Building Organizational Structure

On a Foundation of Strategy
Kenneth S. Roper and I.J. Jackson III

Ken is an FMI director

Jerry is FMIs

whose areas of expertise

president and COO.

include strategic

He is responsible

planning, business

for consulting

evaluation and

operations, corporate

planning, compensa-

product and service

tion-system evaluation

quality, and human

and design, and

resources develop-

management informa-

ment. He assists contractors with strategic

tion systems for construction-industry firms of all

planning, acquisition integration, and

sizes.

organizational development.

303.398.7218

kroper@fminet.com

919.787.8400

jjackson@fminet.com

This article has three objectives: 1) to provide guidance on choices

in organizational structure, emphasizing how important organizational structure is in connecting your strategic direction efficiently and effectively to
your targeted customers; 2) to offer insight into how a companys structure can create
efficiency, increase communication, and reduce internal friction and cost; and 3) to
explain how organizational structure can contribute to the development of a businesss
leaders and managers.

IN BRIEF

rganizational structure should

follow strategy. Establishing a
successful organizational structure
requires that managers understand and
formalize the organizations strategic
direction first, then modify the structure
of the organization to effectively pursue
that direction. The goal of an
organizations structure should not be to
find a position for all of the managers
and subordinates. The goal of structure
is to support execution of the
organizations chosen strategy. The
organizational structure is a major part
of the how of strategic execution.
So before evaluating organizational
design options, you must define what
your strategy is. Strategy involves

FMI DECEMBER 2001

answering three critical questions:

Who are your customers?

What services will you provide?
How will you provide services?

Two customer groups are key to

your organizational design external
targeted customers and internal
customers. First, you must strategically
target external customers. Then you can
develop an organizational structure that
will allow you to best meet their needs.
Your organizational structure must also
take into account the needs of your
internal customers. Most companies fail
to adequately recognize internal customers needs, even though serving internal

customers is also important. If organizational structure does not provide

internal customers with effective
communication, processes for ease of
execution, and support systems, external
customers cannot be served effectively.
Within every organization, information
should flow in every direction from
customers to the company, throughout
all levels within the company, and back
to customers in the form of execution.
If this information flow doesnt occur,
the blockage can create damaging
information gaps internally and externally and inhibit efficient execution.
The ideal organizational structure
places significant emphasis on key
activities that customers value and
expect you to provide. Value chain
analysis is a way to identify these key
activities. The value chain analysis
considers all of the activities performed,
beginning with the initial contact with
the customer and ending with the
completion of the project. For example,
marketing activities such as project
signage may trigger a prospect to call a
contractor to discuss services, so the
value chain analysis would begin with
the activity of putting up the sign. Postproject activities such as warranty work
and punch lists also generate value for
the customer. A value chain activity is
defined as any process that generates
cost, is necessary for the completion of
a project, and aims to create value for
the customer. These value chain activities include billing and collecting,
change orders, scheduling, and value
engineering.
Your organizational structure should
support all of the key activities your
company performs for customers in the
delivery of services. Begin with marketing issues. How do you organize your
marketing efforts? Who is responsible
for this process? Marketing involves all
activities your company performs as
THE CONTRACTORS MANAGEMENT JOURNAL

Exhibit 1: Sample Functional Organizational Structure

viewed by the marketplace. Once a

prospect calls, the sales function comes
into play, converting the prospect into a
customer. How is the sales function
organized and who is responsible for the
sales process? Selling may involve
estimating or pricing the project. How
is this function organized and who is
responsible for the estimating function?
If your company performs hard-bid,
lump-sum public work, you can easily
see that your organizational structure
should differ significantly from a
company that provides design/build
services on a negotiated basis to private
customers. But in both cases, organizational structure plays a key role in
serving targeted customer groups.

A drawback of a functional design is

the difficulty growing into new types of
work and market segments. Also, a
functional design makes it essential that
managers of functional departments be
highly effective. Poor leadership and
management lead to poor performance.
Turning over processes from one
function to another such as from
estimating to operations requires a
delicate, detailed handoff to ensure
transfer of information. Exhibit 1 shows
a sample functional structure.

Divisional Organizational Structure

A divisional organizational design is
another possibility in organizing a
construction company. This design
provides for greater decentralization of
resources and allows for greater flexibility and diversity. The design tends to
become functional at some point
typically at the division level. It is less
efficient due to some redundancy in
responsibilities, but it works well for
negotiated or design/build construction
services. Some customers are willing to
pay more for the advantages of this
structure. It is important to focus on
client relationships and the contacts to
whom you deliver service offerings.
The divisional organization also
provides general management experience for the division managers. This
experience can be a helpful tool in
developing successor leader/managers
for senior roles in the company.
Division leader/managers are better
when they have entrepreneurial instincts, since they are, in effect, heading
a business unit.

Exhibit 2: Sample Divisional Organizational Structure

ORGANIZATIONAL DESIGN OPTIONS

Functional Organizational Structure

A functional organizational structure
allows for specialization and efficiency.
The functional organizational structure
is good for repetitive work and is the
most common design for contractors.
This structure is good for low-cost
production or hard-bid markets because
it contributes to a lower cost structure.
Most functional organizational structures
are centralized, with functional managers
and supporting staff residing in the
organizations headquarters.

FMI DECEMBER 2001

THE CONTRACTORS MANAGEMENT JOURNAL

Exhibit 3: Sample Matrix Organizational Structure

function to another. Design/build

customers want to maintain one
relationship throughout the life of a
project. Consequently, a divisional
structure that embraces both design and
construction will prove more userfriendly to external and internal customers. Matrix organizations tend to
provide a greater blend and flexibility to
serving external customers. However,
the matrix design can be very confusing
to the internal customers it must also
serve. Matrix organizations are generally
found in larger companies, but small
companies where people wear many
hats are also behaving as matrix organizations.
THE OPTIMUM ORGANIZATIONAL
STRUCTURE

One design/build contractor chose

to organize its people by project.
Architects, engineers, project managers,
and project assistants assigned to a
project were physically relocated into an
adjoining location called a neighborhood for the duration of the project.
These neighborhoods optimized
communication and teamwork on the
project and functioned very efficiently.
The neighborhood approach to project
execution created high satisfaction with
clients served by this organizational
design. Exhibit 2 is a sample of a
divisional organizational design.

Matrix Organizational Structure

A matrix organizational design
blends the services and advantages of a
functional design with the highly
focused, relationship-based service
delivery of a divisional design. The
matrix design, which is used by many
contracting organizations, requires
strong communication skills and
practices. It typically requires regular
management maintenance, with
FMI DECEMBER 2001

How does the organizational

structure increase efficiency and
communication and lower cost? The
fewer layers there are between the
customer and the top of the organizational chart, the fewer chances there are
for communication breakdowns and
barriers. Logically, fewer managers
doing more will create greater efficiency
and lower cost. This trend started in the
early 1980s and continues today with
organizations eliminating middle
manager levels and flattening out the
organizational structure. Obvious
benefits to the customer are increased
A functional organization benefits
response time and a closer connection
smaller organizations that separate
to senior management.
business development activities from
However, risk exists in being too
operations. This structure creates
lean, particularly in the construction
specialization of activities targeted at
industry. Being understaffed or having
specific customer needs. In the hard-bid weak managers at the project level leads
market, a critical success factor is being to margin erosion on projects. Change
the low bidder. This requires an intense
orders are not identified and processed
estimating function and high productivity timely, project schedules are not
at the operational level to make money.
controlled, project planning and layout
However, a functional design in a design/ get compromised, and overall project
build environment requires extraordinary performance suffers. In a busy market
communications to transition from one
like the industry has experienced over

supporting meetings and procedures to

maintain communication, efficiency, and
execution. Accountability may be
problematic in matrix organizations.
Clear assignment of accountability can
help. Transitioning to a matrix organization is often very frustrating in the early
stages. However, with patience and
excellent communications, the matrix
organization can take advantage of
diverse skills and become highly responsive to customer needs. Exhibit 3 is a
sample of a matrix organization.

THE CONTRACTORS MANAGEMENT JOURNAL

the past 10 years, this pattern is all too

familiar.
The optimum organizational
structure functional, divisional, or
matrix is one that leads to high levels
of profitability and customer satisfaction
because of high productivity and
efficiency.
GROWING MANAGERS

One of the objectives of the entire

organizational design process is to grow
managers and leaders. A simple illustration is project managers in a small
contracting firm who manage only one
job at a time and report directly to the
president, while lead foremen or
superintendents manage the field
operations and report directly to the
project managers. As the organization
grows, it may be necessary to add a
senior project manager for the project
managers to report to and a general
superintendent who is responsible for
field operations. Although you can
recruit some talent, this process of
adding leadership and management
levels also requires the development of
leadership and management skills within
your organization.
The organizational structure
contributes to this growth of successful
leaders and managers. Questions such
as, Whom do I report to? and Who
reports to me? are critical operational
questions. People need to see reporting
lines and lines of authority, and an
organizational chart visually depicts
these organizational responsibilities.
Career paths can be visualized by
creating an effective organizational
structure. People desire feedback and
clarity on how they are being measured.
An organizational structure facilitates
this feedback by identifying reporting
responsibilities. Too frequently, organizations let people drift without anyone
taking direct responsibility for their
FMI DECEMBER 2001

Case Study: Using a Combination Structure

hris Smith and Steve Kinney,

the owners of Aspen
Earthmoving, wanted to improve
their organization. The existing
organizational structure was a
functional design. Project managers at the company operated very
autonomously. Each manager
approached their segment of the
business as their own with responsibility for selling, growing the
revenue, and cost management.
Their performance was evaluated
primarily on their gross profit
contribution to the company,
although customer satisfaction was
also a factor. According to Smith
and Kinney, the accounting
department was properly focused
on the total operations and on
providing support to the owners in
running the company, but it was
not providing the level of support
and training that the project
managers needed. Smith and
Kinney believed that the interface
between the accounting personnel
and project managers at the
project delivery level could significantly improve gross profits from
each project.
Smith and Kinney concluded
that the right answer was to blend
the accounting and administrative
functions. This solution combines
elements of functional, divisional,
and matrix designs.
An administrative director was
hired and assigned responsibility
over the administrative aspects of
the company. The accounting

success or performance accountability.

If a manager appears overwhelmed,
perhaps the problem is related to the

department staff was used to provide

support to the project managers at
the direction of the administrative
director. The administrative director
is a member of the management
team and provides reports to the
team. The administrative director
does not report to the functional
manager of the accounting department but is responsible for many of
the administrative support aspects of
project management, including
tracking job costs, handling contract
billings, and enhancing gross profits
on projects.
To further strengthen project
performance, project supervisors
were identified and given responsibility for all aspects of project
construction. This addition to the
project staffing structure provided
additional training opportunities for
project personnel and freed up the
project managers to maintain
project control and customer
service.
The administrative director and
project supervisors have made
contributions to margin enhancement on each project that have more
than offset their cost and also
improved the level of customer
satisfaction. Additionally, the
structure has improved teamwork
and morale in the company. Smith
and Kinney believe these changes
have created a true spirit of supporting coworkers and maintaining
internal customer satisfaction while
increasing productivity and profitability.
span of control assigned to that manager. Span of control represents the
breadth of direct-reporting responsibiliTHE CONTRACTORS MANAGEMENT JOURNAL

ties, and too many people directly

reporting to a manager is a sure sign of
a bottleneck. No one can have 15 direct
reports; in fact, the recommended
number of direct reports is four to six.
Much more than that and communication slows and necessary decisions get
delayed. The organizational structure
can prevent this overload from occurring.
An added benefit of a properly
structured organization is to promote
strong individual performance. Managers who are capable of handling increasing challenges are offered the opportunity for advancement. This aspect of an
organizational structure fits particularly
well with Generation X (ages 23 to 35
years old) leaders and managers. Their
desire to be part of a team and have the
opportunity for rapid advancement can

We have frequently encountered

organizational structures in
which the internal customers are
neglected. A mentality of us vs.
them starts to develop, with the
field vs. accounting as a typical
example.

be met. Being part of a cumbersome

organization with little opportunity for
advancement is a recipe for a quick exit
by future Generation X leaders and
managers.

relationships. Opponents say they can

be bureaucratic and result in empire
building driven by ego. Some people
dont like to be told who is their boss or
see someone ahead of them in the
organizational structure.
Another deficiency occurs when
organizational charts are not kept
current. A client recently pulled out
their most recent organizational chart,
which was dated 1993. Few organizations have absolutely up-to-date organizational charts at hand.
In the structuring process, some
companies fail to focus on external
customers, leading to an inefficient and
ineffective design. Internal customers
are equally important. We have frequently encountered organizational
structures in which the internal customers are neglected. A mentality of us vs.
them starts to develop, with the field
vs. accounting as a typical example.
This mentality can exist between
business units, geographic locations,
functional departments, or any combination of these. Internal friction and
higher cost structures that cause
profitability to suffer are the result.
Internal customers matter, and if a
department provides services to other
departments within the company,
internal customer satisfaction standards
should be similar to those for external
customers. Avoiding internal customer
dissatisfaction requires senior leaders to
ensure cross-functional groups stay
focused on identifying their internal
customers and that those cross-functional groups are held accountable for
internal customer satisfaction.
CONCLUSION

POTENTIAL PROBLEMS WITH AN

ORGANIZATIONAL DESIGN

Opponents of formal organizational

charts contend that they are too limiting
and unable to depict all interdependent
FMI DECEMBER 2001

The first challenge of organizational

design is clarifying your strategic
direction meaning that you know
your customers, the activities you
deliver that add value, and the market

Case Study: Adjusting

Structure to Growth

general contractor had the

organizational structure
depicted in Exhibit 4. The organization was profitable and growing.
But as the company grew, it
became increasingly difficult to
maintain the needed volume of
work while controlling systems,
processes, and procedures to
adequately maintain operations. To
accommodate organizational
objectives, the organizational
structure was separated into a
more functional design as depicted
in Exhibit 5. This structure
allowed greater specialization in
business development to maintain
volume, as well as an increased
focus on operations by adding a
general superintendent position to
support management of field
operations. The result was an
improved business development
effort and better control of field
operations. Not coincidentally,
customer satisfaction increased
during the process.

position you seek to secure. Organizational design is simply aligning your

company to facilitate efficient and
effective execution of your strategy.
Efficient cost structure comes from
eliminating activities that do not add
value to your customers. Superior
individual performance is achieved
through accountability. Experience
provides increasing personal productivity and growth in skills necessary for
advancement. Providing future managers and leaders an opportunity to win
through proper strategic direction and
organizational design is a characteristic
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10

Exhibit 4: Previous Organizational Structure of Example Company

Exhibit 5: New Organizational Structure of Example Company

of exceptional companies.
Now for the final exam: When was
the last time you updated your organizational chart? Is your organizations
structure aligned with your strategic
direction? Are the needs of your external
and internal customers being met in the
most-effective way possible?

FMI DECEMBER 2001

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