You're no doubt familiar with the phrase, “herding cats”? It still makes me laugh every time I hear it; the image of someone chasing dozens of cats scrambling in every direction never fails to make me chuckle. In many ways, organizational structures are the antithesis to this trope—a way to place all your cats in a row, if you will.
Organizational structures help companies establish how different departments interact with each other and how decision-making processes flow throughout the organization.
A well-planned and thoroughly executed organizational structure lets employees know where they fit within the organization and how their role factors into the achievement of greater business goals. It has the power to unite team members with disparate functions in alignment with the company’s primary objectives.
Organizational structures aren’t just for large businesses. Small businesses benefit from establishing their organizational structure early on, because the type of structure will influence hiring decisions as time goes on and the company grows.
Curious what type of organizational structure might be right for your business? Let’s take a closer look at how these structures work.
- What is an organizational structure?
- Elements of an organizational structure
- Centralized vs decentralized organizational structures
- Types of organizational structure
What is an organizational structure?
An organizational structure is a framework that demonstrates how decisions are made, how work flows between teams and team members, and what the hierarchy of leadership looks like within a group or company.
If you’ve ever entered a new job and been handed an “org chart” by human resources, you’ve looked at an organizational structure.
Organizational structures can take on several different forms, based on how the group would best manage the flow of information, chain of command, and decision-making tasks.
The organizational structure clearly communicates the various levels of management and the reporting relationships between them.
With the right organizational structure in place, employees will know who to turn to for help when problem-solving, who to connect with for approvals, and how different departments interact with each other to support the overall business goals.
Why is organizational structure important?
Organizational structures are important because they improve efficiency, reduce confusion and miscommunication, and help employees gain clarity on their roles and responsibilities.
Once an organizational structure is established, companies will benefit from faster decision-making and greater proficiency within departments. Everyone knows the role they play and how that role fits into achieving company goals.
An organizational chart, or org chart, is a diagram that visually displays your company’s structure. Org charts help employees gain an understanding of where they are located within the business infrastructure, as well as whom they report to or should seek approval from during the decision-making process.
Generally, the chart begins with c-suite leadership and extends out and all the way through to low-level employees.
Throughout this article, I’ll share examples of organizational charts to illustrate each of the types of organizational structure I’m explaining, and provide real-life examples of companies that have adopted each type of organization.
Elements of an organizational structure
To determine which organizational structure is best for your business, you’ll want to consider the following key elements:
Span of control
The span of control is the number of direct reports under a manager. A manager with a narrow span of control (say, only one or two employees) has the ability to work closely with their reports and develop relationships with plenty of one-on-one communication.
By comparison, a manager with a wide span of control (say, 15 to 20 employees) will not be able to provide as much one-on-one time and, for this reason, may need to choose more highly skilled workers who can handle operating with greater autonomy.
The span of control is influenced by a number of factors:
Size of organization
One might assume that a smaller business would naturally have narrower spans of control. But, in some cases, small businesses are unable to provide much one-on-one support because there are fewer managers.
Large organizations sometimes have a larger middle management team, meaning that lower-level employees receive more one-on-one support.
Level of complexity
Roles that are complex and that require significant subject matter expertise and specialization will naturally require more supervision.
For this reason, companies with loads of complicated roles will generally need to reduce the span of control to provide employees with enhanced support.
Manager + employee skill level
Hiring experienced managers who are experts at leading team-based activities will enable you to expand the span of control. Similarly, managers with little experience communicating with and directing stakeholders will fare best with a more narrow span of control.
The same goes for employees. Lower-level employees like interns will require plenty of hand-holding and will be most likely to succeed if they have closer contact with their manager.
Departmentalization refers to how an organization breaks up employees into specialization groups. For example, a company might have a marketing department, a human resources department, an accounts payable department, and a sales department.
Even small companies can benefit from departmentalization. Grouping individuals together with a specific goal in mind motivates employees and enhances teamwork. Employees with similar job descriptions can support each other within their departments, and focus on achieving their KPIs with greater focus and efficiency.
Many organizations choose to divide their departments by function. But some establish their departmentalization based on customer profile, location, process, or product-based factors.
Chain of command
The chain of command is an organization’s hierarchy of reporting relationships. Sometimes known as the command structure, it demonstrates who reports to whom, and establishes a flow of communication for decision-making and approvals.
A traditional command structure has three levels:
Job descriptions for senior management generally include developing and implementing strategies and plans to promote and grow the business.
These managers are focused on learning about market trends in the business environment so that they can forecast opportunities and threats. Top-level management have direct reports in the middle-management level.
- Chief Operating Officer (COO)
- Chief Marketing Officer (CMO)
- Chief Financial Officer (CFO)
- Chief Technology Officer (CTO)
- Director (of: marketing, human resources, etc.)
Middle managers are largely focused on achieving the goals established for them by top-level management. Middle management has direct reports who are front-line employees, and they are responsible for allocating budgetary resources to these lower-level employees.
- Division manager
- Department manager
- Branch manager
- General manager
Lower-level employees carry out the daily activities of the company. Many of these roles are highly specialized and are tailored to the specific industry in which the company operates.
- Office manager
- Product developer
- Project manager
- Human resources specialist
- Sales representative
The extent to which your job descriptions are specialized will also factor into your departmentalization. Having highly specialized employees is beneficial because it empowers individuals to focus solely on a specific task, leading them to become proficient very quickly.
That being said, specialization can also result in a team that operates in silos, with little communication taking place between departments. It’s worth weighing out the pros and cons of specialization when determining how to organize your departments.
Formalization refers to the amount of standardization throughout the organization. In companies with a high level of formalization, job descriptions, functions, and systems are standardized and very clearly laid out for employees to perform those duties. Formalization is widely considered to improve innovation rather than stifle it.
Centralized vs decentralized organizational structures
Most organizational structures are hierarchical. This means that the greatest authority is granted to one individual—generally the Chief Executive Officer (CEO).
The CEO is responsible for decision-making at the highest and most consequential level, in a top-down authoritative model. Lower-level employees, by comparison, have very little autonomy or say in how those decisions are made. This is called a centralized structure.
By contrast, a decentralized structure is one in which teamwork is prioritized and a more democratic approach is taken. Employees are given greater freedom to share opinions and ideas, and influence decision-making.
Types of organizational structure
There are several types of organizational structures. Each configuration caters to different business needs.
Whether your organization is a startup, small business, or large company, choosing an organizational structure to suit your needs will assist your employees in understanding their roles, succeeding at their duties, and positioning your company for growth.
Let’s take a look at some of the most common organizational structures:
Functional organizational structure
Tne functional organizational structure is one of the most common types. In this configuration, people are grouped by their job function.
For example, a company with this type of organizational structure might group all of their new business development people together, all of their tech support people together, and all of their human resources people together. This structure creates an environment that nurtures specialization, and connection within teams that share a common goal.
Case study: Amazon
Amazon is an example of a company with a functional organizational structure. Though the company began with a lean, flat organization, as it grew it transitioned to a more traditional hierarchical structure.
This gives the organization top-down control over their operations globally, clearly defining roles and responsibilities across functions and geographic divisions.
At the top of the organizational chart is CEO Andy Jassy. Just beneath him are a team of executives responsible for solving problems and shaping company culture in accordance with Jassy’s direction.
From there, the chain of command trickles all the way down to lower-level employees.
Advantages of functional organizational structure
Adopting a functional organizational structure enhances accountability and specialization. It makes it easy for employees to improve their skills because there is stability in the tasks they’re performing, allowing them time to master their role.
Because departments are so focused, they can build processes that support further improvement of their function and put them into practice.
Since there is a clear chain of command, communication is well-organized and the decision-making process is understood by all the stakeholders.
Disadvantages of functional organizational structure
Within a functional organizational structure, teams work within silos that risk limiting communication between departments. This can cause inefficiencies, especially in situations where the company has several target markets and products.
Departments may be dependent on each other to successfully achieve their goals but, without an understanding of each department’s processes and functions, it’s difficult to be innovative and create solutions for greater synergy between departments.
Divisional organizational structure
A divisional structure is one in which the company is organized into many smaller functional structures. For example, each division within a divisional structure might have its own IT department, marketing, sales, etc.
There are three types of divisional structures:
- Product-based divisional structures (in which each division is focused on a certain product line)
- Market-based divisional structures (in which the structure is based around customer profiles, industry, or markets)
- Geographical divisional structures (in which the structure is based on districts, regions, and territories within which a company operates).
Case study: General Electric
General Electric (GE) is an example of a company with a divisional structure.
As a conglomerate with many different business verticals operating in multiple industries, this structure allows GE to implement strategies specific to each vertical’s business needs and market conditions.
Divisions like renewable energy, power, aviation, transportation, and health care can all operate independent of each other while remaining under the GE umbrella.
Advantages of divisional organizational structure
Within a divisional structure, each division has its own leadership (often a Vice President). This ensures that strategic objectives are supported, and makes it more likely that the division will be able to secure the budgetary resources it needs to carry out those objectives.
Focusing on a single product, region, or market enables the division to create its own culture while entrenching specialized knowledge of the team’s function.
Disadvantages of divisional organizational structure
Divisional structures can sometimes create unnecessary competition within the organization. Issues like funding and sharing of resources can become contentious.
If divisions become too separate and specialized, they risk internal incompatibilities, in which one division’s product or service encroaches on business from another.
Process-Based Organizational Structure
Process-based organizations are (you guessed it!) based on an organization’s processes. They look at the complete end-to-end flow of actions and decision-making and consider each employee’s job description, as well as how all the various activities performed by the company interact with each other.
This structure is best suited to companies with activities that are heavily dependent on each other; meaning that one process cannot begin until another is complete.
An example of this might be one in which product development must take place before marketing can begin developing strategy.
Process-based organizational charts operate both from the top down, as well as from left to right. They demonstrate both reporting hierarchies as well as process flow.
Advantages of process-based organizational structure
Process-based organizational processes are excellent at improving efficiency and are easily adaptable to market changes. It promotes intradepartmental (inside a department) teamwork, and interdepartmental (between departments) teamwork.
If one process cannot begin until the first team finishes, teams are encouraged to keep up a good pace with output and maintain momentum.
Disadvantages of process-based organizational structure
Process-based organizations run the risk of creating silos that diminish communication between departments. If one department becomes frustrated because another’s pace is slowing down their output, tensions may flare.
Matrix Organizational Structure
Matrix structures do not align with a traditional hierarchical structure. In these structures, employees have dual reporting relationships.
Generally, an employee will report to someone based on their job function, and another leader based on their product or division. On a matrix organizational chart, direct reporting relationships are represented by a solid line, and secondary reporting relationships are represented by a dotted line.
Having more than one chain of command encourages balanced decision-making and flexibility. And, since projects are overseen by multiple business units, there’s ample opportunity for communication and the sharing of resources and perspectives.
Case study: Starbucks
Starbucks is an example of a company with a matrix structure. At the top of the Starbucks organizational chart are the CEO, board of directors, and several executive vice presidents and senior vice presidents spanning both functional and product-based divisions.
Most of the day-to-day decision-making takes place at the functional hierarchy level. These individuals have control over the departments and divisions beneath them, including geographic divisions, and product-base divisions (like baked goods).
Within these divisions, individuals might have reporting responsibilities in two directions; for example, one report regarding their geographic division (i.e. North America), and another regarding their job function (i.e. merchandising).
Advantages of matrix organizational structure
The biggest advantage of a matrix structure is the promotion of collaboration between teams and divisions. Employees benefit from the ability to develop new skills and have a line of sight on a variety of job functions.
Disadvantages of matrix organizational structure
The main risk of having a matrix structure is confusion. When employees have several layers of approval that need to be checked before moving forward, they can become frustrated and confused about where they need to go for what.
When something goes wrong, finger pointing can take place, with team members debating about whose authority was lacking.
Circular organizational structure
The primary difference between a circular structure and a more traditional organizational structure lies in the ideology.
In a circular structure, there is still a hierarchy of leadership but these leaders are located in the inner rings of the circle.
Rather than being seen as sitting above their employees, leaders in a circular organizational structure are conceptualized as sitting at the center of the organization and sending their vision through to the outer layers.
The idea here is to promote the freedom of ideas to flow between levels of the organization, and to open the lines of communication.
In a circular structure, all divisions and employees are seen as belonging to the greater whole, rather than occupying their own autonomous branches on the organizational chart.
Advantages circular organizational structure
Circular structures follow an outward flow of information and encourage communication across the entire organization. Within this structure, it’s easy to keep employees aligned with the company’s objectives, and to encourage sharing and collaboration between teams.
Disadvantages circular organizational structure
Since circular structures are inherently different from a traditional model, they can be difficult to understand when new employees join the company. New hires may need additional support understanding to whom they report and how the approval and decision-making process is meant to flow.
Flat organizational structures are designed to create proximity between staff and leadership. Rather than being built as a pyramid, with many layers of individuals between low-level employees and upper management, flat organizational structures ensure that every single employee has equal access to all levels of management.
Flat organizational structures are one of the more detailed types of structures. A flat organizational structure, or flatarchy as they’re sometimes known, tends to work best for small companies and startups.
Case study: Google
Google is an example of a company with a flatarchy. Though their organizational structure takes cues from a variety of formats (including matrix and divisional), Google is famous for its lack of middle management, placing lower level employees in direct contact with their superiors and encouraging autonomy and communication at all levels of the organization.
In this structure, staff may have a few different leaders, including a direct line to VP level leadership.
Advantages of flat organizational structure
In the absence of hierarchical pressure, employees may feel as though they have greater autonomy and authority over their job function and relate to leaders as equals rather than looming overlords.
Flat organizational structures speed up the decision-making process by providing authority and encouraging more direct relationships with upper management.
Disadvantages of flat organizational structure
Similar to many of the non-hierarchical models, the primary risk of the flat organization is confusion regarding reporting.
Senior leaders may find themselves often involved in dispute resolution, or having to participate in decision-making that they might not otherwise have in a different type of organizational structure.
Network Organizational Structure
A network structure is an excellent choice for organizations that work with freelancers or otherwise outsource some of their workload to external vendors.
Network structures look very similar to divisional structures, but rather than listing divisions they might list satellite offices, other vendors (like manufacturing, for example), or freelancers.
It’s an excellent way to conceptualize the entire life-cycle of a product when the company operates on a large scale, or, on a smaller scale, it’s a great way to create a visual representation of how your freelance workforce factors into the business.
Case study: H&M
H&M is an example of a company that uses a network organization. H&M is the core company, and they outsource functions to other companies in various countries.
For example, call center operations in New Zealand, product development in Australia, manufacturing in Malaysia, and distribution in Singapore. H&M’s managers control both internal and external relationships.
Advantages of network organizational structure
Outsourcing to freelancers and other vendors enables companies to keep costs low, remain flexible to market changes, and encourage greater focus on a few central job functions.
Rather than creating an entire department to manage a certain function (which might necessitate hiring several full-time employees), a network structure empowers companies to remain lean and competitive.
Disadvantages of network organizational structure
Since network structures can easily become complex as more vendors and freelancers are added to the mix, they risk causing confusion for new hires.
If you choose a network structure for your organization, be clear in how the structure is communicated, and be sure to accurately define all the roles and job functions.
Learn more about organizational structures
Choosing the best organizational structure for your business is one of the most effective ways to set your team up for success.
Organizational structures clearly communicate reporting hierarchies and create an infrastructure to support growth and achievement of the company’s primary objectives.
As we learned, structures such as circular also have the opportunity to emphasize a company’s culture and ethos by underscoring the importance of values like teamwork and collaboration.
If you’re looking for tools to support you in plotting your corporate structure, don’t miss this article from our subject matter experts:
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Suggested Related Content:
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- What is a functional organizational structure?
- Pros and cons of a divisional organizational structure
- Starbucks, Nike, and Ikea use this organizational structure. Should you?
- Best organizational structures to nurture collaboration
- Best organizational structure for companies with a freelance workforce