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11 LeaderLab Vol. 1 Issue 1

Organizational Design:
foundation of a
successful company
“An organization’s ability to learn, and translate that learning
into action rapidly, is the ultimate competitive advantage.” –
Jack Welch1
Many different elements make an organization successful. For
example - leadership style, vision and mission, excellent
product and employees, strategy, organizational culture,
technology, and organizational design are all various
elements that help a company succeed or fail. If a firm falters
in one of these areas, it could make the difference between
being good or being great. If it fails in multiple areas, the
results are often catastrophic. This paper will analyze one
element – organizational design. Many believe that strategy
precedes structure.2 This maybe true, however, I would like to
submit that there are some basic organizational design
principles that can lay a strong foundation for any company in
their pursuit of greatness. This is not intended to be an
exhaustive essay on the subject, but rather an overview on
some critical design issues. There are ten organizational design
principles that are foundational for a company to implement
as they pursue success.
Establish a Healthy Hierarchy
For over a century, American companies have used Frederick
Taylor’s scientific management theory, which calls for precise,
efficient, bureaucratic organizations. This theory gained
popularity during the Industrial Revolution as strong leaders
emphasized top down control, standard rules, and clearly
defined authority and responsibility.3 There are now many
organizational theorists and practitioners that would agree
with this statement by Galbraith, “The traditional hierarchical
structure of organizations – with its dysfunctional effects –
continues to fall under harsher and harsher criticism. There is
an appropriate trend away from authoritarian management
styles and the separatist titles and privileges of a multi level
hierarchy.”4 There will continue to be a growing trend for
Abstract
Many factors come together to make
an organization great. A few worth
mentioning are leadership style,
personality and charisma; a
compelling vision and mission;
excellent products and employees;
exceptional customer service; a
unifying organizational culture; the
right strategy and plans; technology;
and an exceptional organizational
design. This article analyzes one factor
– organizational design. An
extraordinary organizational design
can act as a solid foundation to build
upon as a company strives for success.
This is not an exhaustive study on the
subject, but rather an overview on
some critical design issues. The author
believes there are ten organizational
design principles that are critical for a
company to implement to lay this solid
foundation of organizational
greatness. The ten factors include:
establishing a healthy hierarchy,
increasing the span of control for
managers, dividing the organization
into high performance teams,
encouraging open lines of
communication, empowering
employees, providing systems of
accountability, fostering a learning
organization, implementing a selective
hiring system, training and developing
employees, and instituting a fair
reward system. When all of these
factors come together in their proper
place the foundation for a great
company has been laid.
Eddy Shigley
12 LeaderLab Vol. 1 Issue 1
ISSN: 2153-2443
CC BY-ND-NC
organizations to be leaner and flatter. The old
hierarchy of command and control will
become fewer.
Ashkenas et al. believe that organizations that
have hierarchies designed around the old
success factors of size, role clarity,
specialization, and control is an outdated
model. Instead, they believe healthy
hierarchies in the twenty-first century must
revolve around the new success factors of
speed, flexibility, innovation, and integration.5
This is due to the fast paced, turbulent, ever
changing global economy. I would like to add
that a healthy hierarchy is also based upon
healthy relationships between the layers of
authority. There must be a genuine love and
concern for each other – to treat one another
with love and respect.
Increase Span of Control
There are two ways to remove excess layers of
hierarchy – increase the span of control of
managers and divide the organization into high
performance teams. I will address each in turn.
Span of control is the number of employees
who report to any given manager. In a study
done by A. T. Kearney in 1993 of oil companies,
the average span of control was 4.8 employees
per manager. A conference board study of
spans conducted years after the Kearney study
revealed an average span of 7.8 in the same
industry.6 Based on this evidence, organizations
are getting leaner and flatter. ConocoPhillips is
a highly centralized company with a steep
hierarchy; their span of control is five.7
Ashkenas et al. believe, “Removing layers of
managers gets the organization closer to reality
and helps decision making move faster, tie in
with customer needs, and be more responsive
to changing situations. Also, removing layers of
management and increasing span of control
ensures that the remaining managers cannot
get too engrossed in details.”8 In other words,
increasing span of control liberates employees
to make decisions, take responsibility for those
decisions, and empowers them to have greater
authority. It also helps eliminate micromanaging
by supervisors. There are obviously factors
effecting span of control such as geographic
location, skill and experience of employees,
technology, and complexity of the task.9
Divide the Organization into Teams
The second way to remove excess layers of
hierarchy is the development of teams. Pfeffer
believes self-managed teams are a key
component for a successful organization:
1. Teams substitute peer-based for
hierarchical control of work. He believes
peer accountability is more effective
than hierarchical supervision. People in
teams feel responsible and accountable
for the work.
2. Teams permit employees to become a
think-tank, which allows for creative
solutions to problems.
3. Teams allow organizations to save
money by removing layers of hierarchy
that are not necessary.10
Blanchard uses the term “high performance
teams.” He defines a team as “two or more
persons who come together for a common
purpose and who are mutually accountable for
results.11 He identifies seven characteristics of
high performing teams using the acronym
PERFORM:
Purpose and values. High performance
teams share a sense of purpose and a
common set of values, which includes a
compelling vision.
Empowerment. High performance teams
have the authority to make decisions,
however, with this authority comes
responsibility and accountability.
Relationships and communication. High
performance teams are committed to
open and honest conversations in a way
that exhibits care, dignity and respect for
one another.
Flexibility. High performance teams are
interdependent. The leader of the team
often changes based on needs and
talents. Members are willing and
capable of changing and adapting
according to the internal or external
environments.
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Optimal Productivity. High performance
teams get the job done in a timely
manner with excellence. They are
committed to significant results. They
take pride in their work, and hold each
other accountable for a job well done.
Recognition and appreciation. High
performance teams receive positive
feedback. They encourage each other
and are motivated to perform for the
good of the team and the company.
Morale. High performance teams take
pride in their work. They have a strong
team spirit and sense of a unity.12
Cross-sectional teams are sometimes needed
to solve issues among departments, to find
solutions to organizational problems, or to
create a new product. Cross-sectional teams
take people from a variety of departments to
form a team. It is often advantageous to have
a variety of skills and perspectives on a given
team to solve organizational issues.
Encourage Open Lines of Communication
Organizational design should encourage and
facilitate communication among employees
and departments.13 Every successful
organization needs fluid communication
throughout the company. Employees feel
included when there is an atmosphere of
honest, candid communication. Blanchard
believes, “Sharing information and facilitating
open communication builds trust and
encourages people to act like owners of the
organization.”14 Employees need information to
make informed decisions, including financial
reports. Both good and bad news needs to be
shared. Blanchard goes on to say, “People
without accurate information cannot act
responsibly; people with accurate information
feel compelled to act responsibly. Open
communication is the lifeblood of the
organization.”15 Industry best practices and
standards are some of the essentials that need
to be shared. Communication should happen
through a variety of avenues: email, company
wide bulletins, newsletters, telephone, team
meetings, and face to face. The most
important information should be handled face
to face. Healthy lines of communication keep
the company agile, flexible, and fluid.
Empower Employees
Successful organizational design gives
employees the authority to makes appropriate
decisions. However, with the implementation of
teams, rarely are decisions made in a vacuum,
but rather a team takes responsibility for
decisions and actions. According to Blanchard,
“Empowerment is the process of unleashing the
power in people – their knowledge,
experience, and motivation – and focusing that
power to achieve positive outcomes for the
organization.”16 Decisions need to be made by
those who are closest to the issue. Ultimately,
empowerment is handing over authority and
trusting employees to make the right decisions.
This requires employees to be both informed
and competent.17 The difference in an
authoritarian hierarchy culture and an
empowered culture is displayed in the following
diagram:18
Hierarchical Culture Empowerment Culture
Planning Visioning
Command and
Control
Partnering for
performance
Monitoring Self-monitoring
Individual
responsiveness
Team responsibility
Pyramid structures Cross–functional
teams
Workflow processes Projects
Managers Coaches/team
leaders
Employees Team members
Participative
management
Self-directed teams
Do as you are told Own your job
Compliance Good judgment
Provide Systems of Accountability
If an organization is going to empower their
employees, it is imperative to have systems of
accountability in place to protect the integrity
of the organization and employees.
Accountability is simply being responsible for
one’s actions. There needs to be accountability
for ethical standards, keeping to the mission
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and vision of the organization, reaching
performance goals, and meeting expectations.
Accountability is a good thing; no person
should be an island. The following are ways to
provide everyone in the organization
appropriate accountability:
1. Working on teams. Groups of people are
accountable to each other both
ethically and from a performance
perspective.
2. Strategic plans. Approved and detailed
strategic plans allow for freedom and
yet responsibility. These plans keep us on
task and on target.
3. Ask questions. Foster an environment
that allows anyone in the organization to
ask tough questions. People need to be
able to ask questions without fear of
dismissal or reprimand.
4. Honest and open communication. Do
not keep secrets. Communicate values
and publish a code of ethics. Provide
seminars on the code of ethics.
5. Establish an ethics committee and chief
ethics officer to establish appropriate
ethical standards and to deal with
infractions.
6. Protect whistle-blowers. Employees need
to know they can safely tell someone if
they know about illegal, immoral, or
unacceptable practices within the
organization.19
7. Provide performance reviews. These
reviews can be informal meetings on a
monthly basis to check on the progress
of goals and/or it could include annual
performance reviews. Ashenas et al,
recommend a 360-degree feedback
process. This is a comprehensive
evaluation that allows reviews from the
supervisor, peers, direct reports, and
even customers.20
Foster a Learning Organization
Great companies enjoy the learning process.
They are a better company for both their
failures and successes. According to Daft, “The
learning organization promotes communication
and collaboration so that everyone is engaged
in identifying and solving problems, enabling
the organization to continuously experiment,
improve, and increase its capability.”21 There
are several characteristics of a learning
organization:
1. Open communication between and
within organizations with an intent to
share knowledge and foster continuous
learning.
2. Structures become horizontal, fluid,
flexible, and involve empowered teams.
3. There are few rules and procedures for
performing tasks.
4. Knowledge of tasks and authority to get
the job resides with employees, rather
than managers.
5. Employees, customers, suppliers, and
partners all play a role in determining the
strategic direction of the company.22
6. Welcome questions and analysis of all
decisions. Ideas are debated and at the
end of the day, the best ideas remain on
the table.23
7. Encourage innovation and creativity.
8. A shared mindset that fosters learning.
9. Rotate roles and assignments.
10. Hire competent and experienced
people that bring fresh eyes to the
organization.
11. Provide training programs, conferences,
and ongoing educational experiences.
12. Reflect and evaluate everything you do
as a team.
13. Establish regular performance reviews.
14. Teach leaders to mentor and coach
employees.24
15. Make failures your friend. Learn and
grow from failures. Failures should not be
punished.25
Implement a Selective Hiring System
One of the most important elements an
organization can do is implement a selective
hiring system. Jim Collins believes it is imperative
to get the “right people on the bus, the right
people in the right seats, and the wrong people
off the bus. If you get the right people on the
bus, the problem of how to motivate and
manage people largely goes away. The right
people don’t need to be managed or fired up;
they will be self-motivated by the inner drive to
produce the best results and to be part of
creating something great.”26 When making
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hiring decisions, remember these simple
principles:
1. Define the job clearly. A well-crafted job
description will help your organization
find the right “fit.”
2. Hire the best person for the job. Do not
hire someone just because they are
available. Be patient. Do not get
emotionally tied to an applicant and hire
the wrong person.
3. Establish a trial period. A ninety-day trial
period for new employees gives both
parties an opportunity to evaluate the
partnership, compatibility and job
performance.27
4. Acquire a large applicant pool. A good
goal is to have three times the amount
of applicants as positions available. This
allows the organization to be more
selective.
5. Ask good interview questions. Be
rigorous. Do not get in a hurry to hire
anybody. Be willing to have four or five
rounds of screening. Follow up on
references. It pays to be thorough.28
6. Involve a wide range of people within
the organization in the screening
process. Use customers to help the
screening process. Develop discernment
in character through years of
experience. Value the input of others.
7. Bring in new talent from time to time. Do
not grow all your leaders. Fresh eyes and
ideas in the organization is a valuable
commodity.29
8. Do not hire for a particular job, hire the
best people possible – figure out their job
later.30
9. Hire for character, mission match, and
skill set. In that order, do not reverse the
order.
10. Hire people that will compliment you. Be
secure enough to hire people better
than you.
Almost all the literature on this subject suggests
hiring for character; not education, certain skill
set, work experience, or specialized knowledge.
Implementing a selective hiring system is a key
element for greatness. As Jim Collins says,
“People are not your most important asset, the
right people are.”31
Train and Develop Employees
Once hired, an organization needs to invest in
their employees by training and developing
character, ethics, general and specific skills.
Developing competencies helps the company
to be a learning organization and it is
increasing the intellectual capital of the staff.
Although these factors do not show up on the
balance sheet, it is increasing the health and
success of the organization. Mentoring
programs for new employees can go a long
way to orient a person to an organization and
to help them to grow both personally and
professionally. Collins believes an organization
needs a culture of discipline that includes
disciplined people, disciplined thought, and
disciplined action.32 Much of these
expectations and disciplines can be taught.
Institute a Fair Reward System
Great organizations provide not just a just
wage, but also a fair reward system. There are
a variety of reward systems such as gain
sharing, profit sharing, stock ownership, pay for
skill, and various forms of individual and team
incentives. Many successful organizations
encourage stock ownership. If employees are
owners, they will think and act like owners.33
Many organizations scale rewards according to
vertical position. This is the wrong thinking.
When rewards are based on this premise, it tells
employees that climbing the hierarchy is more
important than performance. According to
Ashkenas et al., “When rewards exist to
recognize and encourage superior
performance regardless of level, boundaries
loosen and the hierarchy’s health improves.”34
This sort of reward system will help employees
avoid the “peter principle.” Employees will be
satisfied to stay in a job that they do well, if they
are compensated in a just fashion through
rewards, instead of feeling compelled to climb
the organizational ladder to a place of
incompetence.
Here are a few guidelines when putting
together a reward system:
1. Base rewards on performance and skill.
Performance pay based on a
combination of firm, team, and
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individual performance.
2. Share rewards up and down the
organization. However, do not reward
everyone the same. Consider using stock
options as an incentive. Wal-Mart has a
stock option program for all employees.
3. Use nonfinancial rewards. This is limited
only by creativity. For example, parking
place, encouraging letters, special
dinners, press releases, conferences,
company vehicle, country club
membership, privileged assignments,
etc.35
4. Give praise publicly and privately.
5. Promote when possible. Every company
is in need of good leaders. Make sure
you do not promote to the level of
incompetence. Use people to the best
of their abilities.
6. You get what you pay for. Compensate
people what they are worth to the
company. Place value on them through
words, positions, responsibilities, rewards,
and pay. By doing this they will give
back to the organization through hard
work and loyalty.36
Conclusion
“An empowered organization is one which
individuals have the knowledge, skill, desire,
and opportunity to personally succeed in a
way that leads to collective organizational
success.”37 Organizational success is the goal. A
company is on its way to greatness when it has
an effective organizational design that
promotes success. The ten organizational
design principles discussed in this paper will
help any company pursue a healthy design
and lay a strong foundation for a successful
organization.
About the Author
Eddy Shigley is President of Doulos Leadership
Group, a speaking and consulting firm helping
organizations and people maximize their
potential through a transformation/servant
leader model. He can be reached at
eshigley@sbcglobal.net.