Which organizational structures work best in unstable and complex environments

Do you operate in an unstable, complex and ever-changing environment? Then your org-structure needs to reflect that.

Not only will your team achieve greater results with the right org-structure, but it will do so with higher engagement, satisfaction and ultimately less headache for you.

In this article, I’ll explain what an unstable and complex environment is. Next, we’ll look at the three core dimensions of organizational structures, and how they define two fundamental organizational approaches: Mechanistic vs. Organic.

Lastly, we’ll describe some examples of the approaches, and tell you how you can transition into the right org structure for your situation.

Let’s go.

Do You Operate in a Complex Environment?

There’s a number of criteria to determine how difficult your environment is. 

Dynamic vs. Stable

A stable environment doesn’t change much over time. Market forces, key players, technology and other components stay the same over long periods of time. 

An example for a more stable environment is the oil & gas industry.

In dynamic environments on the other hand, things change very rapidly. New competitors, new technology or new consumer behavior create the need for your business to change and innovate constantly.

Complex vs. Simple

In simple terms, simple environments are easy to navigate. It’s easy to build a great offering, sell it to your audience and please your clients.

A simple environment for example would be cleaning services.

A complex environment means it’s hard to run your business. It’s difficult to figure out what to offer, how to structure the offering, how to price it, how to find clients, etc.

Diverse vs. Integrated

An integrated business environment means you’re dealing with only a few entities in each category. A small number of clients, a small number of vendors, very few stakeholders. You can also consider your business integrated if you have a larger number of clients etc, but they’re all very similar in the aspects relevant for your business.

An example for an integrated business environment could be that you’re just reselling products from one software company, or just selling to three different clients.

A diverse environment means you’re dealing with a large number of stakeholders on all levels (clients, vendors, partners), that are very different from each other.

An example might include management consulting and other professional services.

Predictability and Variability

There are environments with high predictability and low variability. Outcomes are clear based on inputs, and the same inputs will lead to the expected outcomes.

An example for this would be a paint business.

On the other hand, there are fields of low predictability and high variability. You can’t really predict what outcomes your actions will have, and even if you do the same thing, outcomes might differ from iteration to iteration.

An example for such an environment is research, but also many early stage startups in tech or other industries belong to that category.

A complex environment in summary.

For the sake of readability, I’m gonna use the term complex in the following to express an environment that:

  • Is dynamic rather than stable
  • Is complex rather than simple
  • Is diverse rather than integrated
  • Has low predictability and high variability

Not all of these criteria might exist for your business. But if you’re on 2 or more of the complex ends of this list, then you read on. 

Dimensions of an Org Structure

Now that we’ve established what a complex environment looks like, the next step is to discuss what fundamental options you have when designing an org-structure and the resulting operating model.

High vs. Low Span of Control

The first question is: How many people do you (or any manager in your team) manage directly. If you manage multiple people, you have a high span of control and a flat structure. As a rule of thumb, anything beyond five to seven direct reports can be considered a flat structure, depending on the industry.

Conversely, if you manage a small number of people, you have a low span of control and a tall organizational structure.

Centralized vs. Decentralized Decision-making

Next, let’s look at how you make decisions in your team. In a centralized structure, all decisions are made by a small number of people, in smaller organizations often the CEO.

In decentralized decision-making, decisions are made by the people facing the problem directly. Obviously, this requires more autonomous team members (more on that later).

High vs. Low Formalization

Lastly, the question of how formalized operations are: If there’s rules, SOPs and templates for everything, you have high formalization.

If work, decisions, collaboration and communication are only very basically defined, and people operate more autonomously and freely, you have low formalization.

Mechanistic Structures

Based on the above dimensions, there are two fundamental organizational approaches. They mark the end points of a scale, and most businesses will sit somewhere on that scale, not necessarily at these endpoints.

Also, it’s important to note that different parts of your team might operate on different places on that scale.

First, there are mechanistic structures. They are characterized by 

  1. Low spans of control, resulting in tall organizational structures
  2. High centralization, meaning that decisions are made by few people centrally
  3. High degrees of formalization, meaning there are procedures, policies, SOPs and templates for most of the work.

Mechanistic structures tend to work well in non-complex environments. When business doesn’t change much, is predictable, rather easy to do and rather integrated, mechanistic structures thrive.

They offer great opportunities to increase efficiency, drive productivity and optimize for low-cost delivery.

Examples of mechanistic structures can be found in the 20th century automobile industry, banks or any other industry that is perceived to be very hierarchical. 

For smaller businesses, any organization that focuses on delivering the same service at scale in a non-complex environment will often look more mechanistic, like cleaning companies or tax firms.

Organic Structures

On the other end of the spectrum, there are organic structures. They’re characterized by:

  1. Larger spans of control, meaning falter hierarchies
  2. Decentralized decision-making, more people have the authority and ability to make decisions and
  3. Low degrees of formalization

Organic structures work well in complex environments as defined above. Flat hierarchies call for more autonomy of the team. Decentralized decision-making helps respond to change quickly, and low formalization keeps the team looking for the best solutions to ever-changing challenges.

Here you have it: In complex, unstable environments, you should set up an organic organizational structure.

Let’s have a look at a few examples of organic org structures next.

Examples of Organic Structures

Whether or not an org structure is organic doesn’t only depend on what the org chart looks like. Even more critical is the operating model that results from it.

Flat functional structure

The classical functional structure, where people are being grouped into departments based on their functional tasks, is the most used org structure in smaller organizations.

It can be organic if it is designed like this:

  • You have few hierarchy levels, meaning every manager has a larger number of direct reports.
  • This requires the teams (and managers) to have high levels of autonomy.
  • Decisions are being made by whoever faces an issue, and not necessarily by the manager or CEO
  • You use only a few SOPs and policies, but rely on information communication for problem solving.

Team-based structures

Team-based structures are characterized by small, interdisciplinary teams that can deliver a piece of work autonomously. A sub-form of the team-based structure is the pod structure.

A team-based structure is organic for the following reasons:

  • Decision-making by design is put in the hands of the teams
  • Team members, at least in their day-to-day, don’t report to their managers, but work collaboratively in the team
  • Formalization is usually low, as teams are compiled to solve complex problems. Sometimes, there can be a certain degree of formalization per role in the team, where best practices of the individual disciplines are defined.

How to Implement an Organic Structure

If you’re operating in a complex environment, and have been using a more mechanistic approach (tall structures, you made all decisions, trying to put everything in SOPs), you might consider switching to a more organic approach.

Here are the critical steps.

Design your target operating model

Develop the organic org structure that works best for your organization. This could be team-based, or a more organic version of your existing org structure.

Take people with you on the journey

It’s critical that your team understands what you’re trying to accomplish and what their role is in the plan.

Upskill and allow for change to occur

If your team has operated in a tightly managed and highly mechanistic environment for a while, you can’t just throw them into an organic model and expect them to deliver.

Instead, acknowledge that they have to fundamentally change the way they work across all dimensions:

  • Where there always was a manager to give direction and guidance, now they have to set their own priorities.
  • Where there always was you or the manager to ultimately make decisions, now they have to take ownership of the problem.
  • Where people could rely on someone being accountable, now accountability is on them
  • Where there were clear process descriptions in place, you now want them to develop their own solutions.

Not all of these points might be equally strong in your case, but here’s the key take-away: Changing your way of operating to be more organic will take time. People need to unlearn the old ways and adopt the new ways. 

Autonomy and accountability go hand in hand

It has to be clear to everyone that more freedom in the way they work needs to result in more ownership of solutions designed and results achieved.

Accept mistakes as a natural part of the process

When people have higher autonomy, it means you can’t and shouldn’t control how they work. Inevitably, this will lead to situations where your team does things differently than you would.

You need to accept that, both in the transition and also later when the new structure is implemented.

But the payoff can be huge. 90% of decisions made quicker and in better quality will usually outweigh the 10% poor decisions

Autonomy doesn’t mean negligence

We see all too often that CEOs who try to implement organic models with high authority resort to not managing at all. 

The team has no guidance, no feedback and no strategic direction.

This is not what it’s about. 

You need to still be there for the team, but need to focus on four things:

Following these steps will help you successfully implement an org structure that performs well in unstable and complex environments.

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