Organizational Design: A

Complete Guide
Written by Erik van Vulpen
15 minutes read

Organizational design is as much an art as it is a science. The process

of creating a system in which people can work together to achieve

common goals is highly complex, and there is no one way to do it right.

In this article, we will explain what organizational design is, what

drives organizational design, how to design an organization, and how

you can measure organizational design in terms of organizational

effectiveness. Let’s dive in!

ContentsWhat is organizational design? A definitionThe role of HR in

organizational designFive organizational design principlesFive factors

affecting organizational designOrganizational effectivenessCase

studyFAQ
What is organizational design? A
definition
To start with a technical definition: Organizational design is the

administration and execution of an organization’s strategic plan. This

means that the organization’s strategy determines the optimal

organizational design.
As we discuss in our Organizational Development Certificate Program,

organizational design is about creating the best fit between the

strategic choices of the organization and the organizational setting.

This is represented in the figure below. Organizational design is

determined by the strategic direction of the company, a.k.a. the vision,

mission, and goals of the company. These lead to strategies that the

company competes on, which are enabled through the organizational

design.
Source: Daft, Murphy & Willmott, 2010

For example, Company A operates in an established market and is

looking to maintain its position. This company will have a low-cost

leadership strategy focused on efficiency. In terms of organizational

design, this company will have a strong, centralized authority, tight

control, and many standard operating procedures.

Company B is an innovative and fast-growing organization that

emphasizes learning. This company will have a more fluid and flexible

design, a much more decentralized structure, and loose control.

Employees work directly with customers and are rewarded for

creativity and risk-taking.

In company A, risk-taking and failing are punished, while in company

B, it is much more likely to be rewarded, evaluated, and learnings from

the failed project will be used as a stepping stone for a new project.
Differences in organizational design between Company A and Company B.

What does an organizational design initiative

deliver?
According to Dr. Dieter Veldsman, AIHR’s Chief HR Scientist, any

sound organizational design initiative needs to deliver the following:

 A clear strategic intent: What are we aiming to deliver?

 Guiding principles: What are the principles that inform our design

decisions?

 Capability maps: Which capabilities do we need to deliver on the

strategic intent, and how do they differ in strategic importance?

 Operating model blueprint: How will these capabilities work

together to execute?

 Work design: What are the teams, jobs, and skills required to

deliver, and how do we organize them?

 Workforce plan: What are our strategies to resource the

structure?

 Performance measures: How will we know that the design is

working?

Organizations with highly mature organizational design are:

 30x more likely to adapt well to change

 5.3x more likely to be a great place to work

 2.3x more likely to exceed financial targets

However, only 11% of organizations are at high maturity in terms of

organizational design. What’s more, over 7 in 10 companies say they’ve

operated under their current organizational structure for five or more years.

Source

The role of HR in organizational design

In years gone by, HR only became involved in organizational design

late in the process with a narrow focus on job profiling and

implementation. Today, organizational design capability and skills

have become critical to the toolbox of any HR Generalist, with HR

being called upon more to lead and facilitate the organizational design

process.

Deeper specialist expertise in organizational design is also becoming

more prominent in newer operating models, with many Center of

Excellence structures now having access to a dedicated OD

team. This is a positive move, as business performance challenges

are often a result of poor organizational design. Creating closer

alignment between OD, Talent, Reward, and Performance functions

will deliver positive value for the organization.

Another development to note is a movement towards meaningful work

and ensuring that employees can find purpose within their job. To

achieve this, we need a new perspective on organizational design that

views the organization not only through the lens of process and

outcomes; but also through the lens of human behavior.

“When starting on an OD initiative, the first step HR needs to take is to

understand the current reality,” says Dr. Dieter Veldsman.

“We often jump straight into defining the to-be state of the

organization, but I have found that starting with the as-is is crucial to

gain insights that will inform the future design. Being data-driven is

crucial, and the as-is analysis should collect multiple data points to

understand the strengths and limitations of the current design,”

Veldsman explains.

Three critical success factors that HR needs to consider for any organizational

design project:

 Get the right stakeholders around the table with the appropriate

knowledge, insight, and power to make decisions;

 Use a data-informed approach that validates design assumptions

throughout the process; and

 Trust in the process and work according to a set roadmap. The

steps in an OD process build upon each other. By skipping steps

due to time or resource constraints, we risk making the wrong

design decisions that will negatively impact the ability of

the organizational design model to deliver value.

Dr. Dieter Veldsman, Chief HR Scientist at AIHR

Five organizational design principles

One of the most difficult things in organizational design is what we are

designing. The obvious answer would be “the organization”. However,

what exactly is it that we are designing about the organization? This is

where the five organizational design principles come in.

Our starting point for this is Goold & Campbell’s book Designing

Effective Organizations. Goold and Campbell propose five

organizational design principles. Organizational design is a tug-of-war

between these five principles. Each principle has its own test to see if

the current situation is valid.

This will be slightly complicated, so hang in there! We will make it

more concrete with different examples later on.

1. Specialization principle. This principle states that boundaries

should exist to encourage the development of specialist skills.

The test here is if any specialist cultures, which are entities that

have to be different from the rest of the organization, have

sufficient protection from the influence of the dominant culture.

2. Co-ordination principle. This principle states that activities that

are done should be coordinated in a single unit. This unit can be

a business unit, business function, (horizontally coordinating)

overlay unit, sub-business, core resource unit, shared service

unit, project unit, or parent unit. The test here is if there needs to
 be coordination between departments which is hard to do. These

‘difficult links’ are links where normal networking will not provide

coordination benefits. In that case, coordination should be made

easier, or responsibility should be put in within a single unit.

There are many different units that can be used in organizational

design, as we will show below.

3. Knowledge and competence principle. This principle states that

responsibilities should be allocated to the person or team best fit

to do them. This means that tasks are retained by higher levels

based on their knowledge and competitive advantage. If this is

not the case, they should be positioned lower in the organization.

This means that the CEO should not be involved in every decision

– especially not decisions that involve specialists with much

more subject-matter knowledge. The CEO is there for the big

picture and to balance complex decisions that impact the

organization and strategy.

4. Control and commitment principle. This principle is about having

effective control on the one hand while maintaining engagement

and commitment on the other hand. This is always a balance.

The test here is to have a control process that is aligned with the

unit’s responsibility, cost-efficient to implement, and motivating

for the people in the unit.

 This means that the CEO is not giving the ‘go’ on the purchase

decision for a $30 keyboard – this would be highly demotivating,

and control on such small expenditures should be put lower in

the organization to be adaptive anyway.

5. Innovation and adaptation principle. This principle states that

organizational structures should be sufficiently flexible to adapt

to an ever-changing world. The test here is that the

organizational design will help the development of new

strategies and adaptation to future changes. Later in this article,

we will give a case study of an organization that was unable to

adapt to a rapidly changing environment, hurting its internal

processes and bottom line.

In this organizational design, the central parent unit provides value to the
connected business units (e.g., branding, culture and standards, coordination),
connected to different business unit (e.g., production, R&D, sales), shared
service units (e.g., HR and IT), project units, and collaborative overlay units
aimed at serving specific customer groups.

These five principles are affected by different factors in the internal

and external environment of the organization. Earlier, we spoke about

strategy. The previously mentioned Company A aimed at maintaining

its market share and optimizing its profit margin. This company will

benefit from (1) higher specialization to reduce inefficiencies, (2) lower

coordination, (3 & 4) responsibility and control lies higher in the

organization, and (5) the organizational structure will be more rigid.

These five principles enable an organizational designer to (re)design

and align the organization with the key factors that affect the

organizational design.
Five factors affecting organizational
design
There are five factors that greatly impact organizational design. These

factors are:

1. Strategy. Strategy dictates the strategic priorities of an

organization. This is the most important influencing factor

of organizational structure and design.

2. Environment. The environment a company operates in influences

its strategy but also dictates how it positions itself. In a rapidly-

changing environment, the organization has to design for more

flexibility, or adaptability, while in a stable environment, the

organization can optimize for efficiency.

3. Technology. Information technology is a key enabler for decision-

making. The state of IT impacts organizational design as well.

When systems are in place, and decision-making is based on

data, the organizational structure and design – including the

potential for hierarchical control – will be different from an

organization where most of the data is stored in unorganized

Excel sheets.

4. Size & life cycle. The organizational size and life cycle also

impact the organizational structure and design. A 20-person

company has very different challenges when it comes to design

compared to a 200,000-person company.

5. Culture. Organizational culture is another key element that

impacts organizational structure and design – and, vice versa,

design also impacts culture.

Five factors influencing organizational design principles

When an organization is structured and designed in a way that fits its

purpose, it will result in organizational effectiveness. Organizational

effectiveness includes obtaining resources that the company

competes on (i.e. the company has the capabilities to be competitive),

efficiency (i.e. optimization of the resources required to reach goals,

meaning there is a smooth operational process with little wastage),

and effectiveness (i.e. strategic goal attainment).

Let’s have a look at the five factors and see how they impact

organizational design.

1. Strategy

The organizational strategy is the most important starting point for

organizational structure and design. It goes beyond the scope of this

article to explain how a strategy is created – we have a great article

on HR strategy in case you want to check this out.

Michael E. Porter proposed that organizations can compete through

lower cost or through the ability to offer distinctive products and

services which command a premium price. The second step is to

determine whether the organization has a narrow or broad scope. This

means that the organization either competes in many or in select

customer segments.

This resulted in Porter’s Competitive Strategies framework, in which

four competitive strategies are identified: cost leadership, cost focus,

differentiation, and focused differentiation.

Different strategies justify a different organizational design. For

example, take a beverage company that sells premium whiskey liquor.

The focus here is a specific market segment (well-off customers who

drink whiskey) with differentiation strategies involving strong

branding.

In this organization, production may be a specialized business unit

focused on one thing: producing a specialist technological product for

DJs. There is some specialization in the production department but the

real innovation happens within specialized product teams in which

R&D and marketing are in constant touch with customers to develop

new features and products the market needs.

Similarly, sales and marketing are business units. They have different,

cooperative, horizontally coordinating overlay units under them – e.g.

branding and sponsorships, digital marketing, public relations,

video/multimedia. These units are highly collaborative with each other

and are constantly in touch with the market, leading to high

coordination.

Specialists have high responsibility, and although there is a formal

sign-off procedure for marketing campaigns, many of the campaigns

happen in decentralized project teams that consist of people from

multiple overlay units that communicate with each other frequently as

the market is a niche market in which marketing needs to be well-

coordinated.
Compare this to a low-cost, broad target cost leadership strategy. We

take a soap production company as an example. They produce

hundreds of soaps – and although they do some marketing and sales to

retail stores for a few of their lines, most of the soaps are produced for

external brands. The organizational setup is highly siloed and not

expected to change.

When we apply this to the five organizational design principles, there

is: (1) high specialization between production and sales, (2) low

coordination is required, (3 & 4) knowledge and control lie relatively

high in the organization, and there is (5) little collaboration required

between departments. Indeed, when a new soap line is introduced, the

specifics are communicated to the production department, and after a

few test runs, the company is set to produce that soap for years to

come.
Check out this video to learn everything you need to know about Organizational
Design!

2. Environment
The environment also impacts organizational structure and design.

The industry, raw materials, (labor) market, (international)

governmental, and sociocultural influences all shape the required

design to different degrees.

The most important factor is environmental stability. There are two

dimensions that influence environmental stability:

 Simple-complex dimension. This refers to the degree to which

external factors influence the organization and competition.

These are multiple for large companies such as AT&T and British

Telecom, where all previously mentioned factors act on. In

comparison, a family-owned hardware store in a suburb faces low

environmental complexity.

 Stable-unstable dimension. This refers to the elements in the

environment that are dynamic. Big consumer brands like

McDonald’s are influenced by online media. They are highly

visible on platforms like Twitter, Instagram, and TikTok, and a

single tweet or blog post can greatly damage a brand. On the

other hand, public utility companies have been stable for a long

time. Take public libraries in the US between the 1970s and

2000s. These were funded by the local city, county, state, and

federal governments.
A highly stable and similar environment justifies standardized and non-

dynamic organizational processes. Examples include soap producers

or container manufacturers. On the other hand, a highly unstable and

complex environment requires the organization to adapt constantly.

Examples include chip makers and aerospace firms.

Below are organizational design and structure examples. Each of them

would suit a different environment.

3. Technology

Technology greatly influences organizational design. We saw this

through the COVID crisis, where many companies effortlessly went

digital, and some even closed their offices.

WordPress, a popular blogging platform, has a 100% remote workforce.

This is possible through the extensive use of technology and

technology-driven collaboration.

Information Technology also enables organizations to become more

decentralized, improve horizontal coordination through intranets, and

external collaboration becomes possible through extranets. In fact,

Slack, one of the most-used collaboration tools, allows internal and

external collaborators to join the same team through different internal

and external channels, enabling fast communication.

4. Size & life cycle

Size is another factor that impacts organizational design. Small

organizations are usually responsive, flexible, flat, organic, and

entrepreneurial. Large organizations create value through efficiencies,

have a global reach and brand, a more stable market, and put more

emphasis on managers. This leads to different organizational design

choices.

As organizations grow, they go through different stages of

development. Knowing which stage of organizational life cycle a

company is in helps to spot misalignment between the organizational

goals and strategy and the organizational structure. In addition, it

helps to identify which crisis the organization is likely to face.

5. Culture

Every organization has its own unique culture based on their values,

assumptions, beliefs, attitudes, feelings, stories, heroes, symbols,

language, and habits. These cultures are best summarized in the

competing values framework.

This culture framework proposes that there are a number of

competing values in an organization: flexibility vs. stability, and an

internal vs. external focus. The values compete, meaning that it is not

possible to be both stable and flexible, or both internally and

externally focused.
Source: Quinn & Cameron’s cultural typology

Different cultures lead to different organizational structures. An

internally focused organization will have more collaboration, while an

externally focused organization will have more customer-facing

project groups and business units.

Similarly, a highly stable organization has clearly defined business

units while a flexible organization has much more market-focused

horizontal overlay units that use different specialists to create

customer value.

Organizational effectiveness
Once you have created an organizational design appropriate for the

five factors we mentioned earlier, the result is an effective

organization. This means an organization that is able to reach its

mission and goals.

Organizational effectiveness is hard to measure. However, when we

understand it well, the signals in the organization can provide us with

input on improvements for the organization. Let’s conclude this article

with three approaches to measuring organizational effectiveness.

The approaches correspond with different phases of the production

process. This is an input – process – output (IPO) model. At each step,

organizational effectiveness can be measured.

 The first indicator of organizational effectiveness is the resource-

based approach. This approach looks at the input and assesses

effectiveness by evaluating whether the organization effectively

obtains resources necessary for high performance.

 The Internal process approach looks at the production process

and assesses effectiveness using internal health and economic

efficiency. Examples include a strong culture, trustful

communication, swift decision making, undistorted

communication, and interaction between the organization and its

parts.

 The third indicator is the goal approach. This approach assesses

effectiveness by looking at how well the organization reaches it

goals. Key here is to focus on operational goals, as these are

easier to specify and measure.

To learn more about the finetuning of organizational effectiveness,

check out our full practitioner’s guide, and also our guide on

organizational development.
Case study
To illustrate this, let me share this case study about a coffee bean

production company. This company occasionally struggles to supply

the coffee beans required for production. This leads to supply

problems, and after the company had missed its latest quarterly sales

targets, an inquiry is launched.

It turns out that there is a misalignment between the increasingly

unstable political landscape of the coffee production countries leading

to disruptions in supply, and the fixed organizational structure. Further

inquiry into decision-making processes, shows that decisions to

switch supply lines have to be approved at C-level, leading to a delay

in decision-making capabilities. These hiccups are the main reason the

quarterly sales targets were missed.

To fix this, the organization decides to put the responsibility for parts

of the supply chain management and procurement departments lower

in the organization. This leads to faster decision-making, hence

making the organization more flexible to respond to changes in the

external environment.

In this case study, we saw symptoms at all three levels: the input, the

process, and the output. In an ideal system, you will want to recognize

these symptoms at the input or process level before they will affect
the outcome. This can be done by implementing safeguards and

creating an early warning system.

Over to you

To sum it all up, organizational design and structure are about making

balanced decisions that will give the organization a competitive edge

and will help it reach its objectives.

Before even starting any design project, HR needs to engage with

stakeholders and ask, “Why do we want to rethink our organizational

design?”, “How does the design relate to our strategy?” and “Is

organizational redesign the best solution to address the problem we

are trying to solve?”

Organizational design efforts take a lot of resources and time to do

properly, so it is critical first to determine if this solution will deliver

the desired outcomes.

https://www.aihr.com/blog/
organizational-design/#Principles