The Importance of Organizational Structure

6 minute read

Takeaway: It is in the relationship between competitive strategy, value chain, and structure that the importance of organizational structure is clearly recognizable.

Why is Organizational Structure Important?

Organizational structure is important because it orders your organization to deliver value to a market. Your organization’s value chain is the sequence of high-level operations that represents your core value-creating process. It is the translation of competitive strategy into activity. The value chain is thus the central organizing principle for decisions about structure. If organizations are structured according to a different central principle, the organization is then designed to do something different.

Create a tight connection between the ideas of competitive strategy, value chain, and structure. It is in this relationship that the importance of organizational design structures are clearly recognizable. The benefit of this understanding is that the core work of your organization will always remain the foundation of observations, deliberations, and decisions associated with the way you organize and lead people.

Why Organizations Need a Clear Competitive Strategy

An effective organizational structure is a plan to achieve superior economic performance. It is a set of choices that define what an organization will and will not do. The key to strategy is to define a path to create unique value for a target market. Strategy asks that you determine how you can be unique in ways that are valued by the market.

Strategy as a competitive position in a market identifies three generic strategies capable of producing favorable economic returns. Students of Michael Porter will find these positions familiar.

A distinctive value proposition must translate into a set of activities that is different from those of its competitors. The essential nature of strategy is the development of a tailored value chain—choosing different activities to perform compared to your market competition or performing the same activities differently. Otherwise, you are competing on the same basis as your competitors. You are then said to be competing to be the best and, by Porter’s definition of strategy, you have no strategy.

Organizational Structure Follows the Work

Another importance of organizational structure in business is that it defines the formal way in which work and people are grouped into units. It follows the value chain. Structure helps shape benefits available through skill specialization, focused attention, control and coordination, cost reduction, and opportunity for leadership development. (Mahler, 1975)

The core ideas that form the basis of structural decisions are work and work in boundaries. We started the conversation of work when discussing the value stream as the core expression of competitive strategy. The value stream is the work. It might surprise you to learn that many organizations do not have a clear and explicit understanding of the end-to-end value-generation process. It is this level of work granularity that allows the notion of unit operations to become visible. Organizations are structured to deliver these unit operations. This is called work in boundaries.

A structural design is complete only after work in boundaries is re-integrated through integrating mechanisms, which we call glue. It is an unavoidable feature of departmentalization that some people are brought together while others are separated. Glue mechanisms are needed to allow work to flow through the white space created by the structure itself. It is important to understand that any set of choices that separates work will naturally create gaps that must be addressed through integration.

What Makes a Good Organizational Structure

Lateral capability further integrates an organization across the structure that develops from departmentalization that separates work into work in boundaries. It is through the deliberate development of lateral capability that an organization can respond effectively to challenges that are not neatly addressed through the formal structure. This capability, therefore, allows an organization to make more decisions more often based on perspectives, capabilities, experiences, and knowledge drawn from across the vertical organization structure. For those who say “structure limits flexibility”, this is the answer.

There is a hierarchy of lateral integration mechanisms. The informal organization is at the bottom or most basic level. This is the easiest and least costly integration mechanism to develop and manage. At the other end of the continuum is the matrix organization. The defining characteristics of the matrix are dual reporting relationships and a balance of power. It is a sophisticated and costly form of lateral capability that requires significant managerial and leadership maturity from members of the organization. It is good economic and managerial guidance to work as low on this continuum as possible.

By Design or Default, All Organizations Have Structure

The importance of organizational structure is found in its relationship to strategy and the value chain. The structure is an expression of work that is separated into work in boundaries to deliver the value chain. Because of this separation, it is also necessary to address the concept of glue needed to re-integrate unit operations into a single value chain. It is also necessary to understand that no structure can meet all your operational needs for flexibility and speed.

If you’re interested in the structure of your organization, the first step is to have a conversation with your leadership team about your strategy and your value stream. The benefit of this first step is that you are looking at the bedrock on which an effective and rational organizational structure is built.

Let’s Talk

Dan Schmitz is a Consultant at ON THE MARK. 

OTM is the leading global boutique organization design consultancy with offices in the USA and UK. With over 450 successful redesigns and operating model modernizations completed, OTM is the owner of the industry’s most integrated, comprehensive, and holistic organization design solution. OTM enables its clients to realize their future ambitions.