77. Organizational Diamond

Key Definitions

An organization is a group of people striving towards a shared goal over a prolonged period of time, who have divided the necessary work between them (differentiation), while coordinating their efforts (integration) to achieve the intended result together (Lawrence and Lorsch, 1967).

An organizational structure is the design used to divide work activities between units and individuals (task allocation), while ensuring that, where necessary, these activities are aligned (task coordination) and they are performed efficiently and effectively (task supervision).

Conceptual Model

The Organizational Diamond framework offers a simple key for designing even complex organizations. It is based on the premise that when structuring an organization designers need to balance, on the one hand, the advantages of keeping similar value activities together in functional teams (diagonally on the left), with on the other hand the advantages of keeping complementary value activities together in cross-functional value stream teams (diagonally on the right). In other words, every organizational design is fundamentally a balancing act between achieving internal synergies and external responsiveness. When deciding on the most effective structure, this trade-off needs to be considered at various levels of aggregation.

Key Elements

The two fundamental design principles are the following:

1. Coordinate Value Activities to Achieve Synergies. Keeping similar value-adding activities together in one person or department can create scale advantages, such as lower cost, higher quality and increased expertise. This is the internal functional team logic, usually leading to functional managers at the head of departments (see top left). However, these synergies are only viable if the activities are (made) similar enough.
2. Coordinate Value Streams to Achieve Responsiveness. Keeping complementary value-adding activities together in one person or department can create responsiveness advantages, such as market adaptability and customer-centricity. This is the external cross-functional team logic that is particularly important if markets are very different. This leads to having business unit, product line and/or regional managers as department heads.

The framework then suggests the following organizational design process:

1. Evaluate Building Blocks Bottom-Up:
   1. Map out all main value-adding activities. Determine a detailed picture of all of the work that needs to be done (the light blue examples in the diagram, but more detailed).
   2. Assess the responsiveness advantages. Determine how different each product-market combination (PMC) is and what the benefits of tailoring to each would be.
   3. Assess the synergy advantages. Determine how similar various activities are and how large the scale benefits could be.
2. Structure Building Blocks Top-Down:
3. Design main structure. Determine whether the main structure will be function-based or market-based (by business, region or customer group). At the next level do the same.
4. Design secondary structure. Determine where the “fixed line” coordination needs to be supported by “dotted line” coordination. Do this at every level, from the top down.
5. Slot people into the structure. Determine which person should be on which team, to carry out which activities. Recruit/replace people to fit with the activities.

Key Insights

• Organizational design is about value creation. Organizations are groups of people, but their design shouldn’t be based on the people, but on the value they are intended to create. Organizations should be fit for purpose, so structuring them starts with understanding which value-adding activities need to be carried out and how these can be performed as efficiently and effectively as possible. So, first structure the activities, then add the people.
• Organizational design balances internal and external logics. All the value-adding activities can be coordinated in two ways: similar activities can be clustered to create internally oriented synergies, while complementary activities can be clustered to achieve externally oriented responsiveness. These opposite possibilities need to be balanced.
• Organizational design should always start with business design. Whether the diamond should tip to the right, emphasizing functional synergies, or tip to the left, focusing on market responsiveness, depends on the chosen business strategy. Structure follows strategy (Chandler, 1962). The business model determines which activities to coordinate.
• Organizational design should be bottom-up and then top-down. Structuring should start with a bottom-up understanding of all the required value-adding activities and the potential for synergy and responsiveness advantages. Only then can clustering choices be made, starting from the top down, with a first level of structuring, followed by multiple next levels, each time using the same internal-external advantage trade-off.
• Organizational design balanced fixed line and dotted line. While the main structure determines the formal divisions and reporting lines, there is usually still room to coordinate between activities across units/departments using a variety of “dotted line” integration mechanisms. See the 11C Synergy Model (#8) and Customer-Centricity Model (#51).