The Organizational System: How Defining Your Organizational System Is the Key to Organizational Stability
Companies strive to create structures that can adapt to change, remain efficient, and ultimately, achieve their goals. One crucial but often overlooked aspect of achieving organizational stability is defining and implementing a clear organizational system.
Published by Rupert Morrison
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Definition of Organizational System
An organizational system refers to the structured framework and processes that a company uses to operate, manage resources and achieve its objectives. It encompasses everything from how decisions are made, roles and responsibilities, communication channels, workflow processes and the overall culture within the organization. Essentially, it’s the DNA that shapes the way an organization functions.
Types of Organizational System
1. Functional Structure
A functional structure is a widely used organizational design in which a company is divided into specific departments or functions based on the nature of their work. Each department is responsible for a particular set of tasks or activities, and employees within each department typically have specialized skills and expertise related to their function. This structure is often found in larger organizations and is known for its clear chain of command.
One of the primary advantages of a functional structure is efficiency. It allows employees to specialize in their roles, leading to increased productivity and expertise in their respective areas. Additionally, decision-making tends to be more focused within each department, which can streamline processes.
Another benefit is the potential for cost savings. By grouping similar functions together, organizations can reduce duplication of resources and equipment, resulting in economies of scale. This can be especially advantageous in industries where cost control is critical.
However, functional structures can have their drawbacks. Communication between departments may become fragmented, which can hinder collaboration and innovation. Silos may form, leading to a lack of coordination between functions.
Moreover, this structure may not be well-suited for organizations that need to rapidly adapt to changes in their environment. Decision-making can be slow due to the hierarchical nature of the structure and it may be challenging to implement cross-functional initiatives.
Many large corporations, such as General Electric and Procter & Gamble, use a functional structure. In these companies, you’ll find distinct departments like marketing, finance, human resources and production, each with its own set of responsibilities and expertise.
2. Matrix Structure
A matrix structure is a more complex organizational design that blends elements of both functional and project-based structures. In a matrix structure, employees have dual reporting relationships, typically to both a functional manager and a project manager. This structure is commonly used in industries where flexibility and collaboration are crucial.
One significant advantage of the matrix structure is flexibility. It allows organizations to respond quickly to changing market conditions or project needs by assembling cross-functional teams. This can lead to enhanced innovation and problem-solving.
Additionally, employees in a matrix structure often have the opportunity to develop a broader skill set as they work on various projects and collaborate with different departments.
On the downside, the matrix structure can lead to confusion and power struggles. Employees may face conflicting priorities from their functional and project managers, which can be stressful and counterproductive.
The matrix structure can also be challenging to implement successfully, requiring strong communication and conflict resolution skills. It may not be suitable for all organizations, especially smaller ones with limited resources.
Consulting firms like McKinsey & Company often employ a matrix structure. Consultants may belong to a functional practice area (e.g., strategy or operations) while working on various client projects led by project managers. This structure allows them to leverage both their functional expertise and project-specific skills.
3. Hierarchical Structure
A hierarchical structure, also known as a traditional or bureaucratic structure, is one of the oldest and most straightforward organizational designs. In this setup, authority flows from the top down, with a clear chain of command. Each level of the hierarchy has a specific set of responsibilities and reporting relationships.
One advantage of a hierarchical structure is clarity in decision-making and accountability. Employees know who their superiors are and there is a well-defined path for reporting issues and concerns. This can help maintain order and discipline within the organization.
Hierarchies are also effective in organizations that require strict adherence to procedures and standards, such as the military or manufacturing industries.
However, hierarchical structures can be slow to adapt to change and may stifle innovation. Information and decisions must pass through multiple layers, which can result in delays and a lack of agility.
Hierarchical structures can also foster a rigid and bureaucratic culture, which may hinder employee engagement and creativity.
Large corporations like IBM and General Motors traditionally operate with a hierarchical structure. These organizations have distinct levels of management, from entry-level employees to top executives, each with clearly defined roles and responsibilities.
4. Divisional Structure
A divisional structure is characterized by the organization’s division into semi-autonomous units or divisions, each responsible for a specific product, service, or geographic region. This structure is often employed by organizations with diverse product lines or those operating in multiple markets.
A key benefit of a divisional structure is that it allows for a high degree of specialization and responsiveness. Each division can focus on its unique challenges and opportunities, tailoring its strategies and operations accordingly.
Moreover, divisional structures can foster competition and innovation between divisions, as they operate as independent profit centers.
However, divisional structures can lead to duplication of resources and efforts across divisions. Coordination between divisions can be challenging and the organization may struggle to achieve economies of scale.
Also, conflicts may arise between divisions, as they may prioritize their own interests over those of the overall organization.
A classic example of a company using a divisional structure is General Electric. GE has multiple divisions, such as GE Aviation and GE Healthcare, each responsible for its product lines and operations. This structure allows GE to effectively manage its diverse portfolio.
5. Flat Structure
A flat structure, also known as a horizontal or decentralized structure, minimizes levels of hierarchy within an organization. In a flat structure, there are typically only a few layers of management and employees have more autonomy and decision-making authority.
Flat structures are known for their speed and flexibility. Decision-making is decentralized, enabling quick responses to changing conditions or customer needs. This can lead to increased innovation and employee engagement.
They often have open communication channels, fostering a culture of transparency and collaboration.
However, flat structures may struggle with maintaining control and consistency. With fewer layers of management, it can be challenging to coordinate and standardize processes across the organization.
Not all employees may thrive in a flat structure, as it requires a high level of self-direction and accountability.
Tech companies like Google and Valve are known for their flat organizational structures. They emphasize employee empowerment and encourage employees to take ownership of their projects and ideas.
6. Formal Structure
A formal structure refers to the degree of rigidity and adherence to rules and procedures within an organization. In a formal structure, there is a clear hierarchy, well-defined roles and established protocols for communication and decision-making.
Formal structures can provide stability and order within an organization. They ensure that processes are consistently followed and that employees know what is expected of them. This can be particularly beneficial in industries with strict regulations or safety requirements.
They can also can enhance accountability, as roles and responsibilities are clearly defined.
However, an overly formal structure can stifle creativity and flexibility. It may discourage employees from taking initiative or proposing innovative ideas if they perceive a rigid adherence to rules.
In rapidly changing environments, a formal structure may struggle to adapt quickly to new challenges.
IBM and P&G follow a formal organizational structure. They have a well-defined hierarchy with clear roles and responsibilities, which allows them to manage their extensive global operations effectively and efficiently oversee various brands and product lines through designated departments and teams.
1. Clarity and direction to employees about their roles and responsibilities.
2. Efficiency and productivity as a result of reduced ambiguity and duplication of efforts.
3. Adaptability to change allows organizations to respond to changing market conditions and technology advancements.
4. Better decision-making prevents decision bottlenecks and ensures the right people are involved.
5. Employee satisfaction from a positive work environment.
At its most basic, if you want something done, make clear to the person you want to do that “thing” that they are accountable AND it is them, not someone else. Give them that ownership.
Equally, be sure that the key things that need doing are defined and that you have the right people (i.e. the right competencies) on it.
If you think this is all too much, then think about the time and effort that go into generating job descriptions. The elements in a classic job spec are those that are being defined by this system thinking.
While the benefits are clear, organizations often face several challenges in defining and implementing their organizational systems:
1. Resistance to Change – fear of disruption or loss of control. Overcoming this resistance requires effective communication and change management strategies.
2. Complexity – organizations vary in size, structure and industry. Finding the right balance between structure and flexibility can be challenging.
3. Maintaining relevance – organizational systems must be reviewed and updated regularly to stay relevant.
4. Cultural alignment – requires a deep understanding of the organization’s identity and a commitment to upholding its core principles.
Defining an organizational system lays the foundation for the efficient functioning of any enterprise. The process involves several key steps to ensure clarity, structure and alignment within the organization.
- It begins with a thorough analysis of the organization’s objectives, mission and values. Understanding these core elements provides the guiding principles for the system’s design.
- Identify the various functional units and departments within the organization, delineating their roles and responsibilities. This step clarifies the organizational hierarchy and reporting structure.
- Defining an organization as a system entails crafting clear job descriptions and setting performance expectations for each position. Developing these job roles and responsibilities helps in fostering accountability and productivity.
- Establish communication channels and protocols, facilitating the flow of information both vertically and horizontally.
- Defining the decision-making processes, from routine operational choices to strategic planning, ensures that the right people are involved in critical choices.
- Incorporating feedback mechanisms, periodic reviews and adaptability into the system is essential for continuous improvement.
- Documenting the entire organizational system through manuals, charts and guidelines aids in its dissemination and understanding among employees.
The below is a depiction (model) of the organizational system (all models are a simplification).
An organization has a vision. A reason for being and this is translated into goals & objectives (and more broadly into a strategy in how to get there).
Those objectives are delivered by employees who fulfil roles. Roles fit within a reporting structure. The number of FTEs required is the right-sizing question, i.e. how many FTEs do we need?
The model can be made even more complex. Some examples of how it is often made more complex is by defining who is responsible for each customer or an element of the customer value chain. Read more about micro-level organization design in our article.
Small startups may benefit from a more flexible and informal system, while larger corporations may require a more hierarchical structure.
Different industries have varying demands. For instance, technology companies may adopt more agile systems, while government organizations might need more bureaucratic structures.
Your organizational system should align with your company’s values and culture. If innovation and creativity are core values, a more decentralized system may be appropriate.
Consider the needs and preferences of your customers and employees. An organizational system that promotes customer-centricity and employee well-being can be a significant advantage.
Your organization as a system should support your long-term goals. If you plan to expand rapidly, your system should be scalable. If stability is your primary goal, a more rigid structure may be suitable.
OrgVue has been developed to solve the issue of poor job specs. To provide a place for defining things like roles; listing out employees or defining processes, competencies, customers… and how they “link”.
But linking them all together, you have a “graph”. You don’t have to link them all together, but if you do, then by definition you have everyone’s job spec. You have total transparency on who is accountable for what.
Daniel Pink has famously popularized what really motivates employees in knowledge organizations: Purpose; Autonomy; Mastery. By defining the organizational system, you help to codify the broad organizational purpose and how that cascades.
Each role in a defined system, should have purpose. By being clear on the accountabilities of each role, you are giving autonomy. Given the right level of autonomy requires trust. Trust means you have faith in the person’s ability to effectively do the role. This means they need to have enough competence to do the role… they need mastery.
It is all connected and it is all do-able. You don’t need to define everything at one. Start with processes in one area… and move out from there. Take the job specs and “see” what that looks like.
To define your organizational system requires considered thought. But now, with Orgvue, for the first time it is actually possible.
Your organizational system should document a wide range of information that helps define and guide how your organization operates. This documentation typically includes:
- Organizational Structure: This outlines the hierarchy and reporting relationships within the organization. It includes details about job titles, roles, and responsibilities.
- Processes and Procedures: Documented processes ensure that tasks and activities are executed consistently and efficiently. These can include everything from onboarding procedures to production processes.
- Policies and Guidelines: Clearly defined policies and guidelines provide a framework for how employees should behave and make decisions. These may cover areas like ethics, safety, and compliance.
- Communication Channels: How information flows within the organization is crucial. Documenting communication channels and protocols helps ensure that information reaches the right people at the right time.
- Goals and Objectives: Your organizational system should also include information about the organization’s goals, objectives, and key performance indicators (KPIs). This helps align everyone with the organization’s mission.
- Resource Allocation: Information about how resources, such as budgets, personnel, and equipment, are allocated and managed is essential for efficient operation.
- Technology and Tools: Document the technology and tools your organization uses to carry out its functions, including software, hardware, and other resources.
The primary purpose of organizational systems is to provide structure and clarity within an organization. Here are its key purposes:
- Efficiency: It ensures that work is done in an organized and efficient manner, reducing redundancy and waste.
- Accountability: An organizational system clarifies who is responsible for what, ensuring that tasks and decisions are attributed to specific individuals or teams.
- Alignment: It helps align employees with the organization’s goals and strategies by clearly defining roles and objectives.
- Adaptability: An effective organizational system can adapt to changing circumstances and market conditions, ensuring the organization remains agile.
- Decision-Making: It provides a framework for making decisions, as it outlines the processes and guidelines to follow.
- Communication: The system establishes channels for communication, ensuring that information flows effectively.
Organizational systems and culture are closely related but distinct concepts:
- Organizational System: This refers to the formal structure, processes, policies, and procedures that govern how an organization operates. It is typically documented and can be designed, modified, and adapted to achieve specific objectives. It focuses on the “how” of an organization.
- Organizational Culture: Culture encompasses the shared values, beliefs, behaviors, and norms that define the character and personality of an organization. It’s often informal and emerges over time. Culture is about the “why” and “what” of an organization, representing its identity and how it interacts with its members and the outside world.
In short, the organizational system is the structural framework, while culture is the emotional and social aspect of an organization.
Organizational systems can vary widely depending on the type and size of the organization. Here are some examples:
- Hierarchical Structure: This is a traditional top-down organizational system with clearly defined roles and a chain of command.
- Matrix Structure: In this system, employees report to both a functional manager and a project manager, allowing for greater flexibility.
- Flat Structure: A flat organizational system has few or no levels of middle management, promoting open communication and collaboration.
- Functional Departments: Many organizations organize themselves by functions such as marketing, finance, and operations.
- Process-Oriented System: Some organizations focus on documenting and optimizing their processes to achieve efficiency.
- Network Structure: In a networked organization, teams and individuals collaborate across traditional boundaries, often in a project-based manner.
While related, organizational systems and organizational design are not the same and not to be confused with target operating model:
- Organizational System: This refers to the set of rules, structures, processes, and procedures that govern how an organization operates on a day-to-day basis. It is concerned with the practical aspects of running the organization efficiently.
- Organizational Design: Organizational design is the deliberate process of shaping an organization’s structure and culture to achieve specific goals. It involves decisions about hierarchy, roles, culture, and how various parts of the organization interact to achieve strategic objectives.
In essence, the organizational system is a subset of the broader organizational design, focusing specifically on the operational aspects of the organization.
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