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What is Organizational Design

Organizational design is a step-by-step methodology which identifies dysfunctional aspects of work flow, procedures, structures and systems, realigns them to fit current business realities/goals and then develops plans to implement the new changes. The process focuses on improving both the technical and people side of the business. For most companies, the design process leads to a more effective organization design, significantly improved results (profitability, customer service, internal operations), and employees who are empowered and committed to the business. The hallmark of the design process is a comprehensive and holistic approach to organizational improvement that touches all aspects of organizational life, so you can achieve:

  • Excellent customer service
  • Increased profitability
  • Reduced operating costs
  • Improved efficiency and cycle time
  • A culture of committed and engaged employees
  • A clear strategy for managing and growing your business

By design we’re talking about the integration of people with core business processes, technology and systems. A well-designed organization ensures that the form of the organization matches its purpose or strategy, meets the challenges posed by business realities and significantly increases the likelihood that the collective efforts of people will be successful.

Six Key Elements in Organizational Design

Organizational design is engaged when managers develop or change an organization’s structure. Organizational Design is a process that involves decisions about the following six key elements:

I.  Work Specialization

Describes the degree to which tasks in an organization are divided into separate jobs. The main idea of this organizational design is that an entire job is not done by one individual. It is broken down into steps, and a different person completes each step. Individual employees specialize in doing part of an activity rather than the entire activity.

II. Departmentalization

It is the basis by which jobs are grouped together. For instance every organization has its own specific way of classifying and grouping work activities.

There are five common forms of departmentalization:

  1. Functional Departmentalization. As shown in the Figure 2-1, it groups jobs by functions performed. It can be used in all kinds of organizations; it depends on the goals each of them wants to achieve. Figure 2-1Functional Departmentalization example

Functional Departmentalization example

Different aspects on this type of departmentalization:

Different aspects of departmentalization

2. Product Departmentalization. It groups jobs by product line. Each manager is responsible of an area within the organization depending of his/her specialization

Figure 2: Product Departmentalization example
Source: Bombardier Annual Report
Product Departmentalization example

Different aspects on this type of departmentalization:

What is Organizational Design | Types and Examples | Bohatala.com

3. Geographical Departmentalization. It groups jobs on the basis of territory or geography.

Figure 2-3: Geographical Departmentalization example

Geographical Departmentalization example

Different aspects on this type of departmentalization:

What is Organizational Design | Types and Examples | Bohatala.com

4. Process Departmentalization. It groups on the basis of product or customer flow.

Figure 2-4: Process Departmentalization example

Process Departmentalization example

Different aspects on this type of departmentalization:

What is Organizational Design | Types and Examples | Bohatala.com

5. Customer Departmentalization. It groups jobs on the basis of common customers

Figure 2-5: Customer Departmentalization example

Customer Departmentalization example

Different aspects on this type of departmentalization:

What is Organizational Design | Types and Examples | Bohatala.com

III. Chain of command

It is defined as a continuous line of authority that extends from upper organizational levels to the lowest levels and clarifies who reports to whom. There are three important concepts attached to this theory:

  • Authority: Refers to the rights inherent in a managerial position to tell people what to do and to expect them to do it.
  • Responsibility: The obligation to perform any assigned duties.
  • Unity of command: The management principle that each person should report to only one manager.

IV. Span of Control

It is important to a large degree because it determines the number of levels and managers an organization has. Also, determines the number of employees a manager can efficiently and effectively manage.

V. Centralization and Decentralization

More Centralization More Decentralization
  • Environment is stable
  • Lower-level managers are not as capable or experienced at making decisions as upper-level managers.
  • Lower-level managers do not want to have say in decisions
  • Decisions are significant.
  • Organization is facing a crisis or the risk of company failure.
  • Company is large.
  • Effective implementation of company strategies depends on managers retaining say over what happens.
  • Environment is complex, uncertain.
  • Lower-level managers are capable and experienced at making decisions.
  • Lower-level managers want a voice in decisions.
  • Decisions are relatively minor.
  • Corporate culture is open to allowing managers to have a say in what happens.
  • Company is geographically dispersed.
  • Effective implementation of company strategies depends on managers having involvement and flexibility to make decisions

VI. Formalization

It refers to the degree to which jobs within the organization are standardized and the extent to which employee behavior is guided by rules and procedures. 

Types of Organizational Designs

Organizational designs fall into two categories, traditional and contemporary. Traditional designs include simple structure, functional structure, and divisional structure. Contemporary designs would include team structure, matrix structure, project structure, boundaryless organization, and the learning organization. I am going to define and discuss each design in order to give an understanding of the organizational design concept.

I. Traditional Designs

1. Simple Structure

A simple structure is defined as a design with low departmentalization, wide spans of control, centralized authority, and little formalization. This type of design is very common in small start up businesses. For example in a business with few employees the owner tends to be the manager and controls all of the functions of the business. Often employees work in all parts of the business and don’t just focus on one job creating little if any departmentalization. In this type of design there are usually no standardized policies and procedures. When the company begins to expand then the structure tends to become more complex and grows out of the simple structure.

2. Functional Structure

A functional structure is defined as a design that groups similar or related occupational specialties together. It is the functional approach to departmentalization applied to the entire organization.


 Organizational DesignRevlon, Inc.

is organized around the functions of operations, finance, human resources, and product research and development. Visit Revlon, Inc at www.revlon.com

3.Divisional Structure

A divisional structure is made up of separate, semi-autonomous units or divisions. Within one corporation there may be many different divisions and each division has its own goals to accomplish. A manager oversees their division and is completely responsible for the success or failure of the division. This gets managers to focus more on results knowing that they will be held accountable for them.


walmartWal-Mart Stores, Inc.

is organized by its divisions such as Wal-Mart Realty, Wal-Mart International, Wal-Mart Specialty Stores, Sam’s Clubs, and Supercenters. Visit War-Mart Inc. at www.walmart.com

II. Contemporary Designs

  1.  Team Structure

A team structure is a design in which an organization is made up of teams, and each team works towards a common goal. Since the organization is made up of groups to perform the functions of the company, teams must perform well because they are held accountable for their performance. In a team structured organization there is no hierarchy or chain of command. Therefore, teams can work the way they want to, and figure out the most effective and efficient way to perform their tasks. Teams are given the power to be as innovative as they want. Some teams may have a group leader who is in charge of the group.

whole foods

Whole Foods Market, Inc. is structured entirely around teams. Each store composed of an average of 10 self-managed teams with a designated team leader, and the team leaders in each store are a team called store team. Visit Whole Foods Market, Inc at  www.wholefoodsmarket.com

  1. Matrix Structure

    A matrix structure is one that assigns specialists from different functional departments to work on one or more projects. In an organization there may be different projects going on at once. Each specific project is assigned a project manager and he has the duty of allocating all the resources needed to accomplish the project. In a matrix structure those resources include the different functions of the company such as operations, accounting, sales, marketing, engineering, and human resources. Basically the project manager has to gather specialists from each function in order to work on a project, and complete it successfully. In this structure there are two managers, the project manager and the department or functional manager.

    3. Project Structure

    A project structure is an organizational structure in which employees continuously work on projects. This is like the matrix structure; however when the project ends the employees don’t go back their departments. They continuously work on projects in a team like structure. Each team has the necessary employees to successfully complete the project. Each employee brings his or her specialized skill to the team. Once the project is finished then the team moves on to the next project.

 Organizational Design

Previously known as Oticon Holding A/S,

William Demant Holding A/S has no organizational departments or employee job titles. All work activities are project based, and these project teams form, disband, and form again as the work requires. Once the project is completed, employees move on to the next one. Visit William Demant Holding A/S at www.demant.com

  1. Autonomous Internal Units

    Some large organizations have adopted this type of structure. That is, the organization is comprised of many independent decentralized business units, each with its own products, clients, competitors, and profit goals. There is no centralized control or resource allocation.

AseAse a Brown Boveri (ABB)a Brown Boveri (ABB) is a global organization. It is actually about 1,000 companies operating in more than 140 countries around the globe. The whole operation is managed by just eight top executives at headquarters in Zurich, Switzerland, but each individual company has its own products, resources, and so on. Visit Asea Brown Boveri at www.abb.com

  1. Boudaryless Organization

    A boundaryless organization is one in which its design is not defined by, or limited to, the horizontal, vertical, or external boundaries imposed by a predefined structure. In other words it is an unstructured design. This structure is much more flexible because there is no boundaries to deal with such as chain of command, departmentalization, and organizational hierarchy. Instead of having departments, companies have used the team approach. In order to eliminate boundaries managers may use virtual, modular, or network organizational structures. In a virtual organization work is outsourced when necessary. There are a small number of permanent employees, however specialists are hired when a situation arises. Examples of this would be subcontractors or freelancers. A modular organization is one in which manufacturing is the business. This type of organization has work done outside of the company from different suppliers. Each supplier produces a specific piece of the final product. When all the pieces are done, the organization then assembles the final product. A network organization is one in which companies outsource their major business functions in order to focus more on what they are in business to do.

ChevronTexacoChevronTexaco now sends most of their accounting to the Philippines in order to cut costs. They also send all their computer programming to India . Visit ChevronTexaco at www.chevrontexaco.com

  1. Learning Organization

    A learning organization is defined as an organization that has developed the capacity to continuously learn, adapt, and change. In order to have a learning organization a company must have very knowledgeable employees who are able to share their knowledge with others and be able to apply it in a work environment. The learning organization must also have a strong organizational culture where all employees have a common goal and are willing to work together through sharing knowledge and information. A learning organization must have a team design and great leadership. Learning organizations that are innovative and knowledgeable create leverage over competitors.

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