assignment org structure

7 Organizational Structure Types (With Examples)

Updated: May 29, 2024, 5:39pm

Table of Contents

What is an organizational structure, 4 common types of organizational structures, 3 alternative organizational structures, how to choose the best organizational structure, frequently asked questions (faqs).

Every company needs an organizational structure—whether they realize it or not. The organizational structure is how the company delegates roles, responsibilities, job functions, accountability and decision-making authority. The organizational structure often shows the “chain of command” and how information moves within the company. Having an organizational structure that aligns with your company’s goals and objectives is crucial. This article describes the various types of organizational structures, the benefits of creating one for your business and specific elements that should be included.

Employees want to understand their job responsibilities, whom they report to, what decisions they can and should make and how they interact with other people and teams within the company. An organizational structure creates this framework. Organizational structures can be centralized or decentralized, hierarchical or circular, flat or vertical.

Centralized vs. Decentralized

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.

Conversely, with a decentralized organizational structure, teams have more autonomy to make decisions and there may be cross-collaboration between groups. Decentralized leadership can help companies remain agile and adapt to changing needs.

Hierarchical vs. Circular

A hierarchical organization structure is the pyramid-shaped organization chart many people are used to seeing. There is one role at the top of the pyramid and the chain of command moves down, with each level decreasing in responsibilities and authority.

On the other hand, a circular organization chart looks like concentric circles with company leadership in the center circle. Instead of information flowing down to the next “level,” information flows out to the next ring of management.

Vertical vs. Flat

A vertical organizational chart has a clear chain of command with a small group of leaders at the top—or in the center, in the case of a circular structure—and each subsequent tier has less authority and responsibility. As discussed below, functional, product-based, market-based and geographical organizational structures are vertical structures.

With a flat organization structure, a person may report to more than one person and there may be cross-department responsibilities and decision-making authority. The matrix organizational structure described below is an example of a flat structure.

Benefits of Creating an Organizational Structure

There are many benefits to creating an organizational structure that aligns with the company’s operations, goals and objectives. Clearly disseminating this information to employees:

• Provides accountability
• Clarifies expectations
• Documents criteria for promotion
• Designates decision-making authority
• Creates efficiency
• Fosters collaboration

Essential Elements of Clear Organizational Structure

Regardless of the special type of organizational structure you choose, it should have the following components:

• Chain of command
• Roles and responsibilities
• Scope of control
• Decision-making authority
• Departments or teams within the organization

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. A functional structure facilitates specialization, scalability and accountability. It also establishes clear expectations and has a well-defined chain of command. However, this structure runs the risk of being too confining and it can impede employee growth. It also has the potential for a lack of cross-department communication and collaboration.

Product- or Market-Based Structure

Along with the functional structure, the product- or market-based structure is hierarchical, vertical and centralized. However, instead of being structured around typical roles and job functions, it is structured around the company’s products or markets. This kind of structure can benefit companies that have several product lines or markets, but it can be challenging to scale. It can also foster inefficiency if product or market teams have similar functions, and without good communication across teams, companies run the risk of incompatibility among various product/market teams.

Geographical Structure

The geographical structure is a good option for companies with a broad geographic footprint in an industry where it is essential to be close to their customers and suppliers. The geographical structure enables the company to create bespoke organizational structures that align with the location’s culture, language and professional systems. From a broad perspective, it appears very similar to the product-based structure above.

Process-Based Structure

Similar to the functional structure, the process-based structure is structured in a way that follows a product’s or service’s life cycle. For instance, the structure can be broken down into R&D, product creation, order fulfillment, billing and customer services. This structure can foster efficiency, teamwork and specialization, but it can also create barriers between the teams if communication isn’t prioritized.

Matrix Structure

With a matrix organizational structure, there are multiple reporting obligations. For instance, a marketing specialist may have reporting obligations within the marketing and product teams. A matrix structure offers flexibility, enables shared resources and fosters collaboration within the company. However, the organizational structure can be complex, so it can cause confusion about accountability and communication, especially among new employees.

Circular Structure

Similar to the functional and product-based structure, a circular structure is also centralized and hierarchical, but instead of responsibility and decision-making authority flowing down vertically, responsibility and decision-making authority flow out from the center. A circular structure can promote communication and collaboration but can also be confusing, especially for new employees, because there is no clear chain of command.

Organic Structure

Unlike vertical structures, this structure facilitates communication between and among all staff. It is the most complex, but it can also be the most productive. Although it can be challenging to know who has ultimate decision-making authority, it can also foster a positive company culture because employees don’t feel like they have “superiors.” This structure can also be more cost-efficient because it reduces the need for middle managers.

There is no one “right” organizational structure. When deciding which structure will work best for your company, consider the following:

• Current roles and teams within the company. How are job functions currently organized? Does it foster communication and productivity? Does it impede or encourage employee growth?
• Your strategic plan. What are your company’s goals for the short-term and long-term?
• Feedback from employees, leadership and other stakeholders. What do those within your company say about how the company is structured? What feedback do you have from other stakeholders, such as customers and suppliers?
• Alignment. What structure will best support your strategic plans and address any feedback received?

What is the most common organizational structure?

A functional organizational structure is one of the most common organizational structures. If you are still determining what kind of structure to use, this organizational structure can be an excellent place to start.

What is the difference between an organizational structure and an organizational chart?

An organizational chart is a graphic that depicts the organizational structure. The chart may include job titles or it can be personalized to include names and photos.

What are the four types of organizational structures?

A functional—or role-based—structure is one of the most common organizational structures. The second type—the product- or market-based structure—is also hierarchical, vertical and centralized. Similar to these is the third structure—the process-based structure—which is structured in a way that follows a product’s or service’s life cycle. Lastly, the geographical structure is suitable for businesses with a broad geographic footprint.

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7.3 Organizational Structure

Learning objectives.

• Explain the roles of formalization, centralization, levels in the hierarchy, and departmentalization in employee attitudes and behaviors.
• Describe how the elements of organizational structure can be combined to create mechanistic and organic structures.
• Understand the advantages and disadvantages of mechanistic and organic structures for organizations.

Organizational structure refers to how individual and team work within an organization are coordinated. To achieve organizational goals and objectives, individual work needs to be coordinated and managed. Structure is a valuable tool in achieving coordination, as it specifies reporting relationships (who reports to whom), delineates formal communication channels, and describes how separate actions of individuals are linked together. Organizations can function within a number of different structures, each possessing distinct advantages and disadvantages. Although any structure that is not properly managed will be plagued with issues, some organizational models are better equipped for particular environments and tasks.

Building Blocks of Structure

What exactly do we mean by organizational structure? Which elements of a company’s structure make a difference in how we behave and how work is coordinated? We will review four aspects of structure that have been frequently studied in the literature: centralization, formalization, hierarchical levels, and departmentalization. We view these four elements as the building blocks, or elements, making up a company’s structure. Then we will examine how these building blocks come together to form two different configurations of structures.

Centralization

Centralization is the degree to which decision-making authority is concentrated at higher levels in an organization. In centralized companies, many important decisions are made at higher levels of the hierarchy, whereas in decentralized companies, decisions are made and problems are solved at lower levels by employees who are closer to the problem in question.

As an employee, where would you feel more comfortable and productive? If your answer is “decentralized,” you are not alone. Decentralized companies give more authority to lower-level employees, resulting in a sense of empowerment. Decisions can be made more quickly, and employees often believe that decentralized companies provide greater levels of procedural fairness to employees. Job candidates are more likely to be attracted to decentralized organizations. Because centralized organizations assign decision-making responsibility to higher-level managers, they place greater demands on the judgment capabilities of CEOs and other high-level managers.

Many companies find that the centralization of operations leads to inefficiencies in decision making. For example, in the 1980s, the industrial equipment manufacturer Caterpillar suffered the consequences of centralized decision making. At the time, all pricing decisions were made in the corporate headquarters in Peoria, Illinois. This meant that when a sales representative working in Africa wanted to give a discount on a product, they needed to check with headquarters. Headquarters did not always have accurate or timely information about the subsidiary markets to make an effective decision. As a result, Caterpillar was at a disadvantage against competitors such as the Japanese firm Komatsu. Seeking to overcome this centralization paralysis, Caterpillar underwent several dramatic rounds of reorganization in the 1990s and 2000s (Nelson & Pasternack, 2005).

Changing their decision-making approach to a more decentralized style has helped Caterpillar compete at the global level.

Aconcagua – Bauma 2007 Bulldozer Caterpillar 2 CC BY-SA 3.0.

However, centralization also has its advantages. Some employees are more comfortable in an organization where their manager confidently gives instructions and makes decisions. Centralization may also lead to more efficient operations, particularly if the company is operating in a stable environment (Ambrose & Cropanzano, 2000; Miller, et. al., 1988; Oldham & Hackman, 1981; Pierce & Delbecq, 1977; Schminke, et. al., 2000; Turban & Keon, 1993; Wally & Baum, 1994).

In fact, organizations can suffer from extreme decentralization. For example, some analysts believe that the Federal Bureau of Investigation (FBI) experiences some problems because all its structure and systems are based on the assumption that crime needs to be investigated after it happens. Over time, this assumption led to a situation where, instead of following an overarching strategy, each FBI unit is completely decentralized and field agents determine how investigations should be pursued. It has been argued that due to the change in the nature of crimes, the FBI needs to gather accurate intelligence before a crime is committed; this requires more centralized decision making and strategy development (Brazil, 2007).

Hitting the right balance between decentralization and centralization is a challenge for many organizations. At the Home Depot, the retail giant with over 2,000 stores across the United States, Canada, Mexico, and China, one of the major changes instituted by former CEO Bob Nardelli was to centralize most of its operations. Before Nardelli’s arrival in 2000, Home Depot store managers made a number of decisions autonomously and each store had an entrepreneurial culture. Nardelli’s changes initially saved the company a lot of money. For example, for a company of that size, centralizing purchasing operations led to big cost savings because the company could negotiate important discounts from suppliers. At the same time, many analysts think that the centralization went too far, leading to the loss of the service-oriented culture at the stores. Nardelli was ousted after seven years (Charan, 2006; Marquez, 2007).

Formalization

Formalization is the extent to which an organization’s policies, procedures, job descriptions, and rules are written and explicitly articulated. Formalized structures are those in which there are many written rules and regulations. These structures control employee behavior using written rules, so that employees have little autonomy to decide on a case-by-case basis. An advantage of formalization is that it makes employee behavior more predictable. Whenever a problem at work arises, employees know to turn to a handbook or a procedure guideline. Therefore, employees respond to problems in a similar way across the organization; this leads to consistency of behavior.

While formalization reduces ambiguity and provides direction to employees, it is not without disadvantages. A high degree of formalization may actually lead to reduced innovativeness because employees are used to behaving in a certain manner. In fact, strategic decision making in such organizations often occurs only when there is a crisis. A formalized structure is associated with reduced motivation and job satisfaction as well as a slower pace of decision making (Frederickson, 1986; Oldham & Hackman, 1981; Pierce & Delbecq, 1977; Wally & Baum, 1994). The service industry is particularly susceptible to problems associated with high levels of formalization. Sometimes employees who are listening to a customer’s problems may need to take action, but the answer may not be specified in any procedural guidelines or rulebook. For example, while a handful of airlines such as Southwest do a good job of empowering their employees to handle complaints, in many airlines, lower-level employees have limited power to resolve a customer problem and are constrained by stringent rules that outline a limited number of acceptable responses.

Hierarchical Levels

Another important element of a company’s structure is the number of levels it has in its hierarchy. Keeping the size of the organization constant, tall structures have several layers of management between frontline employees and the top level, while flat structures consist of only a few layers. In tall structures, the number of employees reporting to each manager tends to be smaller, resulting in greater opportunities for managers to supervise and monitor employee activities. In contrast, flat structures involve a larger number of employees reporting to each manager. In such a structure, managers will be relatively unable to provide close supervision, leading to greater levels of freedom of action for each employee.

Research indicates that flat organizations provide greater need satisfaction for employees and greater levels of self-actualization (Ghiselli & Johnson, 1970; Porter & Siegel, 2006). At the same time, there may be some challenges associated with flat structures. Research shows that when managers supervise a large number of employees, which is more likely to happen in flat structures, employees experience greater levels of role ambiguity—the confusion that results from being unsure of what is expected of a worker on the job (Chonko, 1982). This is especially a disadvantage for employees who need closer guidance from their managers. Moreover, in a flat structure, advancement opportunities will be more limited because there are fewer management layers. Finally, while employees report that flat structures are better at satisfying their higher-order needs such as self-actualization, they also report that tall structures are better at satisfying security needs of employees (Porter & Lawler, 1964). Because tall structures are typical of large and well-established companies, it is possible that when working in such organizations employees feel a greater sense of job security.

Companies such as IKEA, the Swedish furniture manufacturer and retailer, are successfully using flat structures within stores to build an employee attitude of job involvement and ownership.

Ikea almhult – Wikimedia Commons – CC BY-SA 3.0.

Departmentalization

Organizational structures differ in terms of departmentalization, which is broadly categorized as either functional or divisional.

Organizations using functional structures group jobs based on similarity in functions. Such structures may have departments such as marketing, manufacturing, finance, accounting, human resources, and information technology. In these structures, each person serves a specialized role and handles large volumes of transactions. For example, in a functional structure, an employee in the marketing department may serve as an event planner, planning promotional events for all the products of the company.

In organizations using divisional structures , departments represent the unique products, services, customers, or geographic locations the company is serving. Thus each unique product or service the company is producing will have its own department. Within each department, functions such as marketing, manufacturing, and other roles are replicated. In these structures, employees act like generalists as opposed to specialists. Instead of performing specialized tasks, employees will be in charge of performing many different tasks in the service of the product. For example, a marketing employee in a company with a divisional structure may be in charge of planning promotions, coordinating relations with advertising agencies, and planning and conducting marketing research, all for the particular product line handled by his or her division.

In reality, many organizations are structured according to a mixture of functional and divisional forms. For example, if the company has multiple product lines, departmentalizing by product may increase innovativeness and reduce response times. Each of these departments may have dedicated marketing, manufacturing, and customer service employees serving the specific product; yet, the company may also find that centralizing some operations and retaining the functional structure makes sense and is more cost effective for roles such as human resources management and information technology. The same organization may also create geographic departments if it is serving different countries.

Each type of departmentalization has its advantages. Functional structures tend to be effective when an organization does not have a large number of products and services requiring special attention. When a company has a diverse product line, each product will have unique demands, deeming divisional (or product-specific) structures more useful for promptly addressing customer demands and anticipating market changes. Functional structures are more effective in stable environments that are slower to change. In contrast, organizations using product divisions are more agile and can perform better in turbulent environments. The type of employee who will succeed under each structure is also different. Research shows that when employees work in product divisions in turbulent environments, because activities are diverse and complex, their performance depends on their general mental abilities (Hollenbeck, et. al., 2002).

Figure 7.6 An Example of a Pharmaceutical Company with a Functional Departmentalization Structure

Figure 7.7 An Example of a Pharmaceutical Company with a Divisional Departmentalization Structure

Two Configurations: Mechanistic and Organic Structures

The different elements making up organizational structures in the form of formalization, centralization, number of levels in the hierarchy, and departmentalization often coexist. As a result, we can talk about two configurations of organizational structures, depending on how these elements are arranged.

Mechanistic structures are those that resemble a bureaucracy. These structures are highly formalized and centralized. Communication tends to follow formal channels and employees are given specific job descriptions delineating their roles and responsibilities. Mechanistic organizations are often rigid and resist change, making them unsuitable for innovativeness and taking quick action. These forms have the downside of inhibiting entrepreneurial action and discouraging the use of individual initiative on the part of employees. Not only do mechanistic structures have disadvantages for innovativeness, but they also limit individual autonomy and self-determination, which will likely lead to lower levels of intrinsic motivation on the job (Burns & Stalker, 1961; Covin & Slevin, 1988; Schollhammer, 1982; Sherman & Smith, 1984; Slevin & Covin, 1990).

Despite these downsides, however, mechanistic structures have advantages when the environment is more stable. The main advantage of a mechanistic structure is its efficiency. Therefore, in organizations that are trying to maximize efficiency and minimize costs, mechanistic structures provide advantages. For example, McDonald’s has a famously bureaucratic structure where employee jobs are highly formalized, with clear lines of communication and specific job descriptions. This structure is an advantage for them because it allows McDonald’s to produce a uniform product around the world at minimum cost. Mechanistic structures can also be advantageous when a company is new. New businesses often suffer from a lack of structure, role ambiguity, and uncertainty. The presence of a mechanistic structure has been shown to be related to firm performance in new ventures (Sine & Kirsch, 2006).

In contrast to mechanistic structures, organic structures are flexible and decentralized, with low levels of formalization. In Organizations with an organic structure, communication lines are more fluid and flexible. Employee job descriptions are broader and employees are asked to perform duties based on the specific needs of the organization at the time as well as their own expertise levels. Organic structures tend to be related to higher levels of job satisfaction on the part of employees. These structures are conducive to entrepreneurial behavior and innovativeness (Burns & Stalker, 1961; Covin & Slevin, 1988). An example of a company that has an organic structure is the diversified technology company 3M. The company is strongly committed to decentralization. At 3M, there are close to 100 profit centers, with each division feeling like a small company. Each division manager acts autonomously and is accountable for his or her actions. As operations within each division get too big and a product created by a division becomes profitable, the operation is spun off to create a separate business unit. This is done to protect the agility of the company and the small-company atmosphere.

Key Takeaway

The degree to which a company is centralized and formalized, the number of levels in the company hierarchy, and the type of departmentalization the company uses are key elements of a company’s structure. These elements of structure affect the degree to which the company is effective and innovative as well as employee attitudes and behaviors at work. These elements come together to create mechanistic and organic structures. Mechanistic structures are rigid and bureaucratic and help companies achieve efficiency, while organic structures are decentralized, flexible, and aid companies in achieving innovativeness.

• What are the advantages and disadvantages of decentralization?
• All else being equal, would you prefer to work in a tall or flat organization? Why?
• What are the advantages and disadvantages of departmentalization by product?

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Principles of Management Copyright © 2015 by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

Module 6: Organizational Structures

Assignment: organizational structures.

Step 1:  To view this assignment, click on  Assignment: Organizational Structures.

Step 2:  Follow the instructions in the assignment and submit your completed assignment into the LMS.

• Assignment: Organizational Structures. Authored by : Nina Burokas. Provided by : Lumen Learning. License : CC BY: Attribution

7.1 Building Organizational Structures

• What are the traditional forms of organizational structure?

The key functions that managers perform include planning, organizing, leading, and controlling. This module focuses specifically on the organizing function. Organizing involves coordinating and allocating a firm’s resources so that the firm can carry out its plans and achieve its goals. This organizing, or structuring, process is accomplished by:

• Determining work activities and dividing up tasks (division of labor)
• Grouping jobs and employees (departmentalization)
• Assigning authority and responsibilities (delegation)

The result of the organizing process is a formal structure within an organization. An organization is the order and design of relationships within a company or firm. It consists of two or more people working together with a common objective and clarity of purpose. Formal organizations also have well-defined lines of authority, channels for information flow, and means of control. Human, material, financial, and information resources are deliberately connected to form the business organization. Some connections are long-lasting, such as the links among people in the finance or marketing department. Others can be changed at almost any time—for example, when a committee is formed to study a problem.

Every organization has some kind of underlying structure. Typically, organizations base their frameworks on traditional, contemporary, or team-based approaches. Traditional structures are more rigid and group employees by function, products, processes, customers, or regions. Contemporary and team-based structures are more flexible and assemble employees to respond quickly to dynamic business environments. Regardless of the structural framework a company chooses to implement, all managers must first consider what kind of work needs to be done within the firm.

Division of Labor

The process of dividing work into separate jobs and assigning tasks to workers is called division of labor . In a fast-food restaurant, for example, some employees take or fill orders, others prepare food, a few clean and maintain equipment, and at least one supervises all the others. In an auto assembly plant, some workers install rearview mirrors, while others mount bumpers on bumper brackets. The degree to which the tasks are subdivided into smaller jobs is called specialization . Employees who work at highly specialized jobs, such as assembly-line workers, perform a limited number and variety of tasks. Employees who become specialists at one task, or a small number of tasks, develop greater skill in doing that particular job. This can lead to greater efficiency and consistency in production and other work activities. However, a high degree of specialization can also result in employees who are disinterested or bored due to the lack of variety and challenge.

Traditional Structures

After a company divides the work it needs to do into specific jobs, managers then group the jobs together so that similar or associated tasks and activities can be coordinated. This grouping of people, tasks, and resources into organizational units is called departmentalization . It facilitates the planning, leading, and control processes.

An organization chart is a visual representation of the structured relationships among tasks and the people given the authority to do those tasks. In the organization chart in Exhibit 7.4 , each figure represents a job, and each job includes several tasks. The sales manager, for instance, must hire salespeople, establish sales territories, motivate and train the salespeople, and control sales operations. The chart also indicates the general type of work done in each position. As Exhibit 7.5 shows, five basic types of departmentalization are commonly used in organizations:

• Functional departmentalization , which is based on the primary functions performed within an organizational unit (marketing, finance, production, sales, and so on). Ethan Allen Interiors, a vertically integrated home furnishings manufacturer, continues its successful departmentalization by function, including retail, manufacturing and sourcing, product design, logistics, and operations, which includes tight financial controls. 1
• Product departmentalization , which is based on the goods or services produced or sold by the organizational unit (such as outpatient/emergency services, pediatrics, cardiology, and orthopedics). For example, ITT is a diversified leading manufacturer of highly engineered components and customized technology solutions for the transportation, industrial, and oil and gas markets. The company is organized into four product divisions: Industrial Process (pumps, valves, and wastewater treatment equipment), Control Technologies (motion control and vibration isolation products), Motion Technologies (shock absorbers, brake pads, and friction materials), and Interconnect Solutions (connectors for a variety of markets). 2
• Process departmentalization , which is based on the production process used by the organizational unit (such as lumber cutting and treatment, furniture finishing, and shipping). For example, the organization of Gazprom Neft , a Russian oil company, reflects the activities the company needs to perform to extract oil from the ground and turn it into a final product: exploration and research, production (drilling), refining, and marketing and distribution. 3 Pixar, the animated-movie company now part of Disney , is divided into three parallel yet interactive process-based groups: technology development, which delivers computer-graphics tools; creative development, which creates stories and characters and animates them; and production, which coordinates the film-making process. 4
• Customer departmentalization , which is based on the primary type of customer served by the organizational unit (such as wholesale or retail purchasers). The PNC Financial Services Group offers a wide range of services for all of its customers and is structured by the type of consumer it serves: retail banking for consumers; the asset management group, with specific focus on individuals as well as corporations, unions, municipalities, and others; and corporate and institutional banking for middle-market companies nationwide. 5

Ethics in Practice

Panera’s Menu Comes Clean Making a strategic change to a company’s overall philosophy and the way it does business affects every part of the organizational structure. And when that change pertains to sustainability and “clean food,” Panera Bread Company took on the challenge more than a decade ago and now has a menu free of man-made preservatives, sweeteners, colors, and flavors.

In 2015, Ron Shaich, company founder and CEO, announced Panera’s “no-no” list of nearly 100 ingredients, which he vowed would be eliminated or never used again in menu items. Two years later, the company announced that its menu was “100 percent clean,” but the process was not an easy one.

Panera used thousands of labor hours to review the 450 ingredients used in menu items, eventually reformulating more than 120 of them to eliminate artificial ingredients. Once the team identified the ingredients that were not “clean,” they worked with the company’s 300 vendors—and in some instances, a vendor’s supplier—to reformulate an ingredient to make it preservative-free. For example, the recipe for the company’s popular broccoli cheddar soup had to be revised 60 times to remove artificial ingredients without losing the soup’s taste and texture. According to Shaich, the trial-and-error approach was about finding the right balance of milk, cream, and emulsifiers, like Dijon mustard, to replace sodium phosphate (a no-no item) while keeping the soup’s texture creamy. Panera also created a new cheddar cheese to use in the soup and used a Dijon mustard that contained unpreserved vinegar as a substitute for the banned sodium phosphate.

Sara Burnett, Panera’s director of wellness and food policy, believes that the company’s responsibility goes beyond just serving its customers. She believes that Panera can make a difference by using its voice and purchasing power to have a positive impact on the overall food system. In addition, the company’s Herculean effort to remove artificial ingredients from its menu items also helped it take a close look at its supply chain and other processes that Panera could simplify by using better ingredients.

Panera is not yet satisfied with its commitment to clean food. The food chain recently announced its goal of sourcing 100 percent cage-free eggs for all of its U.S. Panera bakery-cafés by 2020.

• How does Panera’s approach to clean eating provide the company with a competitive advantage?
• What kind of impact does this commitment to preservative-free food have on the company’s organizational structure?
• Does “clean food” put additional pressure on Panera and its vendors? Explain your reasoning.

Sources: “Our Food Policy,” https://www.panerabread.com, accessed July 24, 2017; Emily Payne, “Panera Bread’s Sara Burnett on Shifting Demand for a Better Food System,” Food Tank, http://foodtank.com, accessed July 18, 2017; Julie Jargon, “What Panera Had to Change to Make Its Menu ‘Clean,’” The Wall Street Journal, https://www.wsj.com, February 20, 2017; John Kell, “Panera Says Its Food Menu Is Now 100% ‘Clean Eating,’” Fortune, http://fortune.com, January 13, 2017; Lani Furbank, “Seven Questions with Sara Burnett, Director of Wellness and Food Policy at Panera Bread,” Food Tank, https://foodtank.com, April 12, 2016.

• Geographic departmentalization , which is based on the geographic segmentation of organizational units (such as U.S. and Canadian marketing, European marketing, and Latin American marketing).

People are assigned to a particular organizational unit because they perform similar or related tasks, or because they are jointly responsible for a product, client, or market. Decisions about how to departmentalize affect the way management assigns authority, distributes resources, rewards performance, and sets up lines of communication. Many large organizations use several types of departmentalization. For example, Procter & Gamble (P&G), the multibillion-dollar consumer-products company, integrates four different types of departmentalization, which the company refers to as “four pillars.” First, the Global Business Units (GBU) divide the company according to products (baby, feminine, and family care; beauty; fabric and home care; and health and grooming). Then, P&G uses a geographical approach, creating business units to market its products around the world. There are Selling and Market Operations (SMO) groups for North America; Latin America; Europe; Asia Pacific; Greater China; and India, the Middle East, and Africa. P&G’s third pillar is Global Business Services division (GBS), which also uses geographic departmentalization. GBS provides technology processes and standard data tools to enable the GBUs and SMOs to better understand the business and to serve consumers and customers better. It supports P&G business units in areas such as accounting and financial reporting, information technology, purchases, payroll and benefits administration, and facilities management. Finally, the divisions of the Corporate Functions pillar provide a safety net to all the other pillars. These divisions are comprised of functional specialties such as customer business development; external relations; human resources; legal, marketing, consumer, and market knowledge; research and development; and workplace services. 6

Line-and-Staff Organization

The line organization is designed with direct, clear lines of authority and communication flowing from the top managers downward. Managers have direct control over all activities, including administrative duties. An organization chart for this type of structure would show that all positions in the firm are directly connected via an imaginary line extending from the highest position in the organization to the lowest (where production of goods and services takes place). This structure, with its simple design and broad managerial control, is often well-suited to small, entrepreneurial firms.

As an organization grows and becomes more complex, the line organization can be enhanced by adding staff positions to the design. Staff positions provide specialized advisory and support services to line managers in the line-and-staff organization , shown in Exhibit 7.6 . In daily operations, individuals in line positions are directly involved in the processes used to create goods and services. Individuals in staff positions provide the administrative and support services that line employees need to achieve the firm’s goals. Line positions in organizations are typically in areas such as production, marketing, and finance. Staff positions are found in areas such as legal counseling, managerial consulting, public relations, and human resource management.

Concept Check

• How does specialization lead to greater efficiency and consistency in production?
• What are the five types of departmentalization?

This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax's permission.

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution License and you must attribute OpenStax.

Access for free at https://openstax.org/books/introduction-business/pages/1-introduction

• Authors: Lawrence J. Gitman, Carl McDaniel, Amit Shah, Monique Reece, Linda Koffel, Bethann Talsma, James C. Hyatt
• Publisher/website: OpenStax
• Book title: Introduction to Business
• Publication date: Sep 19, 2018
• Location: Houston, Texas
• Book URL: https://openstax.org/books/introduction-business/pages/1-introduction
• Section URL: https://openstax.org/books/introduction-business/pages/7-1-building-organizational-structures

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• Section 1. Organizational Structure: An Overview

Chapter 9 Sections

• Section 2. Creating and Gathering a Group to Guide Your Initiative
• Section 3. Developing Multisector Task Forces or Action Committees for the Initiative
• Section 4. Developing an Ongoing Board of Directors
• Section 5. Welcoming and Training New Members to a Board of Directors
• Section 6. Maintaining a Board of Directors
• Section 7. Writing Bylaws
• Section 8. Including Youth on Your Board, Commission, or Committee
• Section 9. Understanding and Writing Contracts and Memoranda of Agreement

• Main Section

What is organizational structure?

Why should you develop a structure for your organization, when should you develop a structure for your organization.

By structure, we mean the framework around which the group is organized, the underpinnings which keep the coalition functioning. It's the operating manual that tells members how the organization is put together and how it works. More specifically, structure describes how members are accepted, how leadership is chosen, and how decisions are made.

• Structure gives members clear guidelines for how to proceed. A clearly-established structure gives the group a means to maintain order and resolve disagreements.
• Structure binds members together. It gives meaning and identity to the people who join the group, as well as to the group itself.
• Structure in any organization is inevitable -- an organization, by definition , implies a structure. Your group is going to have some structure whether it chooses to or not. It might as well be the structure which best matches up with what kind of organization you have, what kind of people are in it, and what you see yourself doing.

It is important to deal with structure early in the organization's development. Structural development can occur in proportion to other work the organization is doing, so that it does not crowd out that work. And it can occur in parallel with, at the same time as, your organization's growing accomplishments, so they take place in tandem, side by side. This means that you should think about structure from the beginning of your organization's life. As your group grows and changes, so should your thinking on the group's structure.

Elements of Structure

While the need for structure is clear, the best structure for a particular coalition is harder to determine. The best structure for any organization will depend upon who its members are, what the setting is, and how far the organization has come in its development.

Regardless of what type of structure your organization decides upon, three elements will always be there. They are inherent in the very idea of an organizational structure.

• Some kind of governance

Rules by which the organization operates

• A distribution of work

The first element of structure is governance - some person or group has to make the decisions within the organization.

Another important part of structure is having rules by which the organization operates. Many of these rules may be explicitly stated, while others may be implicit and unstated, though not necessarily any less powerful.

Distribution of work

Inherent in any organizational structure also is a distribution of work. The distribution can be formal or informal, temporary or enduring, but every organization will have some type of division of labor.

There are four tasks that are key to any group:

• Envisioning desired changes . The group needs someone who looks at the world in a slightly different way and believes he or she can make others look at things from the same point of view.
• Transforming the community . The group needs people who will go out and do the work that has been envisioned.
• Planning for integration . Someone needs to take the vision and figure out how to accomplish it by breaking it up into strategies and goals.
• Supporting the efforts of those working to promote change . The group needs support from the community to raise money for the organization, champion the initiative in the state legislature, and ensure that they continue working towards their vision.

Common Roles

Every group is different, and so each will have slightly different terms for the roles individuals play in their organization, but below are some common terms, along with definitions and their typical functions.

• An initial steering committee is the group of people who get things started. Often, this group will create plans for funding, and organizational and board development. It may also generate by-laws, and then dissolve. If they continue to meet after approximately the first six months, we might say they have metamorphosed into a coordinating council .
• A coordinating council (also referred to as a coordinating committee, executive committee , and executive council ), modifies broad, organization-wide objectives and strategies in response to input from individuals or committees.
• Often, one person will take the place of the coordinating council, or may serve as its head. Such a person may be known as the Executive Director, Project Coordinator, Program Director, or President . He or she sometimes has a paid position, and may coordinate, manage, inspire, supervise, and support the work of other members of the organization.
• Task forces are made up of members who work together around broad objectives. Task forces integrate the ideas set forward with the community work being done.

For example, from the director of a coalition to reduce violence in a medium-sized city: "Currently, we have three operational task forces. Members of each have an ongoing dialogue with members of the coordinating council, and also with their action committees. The oldest was formed with the goal of eliminating domestic violence about fifteen years ago, when a local woman was killed by her husband. Then, after several outbreaks of violence in the schools a few years back, our group offered to help, and a second task force sprung up around reducing youth violence. We've just started a third, with the goal of increasing gun safety. "All of it is interrelated, and all of it applies to our mission of increasing the safety of residents of South Haven, as well as that of our visitors. But each task force is contributing to that mission in vastly different ways, with different objectives, and using different strategies. 'Cause, you know, the strategies you use to stop a ninth grader from bringing a gun to school just aren't the same as the ones you use to stop a 40-year-old man on unemployment from beating his wife."

•   Action committees bring about specific changes in programs, policies, and practices in the sectors in which they work.

For example, the task force on domestic violence mentioned above has the following action committees: A government and law enforcement committee . Members include police officers, lawyers, a judge, and a state representative. Currently, they are trying to pass laws with stronger penalties for those convicted of domestic violence, especially repeat offenders. They are also training officers to be better able to spot an abusive relationship, and better able to inform a victim of his or her options. A social services committee . Members (who include representatives from most of the service agencies in town) work to assure that staff members know where to send someone for the resources he or she needs. They are also trying to increase the number of trained volunteer counselors who work at the battered women's shelter. A media committee . Members include local journalists, writers, and graphic designers. They keep the project and the issue in the public's minds as much as possible with editorials, articles and news clips of events, as well as advertisements and public service announcements.

•   Support committees are groups that help ensure that action committees or other individuals will have the resources and opportunities necessary to realize their vision. Financial and media committees are examples of committees formed to help support or facilitate your work.
• Community trustees , also known as the board of trustees or as the board of directors , provide overall support, advice, and resources to members of the action groups. They are often either people who are directly affected by the issue or have stature in the community. That way, they are able to make contacts, network with other community leaders, and generally remove or weaken barriers to meeting organizational objectives.
• Grantmakers are another part of the picture. Grantmakers exist on an international, national, state, and local level and may be private companies and foundations, or local, county, state, or federal government organizations (for example, block grants given by the city would fall into this category).
• Support organizations (not to be confused with the support committees listed above) are groups that can give your organization the technical assistance it needs.
• Partner organizations are other groups working on some of the same issues as your organization.

Although this list is pretty extensive, your organization may only use two or three of the above mentioned roles, especially at the beginning. It's not uncommon for a group to start with a steering committee, ask others to serve as board members, and then recruit volunteers who will serve as members of action committees. In this broad spectrum of possibilities, consider: Where does your organization fit in? Where do you want to be?

Examples of Structure

So how can all of these pieces be put together? Again, the form a community group takes should be based on what it does , and not the other way around. The structures given are simply meant to serve as examples that have been found to be effective for some community-based organizations; they can and should be adapted and modified for your own group's purposes.

  A relatively complex structure

Example - The Ste. Genevieve's Children's Coalition The Ste. Genevieve's Children's Coalition is a relatively large community-based group. They have a coordinating council, a media committee, and three task forces, dealing with adolescent pregnancy, immunization, and child hunger. Each of the task forces has action committees as well. For example, the adolescent pregnancy reduction task force has a schools committee that focuses on keeping teen parents in school and modifying the human sexuality curriculum. A health organizations committee focuses on increasing access and use of the youth clinic. The media committee works to keep children's issues in the news, and includes professionals from the local television stations, radio stations, newspaper, and a marketing professional. The coordinating council is composed of the executive director, her assistant, the media committee chair, and the chairs of each of the three task forces. A board of directors has been invaluable in helping keep the coalition financially viable.

In diagram form, a complex organization might look like this:

And in diagram form:

As smaller size means fewer people, these groups are usually less complex, as they have less need for a formal hierarchy and instead have governance that is consensus-based. A diagram of such a small group might look something like this, with each of the circles representing an individual member:

What type of structure should you choose?

First, decide upon the formality your organization will have. The following table, adapted from The Spirit of Coalition Building can help you make this first decision.

Organizational structure is something that is best decided upon internally, through a process of critical thinking and discussion by members of the group.

In your discussions, your answers to the following list of questions may guide your decisions.

• What is your common purpose? How broad is it? Groups with broader purposes often have more complicated structures, complete with many layers and parts, than do groups with more narrow purposes.
• Is your group advocacy oriented or service oriented? Service organizations use "top down," one-person-in-charge structure much more often than do advocacy based groups.
• Is your organization more centralized (e.g., through the work of a specific agency ) or decentralized (e.g., different neighborhoods working independently on the same problem)? A decentralized group might find a "top-down" structure inappropriate, as such a group often has several peers working together on an issue.
• How large is your organization? How large do you envision it becoming? A very small organization may wish to remain relatively informal, while a community-wide group might require a more formal structure. A related question, with similar consequences, is:
• How large is the community in which you work?
• How old is your organization? How long do you envision it lasting? A group formed to resolve a single issue might not need a formal structure at all, while an organization with long-term goals may want something more concrete, with clearer divisional responsibilities and authority.
• Is the organization entirely volunteer, or are there (or will there be) paid staff? How many? An organization with many paid staff members may find it more necessary to have people "in charge," as there are generally more rules and responsibilities for paid staff members, and thus, there must be more supervision in carrying out these roles.
• Should yours be a new organization, or part of an existing structure? Do you really need to form a new structure, or would it be better to work within existing structures? Sometimes, your goals may be better met if you are part of (or linked with) another organization.

Structure is what ensures that your organization will function smoothly and as you intended. You should think about structure early in the development of your organization, but be aware that the type that fits best may change as your organization grows.

Online Resources

How to Develop an Organization Structure , by Tara Duggan, Demand Media, is an informational article on how to develop organization structure with a short step-by-step analysis.

It's All About the Base: A Guide to Building a Grassroots Organizing Program   from Community Catalyst.

Module 2: Organizational Structure , by Pathfinder International, is a concise manual describing pros and cons, together with suggestions for how one might change the organizational structure one has.

Print Resources

Berkowitz, W., & Wolff, T. (1999). The spirit of coalition building. Washington , DC: American Public Health Association.

Unterman, I. & Davis, R. (1984). Strategic management of not-for-profit organizations: From survival to success . New York, NY: Praeger.

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Blog Graphs and Charts Organizational Structure: What is it, Types, Tips & Examples

Organizational Structure: What is it, Types, Tips & Examples

Written by: Joan Ang Jul 05, 2023

Every company, whether large or small, needs an organizational structure that defines how it operates.

And if you know a thing or two about company structures, I’m sure you’ve heard about functional, divisional, matrix, and flat organizational design (and if you haven’t, I’ll teach you very soon!).

Each org structure type has its pros and cons, so it’s important to choose the right one for success.

In this post, I’ll walk you through the different types of organizational structures, help you figure out the best one for your business, and show you how to build an organizational structure.

If you’re worried about your design skills, don’t stress. With our Organizational Chart Maker , you can create org structures without hassle.

Another option is to customize our organizational chart templates for beautiful structures in minutes.

Click to jump ahead:

• What is an organizational structure?

6 key elements of organizational structure

7 types of organizational structures, which organizational structure is best for what type of business.

• 5 tips for implementing an organizational structure

How to create an organizational structure with Venngage

Which organizational structure is right for you, what is organizational structure.

An organizational structure is a system of rules and relationships that govern how an organization is run.

An organizational structure defines how a company operates.

Since different divisions in a company have specific roles, an organizational structure helps determine how decision-making is distributed, how work gets done, and how information flows. 

Here’s an example of an organizational chart:

Moreover, studying organizational behavior is also critical.

At its basic level, an organizational structure examines the impact of social and environmental factors on how individuals or groups work. 

A well-designed and successful organizational structure outlines how people interact, communicate, and collaborate.

They help companies run smoothly and efficiently, as you can see from this internal structure chart.

There are many different types of organizational structures, which are guided by certain behavior, and each has its own advantages and disadvantages. 

But they all have the same goal: to help the company run like clockwork. What the best organizational structure is for your own company will depend on its unique needs and circumstances.

Why is an organizational structure important?

An organizational structure is important because they define how responsibilities are divided, and coordinated.

If an organizational chart  is not drawn correctly, the entire system will fail.

For example, the organizational structure of government agencies, business units, or private companies always has a well-defined chain of command and operating procedures.

Whether it’s the public or private sector, an administrative structure based on policies, rules, and hierarchy is necessary.

The organizational structure is also critical when it comes to growth.

Employees are more likely to perform better when a system is in place. The structure helps define who is responsible for what and who the employees can turn to for help. 

An org chart helps everyone understand their role in the business as can be seen in this example.

According to  Organizational Behaviour (Bobbins, Judge, & Campbell, 2012), the six key elements to an org structure are:

• Work specialization

Departmentalization

Chain of command, span of control, centralization, formalization, work specialization or division of labor.

Work specialization refers to how operations are divided into separate roles.

Work specialization not only increases production efficiency and production, but it also increases boredom, weariness, and stress. This can lead to low output, poor quality, increased absenteeism, and high turnover.

Hence, this tendency towards specialization has shifted as people realize broadening the scope of tasks can increase productivity.

Departmentalization refers to the process by which jobs are grouped together.

This can be done by function, product, geography, process, or customer.

Functional departmentalization divides tasks into categories based on their functions, such as engineering, accounting, or human resources. There are  project management software for accountants  that you can invest in which can help streamline communication between these different departments.

The chain of command is the line of authority that runs from the top to the bottom, defining who reports to whom.

The right of a boss to issue orders and expect them to be followed is referred to as authority.

The span of control refers to the number of employees that can be managed by one manager.

A narrow span of control fosters a more intimate and hands-on work environment as a manager only controls a small number of employees.

But a wide span of control puts numerous employees under one manager, assuming that daily tasks and processes are clearly defined.

The optimal control span will vary depending on the situation.

Centralization refers to decision-making concentrated in a single place in the organization.

Top management makes crucial decisions in a centralized structure with little or no involvement from lower-level employees.

A decentralized structure, on the other hand, allows lower-level employees to provide input or even make choices.

Formalization aids the creation of processes, relationships, and operational procedures which outlines procedures, rules, and duties for individual employees, units, groups, teams, and the company as a whole.

When it comes to the types of organizational structure , businesses are spoiled for choice.

Here’s an overview of 7 common org structures used by companies today:

• Hierarchial

Functional org structure

In a functional organizational structure, employees are grouped together according to function or role.

Similarly, internal departments are organized around core competencies required to accomplish a strategic goal.

These org structures generally start at high-level positions and work down from there.

In this hospital org structure example, the organizational chart establishes a clear chain of command from top to bottom.

Divisional org structure

A divisional organizational structure splits a company into self-contained divisions based on products, services, or locations.

These divisions are semi-autonomous and have control over their resources and act as an independent company within a larger one.

In this org chart example, a corporation is organized into divisions based on client segments.

Matrix org structure

A matrix organizational structure is a hybrid of functional and divisional structures. In this structure, employees are grouped based on functional expertise and/or specific projects.

Managers in a matrix org structure have more than one reporting line, which includes both individuals to manage and lines of responsibility.

Depending on project demands and priorities, it might be possible to “switch” from one boss to another.

Flat org structure

A flat organizational structure, also known as a horizontal or decentralized structure, has few or no levels of management between employees and top leadership.

In a flat organization, traditional layers of authority and decision-making are minimized to empower employees.

A flat structure is often used in startups until they grow big enough to have different departments.

Team-based org structure

A team-based organizational structure, also known as a team structure, emphasizes the formation of well, self-managed teams.

In this type of structure, an organization is composed of multiple teams such as Scrum or Innovation teams that have their own set of responsibilities and goals.

Hierarchical org structure

A hierarchical organizational structure, also known as a traditional or pyramid structure, is a system in which authority flows in a linear fashion from top to bottom.

With this structure, employees are organized into various tiers, each with a different level of authority and responsibility.

At higher levels, there is more decision-making power, while the lower levels carry out specific tasks and report to superiors.

Network org structure

A network organizational structure, also known as a networked organization or network model, is a relatively new approach to organizing businesses.

In a network structure, the organization has a decentralized network of interconnected entities, both internal and external, that collaborate to achieve common goals.

For different types of enterprises, different structures can work.

A functional organizational structure, for example, may not be right for a company with a lot of products or services because it doesn’t illustrate how they’re related and arranged. 

In this scenario, a divisional structure could be more appropriate.

However, if a company only sells one product or service and employs a small number of people (say, less than 100), a flat structure is the better option since it allows employees to communicate easily with each other and with supervisors.

When an organization demands change or when difficulties occur, organizational structures must be updated.

For instance, if a leader wishes to make structural changes to be more responsive to changing consumer needs, they can transition from a functional to a matrix structure. 

When leaders find that staff is spending too much time in meetings or dealing with internal issues rather than executing their tasks, they should consider switching from a divisional to a flat structure.

Depending on the demands of the business, an organizational structure can also be a mix of two or more types. 

It’s also critical for project managers or management teams to examine their culture to implement necessary changes.

These design changes begin with actions that best match culture rather than what makes sense from a purely economic perspective.

Organizations should select change management techniques that enable them to attain their desired cultures while also allowing them to successfully implement new designs.

5 tips for implementing a corporate organizational structure

Define the organizational structure and levels.

The first step in creating organizational structures is to designate management and employee levels.

This includes creating management layers and reporting links, cross-functional processes, and workflows, and clear lines of authority and accountability that enable staff to spot and fix issues before they become a problem.

Develop a philosophy

When designing organizational structures, the company’s philosophy should be clearly articulated.

A philosophy defines the driving ideas for how your company will operate, so it should be expressed in plain language that everyone can understand.

Employees must understand the type of company they work for to know what actions are required of them at all times.

Choose options based on tradeoffs

The organizational structure you select should be based on what works best for your business, given its unique demands and objectives.

Everything must be taken into account when developing a structure to guarantee that all employees understand their positions in the company.

The needs, competitive business climate, culture, communication patterns and processes, worker capabilities, and firm size are all elements to consider.

Prepare managers for their new roles

Because managers are in charge of allocating resources within units, they must be heavily involved in the development of organizational structures.

They should always be aware of how employees interact with each other when performing activities, as well as the impact changes in an org structure, will have on their function.

Communicate changes clearly and often

Changes in the structure influence everyone in the organization, so it’s critical to convey them clearly and frequently.

Employees will be more successful in accomplishing duties if they have a better understanding of organizational structures.

This will not only enhance employee morale but will also create stronger teams that properly manage their time and perform tasks per their needs.

When creating an organizational structure, numerous critical components such as design, chart, job descriptions, and workflows must be taken into account.

Venngage takes care of many of these requirements with organizational chart templates like the one below that you can customize. 

• Sign up for a free Venngage account.
• Click on  Templates  on your dashboard or  Home , then  Diagrams  on the left pane to see a list of the types of diagrams and charts you can make, including an  Organizational Chart .

• Choose a template that suits your needs. This will bring you to the canvas, where you can adjust and edit the chart as needed with the many tools available. 

• You can save your work to your device if you have a Premium or Business account. Simply click  Download  from the upper right menu pane and select PNG or PNG HD if you have a Premium account, or in PDF and PPT if you have a Business account.

Venngage also has a business feature called  My Brand Kit  that enables you to add your company’s logo, color palette, and fonts to all your designs with a single click.

For example, you can make your organizational structure reflect your brand by uploading your logo, fonts, and color palette using Venngage’s branding feature.

Not only are Venngage’s organizational chart templates free to use and professionally designed, but they are also tailored for various use cases and industries to fit your exact needs and requirements.

A business account also includes a  real-time collaboration feature , so you can invite members of your team to work simultaneously on a project.

We’ve already seen the advantages and disadvantages of different org structures.

But generally, large organizations can benefit from divisional structures since they can be organized by product line or market segment, resulting in a clear reporting chain.

However, if not handled appropriately, it can lead to silos, which is a problem when separate divisions compete against one another rather than collaborate.

On the other hand, smaller companies or teams will benefit from a flat org structure since everyone can contribute while being close to the boss.

But, on the other hand, employees may believe they lack the resources of larger organizations or authority to effectively provide value.

In Summary: Build your organizational structure with Venngage today

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The examples provided in this post can be used by companies to create structures that are best suited to their goals and available resources.

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Organizational Structure Explained: A Comprehensive Guide for Businesses

Discover the different organizational structures, their benefits, and how they can shape your company's success in 2024 and beyond.

Organizational structure aligns and relates parts of an organization, so it can achieve its maximum performance. The structure chosen affects an organization's success in carrying out its strategy and objectives. Leadership should understand the characteristics, benefits and limitations of various organizational structures to assist in this strategic alignment.

Overview Background Business Case Key Elements of Organizational Structures Types of Organizational Structures

Vertical structures (functional and divisional)

Matrix organizational structures, open boundary structures (hollow, modular virtual and learning).

The Impact of Growth Stages on Organizational Structure Metrics Communications and Technology Global Issues Legal Issues

This article addresses the following topics related to organizational structure:

• The case for aligning organizational structure with the enterprise's business strategy.
• Key elements of organizational structure.
• Types of organizational structures and the possible benefits and limitations of each.
• The impact of an organization's stage of development on its structure.
• Communications, technology, metrics, global and legal issues.

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. Traditional organizational structures tend to be more formalized—with employees grouped by function (such as finance or operations), region or product line. Less traditional structures are more loosely woven and flexible, with the ability to respond quickly to changing business environments.

Organizational structures have evolved since the 1800s. In the Industrial Revolution, individuals were organized to add parts to the manufacture of the product moving down the assembly line. Frederick Taylor's scientific management theory optimized the way tasks were performed, so workers performed only one task in the most efficient way. In the 20th century, General Motors pioneered a revolutionary organizational design in which each major division made its own cars.

Today, organizational structures are changing swiftly—from virtual organizations to other flexible structures. As companies continue to evolve and increase their global presence, future organizations may embody a fluid, free-forming organization, member ownership and an entrepreneurial approach among all members. See  Inside Day 1: How Amazon Uses Agile Team Structures and Adaptive Practices to Innovate on Behalf of Customers .

Business Case

A hallmark of a well-aligned organization is its ability to adapt and realign as needed. To ensure long-term viability, an organization must adjust its structure to fit new economic realities without diminishing core capabilities and competitive differentiation. Organizational realignment involves closing the structural gaps impeding organizational performance.

Problems created by a misaligned organizational structure

Rapid reorganization of business units, divisions or functions can lead to ineffective, misaligned organizational structures that do not support the business. Poorly conceived reorganizations may create significant problems, including the following:

• Structural gaps in roles, work processes, accountabilities and critical information flows can occur when companies eliminate middle management levels without eliminating the work, forcing employees to take on additional responsibilities.
• Diminished capacity, capability and agility issues can arise when a) lower-level employees who step in when middle management is eliminated are ill-equipped to perform the required duties and b) when higher-level executives must take on more tactical responsibilities, minimizing the value of their leadership skills.
• Disorganization and improper staffing can affect a company's cost structure, cash flow and ability to deliver goods or services. Agile organizations can rapidly deploy people to address shifting business needs. With resources cut to the bone, however, most organizations' staff members can focus only on their immediate responsibilities, leaving little time, energy or desire to work outside their current job scope. Ultimately, diminished capacity and lagging response times affect an organization's ability to remain competitive.
• Declining workforce engagement can reduce retention, decrease customer loyalty and limit organizational performance and stakeholder value.

The importance of aligning the structure with the business strategy

The key to profitable performance is the extent to which four business elements are aligned:

Leadership. The individuals responsible for developing and deploying the strategy and monitoring results.

Organization. The structure, processes and operations by which the strategy is deployed.

Jobs. The necessary roles and responsibilities.

People. The experience, skills and competencies needed to execute the strategy.

An understanding of the interdependencies of these business elements and the need for them to adapt to change quickly and strategically are essential for success in the high-performance organization. When these four elements are in sync, outstanding performance is more likely.

Achieving alignment and sustaining organizational capacity requires time and critical thinking. Organizations must identify outcomes the new structure or process is intended to produce. This typically requires recalibrating the following:

• Which work is mission-critical, can be scaled back or should be eliminated.
• Existing role requirements, while identifying necessary new or modified roles.
• Key metrics and accountabilities.
• Critical information flows.
• Decision-making authority by organization level.

See  Meeting the Challenges of Developing Collaborative Teams for Future Success.

Key Elements of Organizational Structures

Five elements create an organizational structure: job design, departmentation, delegation, span of control and chain of command. These elements comprise an organizational chart and create the organizational structure itself. "Departmentation" refers to the way an organization structures its jobs to coordinate work. "Span of control" means the number of individuals who report to a manager. "Chain of command" refers to a line of authority.

The company's strategy of managerial centralization or decentralization also influences organizational structures. "Centralization," the degree to which decision-making authority is restricted to higher levels of management, typically leads to a pyramid structure. "Centralization" is generally recommended when conflicting goals and strategies among operating units create a need for a uniform policy. "Decentralization," the degree to which lower levels of the hierarchy have decision-making authority, typically leads to a leaner, flatter organization. Decentralization is recommended when conflicting strategies, uncertainty or complexity require local adaptability and decision-making.

Types of Organizational Structures

Organizational structures have evolved from rigid, vertically integrated, hierarchical, autocratic structures to relatively boundary-less, empowered, networked organizations designed to respond quickly to customer needs with customized products and services.

Today, organizations are usually structured vertically, vertically and horizontally, or with open boundaries. Specific types of structures within each of these categories are the following:

• Vertical — functional and divisional.
• Vertical and horizontal — matrix.
• Boundary-less (also referred to as "open boundary")—modular, virtual and cellular.

See  What are commonly-used organization structures?

Two main types of vertical structure exist, functional and divisional. The functional structure divides work and employees by specialization. It is a hierarchical, usually vertically integrated, structure. It emphasizes standardization in organization and processes for specialized employees in relatively narrow jobs.

This traditional type of organization forms departments such as production, sales, research and development, accounting, HR, and marketing. Each department has a separate function and specializes in that area. For example, all HR professionals are part of the same function and report to a senior leader of HR. The same reporting process would be true for other functions, such as finance or operations.

In functional structures, employees report directly to managers within their functional areas who in turn report to a chief officer of the organization. Management from above must centrally coordinate the specialized departments. 

A functional organizational chart might look something like this: 

Advantages of a functional structure include the following:

• The organization develops experts in its respective areas.
• Individuals perform only tasks in which they are most proficient.
• This form is logical and easy to understand.

Disadvantages center on coordination or lack thereof:

• People are in specialized "silos" and often fail to coordinate or communicate with other departments.
• Cross-functional activity is more difficult to promote.
• The structure tends to be resistant to change.

This structure works best for organizations that remain centralized (i.e., a majority of the decision-making occurs at higher levels of the organization) because there are few shared concerns or objectives between functional areas (e.g., marketing, production, purchasing, IT). Given the centralized decision-making, the organization can take advantage of economies of scale in that there are likely centralized purchasing functions.

An appropriate management system to coordinate the departments is essential. The management system may be a special leader, like a vice president, a computer system or some other format.

Also a vertical arrangement, a divisional structure most often divides work and employees by output, although a divisional structure could be divided by another variable such as market or region. For example, a business that sells men's, women's and children's clothing through retail, e-commerce and catalog sales in the Northeast, Southeast and Southwest could be using a divisional structure in one of three ways:

• Product—men's wear, women's wear and children's clothing.
• Market—retail store, e-commerce and catalog.
• Region—Northeast, Southeast and Southwest.

A divisional organizational structure might look like this:

The advantages of this type of structure are the following:

• It provides more focus and flexibility on each division's core competency.
• It allows the divisions to focus on producing specialized products while also using knowledge gained from related divisions.
• It allows for more coordination than the functional structure.
• Decision-making authority pushed to lower levels of the organization enables faster, customized decisions.

The disadvantages of this structure include the following:

• It can result in a loss of efficiency and a duplication of effort because each division needs to acquire the same resources.
• Each division often has its own research and development, marketing, and other units that could otherwise be helping each other.
• Employees with similar technical career paths have less interaction.
• Divisions may be competing for the same customers.
• Each division often buys similar supplies in smaller quantities and may pay more per item.

This type of structure is helpful when the product base expands in quantity or complexity. But when competition among divisions becomes significant, the organization is not adapting quickly enough, or when economies of scale are lacking, the organization may require a more sophisticated matrix structure.

A matrix structure combines the functional and divisional structures to create a dual-command situation. In a matrix structure, an employee reports to two managers who are jointly responsible for the employee's performance. Typically, one manager works in an administrative function, such as finance, HR, information technology, sales or marketing, and the other works in a business unit related to a product, service, customer or geography.

A typical matrix organizational structure might look like this:

Advantages of the matrix structure include the following:

• It creates a functional and divisional partnership and focuses on the work more than on the people.
• It minimizes costs by sharing key people.
• It creates a better balance between time of completion and cost.
• It provides a better overview of a product that is manufactured in several areas or sold by various subsidiaries in different markets.

Disadvantages of matrix organizations include the following:

• Responsibilities may be unclear, thus complicating governance and control.
• Reporting to more than one manager at a time can be confusing for the employee and supervisors.
• The dual chain of command requires cooperation between two direct supervisors to determine an employee's work priorities, work assignments and performance standards.
• When the function leader and the product leader make conflicting demands on the employee, the employee's stress level increases, and performance may decrease.
• Employees spend more time in meetings and coordinating with other employees.

These disadvantages can be exacerbated if the matrix goes beyond two-dimensional (e.g., employees report to two managers) to multidimensional (e.g., employees report to three or more managers).

Matrix structures are common in heavily project-driven organizations, such as construction companies. These structures have grown out of project structures in which employees from different functions formed teams until completing a project, and then reverted to their own functions. In a matrix organization, each project manager reports directly to the vice president and the general manager. Each project is, in essence, a mini profit center, and therefore, general managers usually make business decisions.

The matrix-structured organization also provides greater visibility, stronger governance and more control in large, complex companies. It is also well suited for development of business areas and coordination of complex processes with strong dependencies.

Matrix structures pose difficult challenges for professionals charged with ensuring equity and fairness across the organization. Managers working in matrix structures should be prepared to intervene via communication and training if the structure compromises these objectives. Furthermore, leadership should monitor relationships between managers who share direct reports. These relationships between an employee's managers are crucial to the success of a matrix structure.

More recent trends in structural forms remove the traditional boundaries of an organization. Typical internal and external barriers and organizational boxes are eliminated, and all organizational units are effectively and flexibly connected. Teams replace departments, and the organization and suppliers work as closely together as parts of one company. The hierarchy is flat; status and rank are minimal. Everyone—including top management, managers and employees—participates in the decision-making process. The use of 360-degree feedback performance appraisals is common as well.

Advantages of boundary-less organizations include the following:

• Ability to leverage all employees' talents.
• Faster response to market changes.
• Enhanced cooperation and information sharing among functions, divisions and staff.

Disadvantages include the following:

• Difficulty in overcoming silos inside the organization.
• Lack of strong leadership and common vision.
• Time-consuming processes.
• The possibility of employees being adversely affected by efficiency efforts.
• The possibility of organizations abandoning change if restructuring does not improve effectiveness quickly.

Boundary-less organizational structures can be created in varied forms, including hollow, modular and virtual organizations.

Hollow organizations. Hollow structures divide work and employees by core and noncore competencies. Hollow structures are an outsourcing model in which the organization maintains its core processes internally but outsources noncore processes. Hollow structures are most effective when the industry is price competitive and choices for outsourcing exist. An example of a hollow structure is a sports organization that has its HR functions (e.g., payroll and benefits) handled by outside organizations.

Advantages of this type of structure include the following:

• Minimizing overhead.
• Enabling the organization to focus on its core product and eliminating the need to develop expertise in noncore functions.

Disadvantages include:

• Loss of control over functions that affect employees regularly.
• Restriction by certain industries (e.g., health care) on the extent of outsourcing.
• Lack of competitive outsourcing options.

Modular organizations. Modular structures differ from hollow organizations in that components of a product are outsourced. Modular structures may keep a core part of the product in-house and outsource noncore portions of the product. Networks are added or subtracted as needs change. For a modular structure to be an option, the product must be able to be broken into chunks. For example, computer manufacturer Dell buys parts from various suppliers and assembles them at one central location. Suppliers at one end and customers at the other become part of the organization; the organization shares information and innovations with all. Customization of products and services results from flexibility, creativity, teamwork and responsiveness. Business decisions are made at corporate, divisional, project and individual team member levels.

Advantages include the following:

• Minimizing the specialization and specialists needed.
• Enabling the company to outsource parts supply and coordinate the assembly of quality products.

Disadvantages include concerns about the actions of suppliers outside the control of the core management company. Risk occurs if the partner organization removes itself form the quality check on the end product or if the outsourced organization uses a second outsourced organization. Examples of supplier concerns include the following:

• Suppliers, or subcontractors, must have access to—and safeguard—most, if not all, of the core company's data and trade secrets.
• Suppliers could suddenly raise prices on or cease production of key parts.
• Knowing where one organization ends and another begins may become difficult.

Virtual organizations. A virtual organization (sometimes called a network structure) is cooperation among companies, institutions or individuals delivering a product or service under a common business understanding. Organizations form partnerships with others—often competitors—that complement each other. The collaborating units present themselves as a unified organization.

The advantages of virtual structures include the following:

• Contributions from each part of the unit.
• Elimination of physical boundaries.
• Responsiveness to a rapidly changing environment.
• Lower or nonexistent organizational overhead.
• Allows companies to be more flexible and agile.
• Give more power to all employees to collaborate, take initiative, and make decisions.
• Helps employees and stakeholders understand workflows and processes.

The disadvantages of virtual organizations include the following:

• Potential lack of trust between organizations.
• Potential lack of organizational identification among employees.
• Need for increased communication.
• Can quickly become overly complex when dealing with lots of offsite processes.
• Can make it more difficult for employees to know who has final say.

Virtual structures are collaborative and created to respond to an exceptional and often temporary marketing opportunity. An example of a virtual structure is an environmental conservancy in which multiple organizations supply a virtual organization with employees to save, for example, a historic site, possibly with the intent of economic gain for the partners.

Understanding the organizational environment is crucial in open boundary models. For example, some industries cannot outsource noncore processes due to government regulation. (For example, health insurance organizations may be unable to outsource Medicare processes). Or, in some cases, outsourcing may have to be negotiated with a union.

The key to effective boundary-less organizations is placing adaptable employees at all levels. Management must give up traditional autocratic control to coach employees toward creativity and the achievement of organizational goals. Employees must apply initiative and creativity to benefit the organization, and reward systems should recognize such employees.

Learning organizations. A learning organization is one whose design actively seeks to acquire knowledge and change behavior as a result of the newly acquired knowledge. In learning organizations, experimenting, learning new things, and reflecting on new knowledge are the norms. At the same time, there are many procedures and systems in place that facilitate learning at all organization levels.

The advantages of learning organizations include the following:

• Open communication and information sharing.
• Innovativeness
• Ability to adapt to rapid change.
• Strong organizational performance.
• Competitive advantage.

The disadvantages of learning organizations include the following:

• Power difference is ignored.
• Process of implementing will be complicated and take longer.
• Fear of employee participation in organizational decisions.
• Breaking of existing organizational rules.

The Impact of Growth Stages on Organizational Structure

Organizations typically mature in a consistent and predictable manner. As they move through various stages of growth, they must address various problems. This process creates the need for different structures, management skills and priorities.

The four stages of development in an organization's life cycle include the following:

The beginning stage of development is characterized by an inconsistent growth rate, a simple structure and informal systems. At this stage the organization is typically highly centralized. "Dotcom" companies are a good example of startup companies.

The expansion stage is evidenced by rapid, positive growth and the emergence of formal systems. Organizations at this stage typically focus on centralization with limited delegation.

Consolidation

The consolidation stage is characterized by slower growth, departmentalization, formalized systems and moderate centralization.

Diversification

The diversification stage occurs when older, larger organizations experience rapid growth, bureaucracy and decentralization.

As an organization grows or passes from one stage of development to another, carefully planned and well-conceived changes in practices and strategies may be necessary to maximize effectiveness. There are no guarantees that an organization will make it from one stage to the next. In fact, a key opportunity for leadership is to recognize indicators that suggest an organization is in a risky or unhealthy stage and to make appropriate structural adjustments.

The art of organizational design is assessing the environment's essential aspects and their meaning for the organization's future. Translating those characteristics into the right structure is critical to increasing efficiency and controlling costs. When selecting the best structure for the organization, company leaders should examine and evaluate current key structural dimensions and contextual factors. See  How do I determine which HR metrics to measure and report?

Structural dimensions

Leaders can develop an understanding of the organization's internal environment through measurement and analysis of its structural dimensions. Key dimensions, which are usually measured through a survey, include:

Specialization. The extent to which an organization's activities are divided into specialized roles.

Standardization. The degree to which an organization operates under standard rules or procedures.

Formalization. The extent to which instructions and procedures are documented.

Centralization. The degree to which leaders at the top of the management hierarchy have authority to make certain decisions.

Configuration. The shape of the organization's role structure, which includes:

• Chain of command. The number of vertical levels or layers on the organizational chart.
• Span of control. The number of direct reports per manager or the number of horizontal levels or layers on the organizational chart.

Contextual factors

A review of contextual factors will provide a better understanding of the external environment and the relationship between the internal and external environment. Some of the significant contextual factors to consider in this review include:

Origin and history. Was the organization privately founded? What changes have occurred in ownership or location?

Ownership and control. Is the organization private or public? Is control divided among a few individuals or many?

Size. How many employees does the organization have? What are its net assets? What is its market position?

Location. How many operating sites does the organization maintain?

Productsand services. What types of goods and services does the organization manufacture and provide?

Technology. Are the organization's work processes effectively integrated?

Interdependence. What is the degree to which the organization depends on customers, suppliers, trade unions or other related entities?

After examining the structural dimensions and contextual factors and developing an understanding of the connection between an organization's structure and strategy, organization leaders can consider alternative structures. They may use diagnostic models and tools to guide the design process.

Communications and Technology

The last few years have seen an unprecedented expansion and improvement of online communication. Software has pushed the boundaries of workplace communication beyond e-mail into collaborative social media platforms and innovative intranets. The decline in traditional communication methods and the dramatic increase in cyber communication has had a major impact on the workplace and is leading to restructuring.

As organizations continue to restructure to remain competitive, communications can drive the transition to an effective new organizational structure. Research suggests that companies can positively affect their credibility with employees through various organizational communication programs.

In establishing internal communication channels, leadership must be aware of the advantages and shortcomings of communication technologies and match them to the organization's needs, strategic goals and structure. Employers should also be cognizant of, and be prepared to deal with, the common communication challenges in various organizational structures. For example, communications technology has enabled organizations to create virtual workplaces and teams. In a virtual team, members from various geographical locations work together on a task, communicating via e-mail, instant messaging, teleconferencing, videoconferencing and web-based workspaces.

Although virtual teams have significant advantages—most notably reduced travel costs and flexibility in staffing and work schedules—they also pose challenges. Virtual teams often find coordinating team logistics and mastering new technologies difficult. Communication is also a major challenge because of the absence of visual (body language) and verbal (intonation) clues. Research suggests that organizations can overcome these challenges through effective support and training.

Global Issues

Organizational structures often need to change as companies expand around the globe. An organization's leaders should plan carefully before opening offices in another country.

Many issues arise when an employer plans to open an international branch, hire international workers and formulate a globalized strategy. Among the questions that must be answered are:

• How do human resource legal requirements and practices vary from country to country?
• Should HR officials at headquarters do the work, or should a company open HR offices in the other country?
• Should an organization hire consultants to handle local hiring and personnel services?

Unless employers have a sound HR strategy ready before leaping into another country, they could fail.

When an organization opens international offices, HR professionals and other business leaders should be able to communicate as effectively with workers across the globe as around the corner. That can be a challenge. Having a robust intranet and using videoconferencing are alternatives to face-to-face communication.

As rapid changes in technology affect global communication, employees must be aware of linguistic, cultural, religious and social differences among colleagues and business contacts. The organization should train all employees (not just managers and CEOs who travel) in cultural literacy.

Moreover, employers should be aware that language difficulties, time‐and‐distance challenges, the absence of face‐to‐face contact, and, above all, the barriers posed by cultural differences and personal communication styles make global virtual work far more complex than local structures. These practices can enhance global virtual team relationships:

• Using online chats, video- and audioconferencing in addition to one-on-one conversations and e-mail.
• Posting profiles of team members that outline their expertise and roles in the organization.
• Being sensitive to the level of engagement team members are likely to deliver if they must meet at inconvenient hours across multiple time zones.

Legal Issues

Regardless of the type of structure, employers must ensure compliance with legal requirements in the countries where their organizations operate. Some of those requirements will be quite extensive (for example, public companies must ensure compliance with the Sarbanes-Oxley Act, and most organizations must ensure compliance with the Fair Labor Standards Act and its related state laws).

When organizational structures change, or if the chain of command is weak or fails to keep up-to-date with changes in the business, a company may have compliance problems because the structure has not been evaluated with regard to these laws. Imagine, for example, a restructuring that reduces the number of direct reports for an entire layer of management, which perhaps leads to those individuals no longer being exempt.

As an organization moves internationally, laws in the host countries must also be evaluated and a plan put in place for compliance before the expansion occurs. Employers must anticipate and plan for laws affecting all aspects of the employee experience, including hiring, benefits, leaves and termination.

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7 Types of Organizational Structures (Organizational Chart Types) for Different Scenarios

Updated on: 20 March 2023

In one of our previous articles, we discussed organizational chart best practices . Now let’s take a look at types of organizational chart structures which can be used in different scenarios. And you don’t have to worry about creating them too. Our organizational chart software supports all the types mentioned below.

Organizational Structure Types

1) hierarchical structure.

The hierarchical model is the most popular organizational chart type. There are a few models that are derived from this model.

In a hierarchical organization structure,  employees are grouped with every employee having one clear supervisor . The grouping is done based on a few factors, hence many models are derived from this. Below are a few of those factors

• Function – employees are grouped according to the function they provide. The below image shows a functional org chart with finance, technical, HR, and admin groups.
• Geography – employees are grouped based on their region. For example, in the USA employees might be grouped according to the state. If it’s a global company the grouping could be done according to countries.
• Product – If a company is producing multiple products or offering different services it can be grouped according to the product or service.

These are some of the most common factors, but there are many more factors. You can find org chart examples  for most of these types in our diagramming community.

This is the dominant mode of organization among large organizations. For example Corporations, Governments, and organized religions are hierarchical organizations with different levels of management, power or authority. 

• Helps establish a clear line of authority and reporting within the organization
• Clarifies employee roles and responsibilities
• Establishes a clear career path for employees which can in turn keep them motivated
• Allows employees to be in-depth specialists as they are more likely to have niche positions
• Slow decision-making due to the complicated chains of command
• A disconnect of lower-level employees from those of the top-level management
• Inconsistencies in communication due to the vertical and horizontal levels between teams
• Restricted information due to the very little downward flow of information to the lower-level employees

2) Matrix Structure

In a  Matrix organizational structure, the reporting relationships are set up as a grid, or matrix, rather than in the traditional hierarchy. It is a type of organizational management in which people with similar skills are pooled for work assignments, resulting in more than one manager to report to (sometimes referred to as solid line and dotted line reports, in reference to traditional business organization charts).

For example, all engineers may be in one engineering department and report to an engineering manager. But these same engineers may be assigned to different projects and might be reporting to those project managers as well. Therefore some engineers might have to work with multiple managers in their job roles.

Pros: 

• Helps eliminate traditional siloed communications barriers
• Improved decision-making due to the availability of two chains of command
• Allows employees to use their skills in different roles 
• Better use of resources which leads to increased efficiency

Cons: 

• May result in confusion regarding roles, responsibilities, and priorities 
• Conflict of power between the project manager and the functional manager
• Blurred lines of accountability
• Large overhead costs due to employing several managers

3) Horizontal/Flat Structure

This is an organizational chart type mostly adopted by small companies and start-ups in their early stage. It’s almost impossible to use this model for larger companies with many projects and employees.

The most important thing about this structure is that many levels of middle management are eliminated . This enables employees to make decisions quickly and independently. Thus a well-trained workforce can be more productive by directly getting involved in the decision-making process.

This works well for small companies because work and effort in a small company are relatively transparent. This does not mean that employees don’t have superiors and people to report to. Just that decision-making power is shared and employees are held accountable for their decisions.

So in summary, when deciding on a suitable organizational chart, it is important to have an understanding of the current organizational structure of your company.

• Fosters better communication and collaboration between team members
• More autonomy and responsibility to employees 
• More transparency due to limited bureaucracy
• Because the chain of command is shorter, it allows for faster decision-making
• Lack of opportunities for employee progression 
• Risk of power struggles arising due to the lack of a formal system  
• Employees may have a lower sense of accountability because they have one lead
• Risk of confusion because employees don’t have a clear supervisor

4) Network Structure

Network organizational structure helps visualize both internal and external relationships between managers and top-level management. They are not only less hierarchical but are also more decentralized and more flexible than other structures.

The idea behind the network structure is based on social networks. Its structure relies on open communication and reliable partners; both internal and external. The network structure is viewed as agiler than other structures because it has few tires, more control, and a bottom flow of decision making.

Using a Network organizational structure is sometimes a disadvantage because of its complexity. The below example of a network org chart shows the rapid communication between entities.

• Promotes healthy competition, innovation, and collaboration
• Allows organizations to adapt quickly to changes in their environment
• Paves way for an environment that fosters healthy competition, innovation, and collaboration
• Smaller, streamlined teams help save costs and contribute to improved efficiency
• Due to teams being independent and small, large-scale tasks may prove difficult to accomplish
• Without immediate supervision, network organizations may struggle with control over employees
• Can create an environment where employees compete in an unhealthy manner with each other to perform tasks 
• When work is outsourced, secret information about the organization may get breached

5) Divisional Structure

Divisional types of organizational charts have their own division which corresponds to either products or geographies. Each division contains the necessary resources and functions needed to support the product line and geography.

Another form of divisional org chart structure is the multi-divisional structure. It’s also known as M-form. It’s a legit structure in which one parent company owns several subsidiary companies, each of which uses the parent company’s brand and name.

The main advantage of the divisional structure is the independent operational flow, that failure of one company does not threaten the existence of the others.

It’s not perfect either. There can be operational inefficiencies from separating specialized functions. An increase in accounting taxes can be seen as another disadvantage.

Creating org chart with pictures using Creately

• Makes it much easier to assign responsibility for actions and results
• Works well in markets where there is high competition as local managers can quickly respond to changes in local conditions
• Tends to yield faster responses to local market conditions
• Helps build a culture that contributes both to higher morale and a better knowledge of the division’s portfolio
• Multiple divisions add more overhead costs to the organization
• When a number of functional areas are spread among many divisions, it might lead to inefficiencies 
• With skills being compartmentalized by division, it can be difficult to transfer skills or best practices across the organization
• Since each division may have its own strategic goal, it might not always align with the overall company strategy.

6) Line 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. The self-contained department structure can be seen as its main characteristic. Independent decisions can be taken by line officers because of its unified structure.

The main advantage of a line organizational structure can be identified as effective communication that brings stability to the organization.

• It is the simplest method of administration and is easy to understand and manage
• Since it’s easy to add or remove levels of management, this approach can be beneficial to companies that are constantly growing and changing
• Since the decision-making authority is concentrated at the top, it allows for faster decisions
• Ensures that everyone is well-aligned with formalized rules and procedures within a line organization
• Being overly reliant on line officials may become an issue in instances where they aren’t available
• Line organizational structures are rigid and inflexible, as such they maintain discipline so rigorously that they can rarely change
• Might create a culture of favoritism based on relationships or friendship
• Since the department manager is concerned only with the activities of his own department, employees are only skilled in tasks of their own departments

7) Team-based Organizational Structure

Team-based organizational structures are made of teams working towards a common goal while working on their individual tasks. They are less hierarchical and they have flexible structures that reinforce problem-solving, decision-making, and teamwork.

Team organization structures have changed the way many industries work. Globalization has allowed people in all industries around the world to produce goods and services cooperatively. Especially, manufacturing companies must work together with suppliers around the globe while keeping the cost to a minimum while producing high-quality products.

• Communication between employees is much more free-flowing and effective
• Since communication is more efficient, information flows faster leading to quicker problem-solving
• Allows employees from different backgrounds and different skillsets to come together and learn from each other
• With higher flexibility, team-based organizations find it easier to adapt to a fast-changing industry environment
• Personality conflicts within the team can negatively impact efficiency and group harmony
• Have less clear promotional paths for employees
• Since team accomplishments are rewarded rather than individual achievements, it might prove difficult to keep individual employees motivated
• Underperforming employees may hide behind those who are working hard and reap the benefits

Other Types of Organizational Charts

The ones shown above are the most commonly used types of Organizational Charts or organogram structure types as some call them. But there are plenty more models which have various advantages and disadvantages based on the situation and organization. You can easily experiment with different models using our org chart software .

Have questions? Feel free to ask them in the comments or you can reach to us via our social media channels.

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it is very helpful.

Which of the organizational type does Toyota belong to?

limitations of organisation charts

Hi which type of the mentioned organization charts is useful for an eCommerce business?

eCommerce are typically smaller operations as opposed to ‘brick and mortar’ businesses, so they will be more likely to have Horizontal/Flat organisational structure

Im doing MBA in HR. Can someone share the organizational structure of HR department of a large IT Company.

the organizational structure of an IT company is basically Flat!

Back in the day (yep, I am showing my age) I used to dread creating organisational charts. With the technology available now, it’s so much easier to create even the most complex of charts, no matter which of the above options best suits your business.

Is there a post on the advantages and disadvantages of using the above mentioned organizational charts ? Please direct me to it, THanks.

You can check advantages and disadvantages of org charts here https://creately.com/blog/diagrams/advantages-disadvantages-organizational-charts/

your chart is very helpfull for students,and your article with helping material for every professional person.

What factors determine the type of organization chart to use???

Iam doing distance MBA from NMIMS

I have to solve an assignment where the question is:

Study organization structure of two IT companies and prepare a report comprising of the type of chart, positions, levels, functions, process and qualities in the organization.

Can you please help me about the type of content that should be covered in this?

Leave a comment Cancel reply

Please enter an answer in digits: 13 + eight =

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What is organizational structure and why is it important?

Many company organizational structures are pretty linear — or, more accurately, pretty triangular. The traditional “org chart” images of a pyramid depict companies with a few powerful individuals at the top of the company. Under that is a slightly wider level that reports to them. Each subsequent level gets wider and wider, with a large base of entry-level employees at the “bottom.”

However, just because many organizations are structured in this way doesn’t mean that yours should be. Depending on the size of your team and how your workflows are structured, you may benefit from any number of alternative organizational structures. It can also give you some insight into areas of fraction and possible opportunities for development. If your teams are not delivering the outcomes you need, the organizational structure is one possible culprit. Outcomes are the way to assess whether your systems and structures are working as intended. 

Choosing the right structure for your team requires you to think about how your team currently works and where you’re going. Before you draw up that org chart or start proposing new headcount, read on. We’ll dig into the various types of organizational structures, what they are, and ways to implement them.

What is an organizational structure?

An organizational structure is the way that a company, organization, or team is set up. It can be hierarchical, with different levels of management. Or it can be divisional, with different product lines and divisions. Sometimes, there’s little to no hierarchy at all. Every company and team has an organizational structure, even if it’s not formally defined.

An organizational structure defines how job titles, roles, and responsibilities are assigned within a company. It helps determine who reports to whom, and who makes decisions about what.

Startups often have a matrix organizational structure, with different departments working together on projects. Large organizations usually have a hierarchical structure with a clear chain of command. 

Most people only think of organizational structure as it relates to entire companies. But the same structural concepts also apply to how teams get organized within a function, department, or business unit. Organizational structures and restructuring are largely about decision-making authority, information flows, priorities, and allocating resources. 

Each organization is unique (and has unique needs). Even so, each organizational structure will have a few key components in common.

Key elements of an organizational structure

No matter the organization’s size, certain aspects of workplace decision-making and processes need to be clear. Many small businesses handle these designations informally. As a company grows, though, it’s helpful to revisit and clarify these hierarchies (or lack thereof). At the minimum, each organization needs to designate:

Work specialization

Work specializations are less formally known as roles or job descriptions. They outline what a person is responsible for within an organization or on a smaller team. Clear work specializations allow you to make the best use of talent. They make it clear what an individual person’s responsibilities and measures of success are, and help safeguard against a thinning of resources..

Chain of command

If your organization, like many, relies on a mix of people managers and individual contributors , you need to establish a chain of command. This gives people clear direction on who they should reach out to for support. When people from other departments need to check on the status of cross-functional projects, it makes it easy to find out who’s driving them.

Departmentalization and compartmentalization

Compartmentalizing people into departments creates teams of people whose jobs are organized around a specific type of work. A department could be human resources, sales, marketing, or IT. People in these departments often share common skill sets and work together frequently on projects. Each department is typically led by an executive.

Span of control

The number of team members that report to a given manager is formally referred to as “span of control.” If a manager has a large number of direct reports , the team is often subdivided into smaller departments. This happens often at large companies, where multiple people may fill a similar job function.

Centralization and decentralization

Better thought of as “ top-down vs. bottom-up management ,” the terms centralization and decentralization refer to how much influence upper-level leaders have over an organization. Of course, all leaders have power over their organizations. But decentralized management structures tend to have more agile decision making happening at all levels. Employees are empowered to perform their roles and make decisions as they see fit.

Formalization

Formalization determines how much standardizing there is across the organization. It may affect functions, systems, job descriptions, and the flow of information. Organizations with high formalization are often more mature and highly systematized. Done well, this kind of structure should boost innovation, not stifle it.

The importance of organizational structures

Organizational structures are important because they help businesses implement efficient decision-making processes. By assigning specialized roles to lower-level employees, businesses can make better decisions faster. 

Additionally, organizational structures provide a clear org chart that helps businesses keep track of their human resources. When your company is small, it’s hard to imagine that you’d ever lose track of what everyone is doing. After all, in startups and small businesses, it often feels like everyone is doing everything .

As you grow, these silos become more distinct from each other. At that point, an organizational structure helps you identify gaps in skills and support within your business. People’s roles become more specialized and individual teams grow bigger. Revisiting the allocation of work prevents the duplication of effort and reflects business priorities.

Keep in mind, however, that behind these flowcharts are real people. The leaders and employees represented in an organizational chart each work best under different circumstances and with different leadership styles. If you don’t keep them included in the what and why of your organizational shifts, they’re more likely to resist changes when they occur.

Since change is inevitable, it’s a good idea to communicate early and often as things shift. Strive for as much transparency in the workplace as possible. And if you do make changes in your organization, make time to check in with the people being affected. You can try to minimize the impact to them and help create a transition plan if need be.

Types of organizational structures

There are several different types of organizational structures, each with its own advantages and disadvantages. The most common are functional , divisional , matrix , project team , flat , and network .

Functional organizational structures are best for small businesses because they allow for clear decision-making hierarchies. Each team operates as an individual “silo.” Once teams grow, they benefit from making these functional structures less rigid. Teams often move faster and collaborate better with more overlap.

Divisional structures are best for large businesses because they allow for more specialization. For example, a global company might divide their business into regions (such as EMEA/APAC), or broad service categories (like B2B/D2C).

In the matrix structure , employees work in both functional and project teams which may be structured differently. Employees then typically report to two bosses: one who oversees their day-to-day work, as well as another boss that oversees larger projects or tasks.

A project team approach would include any number of functions working together on a specific project without a permanent hierarchy. Employees report up through their individual bosses. But they also contribute to team efforts led by managers from other departments on the team as needed.

Flat organizations have as little hierarchical structure as possible. Middle managers are largely absent from staff. Instead, the workforce often reports directly to managers or leaders at the “highest” level. Highly-autonomous employees often thrive in these environments. The lack of hierarchy motivates people to make decisions, take ownership, and facilitates problem-solving.

In a network structure , individual freelancers, groups, or associations work together. They each work as separate functional teams, but may share an overarching entity. Professional associations often have this type of structure.

Choosing the best organizational structure for your company

When it comes to organizational structures, there is no one-size-fits-all solution. 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. And while we normally advocate for trying several solutions until you find what works, that doesn’t work as well with organizational development . 

Company reorganizations (especially repeated ones) tend to destroy employee morale . Even when handled well, reorgs create uncertainty and stress on employees. Since they’re often a precursor to layoffs, people tend to fear losing their jobs — even when the changes are generally positive. And if there’s a pattern of other major changes rapidly coming down the line? That’s a recipe for cynicism and workplace burnout .

When deciding on an organizational structure, it’s important to keep these four factors in mind:

The structure you choose will depend on the type of company you run. For example, companies that rely on a number of front-line employees are structured a lot differently than nonprofit organizations. Each will have a different organizational chart based on what they do and where they need to prioritize their efforts. 

To build an effective organization , you need to know which team members are there to facilitate the work of the people in the field and which employees support the leaders. For example, C-suite executives often have a team dedicated to supporting their efforts. But the customer service team exists to support the end user. Some roles, like marketing or product development, sit squarely in the middle. Your allocation of resources needs to reflect a balance between these two sets of needs.

Company size is critical to consider when determining a formal organizational structure. Smaller companies often have a high deree of overlap in roles. They have less formalized structures. This lack of standardization can present some challenges, but it frees teams to grow rapidly. 

On the other hand, larger organizations tend to grow faster with a more centralized, formal structure. Why? It makes it easier for people to know where to find information, who to talk to in order to get things done, and avoid duplicating efforts needlessly. The challenges and unique strengths of each differently sized organization help inform the best type of arrangement.

3. Stage 

In order to create standardized systems, there (usually) needs to be something to systematize. It’s pretty hard — or deceptively easy — to develop systems for a business that has no clients, no services, and no employees.

In the early stages, not only do small companies benefit from a less formalized structure — they don’t need one. Once workflows emerge, patterns arise, and problems occur, they can reflect those learnings as a formal process. The need for reporting relationships and divisional structure arises as the need for systems does.

4. Systems 

Organizations at every stage — even with just one person — tend to organize their work by function. There’s accounting, marketing, and service right from day one. When this work is handled by a single person, there’s no need to articulate systems. More people means more need to define how, when, and why teamwork happens. 

Both the existing and desired systems play a role in organization structure. If you need or want faster collaboration and communication across teams, you’ll want to design a “flatter” structure. If leaders need to be removed from day-to-day activities, it will help to have a structure that delegates authority and accountability to others .

Building a healthy organization means more than just functioning well — although that is important. It means creating plans to support your employees and the workplace in their growth. Giving some thought to the types of authority that currently exist can help you choose the right organizational structure. But knowing where you want to go and the outcomes you want to achieve in the future will help you get there.

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With over 15 years of content experience, Allaya Cooks Campbell has written for outlets such as ScaryMommy, HRzone, and HuffPost. She holds a B.A. in Psychology and is a certified yoga instructor as well as a certified Integrative Wellness & Life Coach. Allaya is passionate about whole-person wellness, yoga, and mental health.

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7 Types of Organizational Structures +Examples

• Published March 15, 2022
• Updated: September 13, 2024

Organizations of all sizes require an established, organized structure to drive business outcomes. However, not all companies function best with a traditional, hierarchical organizational structure.

A lack of organizational structure (or choosing the wrong type of structure) leads to miscommunication, work delays, poor process flows, tepid employees, and other serious consequences that stunt business growth. In contrast, a robust organizational structure enables employees to coordinate teamwork, understand their tasks and responsibilities, reduce conflicts, and boost productivity. 

How do you design an organizational structure that’s right for your company? 

What are common types of organizational structures?

• Functional structure
• Divisional structure
• Matrix structure
• Team structure
• Network structure
• Hierarchical structure
• Flat organization structure

What Is Organizational Structure?

Organizational structure is the backbone of all operating procedures and workflows at any company. It determines each employee’s place and role in the business and is key to organizational development .

A clear structure allows every team member to be involved. When employees know what they’re responsible for and who they report to – which isn’t the case in many fast-growing companies – they’re more likely to take ownership of their work. 

Having a documented organizational structure in place enables employes to improve efficiency and provides clarity for each individual employee and business unit. With this clarity, departments can become more focused on how their actions and goals drive business outcomes.

To build an org structure, you need to consider your business size, life cycle, goals, and positioning. Apart from considering the current environment your company operates in, you should also think of where you want to see the organization in five years, a sign of organizational health .

6 Types of Organizational Change, Explained

The McKinsey 7-S Model Framework, Explained (2024)

The People, Process, Technology (PPT) Framework

Basic Elements of Organizational Structure Design

An organizational structure is based on a range of elements, including:

Work specialization

• Departmentation

Chain of command

Span of control.

• Centralization/Decentralization

Formalization

Work specializations define how responsibilities are split between employees based on the job description. It’s used to split projects into smaller work activities and assign digestible tasks to individual employees. The most common results of improper specialization are low efficiency and burnout.

Documentation

Documentation is an act of grouping specialists on the basis of the job description, skills, location, or other factors that connect them. 

The biggest challenge is choosing the criteria for departmentation. In many cases, it’s no more enoug h to apply functional departmentation – where employees are grouped based on the tasks they perform. Startups often go for matrix departmentation that involves combining two types of departmentation and takes the best out of both worlds. For instance, functional departmentation can be joined by geographical departmentation to better serve clients in different locations.

Chain of command represents a system for passing instructions and reporting within an organization. Ideally, it distributes the power, supports knowledge sharing , and encourages employee accountability .

The traditional chain of command makes decision-making more complex and does not allow for much flexibility. On the contrary, modern approaches strive to enhance employee autonomy and avoid micromanagement.

Span of control regulates the number of direct reporters managed by a single supervisor. It heavily depends on the three aforementioned elements of organizational structure. Furthermore, to identify the right span of control, you need to evaluate your leaders’ capacity, workplace size,  and experience level of employees.

Centralization and decentralization

Centralization and decentralization are the concepts defining how managers, as well as employees, give input on company goals and strategy. While centralization gives leaders the ultimate control over decision-making processes, decentralization allows employees to impact business decisions. 

Formalization determines to which extent business processes, policies, and job descriptions are standardized. It may regulate communication between employees and managers, workplace culture, operational procedures, etc.

Centralized vs. Decentralized Organizational Structures

All organizational structures are either centralized or decentralized. When designing an organizational structure, leaders must decide which is best for your company. Here are the differences between the two:

Centralized organizational structure

In a centralized organizational structure, decisions are made by high-level managers and are distributed down the chain of command. 

Centralized organizational structures have a range of advantages, like clear responsibilities, better process governance , and a straightforward chain of command. It places decision-making responsibilities on leadership who can foresee the long-term impact of important decisions.

The biggest drawback of a centralized organizational structure is the time the decision-making process takes in large companies. For example, individual team managers must run requests up the chain of command before going forward.

For GTM and customer-facing teams, this can slow down the customer experience, resulting in missed opportunities and poor service. It can also hamper companies’ ability to innovate, with centralized organizations being less agile and nimble than decentralized ones.

Often, it’s recommended that early-stage startups and small businesses design a centralized organizational structure. 

Decentralized organizational structure

In a decentralized structure, lower-level employees identify issues and make decisions without communicating them up the chain of command to upper management. Greater autonomy empowers employees to take action, eliminating process delays, enabling employees with confidence to make decisions, and driving growth.

Even in decentralized organizations, clear hierarchies still exist. The c-suite, directors, and other leadership roles still operate at a higher capabilities than new and entry-level employees. However, teams can make decisions without approval from centralized leadership, allowing them to act fast and take ownership of their areas of expertise.

This type of structure is common for f ast-growing companies, companies with regional markets, and emerging industries. A decentralized structure makes it more accessible for employees to navigate different roles and work on what’s most impactful at that time in a company’s lifecycle.

7 Types of Organizational Structures

The key purpose of any organizational structure is to make decision-making processes straightforward and provide clear definitions for roles and responsibilities. However, there are many ways to achieve that.

Let’s look at seven common types of enterprise organizational structures to help you decide what’s best for your company and its various departments and teams.

1. Functional structure

A functional structure groups employees into different departments by work specialization. Each department has a designated leader highly experienced in the job functions of each employee supervised by them.

Most often, it implements a top-down (centralized) decision-making process where department managers report to upper management. Ideally, leaders of different teams communicate regularly and coordinate their strategies while lower-level employees have little idea of the processes taking place outside their department.

The main challenge companies with a functional structure face is the lack of coordination between departments. Employees may lose the larger company context when focusing on specific tasks and failing to interact with members of other departments. 

You’ll need to train leaders to foster collaboration across departments to create a functional organizational structure.

Best For: Companies that require a high degree of specialization and efficiency within each department, like manufacturing firms.

Pros of a functional organizational structure:

• Operational efficiency.
• Encourages employees to specialize their skillsets.
• Empower employees to focus on their specific roles and responsibilities.
• Empowers teams and departments with clear, specific goals that they can work towards. 

Cons of a functional org structure:

• Leads to poor cross-department communication.
• Builds silos.
• Creates obscure roles, processes, and workflows that are company or industry-specific.

2. Divisional structure

In a divisional organizational structure, the company is divided into different business units that have complete control of their budget, resources, and strategy – essentially acting as an independent company. Each division can have its own dedicated marketing, sales, product, and IT teams.

A divisional structure works well with large enterprises who have multi-product offerings, have acquired or merged with multiple business entities, service many geographical regions, and serve different industries.

Examples of companies applying a divisional structure are McDonald’s Corporation and Disney. These brands can’t help but split the entire organization by location to be able to adjust their strategies for audiences representing different markets.

These smaller groups are relatively independent and mainly follow a decentralized framework. Still, the leaders of each department are likely to operate under centralized corporate management. This means that the company culture is dictated by top management, but operational decisions can be made independently by each division.

Divisional organizational structures can be divided according to a few different factors, including:

• Market-based divisional org structure: Divisional organizational structures can be divided by market or customer type. For example, Walmart could separate its its internal business units by department and have separate entities that own children’s toys, clothing, electronics, food and beverage, etc.
• Industry-based divisional org structure: Business units can by divided by the industry or use case they target. Consider Salesforce. It packages it Sales Cloud product to verticals based on sector, like Education Cloud, Nonprofit Cloud, Health Cloud, etc.
• Product-based divisional org structure: Enterprise companies often have a multi-product offering and divide its organization up by product line. For example, Google has entire organizations that focus only on AdSense, YouTube, YouTube TV, Google Search, Google Maps, and so forth. Salesforce has entire division dedicated to Sales Cloud, Slack, Salesforce CPQ, etc.
• Territory-based divisional org structure: Business units are divided up by geographical regions, enabling companies to localize their efforts based on the needs, values, characteristics, and demographics of each area. This can be divided into regions (like north, west, south, midwest, etc.), a country’s states or provinces, by country, or by continent.

Best  for: Large enterprises that operate in multiple markets, such as multinational companies or conglomerates, as it allows each division to focus on its specific market or product line .

Pros of a divisional organizational structure:

• Understand individual markets, sectors, and products better.
• Promotes flexibility.
• Faster responses to changes or needs that are locality or regional-based.
• Autonomous approaches lead to team experimentation and allow organizations to test multiple strategies, driving innovation.

Cons of a divisional structure:

• Can result in duplication efforts like multiple applications that do the same thing.
• Siloed teams and data with poor knowledge transfer.
• Poor documentation.
• Lack of organizational communication.
• Departments compete against one another.
• Lack of hierarchy understanding.

3. Matrix structure

Within a matrix organizational structure, team members report to several managers at once. Wait, what’ s the point?

Having multiple supervisors allows for company-wide interaction and faster project delivery. For instance, when answering to functional managers and project managers, employees have a chance to collect experience outside their team. While functional managers can help to solve job-specific issues, project managers can bring in knowledge or talents from other departments.

If you go after a matrix organizational structure, you’ll need to find a way to avoid authority confusion and prevent conflicts between managers. 

Best For: Organizations that need to balance the benefits of functional and divisional structures, like project-based companies, consulting firms, or companies involved in complex projects requiring cross-functional collaboration.

Pros of a matrix organizational structure:

• Flexibility to pull employees into more important projects at will.
• Empower employees to build and test skillsets outside of their pre-determined roles.
• Faster project deliverables.
• Provides a more dynamic view of the organization.

Cons of a matrix structure:

• This often leads to conflicts among leaders and project managers.
• Confusion on authority.
• Frequency of change leads to fatigue and resistance.

4. Team-based structure

A team-based organizational structure creates small teams focusing on delivering one product or service – often via Scrum or tiger teams. These teams can solve problems and make decisions without bringing in third parties.

Team members are responsible for managing their workload and have full control over the project. Team-based organizations are distinguished by little formalization and high flexibility. This structure works well for global organizations and manufacturers.

Best For:  Companies prioritizing flexibility, innovation, and quick response to market changes, like tech startups or creative agencies, where collaboration and teamwork are essential.

Pros of a team-based organizational structure:

• Drives growth and innovation.
• Promotes lateral career moves. 
• Provides experiences across departments and teams.
• Experience is valued over seniority.
• Less emphasis on management.
• Encourages lateral moves.
• Is more agile and fits well with Scrum models.

Cons of a team-based structure:

• No clear authority.
• Career path growth is not clear.
• Not formalized.

5. Network structure

A network structure goes far beyond your internal company structure. It’s the act of joining the efforts of two or more organizations to deliver one product or service. Typically, a network organization outsources independent contractors or vendors to complete the work.

In a network organization, teams are built from full-time employees as well as freelance specialists – this way, in-house workers can spend most of their time focusing on the work they specialize in. Such an approach allows companies to adapt to market changes and obtain the skills they need quickly.

Working with individuals not integrated into your company culture results in lower formalization and higher agility.

Best For: Companies that outsource business functions and rely on external partners, like businesses with extensive supply chains and franchises, or companies that focus on core competencies while leveraging partnerships for other operations.

Pros of a network structure:

• Promotes organizational agility and flexibility.
• Fosters collaboration across employees.
• Breaks down silos.
• Cultivates better understanding of industry, products, and customers.
• Creates a web of work-related relationships.
• Creates highly specialized skills in employees.

Cons of a network structure:

• Extremely complex and convoluted.
• Lower formalization.
• High turnover.
• There is a feeling of inequality between full-time employees and contractors/freelancers.
• It’s difficult to know who has final approval.

6. Hierarchical structure

A hierarchical structure is the most common type of organizational structure. This pyramid-shaped structure follows a direct chain of command from the top (the CEO) and flows down the org chart through individual teams and entry-level employees.

The chain of command goes from the C-suite to senior management to team leaders to lower-level employees. The highest-level executive (typically the CEO) has the most power and authority on the decision-making process.

On one hand, this structure enables organizations to streamline business processes, develop clear career paths, and reduce conflicts. A company hierarchy leaves no place for challenging managers’ authority, which can sometimes be a good thing. 

On the other hand, a hierarchical structure slows down decision-making and may hurt employee morale. Poor leadership – or even a bad CEO – can lead to the downfall of an organization with a hierarchal structure.

Best For: Traditional, stable organizations with clear authority lines and a need for uniformity and control. Examples include government agencies, large corporations, or military organizations.

Pros of a hierarchal structure:

• Obvious chain-of-command.
• Clearly defined reporting structure and individual responsibilities.
• Sets clear career path growth.
• Builds niche skills and specialties.
• Departments and teams create a sense of “we’re in this together”.

Cons of a hierarchal structure:

• Bureaucracy, processes, and red-tape slow down innovation.
• More resistant to change .
• Employees focus on department goals and KPIs over what’s most important for the company.
• Employees at the bottom of the org structure feel like they don’t have an impact.
• Feeling that there is no place to challenge authority.

7. Flat organization structure

Due to its simple nature, a flat organization structure, also called a “flatarchy” or a horizontal structure, is typically used by small businesses and startups. Organizations often start with a flat structure and then transition to a different type of org structure late in their maturity.

In a flat organizational structure, there are few middle managers between employees and top managers. The structure requires less supervision, increases employee involvement, and boosts trust in the workplace.

Best  for: Smaller companies and startups that require faster decision-making and a collaborative culture, accelerating  innovation and flexibility.

Pros of a flat structure:

• More responsibility for employees.
• Open communication.
• Clear path of approval.
• Change and improvement implementation happen fast.
• Rewards adaptability, flexibility, and innovation.

Cons of a flat structure:

• Not scalable.
• Often leads to confusion, as employees lack a clear supervisor or manager.
• Relies on one person to be the decision-maker.
• Leads to employees with generalized skills with a lack of specializations.
• Difficult to maintain when organizations start to scale.

Is It Possible to Change an Organization's Structure?

Of course, organizational design can be reconstructed if needed. The business landscape is constantly evolving, and keeping to a structure that has worked for years might simply become inefficient. 

To adapt to market changes, you might need to resort to organizational transformation which affects not only your strategy but also the structure. Whether you want to build an organizational structure from scratch or want to revisit the existing one, you’ll need to get down to the basics.

How to Design Your Organization’s Structure

Whatever structure you choose, you’ll need to make an effort to implement it. Here are eight simple steps towards designing an organizational structure from scratch.

1. Create a charter

First of all, you need to prepare documentation.

You need a project charter outlining the purpose of building a clear structure, key stakeholders, and their responsibilities. This is your rough plan for implementing an organizational structure that should give you a direction for your next steps.

When creating a charter, you’ll be able to answer the following questions:

• Why do we need to design (or re-design) an organizational structure?
• When do we start?
• Who are the key stakeholders in this project?
• What should we do first?
• Where is the company headed? Will our organizational structure be relevant in a year?

2. Consider factors that influence your organizational structure choice

To build a structure from scratch, you’ll need to start by outlining a long-term strategy and mapping out goals. Your future vision of your company determines which type of organizational structure will work best for you.

When ideating your company strategy and organizational structure, consider your company’s various contextual elements, traits, characteristics, and challenges. These will help you choose the appropriate organizational structure for your company. Consider the following factors:

• Company size: How many employees will your company have? What will be its operational reach? How complex will your teams be?
• Business goals and strategy: What are your business objectives? How will you succeed? What does that path look like? What traits will help your company thrive?
• Industry dynamics: What external factors will impact your company? Is your sector a digital laggard or an early tech adopter? How regulated is your industry? Look to other companies in your industry to see how they structure their org chart.
• Company values: What are your company’s core beliefs and values? What role will company culture play in your organization? Will you be more relaxed or need to be more authoritarian in your people management?
• Product or service complexity: How complex are your selling goods or services? Will you have multiple product lines? Depending on the customer profile, will they need to be packaged and marketed differently? How mature is your product and industry?

3. Assess your internal processes & systems

If your business has already been operating for quite some time, take a look at your current strategy and try to highlight the areas of improvement. Do you need to revisit your core ideology and company culture? You can only answer this question by talking to your employees and managers.

When you know where you stand and have a clear vision of what you want to achieve, creating an organizational direction shouldn’t be a problem.

4. Design your structure

A clear understanding of your company’s strategy lets you filter out irrelevant organizational structure types and pick the one that fits with your core values, mission, and goals.

Choose one of the seven organizational structures and use it as a template for designing a custom organizational chart. This chart is also known as an organogram  – it’s a diagram used to visualize the relationships between individuals, teams, and departments within an organization

5. Create a transition plan

Next, it’s time to design an optimal workflow for implementing or switching to a new structure. 

Talk to the stakeholders and decide on the deadlines for establishing a brand new organizational structure. Prepare a list of recommendations for top managers and team leaders that will help to communicate the change to the rest of the organization.

6. Implement your new structure

From there, leaders should create an implementation plan that includes training their teams to adopt new roles and skills, as well as how to follow a new decision-making and reporting framework. Week by week, employees will become accustomed to their new organizational structure and adapt to the change . 

7. Monitor the impact

The transition process might take months, and it’s very likely that the performance of individual employees or even entire teams will go down at some point. However, you can assess the impact of a new structure in action only after the transition is complete.

With a new organizational structure in place, run the performance review and talk to executives. It’s important that you monitor the contribution of each individual department – chances are the changes don’t work equally well for everyone at the company.

8. Gather feedback & improve

Again, once you implement an organizational structure, it’s never too late to make adjustments. Alongside performance checks, survey your employees to learn how they feel about a new structure. It can be that their input will help you fine-tune the organizational design without extra cost and effort.

Ready to learn more about building healthy, innovative organizations? These resources can help:

• Types of Organizational Change
• Overcoming Resistance to Change
• Employee Training Methods
• Digital Transformation Challenges

Request a demo to see how Whatfix empowers organizations to improve end-user adoption and provide on-demand customer support

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What Is an Organizational Structure?

• Understanding Structure
• Centralized vs. Decentralized
• Types of Structures

The Bottom Line

Organizational structure for companies with examples and benefits.

Ariel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.

Investopedia / Julie Bang

An organizational structure is a system that outlines how certain activities are directed to achieve the goals of an organization. These activities can include rules, roles, and responsibilities.

The organizational structure also determines how information flows between levels within the company. Decisions flow from the top down in a centralized structure. Decision-making power is distributed among various levels of the organization in a decentralized structure. 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. Decentralized structures give almost every employee 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 including the business's goals, industry, and culture before deciding which type of organization is best for their businesses.

Understanding an Organizational Structure

Businesses of all shapes and sizes heavily use organizational structures. 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. 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's 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 and those with the least amount of power are at the bottom.

Not having a formal structure in place can prove difficult for certain organizations. 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. An effective organizational structure should result in each department within the organization becoming more focused and productive.

Centralized vs. Decentralized Organizational Structures

An organizational structure is either centralized or decentralized. Organizations have traditionally 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. There are very clear responsibilities for each role in a centralized organizational system with subordinate roles defaulting to the guidance of their superiors.

More people play a role in decision-making with a decentralized organizational structure, Mid- and lower-level managers as well as regular employees have more of a say in what goes on and can help call the shots.

There's been a rise in decentralized organizations. This approach is popular among many technology startups and is viewed as enabling them to remain fast, agile, and adaptable with everyone able to throw ideas around.

Johnson & Johnson is renowned for its decentralized structure. As a large company with many business units and brands that function in sometimes very different industries, each operates autonomously. Another well-known company that gives employees a high level of personal agency is Spotify.

Decentralized structures are becoming more common and are popular among tech startups.

Built-in hierarchies usually still exist in decentralized companies such as the chief operating officer operating at a higher level than an entry-level associate. Teams are empowered to make their own decisions and come to the best conclusion without necessarily getting "approval" from up top, however.

Types of Organizational Structures

Four types of common organizational structures are typically implemented.

Functional Structure

The first and most common is a functional structure. It's also referred to as a bureaucratic organizational structure . It 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 uses a bureaucratic organizational structure.

Divisional or Multidivisional Structure

This type is common among large companies with many business units. It's 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 it operates. Johnson & Johnson is a good example of this structure. The company has thousands of products and lines of business. It 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. A global corporation might have a North American Division and a European Division.

Team-Based Structure

Team-based organizations segregate into close-knit teams of employees that serve particular goals and functions, similar to divisional or functional structures. Each team is a unit that contains both leaders and workers, however.

Flat (Flatarchy) Structure

Flatarchy, also known as a horizontal structure, is used among many startups. It flattens the hierarchy and chain of command as the name implies. It gives its employees a great deal of autonomy. Companies that use this type of structure have a high speed of implementation.

Matrix Structure

Firms can also have a matrix structure. This is the most confusing and the least used. It matrixes employees across different superiors, divisions, or departments. An employee working for a matrixed company may have duties in both sales and customer service .

Circular Structure

Circular structures are hierarchical but they're said to be circular because they place higher-level employees and managers at the center of the organization with concentric rings expanding outward. They contain lower-level employees and staff. Organizing this way is intended to encourage open communication and collaboration among the 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 it allows the firm to lay out the pay structure for its employees. The firm can decide salary grades and ranges for each position by putting the organizational structure in place.

The structure also makes operations more efficient and much more effective. The company can seamlessly perform different operations at once by separating employees and functions into separate departments.

A very clear organizational structure also informs employees on how best to get their jobs done. Employees will have to work harder at buying favors or courting those with decision-making power in a hierarchical organization.

Employees must take on more initiative and bring creative problem-solving to the table in a decentralized organization. This can also help set expectations for how employees can track their growth within a company and emphasize a certain set of skills. It can help potential employees gauge whether such a company would be a good fit with their interests and work styles.

What Are Some Types of Organizational Structures?

Organizational structures take on many forms. Examples include functional, multi-divisional, flat, and matrix structures as well as 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 to achieve the goals of an organization. They include rules, roles, responsibilities, and how information flows between levels within the company.

What Is an Organizational Structure Example?

A decentralized structure is an example of an organizational structure. It gives individuals and teams high degrees of autonomy without requiring a core team to regularly approve business decisions. Spotify with its "squads," "tribes," and "guilds" and Google with its independent companies are loosely run this way,

What Is an Organizational Structure Chart?

Organizational structures are normally illustrated in some sort of chart or diagram. A pyramid could be used in a centralized structure with the most powerful members of the organization sitting at the top and the least powerful at the bottom.

What Is the Best Organizational Structure?

There's no one best organizational structure. It depends on the nature of the company and the industry in which it operates.

Entire fields of study are 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's goals, industry, and culture.

Johnson & Johnson. " Our Heritage ."

The Wharton School of the University of Pennsylvania. " Johnson & Johnson CEO William Weldon: Leadership in a Decentralized Company ."

Johnson & Johnson. " Our Leadership Team ."

Medium. " Unlocking the Spotify Model: Why your Guild is Failing ."

USU. " The Spotify Model: Magic Bullet or Overrated? "

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