Outline of organizational designs & structures and linkage to innovation

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Talking of innovation, it needs to be noted that when applied in the organizational context, the term innovation cannot be used to describe individual instances that are more the exception than the rule. Innovation needs to be institutionalized through a variety of mechanisms before an organization can claim to have mastered it as core competence, or a source of competitive advantage. In this context, a proper understanding of the organizational design and structure becomes relevant and necessary for together these two help achieve three of management’s most important functions - communication, co-ordination and control.  Once one understands these, they could mix and match it to apply to a particular company for the express purpose of innovation. In this article, I have first tried to focus on various organizational designs and structures possible before trying to link it up.


Organizational Design:


Organization Design is the formal arrangement of groups (departments, divisions, etc.) and individuals within an organization. Organization Design helps define sub-units within an organization, and the members of these sub-units. Clustering of these can be done using the following;


By Function – Here the organization is divided strictly along the lines of different functions e.g. Marketing, Production, and Human Resources


By Product/Service - Here the division is on the basis of the products/services of the company e.g. Detergents, Electronic goods, food products


By Geographies  – Here the division’s is based on the location of the organization’s production units and markets. e.g. North America, Europe, Asia


By Customer  – Here the basis of segmentation are the varieties of customers served. e.g. Individuals, Small companies, large companies, the government.


Mixed – This design is a combination of any two of the designs named above e.g. Sales/ Marketing, Asia


Matrix – This design is specifically a combination of product and functional designs e.g. an employee would report simultaneously to a functional as well a business unit manager.


(A company like Cisco actively follows this and so far can be said to have successfully leveraged it).


Team-based - Break down department barriers and decentralizes decision making to team level.  All employees are members of teams – management teams, work teams, design teams, etc. However, this would not be used alone, merely to overlay a more traditional organization design.
Talking of some alternative options, one that seems to be emerging is called Virtual organization where the core organization is focused on strategy, and non-essential functions and processes are outsourced to other organizations. Relationships change with changing needs. Fabmart, the online retail chain could be one example of this model.


Of these, innovation within a functional design would generally be restricted to within the function itself, and would have a limited impact on the organization as a whole unless the innovation was in a critical function or process. Again, innovation within a product or service based organization design would be difficult to extend to the entire organization, especially if it were operating in diversified product/service markets. A geography-based organization design is again not very conducive to innovation – innovations aimed at a particular local/regional/national market might not be feasible to implement in another geography. For the same reasons, design on the basis of customer segments, though possibly leading to greater customer satisfaction, would not lead to organizational innovation.


The matrix design is more conducive to innovation, because innovations here can be diffused both vertically through the function as well as though different businesses and geographies. A team-based design goes one step further, and makes use of the synergies of teams comprising complementary skills to foster a culture of innovation within the organization. Lastly, a virtual organization design frees the organization from mundane and repetitive non-essential activities, and creates a climate where it can focus on innovation in its core processes.


The ideal organization design to foster organizational innovation would therefore be a virtual organization or a team-based one. Indeed, hybrid versions of the two have been used in several organizations, but with varying degrees of success.


Allow me to move onto organizational structure.


Organization Structure is the mechanism built into the organization to manage, coordinate and control work behavior. The elements of organization structure comprise the following:


1 Work Specialization  2 Work Standardization  3 Chain of Command/Hierarchy/Unity of Command  4 Span of Control  5 Centralization  6 Formalization


Based on these elements, organization structure can be classified as mechanistic or organic.


Mechanistic structures are designed to put as much control and coordination as possible into the structure. They are characterized by high specialization, high standardization, centralization, high formalization, a large span of control and a tall hierarchy, leading to a rigid chain of command


Organic structures are designed to put coordination and control in the hands of employees. They are characterized by low specialization, low standardization, decentralization, low formalization, a small span of control and a flat hierarchy leading to a flexible chain of command.Innovation might sometimes require a high level of specialization, but a purely functional orientation will prevent its benefits from percolating to the entire organization. Similarly, standardization of products leaves little room for innovation except from a reactive perspective. Centralization inhibits employee empowerment, an essential ingredient in fostering innovation, as does formalization. A large span of control makes it difficult for the employee to put his idea across to his immediate superior, and a tall hierarchy means that the idea needs to pass through numerous screenings and levels before it can be commercialized, and this often leads to a more flexible competitor hitting the target market first with the same offering.Therefore, an organic structure is always more supportive of innovation than a mechanistic one.


Other factors, which influence organization structure and design also, affect organizational innovation. These include:


Organization strategy - Whether to differentiate (produce products or services that are higher quality or perform better; this is associated with an organic structure) or be a low-cost producer (produce products or services cheaper than competitors; associated with a mechanistic structure).  Companies that adopt a differentiating strategy are more often innovators than those adopting the low-cost strategy.


Organization Size – Large organizations tend to be more mechanistic, and therefore less innovative.


Technology - The higher the routineness of the jobs, the more mechanistic the structure, and the lower the level of innovation. On the other hand, the greater the interdependence the more organic the structure, and the greater the level of organizational innovation.


The External Environment - The greater the uncertainty in the environment (that is, complexity, volatility and scarcity of resources) the more organic the organization’s structure, equipping it to embrace innovation as a necessity.


Finally, but very importantly, the most carefully thought-out deign and the most organic structure will not foster organizational innovation unless reinforced by the organization’s culture. This would include not only the formal rules and procedures that supposedly govern employees, but the practices and communication s they actually follow, and the congruence of the values the organization officially espouses and actually practices. If innovation is not encouraged and rewarded, and mistakes not looked upon as stepping-stones, then innovation cannot flourish even with the most conducive structural setup provided for it.


(The article was contributed by Mohan Monteiro of Think Harbor, a leading consulting firm working in the area of contact centers and e-CRM. Feedback can be mailed to od/os@businessgyan.com)

Issue BG15 June02