Organizational Design: Journey through the organizational models of business

October 1, 2015 0 By Gaetano Intrieri

In my opinion, one of the most interesting business organization definitions is Richard Daft: “Organizations are social entities guided by objectives, designed as a set of structured activities and coordinates, that interact with the environment which are defined in the organizational structure (OS) of the enterprise”.

More specifically, along the path traced by the activities that characterize a given enterprise, the OS indicates the formal dependencies, the hierarchical levels, and the number of subordinates who are under the manager or supervisor of the organization (span of control); moreover the SO identifies the group of individuals in organizational units and defines the design of communication systems and the coordination between organizational units.

The SO essentially defines four elements of an organization:

  1. Flows of activities: interdependence and coordination of internal activities. Interdependencies, in turn, can be: generic when there is not a direct relationship between two activities, sequential when the output of an activity is the input of the next one, and reciprocal when two activities exchange input and output between each other.
    The coordination of the activities refers to the description of the organization mechanisms which coordinate internal processes. These mechanisms are very important for the proper functioning of the business, and it is the duty of a good organizational structure to ensure the best efficiency possible about them, considering coordination is a cost produced by the organization.
  2. The behavior required by internal activities: which not only refers to the description of the different tasks assigned, but in some cases also defines the possible alignment between the expected behavior for an activity and that established by the organization actors.
  3. Activities control: referred to the behavior of the people operating within them. It is exercised through three basic forms that are inspired by “Theory of the Transactions”. The first form is the one that provides for the exercise of control through the market or through price competition, the second form is the one that provides the bureaucratic control that is expressed through the use of a high level of formalization (rules, hierarchies , written documentation of procedures, etc.) and a strong standardization process. The third form of control is termed “Control of the Clan”, it uses social factors such as: shared values, fairness, commitment, traditions and beliefs. Organizations using the control of the clan are characterized by a strong culture within them which emphasizes the trust between employees. In this case, formalization and standardization appear to be ineffective, otherwise there is a strong environmental impact that creates sudden internal changes. There is also a strong pressure to conform to the group rules and a strong personal involvement oriented to the organization goals through the maximum effort.
  4. The skills: that on the one side are the real corporate assets mainly for businesses with few fixed asset and on the other side can be a critical item in an enterprise life cycle. Often, in fact, the organization can get bogged down in its own know-how, in what is called “the trap of skills”. This phenomenon is paradoxically more common in successful companies, which tend to exaggerate on the their own specialization due to their skills and achievements and they become victims of
    too-standardized routine activities. At that point any innovative process is interrupted and the company is likely to become the victim of its own skills, no longer able to evolve and in danger of losing its competitive advantage. The “trap of skills” in most cases, has a specific evolution that could be defined on three levels: the individual level tends to expand at group level until it reaches the level of the whole organization which tends to become the dominant position.

Based on these four basic elements in defining the concept of organizational structure, we can better understand what are the three basic structures of business organizations:

  1. FUNCTIONAL STRUCTURE is the prevailing approach in the business organization. It is a vertical structure that brings together the activities on the basis of a common function, proving particularly effective in cases where an organization is controlled and coordinated through hierarchical vertical flows and the transformation process requires a proper specialization. Furthermore, it seems very appropriate to enable economies  of scale and in the presence of a small portfolio of products. Conversely, the functional structure is not very receptive to environmental changes and innovation processes; it also has a narrow view of the objectives and frequent problems to coordinate its horizontal dimension. It is not a coincidence that many organizations using this model are forced to integrate it with the typical tools connecting horizontal structure (task forces, groups, product managers, project managers etc.) to adapt to sudden changes in the environment where they work, and to improve the functional units of coordination and sharing.
  2. DIVISIONAL STRUCTURE is used for organizations, that having a large size threshold,  are to broken down by strategic business areas (ASA), by business units, by products, or by region. What really distinguishes the divisional structure is the fact that the grouping, preliminary to the construction of the organizational structure, is based on the outputs of the organization. The aim is to streamline the bureaucracy of the functional structure, reducing the vertical dimension in order to facilitate the environment adaptation and the reaction to the external events.
    This kind of structure, developed in its vertical dimension, makes it difficult to take advantage of economies of scale, and of economies of specialization and standardization among the different product lines.
  3. MATRIX STRUCTURE is used when the functional and divisional structures, with their mechanisms, do not guarantee a good level of organizational functioning; this is because we need technical expertise, product innovation and flexibility to change. The matrix structure is a complex organization which needs a powerful mechanism connecting both vertical and horizontal dimensions. Its main characteristic is the fact that the division and function structures are implemented simultaneously. Compared to a functional organizational structure, the matrix form provides, within the organizational structure, product managers or project managers with the same authority as the manager responsible for the function. So we have a dual hierarchy that implicitly raises coordination problems. The matrix shape is the correct structure when there is the need to share scarce technological resources between product lines or also to pay equal attention to two or more critical outputs, typical of different structures or even in the presence of an unstable and complex environment. By its nature, the matrix structure formalizes horizontal groups and the vertical hierarchy in the same way, trying to give the correct balance to the two structures. It may happen, however, that special needs require that the matrix will move more towards the vertical direction, rather than toward the horizontal direction. That is why two variants of the matrix structure have been developed: the functional matrix and the matrix for the product. The first provides more authority to the department chiefs while integrators are entirely left to coordinate activities related to the product or project; the second provides more authority for integrators, with  function heads that simply assign technical staff to projects to provide expertise.

After defining the essential milestones of an organization and the structures typically used to form an organization, we can go further at most popular models today in building and mapping the organizational structure. These models, inspired by the three forms described, certainly reflect the latest evolution of business organizations inside the increasingly globalized economy.

RAEW MATRIX: (Responsibility, Authority, Expertise, Workings) is a model that focuses on microstructure organizational and more specifically on the organizational levels unit: the task. The RAEW matrix defines the task, the position and the role inside organization through: Responsibility analysis on the activities conduction and finalization, Authority analysis on the decision-making activities, Expertise analysis on the knowledge and capacity in the activities and finally Working analysis on the ability to perform the activities.

PERROW’s MODEL: this model analyzes preliminary organizational units and therefore the activities that make up them through two different dimensions: the number of variables in the process (variability) and the number of solutions to these variables (analyzability). The values for these dimensions are to be categorized in groups through a classification matrix.
– The first group defined by the matrix is related to the routine activities whose processes have a low level of variability and a high level of analyzability. When we design the organization refers to the routine activities is advisable to use a mechanical structure, with high level of formalization and centralization, a large span of control and vertical communication flows using formal and standardized documentation. About human resources choice, we can enter into these activities even people with no high training or experience.
– The second group includes the activities of engineering with a high level of variability and analyzability in the processes, because the tasks derive from established procedures and formulas. In this case, the organizational project plans to consider the mechanical structures, with moderate formalization and centralization, moderate span of control and written and verbal communication flows. We should also adopt a program of formal training.
– The third group covers activities defined artisan with low variability and analyzability in the processes because they are based on the human resources instinct and experience. With respect to these type of activities, it is necessary to adopt a structure mainly organic, with moderate level of formalization and centralization, moderate to large span control and communication flows vertical and horizontal. Staff suited to this type of activity is clearly originated from “learning by doing” or by a substantial direct experience.
– The fourth group defined by the matrix, contains the non-routine activities whose processes are characterized by a high level of variety and a low level of analyzability. In this case it is necessary to adopt an organizational structure with low formalization and centralization, moderate span of control and horizontal communication flows. About human resources, we need a program of intensive training, considering which the actors of these processes must have a good experience and specialization.

RESOURCE BASED VIEW MODEL (RBV): was founded in 1984 by economist Birger Wernerfelt and developed by Jay Barney in 1991. Wernerfelt tried extending the strategy of competitive advantage introduced by Michael Porter in his theory of competition enlarged. Resources specifically are the inputs in terms of labor and capital in tangible and intangible assets owned by the company and used to transform inputs into outputs through a set of business activities and organizational mechanisms. In this transformation process, an important role is exercised by the business skills, resulting in the ability of the company to combine their assets through organizational mechanisms that can effectively achieve the goals by selecting the most suitable resources for the skills required by critical factors successful. Only then, according to Barney, companies can ensure a sustainable competitive advantage over time.
The RBV model, analyzing the company’s resources, requires the following selection steps :
1) selection of working units that generate value, or which maintain a gap with competitors in terms of capacity in the processes;
2) selection of the rare human resources that are not widespread among competitors;
3) selection of specific work units that are not imitated by competitors,
4) selection of human resources organized, which are to be considered as a central element of the supply system for their potential use. Moreover it’s necessary to determine if these resources are sustainable in-house by the company and if they can be imitated by competitors over time.

ZERO BASED REVIEW MODEL (ZBR): this model is often used to design intermediate organizational units and it involves the following steps:

  • Definition of the activities list, composition of activities clusters and formulation of activities subsets grouped by organizational units through the Perrow’s matrix;
  • Analysis of the interdependence between activities clusters through the inter-dependence matrix and network analysis;
  • Specializations analysis, through the description and mapping of skills within the organization, using the model RBV.

In the design of an organizational structure, the ZBR model, within an organization, identifies three types of relationships between activities: i) the generic interdependencies that are the easiest to treat and manage, ii) the sequential interdependencies with respect to which, it is needed to define rules and procedures, iii) the mutual interdependencies, while they have guidance and proceeding techniques analogous and for this, it is necessary that they are close with each other and if possible within the same organizational unit.

ACE MODEL: is a tool for mapping the skills suited to large companies. It, starting firm activities, works with the same procedural principle of ZBR model but has a different purpose In fact, the ACE model seeks to build an organizational structure in relation to the people skills/competencies, while the ZBR model aims at enhancing flows according to efficiency criteria. A first matrix of this tool combines the activities according to the skills needed to perform them, and then, through the analysis of columns, it identifies the number of activities that intercept the same expertise. A first matrix of this tool combines the activities according to the skills needed to perform them, and then, through the analysis of columns, we identify the number of activities that intercept the same expertise. After this step, it is necessary to relate the skills with human resources through a self-evaluation process asking people within the organization to describe their capacity compared to the skills highlighted by the first matrix and assigning a rating from 1 to 5 to their ability aptitude towards those skills, indeed we can realize a second matrix that shows the assets according to the skills people. At this stage in the process, we need to align the first matrix with the second one, intersecting the activities and tasks related with the people skills described in the second matrix.

The application of these models must be consistent with the objectives of the enterprise, considering that each organization is unique about its resources and expertise. Any competitive advantage is the direct result of the organization ability to construct, combine, acquire and manage their resources and expertise