Originally posted on Organizational Physics by Lex Sisney

If I were to ask you a random and seemingly strange question, “Why does a rocket behave the way it does and how is it different from a parachute that behaves the way it does?” You’d probably say something like, “Well, duh, they’re designed differently. One is designed to go fast and far and the other is designed to cause drag and slow an objection in motion. Because they’re designed differently, they behave differently.” And you’d be correct. How something is designed controls how it behaves. (If you doubt this, just try attaching an engine directly to a parachute and see what happens). But if I were to ask you a similar question about your business, “Why does your business behave the way it does and how can you make it behave differently?” would you answer “design?” Very few people – even management experts – would. But the fact is that how your organization is designed determines how it performs. If you want to improve organizational performance, you’ll need to change the organizational design. And the heart of organizational design is its structure.

Form Follows Function — The 3 Elements of Organizational Structure & Design

There’s a saying in architecture and design that “form follows function.” Put another way, the design of something should support its purpose. For example, take a minute and observe the environment you’re sitting in (the room, building, vehicle, etc.) as well as the objects in it (the computer, phone, chair, books, coffee mug, and so on). Notice how everything serves a particular purpose. The purpose of a chair is to support a sitting human being, which is why it’s designed the way it is. Great design means that something is structured in such a way that it allows it to serve its purpose very well. All of its parts are of the right type and placed exactly where they should be for their intended purpose. Poor design is just the opposite. Like a chair with an uncomfortable seat or an oddly measured leg, a poorly designed object just doesn’t perform like you want it to.

Even though your organization is a complex adaptive system and not static object, the same principles hold true. If the organization has a flawed design, it simply won’t perform well. It must be structured (or restructured) to create an design that supports its function or business strategy. Just like a chair, all of its parts or functions must be of the right type and placed in the right location so that the entire system works well together. What actually gives an organization its “shape” and controls how it performs are three things:

    1. The functions it performs.
    2. The location of each function.
    3. The authority of each function within its domain.

The functions an organization performs are the core areas or activities it must engage in to accomplish its strategy (e.g. sales, customer service, marketing, accounting, finance, operations, CEO, admin, HR, legal, PR, R&D, engineering, etc.). The location of each function is where it is placed in the organizational structure and how it interacts with other functions. The authority of a function refers to its ability to make decisions within its domain and to perform its activities without unnecessary encumbrance. A sound organizational structure will make it unarguably clear what each function (and ultimately each person) is accountable for. In addition, the design must both support the current business strategy and allow the organization to adapt to changing market conditions and customer needs over time.

What Happens When an Organization’s Structure Gets Misaligned?

When you know what to look for, it’s pretty easy to identify when an organization’s structure is out of whack. Imagine a company with an existing cash cow business that is coming under severe pricing pressure. Its margins are deteriorating quickly and the market is changing rapidly. Everyone in the company knows that it must adapt or die. Its chosen strategy is to continue to milk the cash cow (while it can) and use those proceeds to invest in new verticals. On paper, it realigns some reporting functions and allocates more budget to new business development units. It holds an all-hands meeting to talk about the new strategy and the future of the business. Confidence is high. The team is a good one. Everyone is genuinely committed to the new strategy. They launch with gusto.
But here’s the catch. Beneath the surface-level changes, the old power structures remain. This is a common problem with companies at this stage. The “new” structure is really just added to the old one, like a house with an addition – and things get confusing. Who’s responsible for which part of the house? While employees genuinely want the new business units to thrive, there’s often a lack of clarity, authority, and accountability around them. In addition, the new business units, which need freedom to operate in startup mode, have to deal with an existing bureaucracy and old ways of doing things. The CEO is generally oblivious to these problems until late in the game. Everyone continues to pay lip service to the strategy and the importance of the new business units but doubt, frustration, and a feeling of ineptitude have already crept in. How this happens will become clearer as you read on.

Edwards Demming astutely recognized that “a bad system will defeat a good person every time.” The same is true of organizational structure. Structure dictates the relationship of authority and accountability in an organization and, therefore, also how people function. For this reason, a good team can only be as effective as the structure supporting it. For even the best of us, it can be very challenging to operate within an outdated or dysfunctional structure. It’s like trying to sail a ship with a misaligned tiller. The wind is in your sails, you know the direction you want to take, but the boat keeps fighting against itself.

An organization’s structure gets misaligned for many reasons. But the most common one is simply inertia. The company gets stuck in an old way of doing things and has trouble breaking free of the past. How did it get this way to begin with? When an organization is in startup to early growth mode, the founder(s) control most of the core functions. The founding engineer is also the head of sales, finance, and customer service. As the business grows, the founder(s) become a bottleneck to growth — they simply can’t do it all at a larger scale. So they make key hires to replace themselves in selected functions – for example, a technical founder hires a head of sales and delegates authority to find, sell, and close new accounts. At the same time, the founder(s) usually find it challenging to determine how much authority to give up (too much and the business could get ruined; too little and they’ll get burned out trying to manage it all).

As the business and surrounding context develop over time, people settle into their roles and ways of operating. The structure seems to happen organically. From an outsider’s perspective, it may be hard to figure out how and why the company looks and acts the way it does. And yet, from the inside, we grow used to things over time and question them less: “It’s just how we do things around here.” Organizations continue to operate, business as usual, until a new opportunity or a market crisis strikes and they realize they can’t succeed with their current structures.

What are the signs that a current structure isn’t working? You’ll know its time to change the structure when inertia seems to dominate — in other words, the strategy and opportunity seem clear, people have bought in, and yet the company can’t achieve escape velocity. Perhaps it’s repeating the same execution mistakes or making new hires that repeatedly fail (often a sign of structural imbalance rather than bad hiring decisions). There may be confusion among functions and roles, decision-making bottlenecks within the power centers, or simply slow execution all around. If any of these things are happening, it’s time to do the hard but rewarding work of creating a new structure.

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