 67-68).
Noting the increasing irrelevance of command-and-control and machine/bureaucratic organizations in today’s milieu, Dee Hock of VISA International said “we are experiencing a global epidemic of institutional failure that knows no bounds. We must seriously question the concepts underlying the current structures of organization and whether they are suitable to the management of accelerating societal and environmental problems – and…seriously consider whether they are the primary cause of those problems” (Hock, 1999, p. 6). The answer, said Hock, “lies in the very concept of organization. Forming of a chaordic organization begins with an intensive search for Purpose, then proceeds to Principles, People, and Concept, and only then to Structure and Practice” (pp. 6-7). Gina Hinrichs, an organizational designer for John Deere for over twenty years, characterizes chaordic as “the intersection of Chaos and Order where innovation emerges” and that chaordic design “is especially suited for both global and local communities where participants are attracted by shared understanding and conviction to the purpose of the organization” (Hinrichs, 2009, p. 7).
Clearly, as strategic leaders, we must be “masters of chaos” like the Navy SEALS, a little bit “paranoid” like Andy Grove, able to shift our paradigms as Kuhn suggests, and embrace Hock’s chaordic organization if we are to structure our organizations to flourish in the 21st century. Let us take a look at some types of designs that organizations are employing to lead the way today.
Types of Organizational Designs
Choosing an effective design is a key responsibility of senior leadership. Employees will flourish in the right environment, and organizational structure and culture play a major role in creating that environment. The framework for organization design is the foundation on which a firm bases its design choices (Galbraith, 2009, p. 9). Many organizations adopt a Star Model as an organizational design framework on which to base its design choices. The business strategy should set the criteria necessary for determining the priority task to accomplish. An organization can then be designed to meet those criteria. In the Star Model (see Figure 1), design policies fall into five categories: Strategy determines direction; Structure determines the location of decision-making power; Processes which have to do with the flow of information; Rewards which influence the motivation of people to perform and address organizational goals; and People which influence and frequently define the employees’ mind-sets and skills.
Figure 1. The Star Model.
Galbraith, J.R. (2002). Designing organizations: An executive guide to strategy, structure, and process. San Francisco, CA: Jossey-Bass. p. 10.
While it is important to note that there is “no one best design,” it is nevertheless of critical importance that the policies interwoven into the Star Model be aligned and interacting harmoniously with each other. These policies are within the power of leaders to control and thus have a direct effect on employee behavior and outcomes (Galbraith, 2009). The Star Model provides the framework for the actual structure of the organization, which is shaped by four policy areas:
1. Specialization refers to the types and numbers of occupational specialties to be used in performing the work.
2. Shape is determined by the number of people forming departments at each hierarchical level. (Wider and flatter predominates today.)
3. Distribution of power refers to decision-making power and authority (vertical or horizontal), be it centralized or decentralized.
4. Departmentalization refers to the choice of departments to integrate the specialized work and form a hierarchy of departments formed along functions or specialty, product lines, customer segment, geographical areas, or work flow processes. (Galbraith, 2009)
Another popular design approach is McKinsey’s 7-S, first designed in the 1970s and popularized by McKinsey and Company partners Tom Peters and Robert Waterman in their 1982 bestseller
In Search of Excellence:
Figure 2. McKinsey 7-S Model.
Hinrichs, G. (2009). Organic organizational design. OD Practitioner, 41(4), 4-11. Retrieved September 5, 2013 from EBSCOhost. p. 7.
Peters and Waterman asserted that the issue of organizational structure would never be optimized if it did not venture beyond structure and deal with problems like resource allocation, incentives, and actions across large organizations. Says Robert Kaplan who with David Norton later introduced the balanced scorecard approach to organizational design, “The 7-S model posits that organizations are successful when they achieve an integrated harmony among three ‘hard’ ‘S’s’ of strategy, structure, and systems, and four ‘soft’ ‘S’s’ of skills, staff, style, and super-ordinate goals (now referred to as shared values)” (Kaplan, 2005, p. 41).
What most of these design models have in common are alignment of strategy, structure, work processes, people, rewards, culture, values, and practices. Other commonalities include emphasis on cooperation and autonomy, vice hierarchical control (Keidel, 1995).
Organizational Designs in Contemporary Practice
Four companies exemplify the ways in which organizational design can be shaped for success. Islamic Azad University researchers Aghajani Hashjeen, et al., propose that creativity and innovation are dependent on the structure of the organization. They studied the relationship between organizational structure and creativity of the Saveh Aluminum Pars Company’s employees, who manufacture aluminum coil, sheet, and foil in Iran. Their findings included:
- The more flexible an organization is and the more it moves toward an organic structure, the more creativity is fostered (and vice-versa).
- The more formalized an organization is (i.e., emphasis on rules and regulations), the more creativity is dampened.
- The more complex the organization, the less creative it is.
- The more centralized an organization is, the more creativity is reduced. (AghajaniHashjeen, et al., 2013, pp. 237-242)
But, you might say, is there a danger that an organization can become too decentralized, too flexible, and too simple to make a profit and keep employees happy? Not necessarily. Let us take a look at Morning Star, a leading food processor (and the world’s largest tomato processor) in California’s San Joaquin Valley that combines managerial discipline and market-centric flexibility – without bosses, titles, or promotions. Gary Hamel writes in the Harvard Business Review that Morning Star is staffed by “‘Colleagues’ [who] are ridiculously empowered yet work together like members of a carefully choreographed dance troupe” (Hamel, 2011, p. 49). Morning Star’s Organizational Vision includes:
Colleague Self-Management. For Morning Star colleagues to be self-managing professionals, initiating communications and the coordination of their activities with fellow colleagues, customers, suppliers and fellow industry participants, absent directives from others. For colleagues to find joy and excitement utilizing their unique talents and to weave those talents into activities which complement and strengthen fellow colleagues’ activities. For colleagues to take personal responsibility and hold themselves accountable for achieving our Mission and shaping the Tomato Game. (www.morningstar.com)
How does Morning Star do it?
- Make the mission the boss. Every employee writes his or her personal mission statement that outlines how he or she will contribute to the company’s goal of “producing tomato products and services which consistently achieve the quality and service expectations of our customers.”
- Let employees forge agreements. Each year, every employee negotiates a Colleague Letter of Understanding (CLOU) or operating plan for fulfilling one’s mission.
- Empower everyone – truly. There is no central purchasing department at Morning Star– every employee is authorized to obtain what he or she needs to be successful on his or her job.
- Don’t force people into boxes. Since there are no centrally defined roles, employees get the opportunity to take on bigger responsibilities as they develop their skills and gain experience.
- Encourage competition for impact, not for promotions. With no hierarchy or career ladder to climb, employees get ahead by mastering new skills or discovering new ways to serve colleagues.
Hamel enthusiastically endorsed Morning Star’s organizational model, and believes it could work in companies of any size, saying, “The real question is not whether the model can be scaled up but whether it can be adopted by a traditional, hierarchical organization” (Hamel, 2011, p. 60).
Morning Star is a good example of what London Business School professor Charles Handy envisioned when he said, “Clever organizations do not, it seems, work the way organizations used to work. They have different shapes, different working habits, different age profiles, different traditions of authority” (Handy, 1989, p. 15).
Sometimes strategic leaders need to create or change the organization structure in order to foster innovation to make a profit.
Sony invented the portable music player, the Walkman, in 1979. The Walkman played a single cassette tape, or an album’s worth of perhaps a dozen songs. Two decades later, Apple invented the iPod, which was promoted as a product whose 5 gigabyte hard drive “put 1,000 songs in your pocket” (Hormby, 2013).
With a two-decade jump on the concept, why did Sony fail to beat Apple to market with its version of the iPod? Steve Jobs’ biographer Walter Isaacson suggests that despite Sony’s “long history of making beautiful consumer devices” and having “all of the assets to compete with Job’s strategy of integration of hardware, software, devices, and content sales,” its organization into divisions (a word that Isaacson points to as “ominous”) with their own bottom lines set up a culture of competition vice synergy within Sony (Isaacson, 2011, pp. 407-408). Steve Jobs, on the other hand, did not organize Apple into semiautonomous divisions like Sony, but rather he “closely controlled all of his teams and pushed them to work as one cohesive and flexible company, with one profit-and-loss bottom line” (p. 408).
Handy may have been thinking of Steve Jobs when he discussed upside-down thinking, a way of thinking that “changes nothing save the way we think, but that can make all the difference.” (p. 24). (Recall Apple’s “Think Different” ad campaign circa 1997)
David Nadler and Michael Tushman would also appreciate Apple’s organizational structure versus Sony’s, saying that:
In the war for competitive advantage, the rules of engagement have been thoroughly transformed. In this environment where instability is the norm, we’re convinced that the last remaining source of truly sustainable competitive advantage lies in what we’ve come to describe as ‘organizational capabilities’ – the unique ways in which each organization structures its work and motivates its people to achieve clearly articulated objectives. (p. 5)
The Future of Organizational Design
Longtime organizational design leader Jay Galbraith said that the future of organizational design will be shaped by three main phenomena:
- Concatenation. Involves ever-increasing complexity and interdependence as firms add new strategic emphases and then incorporate them into their culture.
- The law of requisite variety. As the number and variety of relevant entities in the stakeholder environment increases, the number and variety of units inside the enterprise must increase in order to manage these entities.
- Enabling technologies. New digital devices and technologies like three- dimensional printers can eliminate expensive supply chains, maximize customization, and minimize economies of scale. (Galbraith, 2012, pp. 3-6).
Galbraith further predicts that “the constant interplay of rising complexity and interdependence creates an ongoing demand for organization designs that can respond with new and more powerful coordination mechanisms” (p. 5).
A global organization that is endeavoring to gain competitive advantage in an environment of “rising complexity and interdependence” by organizing itself with “new and more powerful coordination mechanisms” is Ford Motor Corp. Unveiled in 1993, Ford’s Project 2000 was the company’s global strategy aiming at the 21st century. According to Koichi Shimokawa of Hosei University, the basis for this strategy was the “recognition that the globalization of people, things, money and information was rapidly proceeding” and included the “strategic unification of the Ford family including Ford Europe, Mazda and Jaguar and infusing a common global vision” and promoted by the slogan “Think globally, act locally with agility” (Shimokawa, 2002, pp. 16- 17). Today, Ford says it has “big plans” for China and India who are among the top three largest automobile markets in the world in the next ten years. Indeed, “Ford expects 70 percent of its growth in the next 10 years to come from its Asia Pacific and Africa region.” Ford will accomplish this by “simplifying the way we work with suppliers by reducing complexity and expanding parts commonality…built off 13 core platforms” (Ford Motor Corp., 2013).
This paper has argued that achieving competitive advantage in a chaordic global environment takes more than org charts, hierarchies, and other obvious and literal power structures. The essential component is the “secret order” contained in organizational design which aligns the structure, people, rewards, processes, and strategy in a holistic approach to gaining competitive advantage. Various organizational designs can foster innovation, expedite change, and unlock human and technological potential in new and exciting ways. Perhaps we need to blow up our organizational structures and start anew?
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