10 Principles of

Organization Design
These fundamental guidelines, drawn from experience, can help you reshape
your organization to fit your business strategy.

by Gary L. Neilson, Jaime Estupiñán, and Bhushan Sethi

Suddenly, however, the company found itself facing a different challenge. Because of the new
technologies that had entered its category, and a sea change in customer expectations, the CEO
decided to shift from a product-based business model to a customer-centric one. That meant yet
another reorganization, but this one would be different. It had to go beyond shifting the lines and
boxes in an org chart. It would have to change the company’s most fundamental building blocks:
how people in the company made decisions, adopted new behaviors, rewarded performance,
agreed on commitments, managed information, made sense of that information, allocated
responsibility, and connected with one another. Not only did the leadership team lack a full-
fledged blueprint — they didn’t know where to begin.

This situation is becoming more typical. In the 18th annual PwC survey of chief executive officers,
conducted in 2014, many CEOs anticipated significant disruptions to their businesses during the
next five years as a result of global trends. One such trend, cited by 61 percent of the respondents,
was heightened competition. The same proportion of respondents foresaw changes in customer
behavior creating disruption. Fifty percent said they expected changes in distribution channels. As
CEOs look to stay ahead of these trends, they recognize the need to change their organization’s
design. But for that redesign to succeed, a company must make its changes as effectively and
painlessly as possible, in a way that aligns with its strategy, invigorates employees, builds
distinctive capabilities, and makes it easier to attract customers.

Today, the average tenure for the CEO of a global company is about five years. Therefore, a major
re-organization is likely to happen only once during that leader’s term. The chief executive has to
get the reorg right the first time; he or she won’t get a second chance.

Although every company is different, and there is no set formula for determining the appropriate
design for your organization, we have identified 10 guiding principles that apply to every company.
These have been developed through years of research and practice at PwC and Strategy&, using
changes in organization design to improve performance in more than 400 companies across
industries and geographies. These fundamental principles point the way for leaders whose
strategies require a different kind of organization than the one they have today.

1. Declare amnesty for the past. Organization design should start with corporate self-reflection:
What is your sense of purpose? How will you make a difference for your clients, employees, and
investors? What will set you apart from others, now and in the future? What differentiating
capabilities will allow you to deliver your value proposition over the next two to five years?

For many business leaders, answering those questions means going beyond your comfort zone.
You have to set a bold direction, marshal the organization toward that goal, and prioritize
everything you do accordingly. Sustaining a forward-looking view is crucial.

We’ve seen a fair number of organization design initiatives fail to make a difference because
senior executives got caught up in discussing the pros and cons of the old organization. Avoid this
situation by declaring “amnesty for the past.” Collectively, explicitly decide that you will neither
blame nor try to justify the design in place today or any organization designs of the past. It’s time
to move on. This type of pronouncement may sound simple, but it’s surprisingly effective for
keeping the focus on the new strategy.

2. Design with “DNA.” Organization design can seem unnecessarily complex; the right framework,
however, can help you decode and prioritize the necessary elements. We have identified eight
universal building blocks that are relevant to any company, regardless of industry, geography, or
business model. These building blocks will be the elements you put together for your design (see
Exhibit 1).
The blocks naturally fall into four complementary pairs, each made up of one tangible (or formal)
and one intangible (or informal) element. Decisions are paired with norms (governing how people
act), motivators with commitments (governing factors that affect people’s feelings about their
work), information with mind-sets (governing how they process knowledge and meaning), and
structure with networks (governing how they connect). By using these elements and considering
changes needed across each complementary pair, you can create a design that will integrate your
whole enterprise, instead of pulling it apart.

You may be tempted to make changes with all eight building blocks simultaneously. But too many
interventions at once could interact in unexpected ways, leading to unfortunate side effects. Pick a
small number of changes — five at most — that you believe will deliver the greatest initial impact.
Even a few changes could involve many variations. For example, the design of motivators might
need to vary from one function to the next. People in sales might be more heavily influenced by
monetary rewards, whereas R&D staffers might favor a career model with opportunities for self-
directed projects and external collaboration and education.

3. Fix the structure last, not first. Company leaders know that their current org chart doesn’t
necessarily capture the way things get done — it’s at best a vague approximation. Yet they still
may fall into a common trap: thinking that changing their organization’s structure will address
their business’s problems.

We can’t blame them — after all, the org chart is seemingly the most powerful communications
vehicle around. It also carries emotional weight, because it defines reporting relationships that
people might love or hate. But a company hierarchy, particularly when changes in the org chart
are made in isolation from other changes, tends to revert to its earlier equilibrium. You can
significantly remove management layers and temporarily reduce costs, but all too soon, the layers
creep back in and the short-term gains disappear.

In an org redesign, you’re not setting up a new form for the organization all at once. You’re laying
out a sequence of interventions that will lead the company from the past to the future. Structure
should be the last thing you change: the capstone, not the cornerstone, of that sequence.
Otherwise, the change won’t sustain itself.

We saw the value of this approach recently with an industrial goods manufacturer. In the past, it
had undertaken reorganizations that focused almost solely on structure, without ever achieving
the execution improvement its leaders expected. Then the stakes grew higher: Fast-growing
competitors emerged from Asia, technological advances compressed product cycles, and new
business models appeared that bypassed distributors. This time, instead of redrawing the lines and
boxes, the company sought to understand the organizational factors that had slowed down its
responses in the past. There were problems in the way decisions were made and carried out, and
in how information flowed. Therefore, the first changes in the sequence concerned these building
blocks: eliminating non-productive meetings (information), clarifying accountabilities in the matrix
structure (decisions and norms), and changing how people were rewarded (motivators). By the
time the company was ready to adjust the org chart, most of the problem factors had been
addressed.
4. Make the most of top talent. Talent is a critical but often overlooked factor when it comes to
org design. You might assume that the personalities and capabilities of existing executive team
members won’t affect the design much. But in reality, you need to design positions to make the
most of the strengths of the people who will occupy them. In other words, consider the technical
skills and managerial acumen of key people, and make sure those leaders are equipped to foster
the collaboration and empowerment needed from people below them.

You must ensure that there is a connection between the capabilities you need and the leadership
talent you have. For example, if you’re organizing the business on the basis of innovation and the
ability to respond quickly to changes in the market, the person chosen as chief marketing officer
will need a diverse background. Someone with a conventional marketing background whose core
skills center on low-cost pricing and extensive distribution might not be comfortable in that role.
You can sometimes compensate for a gap in proficiency through other team members. If the chief
financial officer is an excellent technician but has little leadership charisma, you may balance him
or her with a chief operating officer who excels at the public-facing aspects of the role, such as
speaking with analysts.

As you assemble the leadership team for your strategy, look for an optimal span of control — the
number of direct reports — for your senior executive positions. A Harvard Business School study
conducted by associate professor Julie Wulf found that CEOs have doubled their span of control
over the past two decades. Although many executives have seven direct reports, there’s no
universal magic number. For CEOs, the optimal span of control depends on four factors: the CEO’s
tenure thus far, the degree of cross-collaboration among business units, the level of CEO activity
devoted to something other than working with direct reports, and whether the CEO is also
chairman of the board. (We’ve created a C-level span-of-control diagnostic to help determine your
target span.)

5. Focus on what you can control. Make a list of the things that hold your organization back: the
scarcities (things you consistently find in short supply) and constraints (things that consistently
slow you down). Taking stock of real-world limitations helps ensure that you can execute and
sustain the new organization design.

For example, consider the impact you might face if 20 percent of the people who had the most
knowledge and expertise in making and marketing your core products — your product launch
talent — were drawn away for three years on a regulatory project. How would that talent
shortage affect your product launch capability, especially if it involved identifying and acting on
customer insights? How might you compensate for this scarcity? Doubling down on addressing
typical scarcities, or what is “not good enough,” helps prioritize the changes to your organization
model. For example, you may build a product launch center of excellence to address the typical
scarcity of never having enough of the people who know how to execute effective launches.

Constraints on your business — such as regulations, supply shortages, and changes in customer
demand — may be out of your control. But don’t get down in trying to change something you
can’t change; instead, focus on changing what you can. For example bogged, if your company is a
global consumer packaged goods manufacturer, you might first favor a single structure with clear
decision rights on branding, policies, and usage guidelines because it is more efficient in global
branding. But if consumer tastes for your product are different around the world, you might be
better off with a structure that delegates decision rights to the local business leader.

6. Promote accountability. Design your organization so that it’s easy for people to be accountable
for their part of the work without being micromanaged. Make sure that decision rights are clear
and that information flows rapidly and clearly from the executive committee to business units,
functions, and departments. Our research underscores the importance of this factor: We analyzed
dozens of companies with strong execution and found that among the formal building blocks,
information and decision rights had the strongest effect on improving the execution of strategy.
They are about twice as powerful as an organization’s structure or its motivators (see Exhibit 2).

A global electronics manufacturer was struggling with slow execution and lack of accountability. To
address these issues, it created a matrix that could identify those who had made important
decisions in the past few years. It then used the matrix to establish clear decision rights and
motivators more in tune with the company’s desired goals. Sales directors were made accountable
for dealers in their region and were evaluated in terms of the sales performance of those dealers.
This encouraged ownership and high performance on both sides, and drew in critically important
but previously isolated groups, like the manufacturer’s warranty function. The company
operationalized these new decision rights by establishing the necessary budget authorities,
decision-making forums, and communications.

When decision rights and motivators are established, accountability can take hold. Gradually,
people get in the habit of following through on commitments without experiencing formal
enforcement. Even after it becomes part of the company’s culture, this new accountability must
be continually nurtured and promoted. It won’t endure if, for example, new additions to the firm
don’t honor commitments or incentives change in a way that undermines the desired behavior.

7. Benchmark sparingly, if at all. One common misstep is looking for best practices. In theory, it
can be helpful to track what competitors are doing, if only to help you optimize your own design
or uncover issues requiring attention. But in practice, this approach has a couple of problems.

First, it ignores your organization’s unique capabilities system — the strengths that only your
organization has, which produces results that others can’t match. You and your competitor aren’t
likely to need the same distinctive capabilities, even if you’re in the same industry. For example,
two banks might look similar on the surface; they might have branches next door to each other in
several locales. But the first could be a national bank catering to millennials, who are drawn to low
costs and innovative online banking features. The other could be regionally oriented, serving an
older customer base and emphasizing community ties and personalized customer service. Those
different value propositions would require different capabilities and translate into different
organization designs. The national bank might be organized primarily by customer segment,
making it easy to invest in a single leading-edge technology that covers all regions and all markets.
The regional bank might be organized primarily by geography, setting up managers to build better
relationships with local leaders and enterprises. If you benchmark the wrong example, the copied
organizational model will only set you back.
Second, even if you share the same strategy as a competitor, who’s to say that its organization is a
good fit with its strategy? If your competitor has a different value proposition or capabilities
system than you do, using it as a comparison for your own performance will be a mistake.

If you feel you must benchmark, focus on a few select elements, rather than trying to be best in
class in everything related to your industry. Your choice of companies to follow, and of the
indicators to track and analyze, should line up exactly with the capabilities you prioritized in setting
your future course. For example, if you are expanding into emerging markets, you might
benchmark the extent to which leading companies in that region give local offices decision rights
on sourcing or distribution.

8. Let the “lines and boxes” fit your company’s purpose. For every company, there is an optimal
pattern of hierarchical relationship — a golden mean. It isn’t the same for every company; it
should reflect the strategy you have chosen, and it should support the critical capabilities that
distinguish your company. That means that the right structure for one company will not be the
same as the right structure for another, even if they’re in the same industry.

In particular, think through your purpose when designing the spans of control and layers in your
org chart. These should be fairly consistent across the organization.

You can often hasten the flow of information and create greater accountability by reducing layers.
But if the structure gets too flat, your leaders have to supervise an overwhelming number of
people. You can free up management time by adding staff, but if the pyramid becomes too steep,
it will be hard to get clear messages from the bottom to the top. So take the nature of your
enterprise into account. Does the work at your company require close supervision? What role
does technology play? How much collaboration is involved? How far-flung are people
geographically, and what is their preferred management style?

In a call center, 15 or 20 people might report to a single manager because the work is routine and
heavily automated. An enterprise software implementation team, made up of specialized
knowledge workers, would require a narrower span of control, such as six to eight employees. If
people regularly take on stretch assignments and broadly participate in decision making, you
might have a narrower hierarchy — more managers directing only a few people each — instead of
setting up managers with a large number of direct reports.

9. Accentuate the informal. Formal elements like structure and information are attractive to
companies because they’re tangible. They can be easily defined and measured. But they’re only
half the story. Many companies reassign decision rights, rework the org chart, or set up
knowledge-sharing systems — yet don’t see the results they expect.

That’s because they’ve ignored the more informal, intangible building blocks. Norms,
commitments, mind-sets, and networks are essential in getting things done. They represent (and
influence) the ways people think, feel, communicate, and behave. When these intangibles are not
in sync with one another or the more tangible building blocks, the organization falters.

At one technology company, it was common practice to have multiple “meetings before the
meeting” and “meetings after the meeting.” In other words, the constructive debate and planning
took place outside the formal presentations that were known as the “official meetings.” The
company had long relied on its informal networks because people needed workarounds to many
official rules. Now, as part of the redesign, the leaders of the company embraced its informal
nature, adopting new decision rights and norms that allowed the company to move more fluidly,
and abandoning official channels as much as possible.

10. Build on your strengths. Overhauling the organization is one of the hardest things for a chief
executive or division leader to do, especially if he or she is charged with turning around a poorly
performing company. But there are always strengths to build on in existing practices and in the
culture. Suppose, for example, that your company has a norm of customer-oriented commitment.
Employees are willing to go the extra mile for customers when called upon to do so. They deliver
work out of scope or ahead of schedule, often because they empathize with the problems
customers face. You can draw attention to that behavior by setting up groups to talk about it, and
reinforce the behavior by rewarding it with more formal incentives. That will help spread it
throughout the company.

Perhaps your company has well-defined decision rights, wherein each person has a good idea of
the decisions and actions for which he or she is responsible. Yet in your current org design, they
may not be focused on the right things. You can use this strong accountability and redirect people
to the right decisions to support the new strategy.

Conclusion

A 2014 Strategy& survey found that 42 percent of executives felt that their organization was not
aligned with the strategy, and that parts of the organization resisted it or didn’t understand it. If
that’s a familiar problem in your company, the principles in this article can help you develop an
organization design that supports your most distinctive capabilities and supports your strategy
more effectively.

Remaking your organization to align with your strategy is a project that only the top executive of a
company, division, or enterprise can lead. Although it’s not practical for a CEO to manage the day-
to-day details, the top leader of a company must be consistently present to work through the
major issues and alternatives, focus the design team on the future, and be accountable for the
transition to the new organization. The chief executive will also set the tone for future updates:
Changes in technology, customer preferences, and other disruptors will continually test your
business model.

These 10 fundamental principles can serve as your guideposts for any reorganization, large or
small. Armed with these collective lessons, you can avoid common missteps and home in on the
right blueprint for your business.

Reprint No. 00318

Author Profiles:

Gary L. Neilson is a senior partner with Strategy& based in Chicago. He focuses on operating
models and organizational transformation.

Jaime Estupiñán is a partner with Strategy& based in New York. He focuses on consumer strategic
transformation and organization for the healthcare industry.
Bhushan Sethi is a partner with PwC Advisory Services. Based in New York, he leads the PwC
network’s financial-services people and change practice.

Source: Strategy + Business. ORGANIZATIONS & PEOPLE /March 23, 2015 / Summer 2015 / Issue
79. Website: https://www.strategy-business.com/article/00318?gko=31dee