What is an organizational structure?
The organizational structure is the formal arrangement of roles and responsibilities within an organization. It defines the way the organization functions, manages its employees and assets, and interacts with external stakeholders.
Organizational structures evolved since the Industrial Revolution when individuals were structured based on the assembly line. In 1911, Frederick Winslow Taylor published The Principles of Scientific Management, advancing the idea that “workers and managers must collaborate” and “employers should divide work and responsibilities among employees.”
“The principal object of management should be to secure the maximum prosperity for the employer, coupled with the maximum prosperity for each employee” Taylor said.
We have come a long way since the Industrial Revolution. Today, organizational structures are more flexible. They adapt and realign to fit new working environments while maintaining the company’s core vision.
An organizational structure defines the workflows and hierarchy of a company. It identifies each job, its role and responsibilities, and its reporting lines within the organization.
Simply put, the organizational structure lays out who does what and reports to whom, so the company can meet its objectives.
Traditional organizational structures categorize employees by function (such as finance or HR), region, or industry. Newer charts are more fluid; they adapt faster to economic realities.
Although there are many organizational structures, all of them are visual representations of how the company is shaped, with the most powerful members sitting at the top while those with the least power are at the bottom.
What are the key elements of the organizational structure?
Leaderships consider and combine six unique elements of organizational structure to craft a hierarchy and create a path for future efficient growth. Managers can benefit from understanding these elements and their critical role in developing and sustaining a successful business.
The six building elements are:
1. Work specialization
Work specialization: a manager assigns a specific task to the employee with the best-suited skillset and education. When managers entrust employees with clear responsibilities, they can focus on developing their leadership skills and improving overall performance.
2. Departmentalization and compartments
Departmentalization: the efficient grouping of professionals based on similar skill sets, duties, and practices. As the organization expands, the structure adds more sub-departments and levels of management.
Compartments group employees from different professional backgrounds and specialties to use their talents in completing a project.
3. Formalization of elements
Formalization refers to the organizational policies, rules, and practices standardizing a workplace. In highly formalized structures, employees have little to no autonomy to make decisions about their jobs. When a problem arises, they will address the in-place procedures to handle it.
4. Centralization/ decentralization
In a centralized organizational structure, the top management makes decisions and communicates them down the chain of command. These companies are unable to keep pace with changes in the business environments.
A decentralized approach shares the decision-making authority among multiple employees or departmental teams. These businesses often respond quickly to changes. Employees have a certain degree of autonomy to make business decisions in the local area.
5. Chain of command
The chain of command establishes the sequence of reporting in an organization. The chain of command clarifies accountability, authority hierarchy, and decision-making capacity. A proper chain of command verifies that every department has one person responsible for performance.
6. Span of control
The span of control defines the number of direct subordinates supervised effectively by a manager. A span of control is either narrow (when a manager has fewer subordinates) or wide (more employees are under the manager’s direct control).
Main types of organizational structures
The purpose of any company is to hire and maintain an engaged workforce that supports the organization’s vision and goals. The organizational structure chart makes this process more transparent and straightforward.
You probably have come across an organizational structure chart at some point during your career. So, you know what we are talking about.
Next, let’s look at seven organizational structures, their pros, and cons, and help you pick the one that will strengthen your company.
1. Hierarchical Organizational Structure
The hierarchical structure is the most common organizational chart. The employees are grouped by their role, function, or geography and are led by a manager. The chain of command goes from the top (highest level of leadership) down (low-level employees) through different departmental and team management levels.
At first glance, this pyramid-shaped structure seems ideal for large companies. But it has some disadvantages.
The pros of hierarchical structure:
- Well-defined lines of authority and accountability.
- Clear communication channels.
- Motivates employee development and encourages loyalty between team members.
The cons of hierarchical structure:
- An increased bureaucracy may block the innovative thinking
- Centralization of power slows down the decision-making process
- It affects low-level employees’ morale as they have less ownership.
2. Functional Organizational Structure
A functional organizational structure divides employees into departments by specific responsibilities and related roles. Each department has a designated manager who also has a supervisor. The supervisor is in charge of multiple departments.
The functional structure implements a vertically centralized decision-making process where staff report to mid-level (department) managers who answer to upper management.
The pros of functional structure:
- Achieving goals faster since workers with specialized skills can perform tasks quickly and efficiently.
- Reduced costs of operations by assigning tasks to employees who possess the expertise.
- Increased productivity.
The cons of functional structure:
- Unhealthy competition between departments.
- The reduced cooperation among functional groups decreases flexibility and innovation.
- High levels of bureaucracy.
3. Divisional Organizational Structure (Geographical)
A divisional structure (known also as a geographical org structure) splits the employees based on products or markets. Multinationals that operate in broad geographic areas use this structure. In this structure, each division has control of the business functions from top management to sales and marketing, engineering, HR, and communication.
The pros of divisional structure:
- Better leadership: divisional managers know and consider local specifics and culture in the decision-making process.
- Great teamwork: the staff collaborates towards the division’s common goal.
- More accountability and transparency.
The cons of divisional structure:
- Duplication of positions and functions in parallel-operating divisions.
- Encourages an “us vs. them” or silo mentality, where divisions focus on their agenda and forget that they belong to a larger organization.
- High operational costs.
4. Horizontal (Flat) Organizational Structure
In a horizontal structure (also known as flat org structure), the decision spreads along horizontal lines creating a collaborative environment that improves morale, productivity, and creativity. This relaxed structure fits small and start-up companies with few levels between top management and employees.
The pros of horizontal structure:
- Increased efficiency by eliminating duplication of efforts and positions.
- High employee satisfaction: each position and every activity is crucial for the company.
- Enhanced flexibility towards challenges and adaptability to changes.
The cons of horizontal structure:
- Employee retention is difficult due to the lack of professional advancement and development opportunities.
- It discourages collaboration and information sharing across the reporting structure.
- It is not fit for a creative and innovative environment.
5 Team-based Organizational Structure
Team-based organizational structures consist of several teams sharing a mission while working on their projects. They are less hierarchical and more flexible, focusing on problem-solving, teamwork, and employee empowerment.
The pros of team-based structure:
- Better communication between professionals working on a project.
- Builds trust and eliminates unnecessary competition among team members.
- Boost creativity: people from different backgrounds working in a diverse team bring innovative ideas to the table.
The cons of team-based structure:
- Potential for conflicts that are inherent within a team.
- Underperforming employees may hide behind the team’s results.
- Exceeding deadlines as teams must meet regularly to discuss tasks, assign roles, and decide steps forward.
6. Network Organizational Structure
Network organizational structure is a newer type of structure based on social networks. Managers coordinate and control both internal and external activities of the company. The network structures are decentralized, meaning a wider span of control and a vertical bottom-up flow of ideas.
The pros of network structure:
- Creating an environment that promotes healthy competition and boosts innovation and collaboration.
- Providing agility and flexibility for companies to adapt to changes.
- Allowing companies to reorganize teams to meet new challenges.
The cons of network structure:
- Increased work stress due to the lack of transparency regarding responsibilities and liability.
- Loss of control when dealing with many off-site processes.
- The conflictual environment is due to the lack of direct and immediate supervision.
7. Matrix Organizational Structure
In a matrix work structure, team members (remote or in-house) usually have dual reporting relationships: a project manager and their department head. This structure looks like a grid, a matrix; it manages cross-functional teams that form to create new products and services without realigning them.
The pros of matrix structure:
- Efficient use of resources because specialists from various departments work together to complete a project.
- High employee retention: specialists enjoy working together and applying their skills in different roles.
- The improved communication flow between teams.
The cons of matrix structure:
- Complex reporting style leads to confusion about roles and responsibilities.
- Potential friction between the project manager and the functional manager.
- Slow response time: employees must report information to multiple people, which can delay projects.
The benefits of organizational structures
It is hard to imagine a small-sized business owner losing track of what each employee does. Crafting an organizational chart in a company where all employees are at the same level seems preposterous.
As the company develops, teams are more diverse, and employees’ roles are more specialized. Implementing a fit organization chart is not a choice; it becomes an obligation. These structures are crucial because they help identify employee skills gaps, implement efficient decision-making processes, and support business priorities.
In the current business environment, a company is no longer just a workplace; it is a community where individuals collaborate and share their innovative new ideas. Consequently, the organizational structure is no longer about reporting lines and channels of communication. Behind these flowcharts are the employees and their work relationships.