What is an Organizational Structure?

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Definition:

Organizational structure is the method a company uses to define its hierarchy and the relationships among roles and departments.

🤔 Understanding organizational structure

Every company needs a clear chain of command to operate effectively. The organizational structure of a company lays out its hierarchies and determines how roles and responsibilities are allocated. Some firms have a more centralized structure, where power largely concentrates at the top. In decentralized organizations, each employee and department has more independence. The organizational structure a company chooses depends in part on the goods or services it offers and its long-term goals. When a company clearly communicates its organizational structure internally, employees know their responsibilities are and who they report to, helping everything run smoothly.

Example

The US military has a clear organizational structure. It is highly centralized — All of the power ultimately rests at the top with the commander in chief. Every member of the military takes orders from those above them in the chain of command. Enlisted soldiers don’t have the authority or agency to make decisions as they see fit — They’re always carrying out someone else’s commands.

Takeaway

A company’s organizational structure is like a family tree…

Imagine that you constructed a family tree dating back generations. You’d be able to see who everyone descended from and who married and had children. The family might spread out across many branches, with lots of cousins, aunts, and uncles. A company’s structure can be mapped onto an organizational chart that looks a lot like a family tree, except it indicates who reports to whom within a company.

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What is the purpose of organizational structure?

A company’s organizational structure defines its chain of command and how leaders and employees are organized with the firm.

Its purpose is to lay out a clear hierarchy that gives employees and leaders direction. A transparent organizational structure helps everyone in the company understand who decides its strategic direction, who calls the shots, and who has the final say if there’s a disagreement. Companies generally craft organizational structures that align with their values and strategic goals.

The organizational structure of each company looks a bit different. Some place a greater importance on a central leader, while others prioritize the autonomy and individualism of employees. Some companies choose to organize employees based on the roles they fill, while others do so based on the divisions or regions they work in.

What are centralized vs. decentralized organizational structures?

Companies generally operate under either a centralized or decentralized organizational structure. In a centralized model, one leader or executive team at the top calls the shots. Leaders make the business decisions and pass them down the hierarchy to the next level of management, who then give direction to their employees, and so on.

In a decentralized organizational structure, employees and departments within the company have more autonomy. Individuals have more leeway to make decisions, as long as they align with the vision and values of the company. Many company structures fall somewhere on the spectrum between centralized and decentralized.

What are the types of organizational structures?

There are several models that companies can look to when crafting their organizational structure. Each comes with certain advantages, but no system is perfect.

Functional

The functional organizational structure is one of the most common in the corporate world. At the top is the chief executive officer (CEO). Under the CEO, employees fall into groups (departments) based on the type of work they do. Companies might have departments such as marketing, sales, human resources, customer service, and more. A leader (usually a company vice president) oversees each department and reports to the CEO.

Divisional

A divisional organizational structure is ideal for large companies and has a place in many industries. Rather than dividing employees into departments based on the type of work they do, it breaks them up by division. This structure gives more autonomy to different groups in the company. Each division might operate as a mini-company, allocating its own resources and setting its own goals. Divisions may also be segmented by geographic location.

Suppose there is a real estate company that rents out residential and commercial properties it owns and also employs agents that help clients buy and sell homes. That company might have three divisions: one for apartment rentals, one for commercial rentals, and one for agent services. Within each division you’d find smaller departments. For example, rather than one big accounting department for the entire company, each division would have its own.

Matrix

A matrix organizational structure is one where there are multiple chains of command instead of just one. Often this model results in workers reporting to more than one boss, based on the project or circumstances. For example, an employee might report to the manager of their department, while also reporting to the head of a specific project or geographic region. This model can promote collaboration among employees across different specialities and departments.

Flatarchy

A flatarchy organizational structure is a newer model that many startups use. It is similar to the functional model, in that it has a leader at the top and different departments, each with their own leader. But this structure is more decentralized, in that employees have more autonomy and work more collaboratively across departments. Companies of this sort often have internal innovation incubators, where employees of any department can take new ideas.

Which organizational structure is best?

Each organizational structure has advantages and disadvantages, so no model is inherently best.

The functional structure is common because it groups employees in a straightforward way — by the tasks they perform for the company. This work environment can help foster collaboration within departments. It also helps with specialization, since everyone in the department is doing similar work toward the same goal. It also makes things easier on management, since they oversee one kind of employee — A marketing executive doesn’t have to manage accounting employees.

The functional model also has some disadvantages. It may discourage inter-departmental communication and result in tunnel vision by creating silos within the company. People in different departments might be working on parts of the same project, but they don’t necessarily collaborate because they’re separated within the company.

The divisional structure is more flexible. Each division may have different needs, goals, and conditions. Acting as its own company lets a division play by its own rules and operate in a way that’s best for meeting its objectives. But this structure also has downsides. Since people aren’t split up based on roles, you may have an accounting department in one division doing things entirely differently from the accounting department in another division. Managers may also have to oversee employees with different expertise than they have. This model is best for large companies with its hands in many industries.

The matrix structure can be advantageous because it allows people with the same specialties and knowledge to collaborate, but still allows for expertise at the head of the department. The downside of this model is that confusion and conflict can arise when people report to multiple managers.

Finally, the flatarchy encourages innovation, individualism, and collaboration across the company. It eliminates bureaucratic hold-ups, and employees aren’t pigeon-holed into a department and separated from everyone else. On the other hand, the less clear hierarchy might lead to confusion about who’s in charge and who reports to whom. This model is often ideal for startups and small companies.

What is a real-life example of an organizational structure?

To understand how organizational structures really work, it can be helpful to see one in action. An example of a corporation with a clear organizational structure is Starbucks. The coffee chain operates under the matrix model, meaning it blends a functional structure with a divisional one.

Starbucks uses the functional structure in that the company has a chief executive officer that oversees departments like human resources and finance.

Starbucks also has divisions within each department based on both geographic locations and product lines (coffee, baked goods, and home goods such as coffee mugs). Each division within the departments has its own leader, but those leaders report to the department heads at the corporate level. This structure helps the company adjust to conditions in individual markets and stay competitive in product development.

What are the benefits of having an organizational structure?

Though not every company chooses to follow the same organizational structure, having a clear framework in place is beneficial for many reasons. First, an organizational structure helps to create a clear chain of command for employees. When people know who they report to and who they take orders from, there’s no confusion about who’s in charge and disagreements are easier to resolve.

An effective organizational structure can also help foster communication, collaboration, and shared company culture.

Ultimately, well-organized companies are often more effective and more efficient. When everyone knows their role, companies can ensure that the human capital within a firm is put to the best use. A strong organizational structure can help employees and departments respond to the needs of the company, its customers, and other stakeholders as quickly and effectively as possible.

A company is going to have a structure of some sort no matter what. Shaping an organizational structure intentionally can help ensure it serves the company’s goals and create a shared sense of purpose among employees.

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