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Organizational Design: A Step-by-Step Approach

Organizational Design: A Step-by-Step Approach

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by Richard M. Burton, Børge Obel, Gerardine DeSanctis

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In today's volatile business environment, it is more important than ever that managers, whether of a global multinational or a small team, should understand the fundamentals of organizational design. Written specifically for executives and executive MBA students, the edition of this successful book provides a step-by-step 'how to' guide for designing an organization.


In today's volatile business environment, it is more important than ever that managers, whether of a global multinational or a small team, should understand the fundamentals of organizational design. Written specifically for executives and executive MBA students, the edition of this successful book provides a step-by-step 'how to' guide for designing an organization. It features comprehensive coverage of the key aspects of organizational design, including goals, strategy, process, people, coordination, control and incentives. These aspects are explained through the use of a unique series of 2 x 2 graphs that provide an integrated, spatial way to assess and plan organizational design. The new edition features a number of important improvements, including a new framework for understanding leadership and organizational climate, the introduction of the concept of manoeuvrability and a completely new chapter examining joint ventures, mergers, partnerships and strategic alliances.

Editorial Reviews

From the Publisher
"This book is a treasure chest of knowledge on how to design organizations to achieve strategic goals. It is among the best researched and most useful business books ever written, and it is authored by three of the foremost scholars in the field of organization design. In one word: superb."
- Felipe Csaszar, Assistant Professor of Strategy, INSEAD

"This edition of Organization Design: A Step-by-Step Approach is a must for CEOs, managers and students. The authors synthesize decades of research into an essential set of concepts and actionable steps that will prove invaluable for anyone charged with leading and managing an organization. Of particular interest in today's climate will be the organization design perspective on M&A, alliances and joint ventures."
- Phanish Puranam, School Chair Professor of Strategic and International Management and Co-Director of the Aditya Birla India Centre, London Business School

"How an organization is designed clearly affects its performance. Organizational Design: A Step-by-Step Approach gives managers the tools they need to analyze the present design of their organization and to make appropriate changes to it. Organization design is still more art than science, but this book provides the latest thinking about the variables involved and how to arrange them for maximum efficiency and effectiveness."
- Charles Snow, Mellon Foundation Professor of Business Administration, Smeal College of Business, Penn State University

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Organizational Design
Cambridge University Press
0521851769 - Organizational Design - A Step-By-Step Approach - by Richard M. Burton, Gerardine DeSanctis and Bøge Obel

Define the scope of the organization and assess its goals

Introduction: The executive challenge of designing the organization

In today's volatile world, organizational design is an everyday, ongoing activity and challenge for every executive, whether managing a global enterprise or a small work team. Globalization, worldwide competition, deregulation, and ever-new technologies drive the ongoing reassessment of the organization. The executive response has been many new forms of organizational design: virtual, learning, modular, cellular, network, alliance, or spaghetti - to name a few. New organizational forms challenge old ways of organizing for efficiency and effectiveness. Yet fundamental design principles underlie any well-functioning organization. Organizations still require a formal design. The fundamentals are: what are our goals? What are the basic tasks? Who makes which decisions? What is the structure of communication, and what is the incentive structure? Fenton and Pettigrew (2000, p. 6) state that "a closer inspection of the literature reveals that many of the new forms are not entirely new but reminiscent of earlier typologies, such as Burns and Stalker's (1961) organic and mechanistic forms and Galbraith's preoccupation with lateral relations." Thus fundamental concepts and principles of organizational design remain very important for the modern organization of today and tomorrow.

To address the challenge of designing the organization we adopt a multi-contingency view (Burton & Obel, 2004). Based on a large body of research, this view says that an organization's design should be chosen based on the particular context, and further that the description of the context should be multi-dimensional, including both structural and human components. Structural components of organizational design include goals, strategy, and structure. Human components include work processes, people, coordination and control, and incentive mechanisms. Together, these components provide a holistic approach to the organizational design challenge.

Organizational design starts with the organization's goals, and from there we work from the top to the bottom, considering strategy, structure, process, people, coordination, and control. This is a top-down approach to design. We could start the design process using the reverse approach, that is, by specifying how we want to coordinate and control work tasks and then designing the organization from the bottom to the top, designing tasks ahead of strategy; but such an approach would eliminate some possible good designs because the tasks of the organization can be affected by its goals and strategy. So we recommend a top-down approach that is complemented by iterative incorporation of lower-level issues on the top-level design. Political and implementation issues may suggest that the organization be designed bottom-up. Here again the top-down approach may have to be done in an iterative fashion, and further caution has to be exercised to ensure that lower-level design and choice of tasks do not eliminate some good alternative designs.

Overview of this book

In this book, we keep to the basics of organizational design. Organizational design involves two complementary problems: (1) how to partition a big task of the whole organization into smaller tasks of the subunits; and (2) how to coordinate these smaller subunit tasks so that they fit together to efficiently realize the bigger task or organizational goals. By complementary, we mean that the smaller tasks must be defined and arranged in a way that allows effective coordination. We consider these issues for "older," classic organizational forms as well as "newer," modern organizational forms.

We present a step-by-step approach which is a "how to" method for designing an organization. Each step and its subcomponents provide fundamental building blocks for any organization, and we guide you through the process of assessing each building block as well as planning for change. To simplify and show continuity in our approach, the components of each building block are mapped onto a series of two-dimensional graphs that clearly illustrate managerial options. The graphs are interlocking such that a specific quadrant in any one graph corresponds to the same quadrant in all other graphs. In this way, you can visualize the relationships among the organizational design components and readily identify where there are misfits in your organization's design. Misfits are misalignments within the organizational design components that can lead to deterioration in the firm's efficiency and effectiveness.

Misfits lead to a decrease in organizational performance, either today or in the future. Misfits thus are the starting point for the implementation of change. As such, misfits are the engine of the organizational design process. If your organization changes in response to design misfits, rather than waiting for financial or other performance problems to arise, goal attainment is more likely to be achieved.

The graphs that we will provide for each design component will allow you to visualize and plot the current location of an organization and then identify the desired point to which you would like the organization to move. In this way, you can see where you are and where you want the organization to be in the organizational design space. While diagnostic questions and the two-dimensional graphs give you an easy way to get an overview, the ideas of the book have also been included in the OrgCon® software.1 This software presents a more elaborate version of the approach presented in this book and provides a set of analytic and graphical tools that will ease the process of design. Meanwhile, you can use this book on its own, and the software is not required to complete the step-by-step approach and design your organization.

Organizational design is an ongoing executive process that includes both short-term, routine changes, as well as intermittent, larger-scale changes. We will address the dynamics of design, including misfit management, for both routine and larger-scale changes in the context of organizational design throughout this book.

Our step-by-step approach is based on an information-processing view of the firm. This provides you with a framework and a toolbox for understanding a wide range of organizations in product and service industries across global boundaries. The approach helps you to interpret the history of organizations, assess and redesign complex organizations of today, and plan for the more information-rich organizations of tomorrow. We next describe the information-processing view and then move on to defining the scope of the organization and assessing its goals.

The information-processing view

The information-processing view uses the following logic. An organization uses information in order to coordinate and control its activities in the face of uncertainty where uncertainty is an incomplete description of the world (Arrow, 1974, p. 34). By processing information, the organization observes what is happening, analyzes problems, and makes choices about what to do, and communicates to others. Information processing is a way to view an organization and its design. Information channels "can be created or abandoned and their capacities and the types of signals to be transmitted over them are subject to choice, a choice based on a comparison of benefits and costs" (Arrow, 1974, p. 37). Both information systems and people possess a capacity to process information, but "this capacity is not, however, unlimited and the scarcity of information-handling ability is an essential feature for the understanding of both individual and organizational behavior" (ibid.). Work involves information processing; individuals conduct information- and knowledge-based activities. They talk, read, write, enter information in databases, calculate, and analyze. Various media are available to facilitate information processing - from pens and face-to-face conversation to computers, networks and video meetings. Innovations in information technology affect both the organization's demand for information processing and its capacity for processing information.

The step-by-step approach presented in this book is based on the fundamental assumption that the work of an organization can be seen as information processing: observing, transmitting, analyzing, understanding, deciding, storing, and taking action for implementation. These issues may be labeled with other words like learning, tacit versus explicit knowledge, knowledge management, and data mining, but the basic idea is the same. Organizations are information-processing entities. Therefore, we want to design organizations so that they process information effectively and efficiently.

The basic design problem is to create an organizational design that matches your organization's demand for information processing with its information-processing capacity. Galbraith (1973, 1974), in his seminal work, put it this way: "the greater the uncertainty of the task, the greater the amount of information that has to be processed between decision makers" (Galbraith, 1974, p. 10). Task (or work) uncertainty can arise from a firm's technology and the business environment in which the firm operates (Thompson, 1967) as well as other sources. If the information-processing demand comes from many routine and predictable tasks with an efficiency focus, then formalization in the form of rules and programs can increase the number of tasks that can be handled. As an example, an online retail store in which the shopping and purchase process is rather routine can use rules and programs to increase the number of customers it processes per day. Task uncertainty is low, so the rules and programs are used to manage exceptions. When there are uncertainties associated with the tasks, then information processing is referred up the hierarchy to a level where an overall perspective exists. This is the traditional use of exception-based hierarchical decision making. Unfortunately, such hierarchical decision making can handle only a limited amount of uncertainty. If the uncertainty demands exceed the capacity of the hierarchy, then targets or goals have to be set for the various tasks, making the tasks somewhat independent. Coordination of work has moved from an efficiency orientation to an effectiveness orientation. Organizations thus face a tradeoff: they can either reduce their need for information processing or increase their capacity to process information (Galbraith, 1974). These are the two managerial options.

The first option is to reduce the organization's need for information processing by increasing slack resources. For example, if the organization uses a just-in-time (JIT) inventory approach, which requires precise coordination, then the organization might shift to having buffer inventory. Buffer inventory replaces the need to process the information required for JIT. As another example, information-processing needs can be reduced by creating self-contained tasks that do not require coordination among them in order to deliver the firm's product or service. For example, a two-product firm can create two self-contained single-product divisions that need not communicate in order to meet their customers' needs. Of course, this strategy of reducing the need for information processing may incur high opportunity costs from loss of coordination of interdependencies. Single-product divisions may ignore interdependencies in production or marketing, which may be costly in terms of lost opportunities. Thus, reducing information needs must be balanced with the returns from coordinated activities.

A second option is to increase the organization's capacity to process information. For example, in a hierarchical organization, the hierarchical processing of information can be increased by investment in a vertical information system. An information system may increase the speed and amount of information that can be exchanged. The introduction of satellites, information computer networks, the Internet and integrated CAD-CAM systems can increase the information-processing capacity of the organization. Upgrading the skills of the workforce, hiring more educated people with broader abilities, using mobile communication devices, or holding face-to-face meetings where people can share information are other ways to increase information capacity. Information-processing capacity can also be increased by creating lateral communications across the organization. Direct contact, liaison roles, task forces and permanent teams are other examples of strategies that will increase the firm's information-processing capacity.

The development of new information technologies, methods for organizational learning and technologies for knowledge management require a revisit of traditional strategies for managing a firm's information-processing capacity. Interactive information networks, multimedia systems, and generally the speed and amount of information that can be processed all have served to increase the information-processing capacity of firms. At the same time, the volume of information that firms must process continues to increase. There are more things we want to know about our customers' buying behavior, more research to be gathered for product development and production, more details in the service we want to provide, and so on. So the challenge of designing the organization in a way that best meets demands for information processing remains.

Without doubt, organizations are information-processing entities, and both the information-processing capacity and demands on firms have surged as the cost of information-processing technology has decreased. Along with this trend, there has been a reduction in slack resources in most companies, a slight increase in use of self-contained units, a large investment in computer-based technologies, and a large increase in lateral communications. All this has led to "leaner and meaner" organizations, less inventory, less equipment, and fewer employees, particularly middle managers. Those who remain use information much more quickly and efficiently. This introduces the issue of information management by the human resources in the organization. Many organizations have invested in the technical side of knowledge-management and other information systems without getting the benefits, often because the human side was neglected. For this reason, we will emphasize the human side of organizational design in our step-by-step approach.

Select an organization for analysis

Let us get started with our step-by-step approach. For the purpose of analysis you should think about the definition of an organization in theoretical terms. In such terms an organization can be defined as "a consciously coordinated social entity, with a relatively identifiable boundary, which functions on a relatively continuous basis to achieve a common goal or a set of goals" (Robbins, 1990, p. 4). Thinking about your organization in these terms will allow you to manage its design and not be overwhelmed by the many, extensive set of activities involved in managing your organization every day. As you will see, this definition corresponds well to the components in our five-step approach.

Now select a specific organization for your use throughout this book. We will walk through the design of that organization in a step-by-step fashion. The organization can be a team, department, division, an entire company, or even a set of companies (such as a holding corporation or a strategic alliance). Your choice of an organization becomes the unit of analysis for the entire five-step design process. It is important to stick with the same unit of analysis as we go through this design process. At the end of each chapter we will state a number of diagnostic questions for you to answer that relate to the organization you have chosen. Your answers to the diagnostic questions will be the basis for the organization's design.

Define the scope of the organization

Let us start with a brief explanation of how you should scope your organizational design problem. This is a necessary starting point for analysis. We use the term "organization" or "firm" in the generic sense to refer to the team, business unit, company, or larger enterprise. For most readers the organization is a business firm, but the method we present applies to nonprofit firms, partnerships, joint ventures, educational institutions, hospitals, churches, government agencies - any type of organization in practically any kind of setting.

As stated earlier, organizational design involves two complementary problems: (1) how to partition a big task into smaller subunit tasks, and (2) how to coordinate these smaller subunit tasks so that they fit together to efficiently realize the bigger task and organizational goals. The smaller tasks must be defined and arranged in a way that allows effective coordination. For example, the big task of General Motors or IBM is broken down into divisions and departments. For a project team, the project task must be broken into individual tasks. These smaller tasks are then integrated so that the large corporation or project realizes the desired goals. In all organizations, these fundamental, complementary problems of breaking down big tasks and putting smaller ones together are repeated again and again in many forms.

You should think about the design process as a set of cascading organizational design tasks where you go through the step-by-step process for each task (see figure 1). Often the best place for you to start will be at the corporate level: you should design the upper echelons first. Once that part has been designed, move on to the next levels, which could be departments or divisions, as we shall discuss in subsequent chapters. For example, you first design the divisions in a divisional organization and then you determine how the divisions should be coordinated with one another. Each division can be different from the other - one functional, another matrix. In the cascading process, it is important to consider only one "organization" at a time; do not mix the design of the whole organization as a set of divisions with the design of any one division. More formally, keep the unit of analysis consistent. This process may be replicated in an iterative fashion. The idea of equifinality (Doty et al., 1993) is that for a given situation there may be more than one feasible design option from which to choose. Therefore, you may have to go through the design cascade for more than one option.

Assess the organization's goals

You should start by assessing the relative importance to the organization of two fundamental goals, efficiency and effectiveness. Efficiency is a primary focus on inputs, use of resources, and costs. Effectiveness is a focus more on outputs, products or services, and revenues. These are competing priorities. Some organizations place a higher priority on efficiency, focusing on minimizing the costs of producing goods or services. Other organizations emphasize effectiveness, focusing on generating revenues or seizing leading-edge innovation in the marketplace. All organizations value both efficiency and effectiveness to some degree, but the question is: which is the dominant priority? For example, no-frills airlines such as Southwest Airlines and Jet Blue focus primarily on efficiency. Firms with significant R&D investment, such as 3M Corporation or a biotech firm, focus primarily on effectiveness. Some organizations focus simultaneously on high efficiency and high effectiveness, such as Singapore Airlines and General Electric.

Firms in quadrant C are just the opposite. Here the organization has higher focus on effectiveness but a lower focus on efficiency. This means that the organization focuses on its goals, but takes less care to attend to the efficient use of resources. This could be the case in highly volatile environments or in situations where the organization constantly develops new ideas and has a first mover advantage and, as such, treats the costs of resources as a secondary concern.

The final goal position is quadrant D, where there is an emphasis on both efficiency and effectiveness. Firms in this quadrant confront competitive, complex and volatile environments that require both product innovations and low cost in order to compete successfully. Organizations in quadrant D pursue the dual goals of efficiency and effectiveness with equal vigor.

The goal position of the organization affects its information-processing requirements. For example, efficiency can be related to first-order learning, which is "a routine, incremental conservative process that serves to maintain stable relations and sustainable existing rules" (March, 1991). Effectiveness, on the other hand, can be associated with second-order learning, where existing rules are modified and new knowledge in the organization has to be facilitated. Information requirements are much greater if the organization's primary goal is effectiveness rather than efficiency. Efficiency and effectiveness also require different managerial approaches to environmental scanning and incentives and thus demand different organizational designs. From this discussion there seems to be a tension, or competition, between efficiency and effectiveness.

Most executives want to obtain the right balance between efficiency and effectiveness, and almost everyone agrees that modern organizations should focus on both dimensions. But how do you obtain a balance? Some scholars have argued that organizations focus on efficiency and effectiveness sequentially by going through an evolutionary period with a focus on efficiency disrupted by revolutionary periods of change where effectiveness is the focus (e.g., Tushman & Romanelli, 1985). The balance is thus achieved over time rather than simultaneously. Many managers, on the other hand, argue that the efficiency-effectiveness foci are ongoing simultaneously, although the emphasis can vary.

© Cambridge University Press

Meet the Author

Richard M. Burton is Professor of Management at the Fuqua School of Business, Duke University.
Børge Obel is Professor of Organization and Rector of the Aarhus School of Business, Aarhus University.
Gerardine DeSanctis was Thomas F. Keller Professor of Business Administration at the Fuqua School of Business, Duke University.

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