Academics 1 Minerva Guide 10
Organizational Structure in Complex Systems Katie McAllister, Ph.D. Last modified: January 22, 2019
As we have seen with networks, the structure of relationships between individuals affects the flow of information and shapes higher order effects or outcomes in a system. In the context of an organization such as a corporation, government or institution, the formal structure will determine how the organization operates and performs. Different organizations employ different structures which can vary from organic, highly interconnected and flexible arrangements to rigid, compartmentalized hierarchies. With many different options available, it is important to consider the values, goals and context of the organization when selecting a particular structure.
Organizational structure and complexity
Organizational structure will be considered a special case of decomposing a system into components or units, such as major divisions/branches, departments, working groups and individuals. In many cases it may also be useful to consider levels of analysis when evaluating an organization, as different “org structures” can result in specific characteristics or behavior at an individual level, group/department level, or organization-wide level (for example).
Common approaches to organizational design
When analyzing system behavior in the context of an organization, an important starting point is to attempt to classify the org structure. While exceptions and hybrid models exist, the below can be used as a general set:
Hierarchical Organizations ● Functional Hierarchy
Figure 1. Functional organization chart of a company that produces medical devices (pacemakers, artificial joints, stents…), consumer healthcare products (toothpaste, deodorant, soaps…) and pharmaceutical drugs (prescription and “over the counter” drugs). Note: this org chart is abridged, other functions could include logistics, operations, technical, finance, IT, human resources, legal...
In a functional hierarchy the organization is structured around major job functions relevant to fulfilling the purpose of the organization. Individuals perform specialized functions within their area of expertise, and the organization can grow by simply adding individuals within the functions. One downside is that it can be hard to communicate effectively across the functions, given different mindsets, priorities, or ways of working specific to each function. This can be referred to as the formation of “silos” or a “silo mentality,” where different functions fail to effectively share information or engage in cross functional tasks that are perceived as requiring effort beyond what would be required to operate within their silo.
● Divisional / Business Unit Hierarchy
Figure 2. Divisional/business unit focused organization chart. Note: this org chart is abridged, other functions could include logistics, operations, technical, finance, IT, human resources, legal… In some hybrid models certain functions could be kept separate as direct reports to the CEO, such as HR or Quality & Compliance
This form of hierarchy is arranged around specific markets or consumer segments. For example, a healthcare company could be structured around a pharmaceutical business unit and a consumer healthcare business unit; similarly, a bank could be structured around an investment banking unit, a commercial banking unit (accounts for businesses), and a retail banking unit (personal bank accounts for individuals). This allows for the organization to develop specialization and expertise around specific units, but can be challenging to scale consistently, have inefficiencies where functions are duplicated, and subject to internal friction if different units compete for resources and autonomy within the organization. Similar to the above, a “silo mentality” can form under these conditions.
● Geographic Hierarchy
Figure 3. Geographic organization chart of a company. The delineation of regions varies by organization; common segments also include EMEA (Europe, Middle East & Africa), LATAM or LAC (Latin America & Caribbean), and AMER (North, Central & South America), among others. Note: this org chart represents a structure organized first by geography then by function (as in the functional hierarchy). Another option could be to organize first by geography then by division/business unit.
Similar to the above hierarchies, the geographic hierarchy creates explicit divisions within the organization. In this case divisions are aligned around geographic regions, allowing a high degree of tailoring to the unique demands of a particular region or the ability to be close to customers or production/supply. While an understanding of local culture and the ability to make decisions “on the ground” can be very useful, it can also lead to inconsistencies between regions given local autonomy. In some cases, this can lead to dysfunction across the organization as geographies each attempt to prioritize themselves. It can also lead to organization-wide inefficiencies if functions are replicated in each geography, or a lesser degree of functional excellence or expertise (if each geography attempts to recruit the best talent locally available rather than the organization focusing on one global optimized team). A final challenge can stem from the fact that regions are not necessarily homogeneous: while a “North America” region may rely on a high degree of consistency across The United States of America and Canada, a “EMEA” region (Europe, Middle East and Africa) encompasses different cultures, languages, time zones, and regulatory frameworks. An organization which uses a geographic hierarchy must carefully consider how best to divide the world into manageable units.
Matrix Organizations
Figure 4. Matrix organization chart of a company (abridged).
Instead of a traditional hierarchy, individuals in a matrix organization will have dual reporting lines: one “direct” or primary and one “indirect” or more secondary. In the org chart above you can see individuals with direct functional reporting (solid), who nonetheless indirectly report to the business unit lead (dashed). This is indicative of a situation where the functional reporting takes precedence over the business unit reporting. Why might this choice be made? Perhaps the organization values consistency of R&D across the company or flexible, optimized manufacturing in shared facilities, yet also wants to ensure there is oversight focused exclusively on Med Devices (and each business unit) from “beginning to end.”
In another organization, one might choose to have the primary reporting relationship be the business unit lead, or even have cross functional teams with different individuals within a team having different direct reports. One can also have a matrix where one set of reporting is based on geography.
The matrix organisation is increasingly common as it often balances regional focus with business units / divisions or functions. It can break down silo mentality, be responsive to change, encourage balanced decision-making and promote a greater degree of collaboration. Unfortunately, the additional complexity of dual reporting lines can also lead to competing priorities within the organization, or confusion if the authority of an individual's two “bosses” is unclear.
Flat or “Organic” Organizations
Figure 5. A flat or organic organization. Some clustering or team structures may be apparent, and some agents may appear more “central” to the organization than others.
A flat organization lacks traditional hierarchy or reporting lines, instead, individuals self-organize around the purpose of the organization and work collectively as equals to negotiate duties and priorities. The overall structure and individual roles thus emerge organically through interactions between individuals. This structure is often found in smaller organizations that have grown out of collaborative projects, for example, from 2008-2014 GitHub was a flat, “managerless,” organization (Finley, 2014). The level of autonomy afforded each individual in a flat organization is intended to increase productivity, engagement, and investment in outcomes. It can also allow individuals flexibility when responding to challenges, or provide more opportunities to shape processes or even the direction of the organization.
While perhaps more typical of smaller organizations, there are examples of this model on a larger scale. In analyzing the operations of The Morning Star Company, Hamel describes how employees effectively “make the mission the boss” in a 400 “colleague” organization with over $700m in annual revenue (2011).
Over time, flat organizations may be challenged by the formation of informal hierarchies derived from the “soft power” of popular employees, the formation of cliques, issues handling grievances or underperformance, or even a lack of diversity. Further challenges may also emerge as the organization grows: it can be difficult to incorporate new individuals into a complex network of duties, and challenging to maintain a clear understanding of purpose and functioning across the organization.
Circular Organization
Figure 6. An example of a circular organization structure
Articulated as a new model of organization structure in the 1990s, the circular organization aimed to create a “network structure with permeable boundaries between people, functions, businesses and outside groups, such as customers and suppliers” (Devanna & Tichy, 1990). Similarly to the organic organization, the behavior of individuals and groups is shaped by their adherence to shared values.
In practice this model can vary, but may generally be described as a hierarchy where the traditional boundaries between teams, functions or units is broken down, leading to more formal and informal interactions. This is intended to foster an environment with more collaboration and consensus in decision making and the ability to transfer knowledge quickly and efficiently throughout the organization (Fanning, 1997). Executives at the center are seen as a source of coordination and thought leadership, shaping the vision that permeates the organization.
Similar to challenges highlighted in matrix and organic structures above, a circular structure can also result in some confusion around reporting line and how a given individual fits into the overall structure.
Operating models and organization design
In business or consulting contexts it is also common to talk about "operating model" design. A distinction can made between defining the organization’s structure and also defining other key elements of how it will operate, such as the governance processes or decision rights that will be applied within the structure (e.g. who has the authority to make a decision, versus who may be merely consulted for input or informed of an outcome).
Figure 7. While definitions of operating models can vary, a common focus combines purpose, strategy and key design choices related to organizational structure and governance.
A hierarchical organization does thus not necessarily have big loops of decision-making from the lowest employees up to senior management for the day to day running of the business. While the CEO is ultimately accountable, the right to make day to day decisions is typically embedded within the organization to country leads, divisional vice presidents, middle managers or similar, although some CEOs can take more of a "control freak" approach (a term often applied to Steve Jobs). In hierarchical organizations with "silos" (clearly defined business units / divisions), governance processes can also specify if some decisions are taken with input from the leaders of different divisions, as a means of ensuring collaboration.
Spans and layers If the organization was a tree: how tall would it be? How would it branch? ● Spans refer to the number of employees directly “under” each manager. Too few and the organization is likely inefficient, too many and the manager is likely overwhelmed. ● Layers refer to the number of levels from CEO to most junior employee. The more levels the less the CEO is considered connected to the day to day operations.
While best practices are debatable (and vary by context), one rule of thumb is that an organization should be “eight by eight” such that there are no more than eight layers and each manager has no fewer than eight direct reports.
Centralization and decentralization Who has the authority to make certain decisions and allocate resources? ● In a centralized operating model, authority is concentrated in the hands of top executives ● In a decentralized operating model, authority is spread downwards through geographic/unit/division managers and below.
It is important to note that deliberate design choices can be made in an effort to mitigate specific weaknesses associated with particular organization structures. For example, if a hierarchy is concerned about slow decision making that is not connected to the “day to day” reality of the business, it can deliberately decrease the layers in the organization or decentralize control.
Emergent properties in organizations
From a complex systems perspective we can think of system dynamics and emergent properties as a means of describing the behavior of organizations. Given that approach, relevant emergent properties shaped by the above design choices could include: ● Quality ● Consistency ● Productivity ● Culture ● Agility ● Robustness
References and further resources
Devanna, M. A. & Tichy, N. 1990. Creating the competitive organization of the 21st century: the boundaryless corporation.”Human Resource Management, 29(Winter): 455-47.
Fanning, M. M. (1997). A circular organization chart promotes a hospital-wide focus on teams. Hospital & Health Services Administration, 42(2): 243-254.
Finley, K. (20 March 2014). "Why Workers Can Suffer in Bossless Companies Like GitHub." Wired. Retrieved from: https://www.wired.com/2014/03/tyranny-flatness/
Hamel, G. (2011, December) First, let’s fire all the managers. Harvard Business Review
Rieley, J. B. (1993). The circular organization: How leadership can optimize organizational effectiveness. National Productivity Review, 13(1): 11-19.
The Morning Star Company Organizational Vision. (2019, January 12). Retrieved from: http://morningstarco.com/index.cgi?Page=About%20Us/Organizational%20Vision
Shub, G. et al (2014, July 16). Differentiation Begins With a Target Operating Model. The Boston Consulting Group. Retrieved from: https://www.bcg.com/en-ca/publications/2014/financial-institutions-differentiation-begins-ta rget-operating-model.aspx
Tollman, P. et al (2016, April 5). Smart design for performance: A new approach to organization design. The Boston Consulting Group. Retrieved from: https://www.bcg.com/en-ca/publications/2016/people-organization-new-approach-organiza tion-design.aspx
Wikipedia (n.d.) Operating Model. Retrieved from: https://en.wikipedia.org/wiki/Operating_model