Organizational structures in business can end confusion and keep your company on track for growth. In this post, you'll discover how structures work, which one is more suitable for your business, and what benefits they offer.
We’ll also give you the pros and cons of using them so you can decide if they are the right way to go. Our objective is to help you move forward confidently to grow your business.
The Most Common Organizational Structures Types
These types of organizational structures have proven to be successful across a wide spectrum of companies and industries:
Matrix organizational structure
The matrix structure organization allows employees to move between departments as supervisors choose the best employees for specific projects.
Employees have a wide range of responsibilities and opportunities to improve their skills.
One disadvantage is that conflicts of interest may arise between departments if rules, roles, and responsibilities aren't strictly defined.
Instead of following a traditional hierarchical model, this new system creates dual reporting relationships for each employee.
Phillips, Caterpillar, and Texas Instruments have successfully used the matrix structure.
In a hierarchical organization, power flows from the top down. Usually, one person supervises all departments under the direction of the CEO.
Relationships between employees and departments are clearly defined, and positive outcomes result from team management.
This type of corporate structure can invite bureaucratic overreach, which may discourage employees from performing optimally because they have no authority to make positive changes.
The largest online retailer, Amazon, uses this type of organizational structure.
Functional organizational structures
This structure is similar to the hierarchical structure, with one exception, each department has its own staff supervisor.
A functional structure develops specific employee roles to encourage innovative and independent thinking.
However, since employees from each department may not interact, communication tends to suffer and reduce a company's efficiency.
All sizes of companies use this team structure.
The functional organizational structure has proven successful for the Starbucks Corporation.
Traditional organizational structure
Businesses with this type of organizational structure have formal and hierarchical relationships. It is also known as a bureaucratic structure.
These businesses have a high degree of division of labor, a clear chain of command, and strict rules and regulations.
This is often criticized for being too rigid and inflexible.
Flat Structure, Horizontal or Flatarchy
Small companies that don't have departments use this type of structure to give employees equal power. The business owner has the final say.
Employees can work independently and assume more responsibility.
Horizontal structures help to improve communication and are best for executing new ideas. Yet, employees have fewer opportunities to advance.
, employees have fewer opportunities to advance.
This is a common structure used by startup companies.
Large companies with many departments use this structure to promote product lines to reach specific markets and territories.
Each department is free to operate on its own to meet customer demand.
Divisional structures can duplicate efforts when departments fail to communicate. Departments may also compete to gain recognition and power.
McDonald's Corporation and General Electric use a divisional organizational structure.
Network organizational structure
This structure helps to organize departments and how they relate to each other in different locations.
Everyone involved can see and understand each other's role in a business organization, whether an employee, freelancer, or a third-party affiliate.
Network structures help to improve efficiency, communication, and innovation in large businesses.
However, because the structure is more complex, sometimes confusion arises when employees are uncertain about who has the final decision-making authority.
Nike uses a network structure to produce and market its lines of footwear, clothes, equipment, and accessories.
Which Organizational Structure Is Best for Your Business?
The current size of your business is the primary determining factor in what is the best organizational structure for you.
You should choose depending on the number of employees you have, your business industry, and how much authority you want your staff members to have.
If you've been in business for a very short while, you may be a solopreneur with few or no employees.
A well-written business plan
is probably all you need until you expand your business.
As you grow, you can choose between horizontal, functional, and hierarchical organizational structures.
Larger, more established companies use divisional, matrix, and network structures.
However, keep in mind that both small and large companies use each of these structures successfully and may combine one or more to strengthen a business's existing potential.
How an Organizational Structure Works
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- Business owners use organizational structures to rank their departments and employees using a business organizational chart or diagram. People with the most power are at the top, followed by those with less authority.
- Structures illustrate the best way for a company to excel. These visual representations depict exactly how the company can reach its goals.
- Everyone has a clear picture of their responsibilities and to who they report. When everyone adheres to the structure's guidelines, efficiency and productivity normally improve.
Benefits and Importance of Having an Organizational Structure
The importance of organizational structure is because it defines the set-up of a company and who is responsible for reaching well-defined objectives.
Based on the common organizational types listed above, think about which one of those structures you might implement.
The hierarchy for each one represents a type of pecking order, so everyone knows what to expect to streamline a business's operation and increase productivity.
A well-written organizational structure helps employees perform better, which depends on everyone giving their best to solve problems and implement changes.
Furthermore, before an employee joins a company, they can review an organizational structure to see if their skills are an excellent match to consider working for that company.
The right organizational structure can:
- improve communication
- help employees make better and faster decisions
- reduce conflict between staff
- prevent overlapping job duties
As your company grows or you add locations, organizational structures for business can simplify the business owner's responsibilities so that each location adheres to the same procedures.
Drawbacks of organizational structures
In a formally structured environment, people can have less freedom to make decisions, fostering overall unproductivity.
Bureaucracy can lead to boredom, rigidity, and mechanical-type responses, desensitizing individuals and departments. This might lead to the business not achieving its goals.
Some departments fail to share information, which causes communication to break down, contributing to mistakes and may cause customer demands to fall through the cracks.
This is what's called an organizational silo.
Employees feel the pressure of not having sufficient time to devote to multiple tasks, especially managers.
This can lead to working inefficiently, which slows down progress.
Misinterpretation of priorities
Employees may fail to see the total picture and under-prioritize decisions.
Having multiple managers makes following a business organizational structure more difficult because each manager may have different goals.
When departments start to compete, it weakens a business. Also, individuals may compete for power rather than help grow the business.
Lack of information and goal differences can lead to rivalry between departments.
Key Elements to Consider When Choosing an Organizational Structure for Your Business
Know where you intend to take your company
Business owners that strategize their goals and objectives have a greater chance of succeeding. The corporate structure you choose should be compatible with your industry to compete in the marketplace.
Consider your organization's size and age
Generally, a horizontal structure works for small companies, and vertical structures are best for large corporations.
Consider who your clients are
The type of structure you choose should benefit your clients. For example, horizontal structures allow the employees of a marketing company to be more creative.
Factor in employee growth
Business owners want to keep their best employees. Depending on the organizational structure you choose, you can help employees grow and advance in your business by offering them opportunities to succeed.
Combine more than one structure
You can use specific components of vertical and horizontal organizational structures and tailor them to your goals and objectives to maximize your business's growth potential.
Change the structure
If one structure doesn't prove promising, you can always change it. Your selection is not set in stone, so don't hesitate to try another one that may work better.
How Do I Make a Business Organizational Chart?
This step-by-step explanation can help guide you when making a chart.
Choose an organizational structure
Organizational charts include information relating to the type of structure you choose.
For example, a functional structure lists employees in various departments.
Typical information includes titles such as:
- Employee names
- Job titles
- Contact information
- ID photo
Look at organizational chart examples and templates to become familiar with how to display the information based on which structure you chose.
Decide how to set up your chart
Once you gather the employee data to include in the chart, you can decide how you want the information to appear, such as:
- Department heads
Choose a format
To make the chart accessible to everyone in your company, purchase or use a free template or use Microsoft programs such as PowerPoint, Excel, Word, or Google Sheets to input the information in a chart format.
In the future, as your business expands and employees come and go, you can make changes to the chart.
Complete the chart
Make sure to complete each section of the chart to list every employee, department, etc.
Ensure that only designated people can make changes and circulate read-only copies to other employees.
Use an Organizational Structure to Your Business’s Best Advantage
It's easy to see how organizational structures in business could help define your company's goals and future.
Their primary purpose is to provide a visual illustration of each person's responsibility in how a business operates.
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What are horizontal organizational structures?
These are the different types of organizational structures. They are flat management structures where there are one or more managers, many employees, and only a few layers.
Usually, the business hierarchy for a horizontal structure lists the business owner at the top, below them the managers, and finally, at the bottom, the employees.
What is the highest level of organization?
Vertical structures have a top-down management structure. The person at the top has the most influence and power and makes difficult decisions.
What is an organizational structure?
It's a document outlining activities and information to achieve an organization's goals.
Most organizational structures include charts to show specific interactions between members and/or departments to provide a synopsis of an organization's operation.