Organization Design Challenges of Startup Companies

Published by MBA Skool Team, Published on February 05, 2016

Startup companies always face the challenge of organization design. This article covers the various organizational designs and cultures which budding startup companies can adopt.

The goal of organization design is to achieve a high degree of fit between the following. 

• Tasks that an organization needs to perform

• The characteristics of the employees and

• The management methods and leadership

It is essential to consider the above mentioned goals while analyzing or designing an organization. The organization who is at the entrepreneurial stage determines the status of the three levers of an organization. Next it determines the ideal design for the organization and then by comparing it with the current design it identifies the challenges that it may face.

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To determine ideal design for an organization the report makes use of the following steps: -

• Initially determine the environment the organization works in

• Next determine the current stage of the organization in organizational life cycle

• Finally ensure that the informal culture backs the formal structure

Three Levers of an Organization

Differentiation – Integration

• The organization which has just passed the entrepreneurial stage and thus it may face constraints of resources as well as lack an established culture, hierarchy or processes etc. Usually in the entrepreneurial stage there is very little differentiation in roles initially and the roles are divided as per requirement informally.

• So, differentiation is done through functions and hence the roles are quite defined. Therefore, we find high amount of cross functional teams and copious amounts of informal communication among the employees. This helps them share ideas as well as information and thus increases the cohesiveness. The cross functional teams and informal communication provide integration among the employees.

Centralization – Decentralization

• The startup industry is currently developing at a rapid stage and we find various startups getting the funding. Companies in the initial phase try to create a niche for itself and for this it wants to bring out its mobile app to get the maximum market share. Thus it is operating in an environment which is uncertain and hence it must have a higher degree of decentralization.

• employees are given fair amount of liberty at decision making in the startup. This means that there is high degree of decentralization.

Standardization – Mutual Adjustment

• The organization who is in the startup phase and also it is working in an environment which is uncertain. This implies that there can be few processes that may be formalized or standardized as the industry is new and there may be very few processes which may be considered as best practices.

• Thus the organization is required to follow mutual adjustment for faster growth. This also helps emphasize on the need to focus on innovation. As and when newer competitors enter the industry and as the industry ages there will be certain practices which will be identified as the best practices and then maybe there will; be requirement of the standardization and till then we believe that the organization should work on the principle of mutual adjustment.

Organization Structure

Organization structure of Startup Company

The organization in the startup phase follows a structure which is departmentation through functions. The founders have become the CEO and CTO. Other people report to them. Departments have been formed on the basis of functions such as Business Development, Operations, Technology and Sales. Though the company follows functional structure, the processes are organic in nature. The organization provides the required amount of decentralization and the communication and processes are more towards the mutual adjustment in the standardization – mutual adjustment continuum.

The industry is not only affected by the online players but also the offline players. It is further affected by different policies that may come in future as government will step up to regulate the industry. Also with different startups getting their funding, the industry is highly unstable. Therefore, Startup works in an uncertain environment. The organizations working in an uncertain environment must be organic and must focus on continuous improvement and innovation. Its characteristics of organic processes include a fair degree of decentralization, minimum formalization, encouraging teamwork and an informal approach to accomplish tasks and in assigning responsibilities.

The structure of a startup is usually a fine balance of centralization – decentralization as is required due to its stage in the organizational lifecycle and its environment. The challenges that it might face in the future include:

• The functional structure would require revamping as the organization adds newer products. For instance, the departments may be divided on the basis of different language or sets of languages.

• As the number of employees increase, the organization will be required to become more formal in communication. While the industry may still be uncertain and these might reduce the ability of the organization to innovate. Thus the organization will be required to come up with different strategies to integrate the people with a view to enhancing the ability of the organization to innovate.

• As the organization ages, it will become more centralized. But the environment will still be uncertain and hence this centralization may cause the ability of the organization to be flexible to deteriorate. So, it will be important for the organization to come up with ideas to allow the power to take decisions while also assuring the enhancement of efficiency through centralization. One of the solutions is that only certain functions, such as purchase function, be centralized unlike the conventional practice of centralizing every function which takes away the authority of the lower level managers to take decisions.

System and Process of an organisation

System can be defined as a set of processes that can run without any intervention. Similarly, a process can literally be defined as an activity or set of activities that will accomplish a specific organization goal or more generally a series of ordered activities which will help one to get something done. So putting the ideas forth a system consists of various processes.

Entrepreneurship, risk and uncertainty are long time bedfellows and they push the entrepreneur to the limit. It is these parameters which shape the initial anatomy of an organizational structure. The startup is driven by passion and The company is light on formal systems and believes in minimal amount of efficient systems for its operations and is primarily innovation driven. During its initial period the organization was typically unstructured and relied on important processes to get things done. After the company generated some business and customers started coming in, they felt the need to build system and processes that will help them in getting their work done. To keep pace with the already grown company, startup usually install MIS systems in place to ensure that they keep track of everything bought and sold by the business.


It is very important that the culture of an organization backs its structure and strategy. The dynamic environment may drain the employees emotionally, mentally as well as physically. Hence, the culture should be open with free flow of information and should work towards the integration of the employees even as the structure move towards formal structure and standardization of processes. As the organization ages and the number of employees increase it will become increasingly difficult to maintain the same level of cohesion among the employees.

Startup always tries to inculcate a culture which suits the requirement of a dynamic, uncertain environment while also caters the notion of improving efficiency even as the organization ages. This is further backed by providing opportunities to grow and employees are allowed to work in the domain of their choice, be it related to any field. This give the employees an incentive to work towards the attainment of an organization’s goals. There is an atmosphere of amicable guidance and cooperative relationship as peers and seniors are always willing to help. Organizing fun activities, catering to employees’ need of proper laptops, doing away with the dress code and the rigid work hours has ensured that the work environment is enjoyable, amiable and full of enthusiasm. Though, the organization has moved towards the formal communication, employees don’t feel that the work environment is bureaucratic as the culture does away with the soft bureaucracy and encourages informal communication. Companies balances the increasing formalization by encouraging informal communication, increasing centralization by free flow of information and increasing standardization by allowing for creativity.

The organization needs to focus on encouraging the current culture while pressing for innovative ways to scale it up as only then will they be able to progress as the increasing age and standardization will be up against the need for enhancing efficiency even as the organization matures.

This article has been authored by Sharad Prakash from IIM Kashipur

References: -

• Understanding the Theory & Design of Organisations by Richard L.Daft

• Organization Structure & Design: Applications and Challenges by P G AQUINAS

Views expressed in the article are personal. The articles are for educational & academic purpose only, and have been uploaded by the MBA Skool Team.

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