Organizational Structure for Companies With Examples and Benefits

What Is an Organizational Structure?

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.

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.

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.

The Bottom Line

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.