Do You Have a Well-Designed
Organization?
y Michael Goold and Andrew Campbell
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Do You Have a Well-Designed Organization?
Michael Goold and Andrew Campbell
March 2002
Copyright © 2002 by Harvard Business School Publishing Corporation. All rights reserved. 5
Creating a new organizational structure
is one of the toughest – and most
politically explosive – challenges
that an executive faces. Here are
nine tests to guide the way.
Do You Have a
Well-Designed
Organization?
y Michael Goold and Andrew Campbell
To o l K i t
or most companies, organiza-
tion design is neither a science
nor an art; it’s an oxymoron. Or-
ganizational structures rarely result
from systematic, methodical planning.
Rather, they evolve over time, in fits and
starts, shaped more by politics than by
policies. The haphazard nature of the
esulting structures is a source of con-
stant frustration to senior executives.
Strategic initiatives stall or go astray be-
cause responsibilities are fragmented o
unclear. Turf wars torpedo collabora-
tion and knowledge sharing. Promising
opportunities die for lack of managerial
attention. Overly complex structures,
such as matrix organizations, collapse
ecause of lack of clarity about respon-
sibilities.
Most executives can sense when thei
organizations are not working well, but
few know how to co
ect the situation.
A comprehensive redesign is just too
intimidating. For one thing, it’s im-
mensely complicated, involving an end-
less stream of trade-offs and variables.
For another, it’s divisive, frequently dis-
integrating into personality conflicts and
power plays. So when organization de-
sign problems arise, managers often fo-
cus on the most glaring flaws and, in the
process, make the overall structure even
more unwieldy and even less strategic.
What’s been lacking is a practical
framework to guide executives through
the complexities of organization design.
That’s what we aim to provide in this
article. We have reviewed the principles
of good design, studied the structures of
dozens of companies, large and small,
and observed how executives go about
making design decisions. We have en-
capsulated our findings into nine tests
of organization design, which can be
used either to evaluate an existing struc-
ture or to create a new one.The first fou
F
ating initiatives (product launches, fac-
tory automation). List these sources and
initiatives, and check how the design
addresses them. In a perfect world, you
would have a single unit, or department,
dedicated to each source and initiative.
In reality, however, market advantages
often require coordination across units.
For instance, your source of advantage
in one segment may be superior new-
product development. To achieve that
advantage, the business unit responsi-
le for the segment may need to collab-
orate with a central research function.
Or your advantage may be an economy
of scale in manufacturing that requires
coordinated production across numer-
ous business units.
Because collaboration across units is
always more difficult to manage than
collaboration within units, any source
of advantage that requires cross-borde
links–particularly complex ones–should
e a cause for concern. You’ll need to be
confident that the design will enable the
unit managers to give sufficient at-
tention to maintaining the links. Some
compromises may remain; they’ll be
further analyzed by the good-design
tests below.
The Parenting Advantage
Test. Does your design help
the corporate parent add
value to the organization?
Just as parents play varying roles in
families, corporate headquarters play
varying roles in different companies.
The focus of this test is to make sure the
organizational design is tailored to sup-
port these roles. First, explicitly define
and list your company’s “parenting
propositions”–the corporate-level activ-
ities that provide real value to the over-
all company. The propositions might
involve na
ow tasks–for example, man-
aging government relations – or
oad
tests are what we call “fit” tests. They
provide an initial screen for design alter-
natives, revealing whether the struc-
tures support the company’s strategy,
talent pool, and situation. The next five
are “good design” tests. They can help
a company refine a prospective design
y addressing potential problem areas,
including the balance between empow-
erment and control.This set of tests helps
you establish the right amount of hier-
archy, control, and process–enough fo
the design to work smoothly but not so
much as to dampen initiative, flexibility,
and networking.
Many of the tests, and their underly-
ing principles, will sound familiar. Thei
power stems not from their innovative-
ness–we’re not trying to promote a new
theory of business organization – but
from their rigor and completeness. To-
gether, they provide a company’s man-
agement with a structured approach
for analyzing all the key variables of or-
ganizational success. Individual design
decisions will still be difficult, often re-
quiring subjective judgments and hard
trade-offs, but using the framework will
help make the debate more rational,
shifting it away from issues of person-
ality and toward issues of strategy and
effectiveness.
Getting the Fit Right
The Market Advantage
Test. Does your design
direct sufficient manage-
ment attention to your
sources of competitive
advantage in each market?
In formulating a strategy, a company
has to ask itself two fundamental ques-
tions: Which markets should we com-
pete in, and how will we gain an advan-
tage over competitors in those markets?
It may seem obvious that these ques-
tions should also drive the company’s
organization design, but many struc-
tures end up impeding market strategy
ather than furthering it. Some distrib-
ute responsibilities in ways that distract
the management team’s attention from
target customers. Others create divisions
among units that make it difficult fo
them to operate in ways that provide
the company with a competitive edge.
The penalties of such misalignments
can be enormous.
The first and most fundamental test
of a design, therefore, is whether it fits
your company’s market strategy. You
should begin by defining your target
market segments. The definitions will
vary depending on which part of you
organization is being evaluated. If GE,
for example, were designing its overall
corporate organization, it would use
oad definitions such as “aircraft en-
gines” or “
oadcasting.” But if it were
looking only at the design of its financial
services unit, it would use much nar-
ower definitions, probably combining
particular service lines with particula
geographic markets: “aircraft leasing in
Europe,” for instance, or “receivables
financing in Mexico.” There should be
no dispute about the relevant market
segments; if there is, you need to do
some fresh strategy thinking before you
proceed with the design effort.
Next, determine whether the design
directs enough attention to each market
segment. Here’s our rule of thumb: If a
single unit is dedicated to a single seg-
ment, the segment is receiving suffi-
cient attention. If no unit has respon-
sibility for the segment, the design is
fatally flawed and needs to be revamped.
Often, the analysis is not so clear; a unit
may have responsibility for a numbe
of segments. (This is often the case with
small, but rapidly growing, market seg-
ments.) You will need to evaluate such
situations carefully, making judgments
about whether the division of responsi-
ilities will allow sufficient attention to
e focused on the segment.
It’s also important to determine
whether the design supports your key
sources of advantage (speedy introduc-
tion of products, for example, or low-
cost manufacturing) and related oper-
6 harvard business review
T O O L K I T • Do You Have a Well -Designed Organization?
Michael Goold and Andrew Campbell are directors at the Ashridge Strategic Man-
agement Centre in London. They are the authors of Designing Effective Organizations:
How to Create Structured Networks (Jossey-Bass, 2002) and The Collaborative
Enterprise: Why Links Between Business Units Often Fail and How to Make Them
Work (Perseus, 1999) as well as several HBR articles.
❶
❷
The People Test.
Does your design reflect the
strengths, weaknesses, and
motivations of your people?
When an organization doesn’t work
ight, executives are often quick to
lame “people problems.” But that’s
wrongheaded. If an organization is not
suited to the skills and attitudes of its
members, the problem lies with the de-
sign, not the people. For this test, first
look at your key players – the members
of the top management team and othe
individuals deemed critical to the busi-
ness. For each, ask whether the design
provides the appropriate responsibili-
ties and reporting relationships and
wins their commitment. If, for example,
your CEO is a marketing type and the
design focuses her attention on perfor-
mance management, you’ve got a prob-
lem. If your CFO is a hands-on, detail-
oriented guy and your design has the
top finance manager in each business
unit reporting to the unit head instead
of to him, you’re setting yourself up fo
ig conflicts.
Now look at the pivotal jobs in the de-
sign – the positions that will need to be
staffed by highly talented people if the
organization is to work well. Typically,
these will include the heads of all key
usiness units and the managers of all
functions involved in critical cross-unit
elationships. Do you have outstanding
people to staff these jobs today? Do you
have the career paths and development
initiatives needed to create and retain
new talent for tomo
ow? If you had to
find replacements outside, would you
e able to attract and hire them? A de-
sign that cannot be staffed with compe-
tent managers should be abandoned.
If you’re creating a new structure, you
also need to look at the losers – the em-
ployees who will forfeit status or powe
in the revamped organization. All re-
designs create losers, and losers can turn
cynical and resistant, becoming road-
locks to change. You need to make two
difficult judgments. First, determine
which of the losers are influential. Then
decide how to deal with them – eithe
uying their support through added
compensation or neutralizing their in-
fluence by changing their roles or letting
them go.
march 2002 7
Do You Have a Well -Designed Organization? • T O O L K I T
coordination roles, such as maintaining
strong research capabilities across all
units. Or they might entail specific initia-
tives, such as implementing a company-
wide ERP system. (See the exhibit “How
Parents Create Value.”)
Next, determine whether the design
gives sufficient attention to these value-
adding tasks and initiatives. If, for exam-
ple, one of the parent’s key roles is en-
couraging knowledge sharing among a
particular group of units, it’s important
to ask whether there is a manager in the
parent unit focused on that task. You’ll
also need to look hard at the organiza-
tional links among those units. If the
units are located in different divisions, it
may make sense to change the design so
that they become members of the same
division, making collaboration much
easier.Sometimes, this test will highlight
difficult trade-offs that need to be made.
If one of the parenting propositions is to
spur high-speed innovation, for instance,
you will need to decide whether it makes
more sense to centralize R&D in a cor-
porate unit or disperse it in the business
units, which are closer to the market.
The parenting advantage test can
help companies see more clearly the
organizational implications of thei
strategies, as agriculture giant Cargill
ecently discovered. One of the most
important parenting propositions of
Cargill’s headquarters was encouraging
a greater focus on
oad customer solu-
tions rather than on individual prod-
ucts. When top management viewed the
organization in this light, it saw that cer-
tain fundamental changes were needed.
Cargill created new, more market-
focused business units, and it grouped
them together into
oad “platforms”
with management teams that could pro-
mote a coordinated approach to cus-
tomer relationships and solutions. The
Food Applications platform, for exam-
ple,
ought together all of Cargill’s
usinesses that sold products to food
manufacturers; the businesses that dealt
with farmers became the Farmgate plat-
form. The exercise enabled Cargill to
more clearly define its parenting prop-
ositions and create an organization that
supported them.
How Parents Create Value
To be effective, parent units need to think through the ways in which
they can create value or add value to the rest of the organization.
We call these sources of added value “parenting propositions,” and,
in general, they fall into five categories:
Select Propositions
The parent unit creates value by acquiring units or people for less than
they are worth or disposing of activities for more than they are worth.
Build Propositions
The parent unit helps units expand their size and scope of activity
y, for example, helping with globalization or product extensions.
Stretch Propositions
The parent unit helps units improve costs, quality, or profitability by,
for instance, setting stretch targets or providing benchmarks.
Link Propositions
The parent unit helps units work together in ways they would find
difficult if left to themselves. For example, it might centralize activities
or alter incentives