An organizational structure can help you define elements of your business that otherwise could easily get overlooked! There are many factors to consider while forming the best version of your company’s organization structure.
But, lucky for you you’ve come to the right place to find out!
In this blog, I will talk about everything you need to know about organization structure. Right from its importance and types, to how to form one for your business.
To begin with, let’s have a look at what I’ll talk about here.
- What is organizational structure?
- Why is organizational structure important?
- Factors to take into consideration while forming your organizational structure
- Mechanistic versus organic organizational Structure
- Types of organizational structures
- Functional Organizational Structure
- Product-Based Divisional Structure
- Market-Based Divisional Structure
- Geographical Divisional Structure
- Process-Based Organizational Structure
- Matrix Organizational Structure
- Circular Organizational Structure
- Flat (or Horizontal) Organizational Structure
- Network Organizational Structure
- How to create an organizational structure for a company
What is organization structure?
Organization structure is basically the structure of an organization. But what is it?
It dictates how various activities are carried out in an organization. The roles, responsibilities and rules that form an organization, along with who reports to whom. Organization structure also plays a huge role in determining the direction of the flow of information across employees.
Does information flow from up to down?
Do employees receive information at the same time irrespective of their designation?
The organization structure determines all of this.
Organization chart: Representation of organization structure
An organization chart is a diagram that represents an organization chart. The chart showcases the interconnection between the roles and job designations within the company.
Similarly, things like who is whose boss, segregation of departments teams and so on etc., are shown very clearly through an organization chart.
All businesses, both small and big, use organization charts or depict the company’s structure. It helps define the hierarchy within an organization. When an employee looks at an organization chart, they must be able to understand very easily what their contribution to the company is. They should also be able to understand where they fit in the organization.
So, an organization chart shows company structure, usually in the form of a tree diagram or a pyramid. Here, the senior people in the company appear at the top, while junior employees and designations are at the bottom.
Why is having a good organization structure so important?
If there is no organizational structure, employees won’t know to whom they report. As a result, a lot of uncertainty could prevail in a company. On the flip side, having structure means employees know who their supervisors, managers etc. are. People know whom they report to.
As a result of that, productivity goes up!
A good organizational structure allows good communication
Communication and flow of information are the 2 most important aspects of any company. And a good, strong organizational structure increases ease of communication and also allows for information to flow from one employee to another without any hassle. Thus ensuring that no single employee gets left out of the loop at any given point in time.
Reporting relationships are extremely clear when employees are aware of the organizational structure
As I mentioned before, a good organization structure tells us who reports to whom.
Thus, when employees know whom they report to (along with who all report to them) then work gets done in an efficient manner. Just like a well-oiled machine!
Organizational structure helps in succession planning
When someone from senior management leaves your company or vacates their role, you know exactly who their subordinates were. As a result, you already have a list of potentials for the job!
Growing and expanding the business becomes easier
Imagine you have a company of 5 people. Everyone works well together, but there isn’t really any structure in place. What happens when you decide to grow the company? You go from an easy to manage 5 member team to a very difficult to control, confusingly large team of 35. Then what? You struggle to keep track of what everyone is doing.
But, if you have some semblance of structure in place, (even within a 5 people team), when you expand, that structure expands with you. As a result, eventually, you don’t have a huge, mismanaged team of 35, but a set of maybe 5 smaller teams of 7.
Factors to consider while creating organizational structure
So, now you know why organization structure is very important. You even have a basic idea of what it means to have a structure within an organization.
Now, let’s have a look at what are the various factors you must consider while planning and putting in place some structure in your organization.
1. Adaptibiltiy in organizational structure
When creating an organizational structure, one of the most important things is adaptability.
The main of every business is growth. If you aren’t growing, then there’s no point in being in business! And growth doesn’t just mean in terms of the number of customers or your website traffic. It also means the number of employees you currently have will increase. And your organization structure must be formed in a way that can adapt to a fast-growing, changing company.
2. Organizational structure should fit your company culture
Companies in different industries function very differently. They require different mixes of employee talent and abilities. Therefore, the organization structure you put in place must fit your industry needs. It should also work in accordance with your work culture. Is it more hierarchical in nature or flat? Things like this make a difference in the structure you plan for!
3. Chain of command in the organizational structure
Your organization’s structure should reflect the chain of command that exists in the company. Obviously, this goes without saying. Senior people at the top and junior people at the bottom.
4. Span of control is an important factor to consider here
How many employees are under the control of one manager (so to speak)? Meaning, how many employees does one person manage. Is it 5, 8, 15 or 30?
This will affect the productivity of your company and the way you structure your organization.
5. Level of centralization in the organizational structure
Does each and every single decision of your organization come from the CEO? This means that you have a centralized organizational structure. Whereas the opposite of this would be, if there exists a system of more democratic decision making, a decentralized structure exists.
6. Degree of specialization plays a huge role in organizational structure
What is the meaning of degree of specialization though?
Let’s take for example the HR department. You could have a team of all generalist HR employees. Each of them can work on any of the HR tasks in the department because all are generalists. So, right from recruiting, training and development and so on, work can be interchanged seamlessly among employees.
On the other hand, if you have a group of HR specialists forming your HR team, that would mean that every person works o different things that they specialize in. Meaning, that one person does only recruiting, one focuses solely on training and development, an HR employee does only payroll management etc.
7. Level of formalization in the company
Formalization basically talks about the degree to which you follow strict hierarchy and protocol while working. Is your company flexible when it comes to teams and the flow of work or not?
Mechanistic versus organic organizational Structure
To understand these two structures better, let’s think of organizational structure as a spectrum. On one side you have a mechanistic structure, whereas, on the other side you have an organic structure.
A mechanistic structure is a very traditional, top-down sort of an approach to company structure. Whereas, on the other hand, organic is a kind of structure that forms more naturally and organically.
But, let’s look at both these individually.
Mechanistic (or bureaucratic) organizational structure
This is an extremely democratic form of structure. Hierarchy plays a huge role here. A major characteristic of a mechanistic structure is its highly centralized nature. Also known as a bureaucratic structure, it is very rigid in the division of departments. Such structures hold employees more accountable for what they do, it becomes a hindrance to the creativity and agility the organization needs to keep up with constant market changes.
An upside to this structure is that the chain of command is extremely clear and everyone knows exactly what is expected of them.
Organic (or flat) organizational structure
This is a more informal structure that allows for better flexibility. This is also known as a flat organization structure and takes a more ad-hoc approach to get things done. While it may lack proper structure, employee talent is a factor that determines what work they do.
The chain of command here could be a little confusing (cause of constant change) but such companies are much more capable of adapting to random market changes over time.
Types of organizational structures
Now, depending on the various factors mentioned above, a company could have any of these below mentioned organizational structures.
Let’s have a look at each of them in detail, along with their pros and cons!
1. Functional Organizational Structure
Just as the name suggests, this type of structure is when the company is divided into smaller teams or departments based on functions. This means that all the marketeers would be grouped together in one department, all the HR employees in one department and so on…
This form of organizational structure usually makes way for a very high degree of specialization because departments are based on functions and employees within departments usually end up working on very very specific sub-functions (a.k.a. sub-specializations)
Advantages of functional organization structure
This form of structure provides stability in terms of the chain of command and the level of centralization is moderate.
Since the roles, responsibilities and job descriptions rarely change in such organizations employees can continuously work on similar projects and fine-tune their skills.
Employees also know the different departments and areas of focus. Hence, communication is high and teams are accountable for the work they do.
Such structures make it very for companies to be able to scale and also adapt to changes.
Disadvantages of functional organizational structure
In a functional organizational structure, while communication is usually strong, there’s always a risk of forming silos.
Because people get so used to working within tiny teams within their own specialization, they very rarely come out and have a look at what is happening in the rest of the company. They very rarely come out of their own little department bubble, as a result, the company’s vision and mission could get lost.
People also may not get the chance to share knowledge across departments in such situations.
2. Product-Based Divisional Organization Structure
Now that you know what a functional organizational structure looks like, it’ll be very easy to understand a product based division structure!
When you think of a company, imagine each product to be a mini sub-company. Now each of these smaller companies has a functional structure within them. So, in other words, each product will have its marketing, sales, finance (and other functions) teams. This is basically what a product based structure looks like.
First, you divide the company based on the products, then based on function.
Advantages and disadvantages of product based divisional organizational structure
On one hand, since each product works so independently, there could be a huge wastage of resources because a duplication f work could exist. Also, scaling the company too might be a challenge since a new product would require a whole new team from scratch (which can be extremely expensive!)
On the other hand, the poor performance of one division very rarely (in most cases does not) affect the performance of another. As a result, the teams can easily isolate and fix trouble points!
3. Market-Based Divisional Organization structure
Just like in a product based divisional structure the company was divided on the basis of the products, here, the organizational structure is formed (or divided) on the basis of market, industry or consumer type
This structure is ideal for organizations that have products that belong to different market segments or industries.
Advantages of market based divisional organizational structure
- Each division focuses on its own product or service
- Poor performance of one division does not affect the other
- People can really hone their skills, and specialize their abilities while focusing on one industry
- Easier to adapt to changes in specific industries (that affect the company)
Disadvantages of market based divisional organizational structure
- Unhealthy competition may arise across divisions
- Lack of sync between divisions
- Duplication of work may exist since each market based division has their own functional teams
4. Geographical Divisional Organization Structure
Yup, you guessed it right! Similar to the previous 2 structures, the geographical divisional organizational structure divides an organization on the basis of its geographical locations.
Very often, companies need to be situated very close to the customer. Such a structure is extremely well suited for such companies.
Advantages and disadvantages of product based divisional organizational structure
The major downside to this structure is that decision making tends to be extremely decentralized and as a result, different locations can be totally out of sync with each other. While this kind of structure results in divisions having total autonomy, functions such as digital marketing could have a cannibalising effect if they don’t work together on campaigns.
On the upside, an organization could specialize in the location they exist in. What this means is that they could work better in providing localized, culturally specific products. An example of this would be when you enter a Mcdonald’s store and order a Mc Aloo Tikki, and realise that this is only available in the Indian chains of McDonald’s!
5. Process-Based Organizational Structure
A process based organizational structure is based on the flow of processes in an organization. So, it doesn’t specifically depend on the function or the employee’s role, but more on the work the employee performs.
Say, for example, a process in a restaurant or cloud kitchen, you have various processes such as taking orders from businesses, preparing the meal, delivering the meal to the customer and receiving feedback.
If you consider these 4 processes, you can divide the organization into these 4 sections (o processes). And each section works on optimizing its own functioning. Also, each section in the process relies on the previous process to finish their work so that they can start.
Advantages of a process based organization structure
- Increases efficiency because each section is completed to deliver quality work s that the section that is next in line can begin work.
- Increases productivity because each section is only focusing on perfecting their own work.
- It promotes intra and well as interdepartmental teamwork.
Disadvantages of a process based organization structure
- While this model promotes communication between teams and thus has the potential to increase communication, it could work in quite the opposite way. So, as a result, communication could reduce drastically resulting in each section functioning in silos.
6. Matrix Organizational Structure
This form of organizational structure works very well in companies where employees work on projects/teams that are different from their own.
Say, for example, an engineer working in team A may need to carry out some tasks in team B.
So, the matrix organizational structure looks a lot like a grid, where people are interconnected even with people from outside their own team.
Advantages of a matrix organization structure
This form of organizational structure allows project supervisors to pick and choose their team members. Hence a lot of flexibility exists.
Another major pro of this organizational structure is that there is a balance in decision making since in most cases there are 2 supervising managers. Also, having more than one business line overseeing a single process creates an opportunity to share resources and avoid any duplication.
There is an increased sense of teamwork and collaboration across teams in such an organizational structure.
Since people work in different departments, this structure allows for employees to learn things that are beyond the scope of their own department. Thus, employees also have a better and wider understanding of what happens in the company.
Disadvantages of a matrix organization structure
While having 2 supervisors keep track of decisions being made and business process helps make better decisions, it could also be seen as a pitfall. This could cause a lot of confusion among employees. They may be confused about who needs to approve of or supervise the work they do. Conflicts between project managers and function managers could also arise here.
This organizational chart also keeps changing a lot more than in the case of other structures because of the high amount of flexibility.
7. Circular Organizational Structure
This form of organizational structure basically is a different organizational chart. While it is similar to the hierarchical organizational structure, the chart is in a circular form. Unlike other organizational charts that depict the hierarchy in a top-down flow, here the senior-most people are at the centre of the circle.
The major difference between the circular organizational structure and the hierarchical one is that here, the idea is that information must flow freely across employees and teams. The senior-most employees are at the centre of the company and have an outward vision.
Advantages and disadvantages of product based divisional organizational structure
On one hand, the circular organizational structure allows for the free flow of information and increased communication across teams. The result of this is that all employees are constantly aware of the goals and functioning of the company.
On the other hand, new employees looking at a circular organizational chart can find it confusing. This is because, it’s not like the other organizational structures, where the senior employees are on the top and the junior ones a down.
8. Flat (or Horizontal) Organizational Structure
In a traditional organizational structure, you can see many levels of management and a lot of levels between the CEO and the lowest person in the company. exactly opposite to this is the flat organization structure.
Here, there are very few levels throughout the organization. The number of managerial levels too are limited. As a result, the lowest employee down the rung is only a few levels below the CEO.
This organizational structure is a lot closer to the organic side of the mechanistic versus organic spectrum.
Advantages of a flat (horizontal) organization structure
- No middle management means that your company can make decisions a lot faster
- Reduced costs because fewer levels of employees in the company
Disadvantages of a flat (horizontal) organization structure
- It could be confusing as to which manager an employee reports to (because of the flat nature of the structure)
- If 2 teams disagree about something, then it can become tricky for them to align themselves without a leader or manager
9. Network Organizational Structure
A network organizational structure usually focuses on other companies an organization works with or the people they outsource.
This structure is very similar to the various divisional structures that we saw, but instead of geographical locations, process-based or market-based structures, here the division is based on the services that are being outsourced for various reasons.
Advantages and disadvantages of a network organization structure
The upside to this form of organizational structure is that it gives a very clear picture of the services a company outsources. Right from freelancers or contractors that are hired. However, if not done clearly, this can look very confusing. Especially if 2 or more contractors (or freelancers) do similar work.
Another pro is that outsourcing gives companies the opportunity to focus on their core processes rather than frivolous tasks. Apart from that, the cost of hiring freelancers or outsourcing work tends to be a lot cheaper so that way the company can reduce costs drastically.
How to create an organizational structure for a company
When creating an organisational structure for a company there is no one size fits all kind of rule. You need to take into consideration certain factors (which I mentioned above in this blog) and tailor make an organization chart for your company.
Your organization chart could either fit perfectly into some of the organization structure types that I have mentioned above, or it could be totally different from all of them. Either way, it should fit into your company culture and the way you work.
Organization structure – Summary
So, now you know how to create an organizational structure for your company. In this blog, we looked at
- What does it mean for an organization to have structure
- Its importance
- The 7 factors you need to consider while creating an organizational structure
- The different types of organizational structures and charts
Having structure in your organization that all your employees know about can make the world of a difference when it comes to productivity and employee engagement.
What are the 9 types of organizational structures?
The 9 types of organisational structures are
1. Functional organizational structure
2. Product-based divisional structure
3. Market-based divisional structure
4. Geographical divisional structure
5. Process-based structure
6. Matrix organizational structure
7. Circular organizational structure
8. Flat organizational structure
9. Network-based structure
Why is organizational structure important?
Organizational structure provides employees with clarity to the employees. Employees get a better understanding of their place in the organization and reporting relationships are also made a lot clearer.
What is the best organizational structure?
There is no such organizational structure that is best for every company. One size does not fit all. There are various factors that play a role in deciding the organizational structure for your company. Click here to understand the factors
Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant or Labour Law expert for specific guidance.