What Is Organizational Structure?

FT Contributor
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Every company, regardless of size, needs an organizational structure. Along with meeting the legal requirements for starting a business, defining your company’s operational and decision-making system is the most important aspect of the business planning process.

A well-organized company structure makes responsibilities, decision-making powers, and communication channels clear to everyone in the business. In other words, it helps everyone know their role within the company.

Every company needs to have a structural hierarchy so that operations run smoothly. However, there are multiple options for organizational structures, and you need to choose the one that best fits your business’s needs.

Some companies have different divisions, while others rely on specialized groups with very specific responsibilities. Others allow specialists to work across different departments wherever they happen to be needed the most at a particular time.

Which organizational structure is best for your business? It depends on which one gives you the best chance to meet your goals and achieve success in your industry.

What Is Organizational Structure?

The organizational structure defines who does what and who is responsible for what within the company.

In broad terms, there are two different types of organizational structures: centralized organizations and decentralized organizations.

Centralized Organization

Centralized organizations have a well-defined hierarchy. Small businesses often have this type of structure by default because the owner makes the decisions and controls operations.

As a company grows, it usually keeps the centralized framework. The owner adds levels and hires managers to oversee operations as needed. The advantage of this structure is that it is easy to add levels as the company grows.

Centralized organizations rely on individuals to make decisions and oversee specific business operations. However, a company with multiple management levels may experience efficiency problems because decisions and plans need to pass through several levels before reaching the top executives for approval. This bureaucracy can slow development and make changes difficult.  

Decentralized Organization

Decentralized organizations have different individuals oversee specific aspects of the business operation. Ideally, the management-level decision-makers are experts in the particular area they lead.

These managers have more leeway to make departmental decisions and run operations as they see fit. This approach can be very efficient because there is less bureaucracy than in centralized organizations.

However, because the hierarchy is less defined, there may be issues or disagreements regarding decision making, planning, or strategizing.

Different Types of Organizational Structures

Organizational structures typically fall into one of four categories. Each of these four structures has benefits and drawbacks, and some are a better fit for smaller companies and entrepreneurs with newly established businesses.

Here is a closer look at the four main types of business structures.  

Divisional Structure

A company with a divisional structure has different departments, each with a specific focus. These divisions operate with a high degree of autonomy, and each has its own hierarchy. The division’s executives oversee operations, make decisions, and develop strategies in a manner that is similar to an independent company.

There are different levels and departments within each division. The head of the division answers to the company’s executives.

This type of organizational structure is most common in large corporations that produce multiple product lines. Each division focuses on a specific product line and, for the most part, its operations are not affected by the operations of other divisions.  

Microsoft is an example of a divisional company. It has different divisions for each type of software and hardware that it produces.

Flatarchy Structure

Flatarchy structures are common in startups and companies that do a lot of research and development. A flatarchy has different groups who work on specific projects. However, people within a particular group can also suggest and develop new ideas. These new ideas could potentially spawn new projects and new groups to work on them.

Flatarchy companies have fewer levels and a less-defined hierarchy. Communication and decision making often move laterally rather than up to higher levels of the company.

This structure can streamline development, help the company foster new ideas, and give employees a more significant stake in the outcome of their work. On the other hand, flatarchies could lead to employees using resources and working on projects that do not align with the company’s overall goals.

Small businesses and startups often adopt this organizational structure because it gives them the flexibility to pursue the ideas that provide the best chance for success. Larger companies such as Google have also used this structure effectively.

Functional Structure

The most common type of business structure is the functional structure. In this type of company, each group has a specific focus. One group may work on marketing, while another focuses on sales or research and development.

The goal is to create an efficient operation with specialists who focus on their area of expertise. Small businesses can run relatively efficiently using this structure.

New or very small companies may not have the budget to hire specialists for each role. Also, executives need to make sure that all groups work together to reach common goals and communicate with one another when working on different aspects of the same project.  

Matrix Structure

In a company with a matrix structure, employees work on specific projects related to their area of expertise. However, they do not fit within a department or work for a particular manager. Instead, they work with a different boss or group depending on the nature of each task.

The advantage of this setup is that an employee can share their expertise across different departments. Employees are also able to develop new skills that they could potentially use to benefit the company. The company may be able to save money by having one employee work for several different departments.

For example, you may have one bookkeeper to run accounting software for every department in the company. Programs like Quickbooks could make it feasible for one employee to handle this workload.  

A matrix organizational structure may cause problems if priorities and goals are not clearly defined. Both employees and managers could be confused about where to focus their efforts and how to balance multiple demands.

Smaller businesses can get more value out of fewer employees with a matrix approach to business organization. However, executives may sometimes need to intervene to avoid confusion relating to priorities and goals.

Importance of Organizational Structures

Issues such as meeting licensing requirements and filing a trademark for a company name may be foremost in the mind of new business owners. However, defining a company structure is vital for many reasons.

  • The structure lets everyone know who is in charge and who they need to answer to during operations. This type of hierarchy can make the business more efficient.
  • The company’s hierarchy can help the executives decide on salary ranges for different employees and put a promotion system in place.
  • With a working structure in place, business owners are able to define roles and specialties within the company. This can aid in hiring and in ensuring that employees clearly understand their role within the company.
  • Owners and employees will know who is responsible for making decisions and formulating essential strategies and plans.

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