The future of organizational design: Innovative organization concepts beyond hierarchies

Organization design as a discipline refers to the systematic approach to aligning structures, processes, people, leadership, practices, culture, and metrics to ensure that organizations achieve their mission and strategy.

What is organizational design?

Organizational design is a vital factor determining an organization’s performance; therefore, it is essential to know how a specific organization should be designed.

The organizational theory provides theoretical foundations for organizational design. However, organizational theory is a positivistic science that explains the structure, behavior, and effectiveness of an organization.

In contrast, organizational design is a normative science that seeks to prescribe what might be a desirable design to achieve increased effectiveness and efficiency. In other words, the organizational theory describes our understanding of how the world works, while organization design expands on this to explain how the world could possibly work.

Organization design as a discipline refers to the systematic approach to aligning structures, processes, people, leadership, practices, culture, and metrics to ensure that organizations achieve their mission and strategy.

Organizational design shapes structure and coordination

An organization is a social system that is structured and managed to pursue collective goals. All organizations have a structure and coordination as fundamental components of their organizational design.

The structure involves things such as the assignment of tasks to individuals or units, the allocation of resources to these units, the designation of markets to units, etc.

Coordination refers to bringing the units together through communication, culture, leadership, routines, procedures, incentives, IT, and what we generally call the management (Burton et al. 2015). Although the structure is an analytical problem, while coordination is a design problem, there is no doubt that they are interdependent.

Organizational design has always been a strategic management practice since the strategy is concerned with transforming a current state of an organization into a desirable future one by reorganizing and reallocating resources to increase business and financial performance (Auernhammer & Leifer, 2019).

What are the different approaches to designing organizations?

The practice and process of designing organizations are essentially strategy making. First we define strategy, and then we develop the organizational design - the structure, and the coordination - to implement the strategy and achieve the declared goals. Hence, different approaches to organizational design are inevitably linked to different approaches to strategy making.

Mintzberg (1987, 2007) proposed the so-called five Ps in strategy making: plan, ploy, pattern, position, and perspective. The first three are relevant for designing organizations; therefore, these aspects will be covered in the text that follows, while ploy and position are more concerned with strategic moves than design considerations (Mintzberg, 1987, 2007) and will be left for some later potential account.

Planning approach to organizational design

Here strategy making is a planning exercise that involves the design and development of a comprehensive plan that leads towards the achievement of the core business objectives of the organization (Mintzberg, 2007). This approach can be linked to the structural approach in organizational theory.

A pattern approach to organizational design

From the pattern-approach, strategy making emerges from the patterns of actions and behavior that make part of existing organizational routines, which are the foundations of organizational capabilities. Organizational design practice requires making sense of everyday events that occur in an organization, and organizational design becomes a daily activity. The organizational design in this context can be linked to the behavioral approach in organizational theory.

Perspective approach to organizational design

This approach treats organizational design as a collective perspective, ideology, shared philosophy, or an organizational view of life. Organizational design practices require a constant re-framing of shared perspectives and recognizing gaps in shared perception and actual results. Organizational design is focused on designing organizations to enable collective learning. This approach can be linked to the learning and knowledge management approach in organizational theory.

The importance of organisational design and its effect on organizational performance

Organizational design is important as it can become a source of sustained competitive advantage. It affects organizational results in terms of productivity, economic, and financial performance. More specifically, organizational design impacts organizational performance through the following three channels (Delmastro, Colombo, and Rabbiosi, 2012):

Organizational design impacts information and communication costs

An organization must be designed to minimize failures in the transmission of information and delays in the implementation of decisions. Speed of information flow and decision making is crucial in an environment characterized by a high level of volatility, uncertainty, complexity and ambiguity also referred to as VUCA.

Organizational design impacts agency costs

Hierarchy involves a series of principal-agent relations, in which the objectives of agents and principals are usually not aligned (Mookherjee 2006). For example, if the contribution of an employee to value creation cannot be demonstrated, employees will have an incentive to free-ride. Hence, organizational design is aimed at alleviating the problems generated by these agency relations, most commonly through an adequate incentive system.

Organizational design impacts how employees can utilize their knowledge

The motivations of individual employees to apply their unique knowledge and skills to the benefit of their employers – inspired by Hayek’s (1945) seminal work on the use of knowledge in society, there is a recognition that individual employees often hold specific knowledge that is vital to the firm's operations, which equips the employee with an information advantage over his/her superior. If these employees are delegated with a decision authority, it will allow their knowledge to contribute to decision making (Aghion and Tirole 1997).

The significance of improving our knowledge about the organization design will stay high in the foreseeable future due to several trends that are taking place (Puranam, 2012):

1. Technological advancements that encourage and enable experimentation with new organizational designs.
2. Large economies like India and China that are transforming the organizational infrastructure of their public administration.
3. The multinational corporations’ increasing attempts to employ globally distributed intellectual resources, coupled with the professionalization of the NGO and charity sector following their example.

The emergence of new forms of organization - What really qualifies as a novel organizational forms?

There is an important phenomenon emerging in organizational design —the gradual substitution of traditional top-down hierarchies with more flexible decentralized structures where employees are given considerable independence in how to carry out their work. The writings, from the popular press, and business books to academic research, have been describing in upbeat voice this new breed of organizations where conventional, old school superior-subordinate relationships have been significantly altered or eliminated altogether to make way to the emergence of novel organizational forms (Billinger & Workiewicz, 2019).

But what makes an organizational form novel? It turns out that the task of proving novelty continues to be challenging for scholars and practitioners alike. Puranam, Alexy, and Reitzig (2014) provide a structured way of defining new forms of organizing. They argue that to qualify as truly novel, an organizational form should provide unique solutions to at least one of the four fundamental problems of organizing in a way that is new compared to other organizations:

1. labour division,
2. labour allocation,
3. reward distribution, and
4. information provision.

However, as each of the four fundamental problems can be solved in an almost infinite number of ways a result is an endless number of possible combinations, with sometimes minuscule differences between them. Also, there are instances when we think that new organizational forms have been developed when they are no more than a modern application of already existing organizational solutions - if we search far back enough, we will find that a "novel" solution has, in fact, been around for some time already. For example, the concept of self-organizing companies like Valve or GitHub can be traced back to the anarchist movements of the nineteenth and early twentieth century in Europe (Billinger & Workiewicz, 2019).

Novel or not, organizational forms are changing

Today’s business environment is more complex as reflected in the increased number and variety of competitors, more dynamic as evident in the faster development of new products and increased effectiveness of transportation and communication technologies, and more dangerous due to increased capabilities of competitors. These developments will almost certainly continue to grow. Galbraith (2012) calls attention to four changes in the business environment that will cause large, hierarchically-structured companies to become too complex.

1. Digitalisation - Big Data could be the next strategic emphasis of future organizations;
2. The move from an economy that is based on mass production that serves mass markets to an economy of mass customization and segmented markets;
3. The increase in the number and types of stakeholders;
4. The need to take into account market differences across regions and nations;

The corporate organizational landscape clearly needs changing – and is changing, indeed. Exploring this shifting nature of the US organizations, Davis (2016) calls attention to a little-acknowledged fact that the number of listed US companies dropped by more than half between 1997 and 2012. The author explains how newly evolving organizational forms are increasingly contributing to the eradication of the traditionally structured multi-tiered companies listed on the stock market. While information and communication technologies improve coordination in traditionally structured organizations, they also enable smaller, less complex companies to supply the same products or services but faster or at a lower cost. They achieve these advantages by using modern information and communication technologies to compensate for the business functions they are missing as they are lean and nimble. These swiftly evolving structural forms come in two shapes:

1. a highly adaptive prime-contractor network
2. a platform structure that provides rapid customer service and operates with low labor costs

Do new forms of organizational design replace the more traditional ones?

We do not yet have enough systematic studies to decide what portion of organizations have left the strict formal hierarchies to embrace flat, matrix, or self-organizing solutions and whether this proportion is increasing over time (Billinger and Workiewicz, 2019). It is hard to claim that organizations with little or no formal hierarchy are novel to the world or that a formal hierarchy disappearing is a recent trend—or a trend at all. What we know, though, is that although these new forms exist, they remain relatively understudied in comparison with conventional hierarchical forms. Hence, these emerging forms certainly present a novel area of research.

Many questions need answers such as:

• Do these new forms perform better compared to traditional alternatives?
• What specific combinations of organizational features generate effective non-hierarchical forms?
• What is the place of leadership in such companies?
• What types of environment call for the switch to non-hierarchical forms?
• How these new organizational forms affect decisions and outcomes?
• What kind of employees are a good fit for such organizations?
• What is the potential of embedding non-hierarchical or less-hierarchical forms into hierarchical organizations?

Some of these questions will be addressed in future articles in the quest of equipping practical decision making with the science-based insights.