Organizational Structures: A Complete Guide

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KEY TAKEAWAYS

• Organizational structures have several important key elements.
• An organizational structure diagram is a visual representation of a company’s organizational structure.
• Organizational structures enable companies to coordinate activities, specialize and make decisions quickly.
• Organizational structures are necessary for companies to operate effectively.

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What Is an Organizational Structure?

An organizational structure refers to the way that a company is set up. 

This dictates its departments, management hierarchy, and decision-making. Companies will look to select an organizational structure. This will enable them to achieve their goals.

Departments organize function, product, geography, or a combination of these. Many companies divide into different business units. Each unit would have its own sales and marketing teams. They can also have separate production facilities and management hierarchies. Management structure delegates authority and how communication flows within a company.

Organizational structure makes decision-making and coordination possible. It clarifies who reports to who. It also determines how the company allocates resources and responds to changes.

What Are the Nine Types of Organizational Structures?

There are nine main organizational structure types. 

1. Functional Organizational Structure
2. Product-Based Divisional Structure
3. Market-Based Divisional Structure
4. Geographical Divisional Structure
5. Process-Based Structure
6. Matrix Structure
7. Circular Structure
8. Flat Structure
9. Network Structure

Each type has its own advantages and disadvantages. It’s important to select the right structure for your business. 

We’ll take an in-depth look at each of these organizational structures. As well as give the advantages and disadvantages of each.

1. Functional Organization

The functional structure is a common type of organizational structure. It is also a relatively simple structure. It is where the company organizes employees by their job function. 

For example, the marketing department, the accounting department, and the human resources department. These would all be part of a functional structure. 

This type of structure is common in small businesses and new businesses. It’s easy to set up and it’s simple to manage. It also allows for a high degree of specialization for a business’s employees. Meaning it can be scalable quite easily if the organization starts to grow. It can be difficult to respond to changes in the environment. This is because decision-making is centralized.

Advantages of Functional Organization 

There are many advantages that come with a functional organization. 

It increases efficiency, as well as provides stability, and boosts accountability. It also allows departments to focus on their respective fields. And on their specialized tasks. This is especially the case with employees who share similar skills and knowledge.

The roles and responsibilities of functional organizations rarely change. This means that department employees can consistently hone their skills. This is because they will be consistently working on similar assignments. 

Functional organizations have a fixed structure. This means that everything passes through management. Giving employees hierarchical structures that they can understand. This helps to guide communication between teams and keeps them accountable. 

Disadvantages of Functional Organization

The functional structure can be known to create barriers between different functions. It can be inefficient if the business has a wide range of different products or target markets. 

These barriers between the different departments can also limit people’s knowledge. This is when it comes to knowing and communicating with other departments. Especially when they may depend on a different department for success. 

2. Product-Based Divisional Organization 

This type of structure is made up of many smaller functional structures. This would mean that each separate division has a different dedication. This is to a different product line. 

This is ideal for organizations with a wide range of products. Meaning, it can help to shorten the product’s development cycles. It is particularly useful for small businesses. Especially those who want to go to market quickly with new offerings. 

Advantages of Product-Based Divisional Organization

Both businesses and employees can benefit via the product-based divisional structure. If one facet of the business doesn’t perform well, it doesn’t translate across the business. 

Because they are separated, these divisions may succeed or fail concurrently. This then allows the business to mitigate its risk. 

Disadvantages of Product-Based Divisional Organization

A business with product-based divisional organization structures may find it difficult to scale. They may also end up with some duplicate resources. This can happen when the different divisions try to develop new products. 

3. Market-Based Divisional Organization 

Market-based structure is another variety of divisional organization. As the name suggests, it’s based around markets. But it is also based on industries or customer types. 

It is an ideal structure for a business that has offerings that are unique to specific markets. This is true if the business has a high level of knowledge of these different segments. 

This structure also keeps organizations consistently aware of any changes in demands. 

Advantages of Market-Based Divisional Organization 

This structure focuses on specific market segments. This means it provides each division with autonomy. 

By the divisions working separately, employees are allowed to work independently. This allows them to purely focus on the needs of their industry. 

Disadvantages of Market-Based Divisional Organization

When there is too much autonomy, there can be divisions in developing systems. It may also accidentally lead to activities being duplicated. 

4. Geographical Divisional Organization

The geographical organization structure bases its divisions on geography. This geographical structure can consist of any boundaries. Such as territories, districts, or regions. 

It is a structure that is best suited to businesses that need to be near their sources. This could be their supply or their customers. The structure lends itself to bringing together different forms of expertise. This allows each division to make decisions from a far more diverse angle. 

Advantages of Geographical Divisional Organization

Geographical divisions mean that companies can cater specifically to customers. You can’t expect the same operations to work as effectively in different locations. This is because of the differences in culture. As well as the language, and customs that you can find across the world. 

It allows businesses to tailor their approach based on where they are based in the world. But it also allows them to react quickly and efficiently to any global market changes. 

Disadvantages of Geographical Divisional Organization

The main disadvantage of this structure is that it can affect decision-making. It can easily allow it to become decentralized. This is because the geographic divisions can have a large amount of autonomy.

5. Process-Based Organization

A process-based structure is designed around the end-to-end flow of different processes. This could include Research & Development or Order Fulfillment. 

A process-based structure considers the activities that employees perform. It also considers how these different activities interact with each other. 

It is an ideal structure for businesses to improve their efficiency and speed. It makes it an ideal structure for any organization that is in a rapidly changing industry. This is because it is very easily adaptable. 

Advantages of Process-Based Organization

One of the main advantages of this structure is that it increases efficiency and speed. As we mentioned before.

But another advantage is its ability to promote teamwork. This is across many departments within a business. 

Disadvantages of Process-Based Organization

The process-based structure can put up barriers between different process groups. This can lead to issues with communication. As well as the process of handing off work to other employees or teams. 

6. Matrix Organization

The matrix structure assigns employees to many areas. For example, a product manager might report to the marketing and engineering department. This type of structure is also common in large businesses. It enables companies to take advantage of the strengths of different departments. Yet, it can be difficult to manage and can lead to conflict between departments.

Advantages of Matrix Organization

The matrix structure promotes collaboration as well as communication. 

This allows businesses to share resources. It also allows their employees to develop new skills. This would be from working with a range of different departments. 

Disadvantages of Matrix Organization

The matrix organization structure is complex. As there are many layers of approval that employees have to go through, confusion can occur. Especially when it comes to knowing who they are supposed to answer to. 

This confusion can then lead to frustration. 

7. Circular Organization 

The circular structure has a different design to most of the other structures. But while it is a circular structure, it still relies on a hierarchy. 

The upper management of a business is represented in the inner rings of the circle. And the lower level employees are represented by the outer rings. 

The point of the circular format is to highlight that orders aren’t sent down the chain of command. Rather they are spread out from the center. 

This structure is designed to promote the free flow of information and communication. This is between different levels of the organization.

Advantages of Circular Organization 

The benefits of a circular structure is that all employees can be aligned with the processes. As well as the goals of the company. This means that employees are encouraged to collaborate. This is between various departments of the business. 

Disadvantages of Circular Organization

The circular structure can be quite confusing. Especially for newer employees who aren’t used to working within this format. 

Due to the circular nature of the structure, it can be confusing. Especially when trying to figure out who the employees are supposed to report to. As well as being confused about what part they play in the structure. 

8. Flat Organization

A flat structure is a type of structure in which there are few levels of management. For example, a company might have a CEO, a vice president, and a few managers. This type of structure is common in small businesses and start-ups. It’s easy to manage and it enables companies to make decisions quickly.

Advantages of Flat Organization

This structure eliminates the middle management of a business. This reduces the expenses of the company. It also allows staff to build strong relationships with upper management. Lastly, it also shortens the time needed to make decisions. 

Disadvantages of Flat Organization

The flat organization structure can struggle when there is a disagreement. It can be hard to get back on track without decisions from upper management. 

It can also be difficult to figure out which manager an employee will need to go to. This is because of its intricate structure. 

9. Network Organization

A network structure is used when a company relies on sharing resources with another. It can also be used when a business has many locations. Each one with different functions and leadership. 

It can also be used to lay out your company’s workflows. Especially if the majority of your staff or services are outsourced to freelancers. 

Advantages of Network Organization 

This structure has a lower cost point for companies. As well as more flexibility and focus. 

The process of outsourcing saves money. It also allows you to change up your processes. 

Disadvantages of Network Organization 

This structure can vary. This is depending on the number of companies or locations you’re working with. 

This can lead to it becoming confusing if it’s not kept clear and simple. 

What Are the Key Elements of an Effective Organizational Structure?

There are several key elements of an effective organizational structure. Some of these are departmentalization, hierarchy, centralization vs decentralization, and span of control.

Departmentalization

Departmentalization is the process of dividing a company into different departments. Companies organize this by function, product, geography, or a combination of these. Departmentalization enables companies to specialize. It does this by enabling employees to focus on a specific area of the business.

Hierarchy

Hierarchy is the structure of authority within a company. It defines who reports to who and how employees make decisions. Hierarchy ensures that employees know who to go to for orders and guidance. It also enables companies to coordinate activities across departments.

Centralization vs Decentralization

Centralization vs decentralization gives power to different levels in the organization. Centralization refers to giving power to the top of the organization. This enables companies to make decisions quickly. Decentralization refers to giving power to the bottom of the organization. This enables employees to make decisions at the local level.

Span of Control

Span of control is the number of employees that a manager can effectively manage. A high span of control means that a manager can manage a large number of employees. A low span of control means that a manager can only manage a few employees.

What Is an Organizational Structure Diagram?

An organizational structure diagram is a visual representation of a company’s organizational structure. It shows the relationships between different departments. It also explains how the company distributes power. Employees can use organizational structure to help understand their role within the company.

These diagrams also ensure that everyone is aware of their reporting relationships. This can help with the coordination of activities between different departments.

Summary

Organizational structures are a useful tool. Especially when setting up the framework for your business. 

The choice of which structure to use depends on many different factors. Each business owner will have to decide how they want their business to run. Only then can they start choosing their structure.