What Is an Organizational Structure?
An organizational structure is a system that outlines how certain activities are directed in order to achieve the goals of an organization. These activities can include rules, roles, and responsibilities.
The organizational structurealso determines how information flows between levels within the company. For example, in a centralized structure, decisions flow from the top down, while in a decentralized structure, decision-making power is distributed among various levels of the organization. Having an organizational structure in place allows companies to remain efficient and focused.
Key Takeaways
- An organizational structure outlines how certain activities are directed to achieve the goals of an organization.
- Successful organizational structures define each employee's job and how it fits within the overall system.
- A centralized structure has a defined chain of command, while decentralized structures give almost every employee receiving a high level of personal agency.
- Types of organizational structures include functional, divisional, flatarchy, and matrix structures.
- Senior leaders should consider a variety of factors before deciding which type of organization is best for their business, including the business goals, industry, and culture of the company.
Understanding an Organizational Structure
Businesses of all shapes and sizes use organizational structures heavily. They define a specific hierarchy within an organization. A successful organizational structure defines each employee's job and how it fits within the overall system. Put simply, the organizational structure lays out who does what so the company can meet its objectives.
This structuring provides a company with a visual representation of how it is shaped and how it can best move forward in achieving its goals. Organizational structures are normally illustrated in some sort of chart or diagram like a pyramid, where the most powerful members of the organization sit at the top, while those with the least amount of power are at the bottom.
Not having a formal structure in place mayprove difficult for certain organizations. For instance, employees may have difficulty knowing to whom they should report. That can lead to uncertainty as to who is responsible for what in the organization.
Having a structure in place can help with efficiency and provide clarity for everyone at every level. That also means each and every department can be more productive, as they are likely to be more focused on energy and time.
Centralized vs. Decentralized Organizational Structures
An organizational structure is either centralized or decentralized. Traditionally, organizations have been structured with centralized leadership and a defined chain of command. The military is an organization famous for its highly centralized structure, with a long and specific hierarchy of superiors and subordinates. In a centralized organizational system, there are very clear responsibilities for each role, with subordinate roles defaulting to the guidance of their superiors.
There has been a rise in decentralized organizations, as is the case with many technology startups. This allows companies to remain fast, agile, and adaptable, with almost every employee receiving a high level of personal agency. For example, Johnson & Johnson is a company that's known for its decentralized structure.
As a large company with over 200 business units and brands that function in sometimes very different industries, each operates autonomously. Even in decentralized companies, there are still usually built-in hierarchies (such as the chief operating officer operating at a higher level than an entry-level associate). However, teams are empowered to make their own decisions and come to the best conclusion without necessarily getting "approval" from up top.
Types of Organizational Structures
Functional Structure
Four types of common organizational structures are implemented in the real world. The first and most common is a functional structure. This is also referred to as a bureaucratic organizational structure and breaks up a company based on the specialization of its workforce. Most small-to-medium-sized businesses implement a functional structure. Dividing the firm into departments consisting of marketing, sales, and operations is the act of using a bureaucratic organizational structure.
Divisional or Multidivisional Structure
The second type is common among large companies with many business units. Called the divisional or multidivisional (M-Form) structure, a company that uses this method structures its leadership team based on the products, projects, or subsidiaries they operate. A good example of this structure is Johnson & Johnson. With thousands of products and lines of business, the company structures itself so each business unit operates as its own company with its own president.
Divisions may also be designated geographically in addition to specialization. For instance, a global corporation may have a North American Division and a European Division.
Team-Based
Similar to divisional or functional structures, team-based organizations segregate into close-knit teams of employees that serve particular goals and functions, but where each team is a unit that contains both leaders and workers.
Flat (Flatarchy) Structure
Flatarchy, also known as a horizontal structure, is relatively newer, and is used among many startups. As the name alludes, it flattens the hierarchy and chain of command and gives its employees a lot of autonomy. Companies that use this type of structure have a high speed of implementation.
Matrix Structure
Firms can also have a matrix structure. It is also the most confusing and the least used. This structure matrixes employees across different superiors, divisions, or departments. An employee working for a matrixed company, for example, may have duties in both sales and customer service.
Circular Structure
Circular structures are hierarchical, but they are said to be circular as it places higher-level employees and managers at the center of the organization with concentric rings expanding outward, which contain lower-level employees and staff. This way of organizing is intended to encourage open communication and collaboration among the different ranks.
Network Structure
The network structure organizes contractors and third-party vendors to carry out certain key functions. It features a relatively small headquarters with geographically-dispersed satellite offices, along with key functions outsourced to other firms and consultants.
Benefits of Organizational Structures
Putting an organizational structure in place can be very beneficial to a company. The structure not only defines a company's hierarchy but also allows the firm to lay out the pay structure for its employees. By putting the organizational structure in place, the firm can decide salary grades and ranges for each position.
The structure also makes operations more efficient and much more effective. By separating employees and functions into different departments, the company can perform different operations at once seamlessly.
In addition, a very clear organizational structure informs employees on how best to get their jobs done. For example, in a hierarchical organization, employees will have to work harder at buying favor or courting those with decision-making power. In a decentralized organization, employees must take on more initiative and bring creative problem solving to the table. This can also help set expectations for how employees can track their own growth within a company and emphasize a certain set of skills—as well as for potential employees to gauge if such a company would be a good fit with their own interests and work styles.
What Are Some Types of Organizational Structures?
The four types of organizational structures are functional, multi-divisional, flat, and matrix structures.Others include circular, team-based, and network structures.
What Are the Key Elements of an Organizational Structure?
Key elements of an organizational structure include how certain activities are directed in order to achieve the goals of an organization, such as rules, roles, responsibilities, and how information flows between levels within the company.
What Is an Organizational Structure Example?
An example of an organizational structure is a decentralized structure, which gives individuals and teams high degrees of autonomy without needing a core team to regularly approve business decisions. A good example of this decentralized structure is Johnson & Johnson. With thousands of products and lines of business, the company structures itself so each business unit operates as its own company with its own president.
What Is an Organizational Structure Chart?
Organizational structures are normally illustrated in some sort of chart or diagram like a pyramid, where the most powerful members of the organization sit at the top, while those with the least amount of power are at the bottom.
What Is the Best Organizational Structure?
There is no one best organizational structure, as it depends on the nature of the company and the industry it operates in.
The Bottom Line
There are entire fields of study based on how to optimize and best structure organizations to be the most effective and productive. Senior leaders should consider a variety of factors before deciding which type of organization is best for their business, including the business goals, industry, and culture of the company.
FAQs
Because organizational structures divide companies into various teams or branches, they're helping to ensure that all tasks and responsibilities specific to those divisions are met more easily. When an employee knows what they should be working on, they're able to operate quickly and more efficiently.
What is organizational structure and its benefits? ›
Because organizational structures divide companies into various teams or branches, they're helping to ensure that all tasks and responsibilities specific to those divisions are met more easily. When an employee knows what they should be working on, they're able to operate quickly and more efficiently.
What are the 4 types of organizational structures examples? ›
Types of organizational structures include functional, divisional, flatarchy, and matrix structures.
What is organizational structure with example? ›
Definition of an Organizational Structure
The organizational structure also determines the flow of information between divisions within the corporation. A centralized structure, for example, makes choices from the top-down, whereas a decentralized structure distributes decision-making power throughout the organization.
What is the best organizational structure for a company? ›
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.
How an organizational structure can truly benefit his or her company? ›
Organizational structures help companies establish how different departments interact with each other and how decision-making processes flow throughout the organization.
What are the pros and cons of organizational structure? ›
Organizing a company in this way has inherent advantages and disadvantages.
- Advantage: Specialization. ...
- Advantage: Operational Speed. ...
- Advantage: Operational Clarity. ...
- Disadvantage: Segregation. ...
- Disadvantage: Weakening of Common Bonds. ...
- Disadvantage: Lack of Coordination. ...
- Disadvantage: Territorial Disputes.
McDonald's has a divisional organizational structure where each division – based on geographical location – is assigned operational responsibilities and strategic objectives. The main geographical divisions are the US, internationally operated markets, and international developmental licensed markets.
What are the three most popular organizational structures? ›
The three main organizational structures are Hierarchical, Sequential, and Matrix.
What is the most common organizational structure? ›
A hierarchical structure, also known as a line organization, is the most common type of organizational structure. Its chain of command is the one that likely comes to mind when you think of any company: Power flows from the board of directors down to the CEO through the rest of the company from top to bottom.
Starbucks follows a matrix organizational structure with a combination of vertical and horizontal structures. It is characterized by multiple overlapping chains of command and divisions.
What is a real life example of simple organizational structure? ›
Simple Structure
If the firm is a sole proprietorship, one person performs all the tasks the organization needs to accomplish. For example, on the TV series The Simpsons, both bar owner Moe Szyslak and the Comic Book Guy are shown handling all aspects of their respective businesses.
How is Apple organizational structure? ›
Apple uses a company structure that is commonly known as “functional organization”. This means that the company has been organized around areas of expertise, rather than individual products. The products themselves are then worked on by individuals from across the different areas of expertise.
Which business structure is the best and why? ›
If you want sole or primary control of the business and its activities, a sole proprietorship or an LLC might be the best choice. You can negotiate such control in a partnership agreement as well. A corporation is constructed to have a board of directors that makes the major decisions that guide the company.
How do you choose an organization 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 organizational structure do big companies use? ›
Many companies use the traditional model of a centralized organizational structure. With centralized leadership, there is a transparent chain of command and each role has well-defined responsibilities.
What are the benefits of structure in a company? ›
Advantages of a company structure
- Built for business expansion. The company business structure enables easy additions of new shareholders, investors, and co-owners. ...
- Well-defined governance agreements. ...
- Limited liability and reduced personal risk. ...
- Unlimited lifespan. ...
- Government support.
Organizational structure is the method by which work flows through an organization. It allows groups to work together within their individual functions to manage tasks.
What are the benefits of having a functional organizational structure? ›
Advantages of a functional structure
- specialisation - departments focus on one area of work.
- productivity - specialism means that staff are skilled in the tasks they do.
- accountability - there are clear lines of management.
- clarity - employees understand their own and others' roles.
Because a simple business structure hires a lower number of employees, there are fewer budget costs. With a lower number of employees, a company needs fewer computers, resources and payroll checks. With this increase in capital, a simple business structure has more opportunities for expansion, hiring and development.
Evidence of a bad organizational structure includes low productivity, high employee turnover and hiring problems, misalignment between technology and decision-making, and the inability for the business to grow.
How does organizational structure affect a company? ›
Organizational structure improves operational efficiency by providing clarity to employees at all levels of a company. By paying mind to the organizational structure, departments can work more like well-oiled machines, focusing time and energy on productive tasks.
What organizational structure does Coca-Cola use? ›
The Coca-Cola Company is controlled through a vertical top-down hierarchy, with decision-making authority residing with the company's upper management and flowing down the organizational hierarchy.
What is the organizational structure at Coca-Cola? ›
The Coca-Cola Company has a somewhat complex matrix organizational structure with geographic divisions, product divisions, business-type units, and functional groups. What is this? Costco has a matrix organizational structure, which can simply be defined as any structure that combines two or more different types.
What is the organizational structure of Netflix? ›
The three main divisions of the Netflix organizational structure are functional, geographical, and products team. The functional division includes CEO, content, communication, talent, finance, legal, and so more. Additionally, the geographical team consists of local and international streaming.
What is the easiest organizational structure? ›
Line organizational structure is one of the simplest types of organizational structures. Its authority flows from top to bottom. Unlike other structures, specialized and supportive services do not take place in these organizations. The chain of command and each department head has control over their departments.
What is the best organizational structure for a startup? ›
Flat structures tend to work best for startups, though challenges may arise as the need for oversight and delegation increase as a company grows.
What is an example of a simple structure in business? ›
A start-up is a typical example of an organization having a simple structure because apart from the founder there may be one or few employees who multi-task, and take care of all that has to be done to help attain organizational goals. Communication is informal and there is a high degree of collaboration.
What is the most common organizational structure in small companies? ›
The functional reporting structure is one of the most common types of org structures. It groups employees together based on their function, or role, within the organization. For instance, the sales team works in one department, the IT team in another and the finance team works in a third group.
What is the hardest organizational structure? ›
The most complex of all organizational structures is a matrix structure. Because in a matrix organizational structure there are more than one managerial responsibility and accountability involved which makes the structure more complicated.
Walmart has a hybrid hierarchical-functional organizational structure, otherwise referred to as a matrix structure that combines multiple approaches.
What kind of organizational structure does Amazon have? ›
Amazon organizational structure can be classified as hierarchical. Senior management team include three CEOs and three senior vice presidents responsible for various vital aspects of the business reporting directly to CEO Andy Jassy.
What is the organizational structure of Google? ›
Google follows a cross-functional organizational structure, or in other words, a matrix corporate structure. Using the cross-functional or matrix structure means that staff from different functions with a variety of skills are grouped together to work on a certain project or product development.
Why does Amazon use functional organizational structure? ›
Global groups based on functions
Each major business function has its own dedicated group that is headed by an executive-level manager, such as a CEO or SVP. By structuring the company in this way, Amazon can efficiently and successfully manage its e-commerce operations throughout the entire organization.
What is a real life example of divisional organizational structure? ›
McDonald's Corporation, one of the leading fast-food chains in the world is an ideal example of a divisional organizational structure. The overall business is divided into independent divisions that have responsibilities based on operational requirements.
What are good examples of structure? ›
Buildings, aircraft, skeletons, anthills, beaver dams, bridges and salt domes are all examples of load-bearing structures. The results of construction are divided into buildings and non-building structures, and make up the infrastructure of a human society.
What is Tesla's organizational structure? ›
Tesla is characterized by a functional organizational structure with aspects of a hierarchical structure. Tesla does employ functional centers that cover all business activities, including finance, sales, marketing, technology, engineering, design, and the offices of the CEO and chairperson.
What is the organizational structure of Samsung? ›
Samsung has a product-type divisional organizational structure where products determine how resources and business operations are categorized. Samsung consists of three product divisions: consumer electronics, IT & mobile communications, and device solutions.
How is Nike structured? ›
Nike has a matrix organizational structure with a strong preference for geographic and regional divisions. At the top of the Nike hierarchy is global corporate leadership headquartered in Beaverton, Oregon.
Which business structure is the most difficult to open? ›
A business corporation is the most complex form of business organization. Its formation and its internal operations are governed by state law. A business corporation is an entity organized for profit under the laws of one state.
Corporation
It creates an extra legal barrier between you and your business entity that you can't get as a sole proprietor or with a general partnership. This is one of the reasons why it's a popular form of business organization choice for entrepreneurs.
What is the best company structure to limit liability? ›
Limited liability company (LLC)
A limited liability company is often the best choice for a business. The LLC offers simplicity, flexibility and limited personal liability from business creditors. Number of owners. An LLC may have one or more owners.
What is the purpose of organizational structure? ›
The main purpose of such a structure is to help the organization work towards its goals. It brings members of the organization together and demarcates functions between them. Secondly, the structure also helps in ensuring smooth and efficient functioning. In other words, it reduces time, money and efforts.
What are the main purposes of an Organisational structure? ›
The purpose of an organisation structure is to help the organisation to achieve its aims and objectives and employees to complete their work effectively and efficiently. An organisation structure allocates employees designated work roles and responsibilities and helps management to coordinate and control activities.
What are three reasons why the Organisation structure is important? ›
Structure will give employees more clarity, help manage expectations, enable better decision-making and provide consistency. Organizational charts also assign responsibility, organize workflow and make sure important tasks are completed on time.
What are the 3 basic organization structures? ›
The three main organizational structures are Hierarchical, Sequential, and Matrix.
What is the most important organizational structure? ›
Hierarchical structure
Its chain of command is the one that likely comes to mind when you think of any company: Power flows from the board of directors down to the CEO through the rest of the company from top to bottom. This makes the hierarchical structure a centralized organizational structure.
What is the most important part of an organization? ›
People are the most important part of an organization. Giving them the right tools to succeed is paramount. But it's also a business. Having a solution that can meet the needs of employees and the business at the same time will synchronize their goals and lead to happier, more effective work.
What are the four most important factors affecting organization structure? ›
Although many things can affect the choice of an appropriate structure for an organization, the following five factors are the most common: size, life cycle, strategy, environment, and technology.
How organizational structure influences organizational behavior? ›
The structure of an organization clarifies roles for organizational members, so that each member knows what they are supposed to do and who they report to. The structure also dictates the amount of control an organizational member has regarding their job in the organization.
Every business is managed through three major functions: finance, marketing, and operations management.
How do you describe organizational structure? ›
Organizational structure is the method by which work flows through an organization and allows groups to work together within their individual functions to manage tasks.
How to structure a company? ›
How to Structure Your Business: 9 Tips For Structuring New...
- Determine Your Level Of Involvement.
- Separate Intellectual Property And The Business Itself.
- Just Structure It.
- Determine How Personal Factors Affect The Business.
- Consider Your Future Funding Needs.
- If You Need Investment, Start With A C-Corp.
