Types of Organizational Structure in Business

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What is an Organizational Structure?

Organizational structure is how the work of an organization is divided up among its employees. It can tell you how management authority is delegated, who reports to whom and what titles people have within the company.

An organizational structure is a model that organizes people, departments and jobs into a hierarchy. The hierarchical relationships define who reports to whom, as well as which groups have the authority to manage their subordinates or budget under what conditions. For example, if your company is going through an ownership transfer of some sort (sale, merger etc.), it’s important to define whose authority it is to sign off on expenditures.

Why Should I Care About Organizational Structure?

Every company has an organizational structure, although not all of them are well-defined or announced. It’s important clarity on the topic because it sets the framework within which people will operate and can impact their motivations for wanting to work in your company or join your team.

What is a Department?

A department in an organizational structure generally refers to a grouping of employees who have similar functional responsibilities and skills, such as “marketing,” but can also refer to people from different teams who have the same manager. In some organizations, departments sit together physically (in an open plan office or in one physical location) and are known as “functional departments” whereas other organizations group employees by product, project or customer (called “matrixed organizational structures”) where teams often report to different managers.

What is a Function?

A function is another word for department that’s used more frequently in heavily matrixed companies.

What Does Hierarchical Mean?

A hierarchical structure is one in which there are levels of authority, each level having the ability to make decisions only on matters within their defined scope of control or responsibility. Level 1 can make decisions on issues that affect just them while Level 2 people have decision-making authority on matters that affect both Level 1 and 2. This means that a Level 3 person cannot make a decision affecting a matter in the realm of Levels 1 or 2 without the approval from those levels.

What is an Organizational Chart?

An organizational chart is a diagram that shows who reports to whom within an organization. In addition, each person is assigned a unique identifier, which is usually their job title. Organizational charts are often used to show the hierarchy within an organization.

An organizational chart typically shows different levels of management that exist in an organization as well as functional or operational areas that are sometimes referred to as “departments”.

Organizational Structure and Design

What are the various types of organizational structure?

There are basically four main types of organizational structure: functional , divisional, matrix, and projectized.

Functional structure is most prevalent in manufacturing organisations where different people are grouped together with similar skills working on similar tasks.

Divisional or product structure organises the company into business units that produce specific products or services. These units might be expected to achieve sales and profit targets.

Matrix structure is relatively common in service and white-collar industries where large numbers of employees are required to work on many different but related projects at the same time.

Projectized organization structures are commonly found in engineering, construction, software development or other industries that rely on temporary teams of professionals for specialized projects.

What are the differences between functional and divisional organizational structures?

-The main difference between functional and divisional organizational structures is that, in a functional structure people with similar skills work together on specific tasks; while, in a divisional structure the production process is organized into separate divisions that are responsible for different products or services.

-Functional structures are most prevalent in manufacturing organizations where they allow people to have specialized skills and they work on similar tasks together. Divisional structures are more common in service and white-collar industries, where large numbers of employees work on many projects at the same time.

-Another difference between functional and divisional structures is that, employees in a divisional structure are grouped into different divisions based on the products or services they produce whereas, employees of a functional structure might not be associated with specific products or service although they may have similar job function.

What Is an Organizational Structure?

An Organizational structure is a system for dividing and managing an organization. It defines how the units, roles and individuals fit together and interact to get their work done and at what level.

An organizational chart illustrates an organizations’ structure. It shows the relationships between various levels of management within an enterprise, such as who reports to whom at each particular level. It also shows the different units or branches of work groups, with whom each unit reports to.

Who’s Who in Organizational Structure?

The top position in an organizational structure is held by the chief executive officer (CEO). Other key players include the chief operating officer (COO) and chief financial officer (CFO). All these folks are “above the line.”

At lower levels, coordinators and managers are responsible for specific work areas. Those at the next level down are supervisors who directly supervise employees. Layers of management multiply as one descends to first-line workers, who report to supervisors, middle managers and other higher-ups.

Why Is Organizational Structure Important?

The goal in organizing work is to achieve efficient production and service with the least waste of resources. An efficient organization also needs to be flexible enough to meet the needs of an ever-changing marketplace without becoming too rigid or ossified.

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What Is Organizational Design?

Organizational design is planning how capabilities will be configured for an organization of a specific size and type.

Designers look at the company’s mission, vision, strategy and objectives — not to mention its culture — in order to consider what kind of organizational structure it needs today (and in the future). They also weigh current capabilities against future needs in order to make sure an organization is structured for maximum efficiency tomorrow.

Centralized vs Decentralized Organizational Structures:

In a centralized organization, most of the decision-making authority is vested in a central headquarters. In a decentralized structure, final authority rests with individual operating units. There is no perfect organizational structure for all types of businesses and there are pros and cons to each that managers must understand when considering their own organizations.

Centralized Organizations:

– Promote simplicity in decision making

– Promote synergy, since all units are working toward the same goals

– Potentially clearer lines of responsibility and accountability

– Can stifle innovation by limiting participation or encouraging conformity to approved policies and practices

Decentralized Organizations:

– Creates more opportunities for employees to participate in setting goals and strategies

– Promotes responsiveness, since managers near the front lines have more decision-making authority

– Allows for local tailoring of operations to meet unique conditions or needs

– Can create redundancies among units and encourage operational inefficiencies and turf wars.

Pros and Cons of the Functional Structure:

The functional organization is the oldest and simplest method of organizing business. It consists of departments organized by function or activity. For example, in a manufacturing company there might be separate departments for engineering, marketing, production, finance and so on– each headed up by its own vice president.

Functional managers typically view their operations in terms of functions or activities, not in terms of products or customers. Since functional managers may have little authority over one another, a functional structure can lead to conflict and turf wars.

Functional structures tend to be poor at planning and promoting teamwork because there is usually no single person who has responsibility for the success of an entire product from beginning to end. Functional structures are also poor for handling multiple products with significantly different requirements or technologies.

Finally, functional structures are typically slow to respond, since most decisions must be made at the top.

Pros and Cons of Product Structures:

A product structure organizes a company around its products. This is good for companies that want every employee working toward the goal of meeting customer needs for a particular product line.

For example, General Electric was organized by products when it was led by CEO Jack Welch in the 1980s and 1990s. At that time, GE had separate operating units for everything from household appliances to medical devices to jet engines to financial services. Each business unit was accountable for its own P&L and had its own set of customers.

A product structure allows for cross-functional cooperation by organizing employees around products rather than functions or activities. This can permit quicker response to customer needs, since managers from different departments work together on the same team. Finally, this structure is useful if a company has several products that require very different resources– for example, if the company wants to build new products that combine people from different functions or departments.

Product structures work best when a company is organized around similar products– for example, if it manufactures a few related items rather than a variety of unrelated brands. Product structures also work well when companies want their employees to identify with the product rather than with functional or departmental responsibilities.

##Pros and Cons of Customer Structures:

A customer structure– also known as a market structure– organizes the company around its customers or markets. Marketing managers typically head up these teams, which are composed of people from different functions who work together to serve one set of customers. For example, Procter & Gamble uses a market structure, with company executives organized by customer segment.

A customer structure can be useful for companies that serve customers who have different needs, since it will allow managers to meet those unique requirements. Customer structures also create opportunities to reduce costs or improve quality by standardizing the buyer’s experience across markets. The downside of this form of structure is that it doesn’t promote cross-functional integration or teamwork.

A customer structure may require more managerial effort than other structures because of the need to coordinate different functions for each product line or customer segment. Also, this type of organization can encourage turf wars between departments trying to serve the same customers.

Pros and Cons of the Divisional Structure:

A divisional structure, also known as a multidivisional structure, lets a company organize its business into different divisions or branches. Each division may have its own managers, human resources department, and budget. A division’s P&L usually reflects the performance of one product line or customer segment.

In this type of structure, each division is responsible for developing its own strategy, objectives, and plans. This keeps the divisions from treading on each other’s toes. However, it can complicate strategic planning since numerous departments are involved in setting goals– which can lead to conflicting ideas about how the company should grow or compete.

A divisional structure is useful when different business units have different geographical locations or markets. It can foster a sense of identification with the division and encourage each to compete within its own sphere. This form of structure also encourages managers to make decisions about their specific areas, rather than allowing company-wide policies from overshadowing local knowledge.

The primary drawback of a divisional structure is that it can encourage infighting between divisions. Also, it can make company-wide problem-solving more difficult because people from different branches may have difficulty sharing information and cooperating with each other. In addition, a divisional structure can sometimes lead to inconsistent quality or service across the organization.

Pros and Cons of the Flatarchy:

A flatarchy is a structure in which all employees can participate in making decisions about an organization’s strategy. This usually happens through some type of team-based approach, with people from different functions working together to solve problems. For example, Google has an approach called “Rands & Steeg” that brings together 40 or 50 engineers, product managers, and designers to solve a problem. Sometimes, there is a “triumvirate” that oversees the process.

A flatarchy can be useful when companies want their employees– from various levels and functions– to participate in decision making as equals. It also ensures proper communication among different areas of the business so that ideas from each department can be considered in developing strategy.

However, a flatarchy can make it difficult for managers to hold people accountable or get work done quickly. It can also take longer for companies to innovate because of the need to seek input from so many different areas and functions within an organization. In addition, a flatarchy may not foster accountability among employees at lower levels of the structure.

Pros and Cons of the Matrix:

A matrix organization is a flatarchy in which there are competitions between different business units and projects. Decisions on strategy and goals– but not day-to-day operations– tended to be overseen by higher level managers, such as a chief executive officer or chief operating officer.

How to Design an Organization:

Before designing an internal structure, managers should understand the different types of structures. They should also consider the needs of employees and seek input from them on how they would prefer to be organized. Since several forms are designed to encourage collaboration among employees with diverse skills, managers should have conversations with these stakeholders about what form will work best for their specific company or team.

Once a form of organization has been chosen, managers must implement processes that foster open communication and encourage engagement among all employees in determining strategy. This can be done through cross-functional teams, for example. Also critical is the need to make sure employees at different levels within an organizational hierarchy understand their roles in developing strategy and how it affects them.

Successful organizations have staff members who are engaged in daily work, satisfied with their jobs and able to provide high-quality service. By creating a structure that meets employees’ needs, managers can help ensure that the goals of the organization are being met by its workforce.

What Is the Purpose of a Structure Chart?

An organization’s structure chart is a visual depiction of an organization’s hierarchy. It shows the reporting relationships between managers and employees to illustrate how strategy flows through an entire company.

What Are the Benefits of an Effective Structure Chart?

The main benefit of an effective organizational structure is increased communication in order to make sure that everyone understands their roles in developing strategy and how it affects them. This increases the ability of employees to work together to meet organizational goals.

Also, clear roles allow for increased collaboration, giving staff members the ability to determine which departments share related responsibilities and identify who they need to contact in order to perform their tasks.

Creating a structure chart also ensures that every employee is aware of how their work contributes to the company’s overall success and how their role fits into the organization’s broader strategy.

When Is a Structure Chart Problematic?

The main drawback of structure charts is that they can become outdated, resulting in blurred or nonexistent reporting lines. This often happens when companies hire new employees to solve organizational problems without redesigning the chart to keep up with the changes.

Since structure charts can become outdated, it is important to take time for regular reviews and updates of organizational structure. This ensures that employees understand their responsibilities and how they fit into the bigger picture.

What Are Organizational Subsystems?

Organizational subsystems are the individual parts of an organization that contribute to overall organizational function. Each system has its own purpose and makes independent decisions within its sphere of responsibility. Organizations have many different types of subsystems, including financial, information systems, training and development, production management, marketing services, customer service, human resources administration and accounting.

Organizational Subsystems

Other examples of organizational subsystems are geographic subdivisions, departments, divisions, product lines and programs. These organizational units have specific responsibilities that contribute to the overall mission of the organization. When each unit is working independently toward its own goals, yet also working together toward the same vision or goal for the organization, it becomes an effective system.

Purposes of Organizational Subsystems

The main purpose of organizational subsystems is to help the organization achieve stability and control within its environment through centralization, specialization and coordination. Each organizational unit operates with greater independence than units in other types of organizations because it has the authority to make decisions that affect the production of its product or service. This independence helps the organization achieve stability, control and flexibility in an unpredictable environment.

Budgets and Accountability

The subsystems are responsible for producing goods or services that enable their parent organizations to generate revenue, which is used to pay for overhead costs associated with running the organization as a whole. Each subsystem is accountable for reaching its own budget goals. Organizational leaders can require that subsystems reach certain revenue targets, but it is up to each subsystem to accomplish them within their means.

Relationship to Other Systems

The subsystems are considered semi-autonomous because they have the ability to make independent decisions while being closely connected with other subsystems. This connection is most apparent between financial, production management and marketing services subsystems. These three systems are typically located within the same department because they work so closely together with each other. For example, marketing services have to consider what volume levels are needed by production management in order to generate the necessary revenue for the corporation as a whole. The subsystems also work with their own suppliers and customers, forming a strong bond between the company and those businesses.

Anatomy of an Oak Tree

The subsystems can be compared to individual components of an oak tree. Each component is different from all the others, but they are connected in such a way that each system is dependent upon one another for survival. The tree survives because all of its subsystems work together, just as the organization is more successful when each of its subsystems performs successfully.

Organizational Subsystem Examples

Some examples of these individual parts of an organization are accounting, human resources administration, information systems, marketing services and training. These systems have several different types of employees working within them. Each system has a manager or supervisor, support personnel and one or more teams of employees who are responsible for completing the tasks required by the subsystem. Subsystems work together to make sure all different types of needs are being met.

Human Resources Administration

The human resources administration department is composed of several individuals whose primary responsibility is to ensure that employees of the organization are treated fairly and receive all of their benefits as stated in their contracts. The department also has to make sure that employees understand how they benefit from working for the company and why it is a good place to work.

Information Systems

The information systems department includes personnel responsible for managing the technology infrastructure supporting the entire organization. This subsystem is sometimes referred to as the IT department. It has to make sure all employees have access to technology that will enable them to successfully complete their daily work tasks. The information systems department also develops new technologies that can help increase employee productivity and improve the overall performance of the organization over time.

Marketing Services

Marketing services includes everyone working in one of the various marketing departments. These include graphic design, advertising or public relations. This subsystem is responsible for creating strategies that result in new customers being acquired and existing customers making more purchases over time.

Production Management

Production management includes everyone working within manufacturing, including purchasing agents, engineers, manufacturing supervisors and line workers. Their primary responsibility is to make sure the company’s manufactured goods are designed and produced with as few costs and defects as possible. These products must also meet specific requirements set by the customers of the organization.


The accounting department includes everyone working within finance, including accountants, financial analysts and budget analysts. The primary responsibility for this subsystem is to ensure that all transactions involving the financial aspects of a company are properly recorded and tracked over time. The accounting department has to work within all other subsystems to make sure money is being spent as designated by upper management.

Organizations have dozens of subsystems that all serve a different purpose in order for the organization as a whole to be successful. All subsystems work together to create synergies that benefit the organization as a whole. All employees within each subsystem have different responsibilities, but all are linked in such a way that they complement one another and rely on one another for survival.


Different forms of internal structures all aim at making employees feel valued and increasing their satisfaction with the organization. By creating a structure that meets employees’ needs, a company can build loyalty and increase productivity. When structured correctly, internal structures also enable employees to make the best use of their skills and knowledge.

In all forms of organizational structure, managers should aim to create small teams with members who have complementary skills and expertise. This will allow employees to work together more efficiently and achieve greater results than if they worked alone. For example, in a divisional structure, managers should create teams that can share information across boundaries.