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How to Design Organizational Structures by Understanding Organizational Routines - Ideas for Leaders
Idea #451

How to Design Organizational Structures by Understanding Organizational Routines

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KEY CONCEPT

The characteristics of an organization’s routines — specifically their purpose (operational or dynamic) and whether or not they are specific to individual business units — help define the most effective structure for that organization. 


IDEA SUMMARY

How are organizational routines — routines in an organization that involve more than one individual — related to the effectiveness of an organizational design or redesign? Answering this question begins with understanding two important characteristics of organizational routines: purpose and business-unit specificity.

Routines in an organization will have one of two purposes: an operational purpose, that is, the routine is oriented toward maintaining the status quo; and a dynamic purpose, which indicates a purpose to foster and enable change. Capital investment, product development, and strategic development and implementation all involve dynamic routines.

Routines are often context specific. Automobile assembly, for example, is based on a routine that is repeated continuously. However, that routine will be different for different automakers, and even for different plants within one automaker (depending on the make or type of vehicle being assembled). Previous research shows that the most common level of context for organizational routines is the business unit. Thus, business-unit specificity — whether the routines are specific to individual business units or involve the organization beyond the business unit — will also help define the ideal structure or design for the organization.

Any analysis of organizational design must involve the core issue of centralization versus decentralization. Two aspects of this issue — the division of tasks and the extent of delegation of decision-making — are key to understanding the link between routines and organizational design.

Certain organizations consist of highly independent business units, each with tasks and processes that are specific to the business unit. Because the tasks and processes are business-unit specific, the organizational routines associated with these tasks are also business-unit specific. This type of organization — with independent units that have minimal interaction among them — is considered to have a “modular” design: its organizational structure consists of independent modules. Non-modular organizational structures occur when the overlap or similarity of processes and tasks among the different business units require cross-unit coordination, for example involving the transfer and sharing of resources.

In modular organizational structures, top management does not have a heavy coordination responsibility, which means that decision-making authority can be pushed down to the individual business unit level. Top management oversight in these organizations is often limited to financial controls.

All other things being equal, then, business-unit specific organizational routines indicate independent business units, which in turn indicate that a modular organizational design is the ideal. Conversely, non-business-unit specificity in organizational routines would point to a non-modular design.

The dichotomy is incomplete, however, because research shows that the purpose of the organizational routines — whether business-unit specific or not — makes a difference. Some operational routines are indeed self-contained; there is no need for top management involvement or inter-unit coordination. Other operational routines, for example involving internal supply chains, will involve different units and therefore require some coordination and oversight outside of the individual business units; with these types of routines, top management becomes more involved.

Dynamic routines, which involve areas such as cross-functional innovation or supporting strategic and organizational change, would seem to intuitively involve top management. Such change involves the organization as a whole rather than the individual business units. However, not all dynamic routines require top management support. For example, in pharmaceutical companies, different medical conditions require different routines for choosing the next research avenues to explore. Such choices, although involving change, should stay within the business unit, where the expertise to make these choices reside.  


BUSINESS APPLICATION

What is the best organizational design for your company? When making decisions on how to design or redesign your organization, a thorough exploration and understanding of organizational routines can indicate the ideal design.

As a decision-making guide, the relationship between organizational routines and organizational design (including the level of top management team involvement) can be summarized in a four-quadrant matrix based on the two characteristics of organizational routines — business-unit specificity and purpose:

Quadrant 1: Operational Routines With Low Business-Unit Specificity. Standard operational routines would intuitively require low top management team involvement. However, the routines are inter-unit, which means that low to medium top management team involvement is required. Because of the low business-unit specificity, this quadrant calls for less modular design.

Quadrant 2: Operational Routines With High Business-Unit Specificity. Because we are dealing with operational routines that are business unit specific, low top management team involvement is all that is required. The business-unit specificity of the routines means that this quadrant calls for more modular design.

Quadrant 3: Dynamic Routines With High Business-Unit Specificity. As indicated above, dynamic routines are not always related to organization-wide tasks and processes. The business-unit specificity characteristic trumps other factors. This quadrant also calls for low top management team involvement and more modular design.

Quadrant 4: Dynamic Routines With Low Business-Unit Specificity. Dynamic routines that are not specific to business units are the ones that demand the most attention of top management. This quadrant, therefore, requires medium-to-high top management team involvement. The low business-unit specificity of the routines also calls for a less modular design.

In sum, the level of modularity ideal for your organization’s structure — that is, how independent or inter-connected are its units — can be determined in large part by looking at the characteristics of the organizational routines in the different units.


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Idea conceived

July 31, 2014

Idea posted

Oct 2014
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