Blueprints on how companies are run and how information is passed within the organization
Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
Organizational structures are essentially blueprints that reveal how companies are run and managed and how information is passed within the organization. An organizational structure is literally a chart or diagram that depicts the logistical organization of a company.
Finding the most appropriate organizational structure for a business depends on a number of factors. Below are three of the most important factors to consider in choosing among the best organizational structures for a business:
- The industry the company fits into
- The overall size of the company
- The company’s goals (what it hopes to achieve, whether that be in terms of finances or how the company intends to be of service to its customers)
Summary
- Organizational structures are essentially blueprints that reveal how companies are run and how information is passed within the organization.
- Traditional line organizational structures are simplistic but rigid. It can take a good deal of time for information to pass through the company, with each link reporting to ONE direct supervisor. Such a structure is best suited to smaller companies.
- Functional organizational structures are similar to line structures; however, each tier may share information and offer direction horizontally (to one another). This structure is ideal for large companies with many departments and for those companies that need to meet strict deadlines.
Types of Organizational Structures
1. Traditional
A traditional line organizational structure is truly the place to start for most companies, especially the smaller ones that don’t necessarily comprise a vast number of departments or require a major number of links in the chain of command/communication. The image above is an example of what a traditional line organizational structure looks like.
With the traditional structure, simplicity is the primary distinguishing feature. It is a top-down approach. Direction and communication start with the head of the company (in this example, the company is led by the chief executive officer). The next tier or link in the chain is a director. This is the individual (or office) that oversees a department or segment of the company. Finally, within each department, there are managers and employees.
With the traditional line organizational structure, the process of communicating information is very much narrowly focused. All information starts at the top and is passed down, typically from one individual to the next. While the practice keeps things simple, it’s a rather rigid organizational structure and, because there is no horizontal sharing of information, it can take a substantial amount of time to process information throughout the company. The traditional organizational structure is best suited to small businesses that, again, comprise a fairly small number of departments and a limited number of employees.
2. Functional
The image above reveals what a functional organizational structure looks like. It differs from the traditional line structure by means of the existence of established channels for the horizontal sharing of information and direction, with a substantial increase in the sheer number of lines of communication.
With the traditional structure, individual employees communicate directly with their immediate supervisors. With the functional structure, however, employees often communicate with individuals whose control they don’t fall immediately under.
The functional type of organizational structure is ideal for larger companies with a lot of departments and for companies that need to meet short timeframe deadlines.
One final organizational structure to look at is the project-based structure.It breaks a company up into groups based upon the projects it needs to complete. There is, of course, a primary leader – the director. Then, there is a manager appointed to oversee the team assigned to complete each project.
The project-based structure features the best of both the traditional line and functional organizational structures: it’s simple, with the first tiers answering only to a direct supervisor. The final tier is the team responsible for completing whatever project is set before them. However, each member of the team can easily get information and assistance from the other members.
Related Readings
Thank you for reading CFI’s guide to the Best Organizational Structures for a Business. To keep learning and advancing your career, the following CFI resources will be helpful:
- Forms of Business Structure Course
- Board of Directors
- Key Performance Indicators (KPIs)
- How to Assess Effective Management
- Types of Organizations
FAQs
A traditional line organizational structure is truly the place to start for most companies, especially the smaller ones that don't necessarily comprise a vast number of departments or require a major number of links in the chain of command/communication.
What are the 4 types of organizational structure? ›
The four types of organizational structures are functional, multi-divisional, flat, and matrix structures.
What is more effective organizational structure? ›
To succeed, organizational structures need to be underpinned by strong interpersonal relationships, well-defined decision-making processes, and, most importantly, trust.
What is the most commonly used Organisational structure? ›
Hierarchical structure
It's the most common organizational structure type that follows a direct chain of command. A chain of command, in this case, goes from senior management to general employees through a range of executives on the departmental and team level.
What is the most beneficial business structure? ›
C Corporations
This business structure provides the best protection against liabilities. There are also no limits to the size of investments or number of investors, which attracts equity investors more.
Which organizational structure is most widely used? ›
Hierarchical org structure
It's the most common type of organizational structure—the chain of command goes from the top (e.g., the CEO or manager) down (e.g., entry-level and lower-level employees), and each employee has a supervisor.
How to choose an organizational structure? ›
The best way to choose an organizational structure for your company is to first assess your business needs and goals. From there, you can match those needs with one of the common organizational structures. Although there isn't a “right” answer, some organization structures are a better fit for your team than others.
What is a strong matrix organization structure? ›
Strong matrix - the project manager holds most of the power and authority, controls the project budget and manages staff. The role of the functional manager is limited. Balanced matrix - the functional managers and the project managers share the power and the authority over staff and budget.
What are the three 3 types of organization structure? ›
Types of Organizational Structure
- Functional Structure. Under this structure, employees are grouped into the same departments based on similarity in their skill sets, tasks, and accountabilities. ...
- Divisional Structure. ...
- Matrix Structure. ...
- Hybrid Structure.
Although bureaucracies are the most efficient form of social organization, they can also be dysfunctional. Dysfunctions of bureaucracies can include red tape, lack of communication between units, and alienation.
Some organizational patterns are better for informative speeches: Chronological, spatial, topical, and narrative. Although cause-effect and problem-solution can be used for an informative speech, use these patterns with caution as they are better used for persuasive speeches.
What is the most complex organizational structure? ›
The correct answer is C) Matrix. A matrix is considered a complex form of organizational structure because it utilizes a dual-management system where there are at least two managers and two separate authoritative chains.
What is the best organizational structure for a startup? ›
In the early stages, most startups will adopt a flat org structure. This helps create faster expansion because it's less structured than competitors that may have complex management hierarchies. It also fosters faster decision-making. A flat org structure has few (or no) layers of management.
Which organizational structure is best for large companies? ›
Functional/Role-Based Structure
A functional—or role-based—structure is one of the most common organizational structures. This structure has centralized leadership and the vertical, hierarchical structure has clearly defined roles, job functions, chains of command and decision-making authority.
What is the most simple organizational structure? ›
A Simple Organisational Structure is a basic and flat managerial hierarchy where the top layer of management interacts directly with every employee, and there are few levels in between. The top manager or owner takes all major decisions.
Which business structure is usually the best for a small business? ›
Sole Proprietorship
Easy to Form – Sole Proprietorships are the easiest, most common, and least expensive business structure. A person is essentially a walking, talking sole proprietorship in waiting. All you need to do is sell something—a product, a service, anything—and boom … suddenly you're a sole proprietor.
What is the right organization structure? ›
A company's organizational structure is the hierarchy of the business's teams, leaders, managers, and individual contributors. Organizational structures determine what employees do, whom they report to, and how decisions are made.
Which type of organizational structure is best for project? ›
Matrix Organizational Structure
A matrix organizational structure combines the best aspects of both functional and project-oriented organizations into one system. Employees often have multiple reporting relationships depending on their role in the company and their level of expertise in different domains.
