Aligning Business Strategy with Organizational Structure
Business strategy is a function of a company’s internal makeup and its external environment. Change management initiatives are used to continually adjust the strategy over time so companies can achieve their evolving performance goals.
When leaders implement a new strategy without cascading the changes throughout an organization’s structure, they are setting themselves up for a strategic failure. Every company should align its business strategy with a deliberate organizational structure to secure a competitive market position. Creating an appropriate structure will result in a more productive workplace environment that improves staff communications and innovation.
Large global companies often pursue rigid hierarchical structures with clearly defined job roles to manage their output. Many startups take flatter organic structures in which everyone shares different duties. Functional structures are defined by job functions, such as splitting into separate teams for operations, accounting, marketing and HR. Divisional structures are organized by offices or regional locations, allowing each divisional unit to focus on its overall local performance.
Matrix structures combine models so that most people report to two or more leaders, such as a marketing manager who reports to a local marketing director and a national divisional leader. Network structures are designed to focus on the core functions that differentiate a business, with all non-core functions being outsourced to subcontractors.
In poorly designed structures, the business may pursue inconsistent strategic goals. For instance, if the leadership team tries to increase revenue by acquiring new customers, yet the sales team is still rewarded for customer retention, those two conflicting goals will likely get compromised.
The method for creating an effective alignment of strategy and structure should follow four distinct phases, including assessment; design; alternative choices; and architectural design and implementation, based on recommendations by Innovation-Point.com, a strategic innovation consulting firm based in California.
Assessment: Leaders should base their strategic assessments on direct observations, employee feedback loops and archival research from planning documents and performance studies. Findings should be sorted into specific issue categories to help validate management’s options. In this way, managers can agree on how to modify the organizational structure based on key concerns and root causes.
Design: Steps include decisions and processes to scale the business and leverage existing strengths. In addition, management should explore other opportunities across their vertical industry, such as penetration of adjacent markets or forging new partnerships. A successful strategy also requires an impact analysis of lateral processes and structures, such as the effectiveness of org charts, departmental cultures, and systems for staff recruitment and talent management.
Alternative Choices: Any changes to organizational structure will involve some degree of trade-offs. Therefore, discussions should assess where the company enjoys the clearest advantages, and where it is most challenged by competitors. Strategic choices should be focused on increasing customer value, reducing costs over time, and safeguarding a high return on investment. In certain situations, leaders should consider making big bets to finance bold new strategies when the potential outcomes could be extremely advantageous. However, such risky, high-stakes investments should be thoroughly vetted first with a comprehensive cost-benefit analysis.
Architecture Design and Implementation: Each new strategic advance will impact the larger organization, so managers should set out clearly defined responsibilities to guide operational decision-making. Key capabilities for organizational skills and knowledge must also be assigned for each team. In addition, the company should nurture strong cultural standards that are tightly aligned with the larger strategy, including the creation of relevant incentives and penalties to motivate individuals and work groups.
All this advice may sound obvious, but achieving real alignment between business structure and strategy is a challenge for leaders because markets continually change. For this reason, the strategy should be developed by diagnosing the organization’s main problems and identifying any existing performance gaps. A sequential design process can help leaders devise new alternatives for the organizational structure based on an ongoing analysis of competitive pressures, new technology advances, and other changing market conditions. Companies that don’t pay close attention to aligning their strategy with their business structure will continue to pay a steep price in terms of failed initiatives and missed opportunities.