Choosing the correct type of organizational structure is an essential decision businesses must make. That said, choosing the wrong one or not keeping certain components in mind can create problems down the road. Learn more about organizational structure and what factors companies need to consider before designing one.
What Is an Organizational Structure and Why Is It Important?
An organizational structure is the hierarchy of a company. In other words, how the business is laid out. It explains what employees will perform certain functions and how an organization will handle specific operations. The company’s structure also dictates how information is passed within the business.
In addition, it takes roles, responsibilities and rules into account. Organizational structure is essential because it dictates who is responsible for what while working towards business objectives. It helps everyone know their part in the company and allows them to work towards the same goal.
7 Types of Organizational Structures
Companies can choose from several structures, each with its associated benefits and drawbacks. Here is a quick overview of the different organizational structures available:
- Functional: In a functional structure, employees are divided into different departments depending on work specialization — sales, marketing, finance and human resources. It is one of the most common structures companies use.
- Multi-divisional: This structure is also common but it’s more frequent in larger enterprises. Instead of focusing on work specialization, it groups employees around a location or product. A popular company using this structure is McDonald’s.
- Matrix: With Matrix organizations, employees are categorized on project and function. Instead of having one manager, staff have multiple people who they report to simultaneously. This allows them to learn from people outside of their team.
- Hierarchical: This is the most common structure most organizations employ. It has a clear chain of command and can aid in speeding up company operations. It has top-level executives who make business decisions and go all the way down to regular employees.
- Flat/flatarchy: Many smaller companies have adopted this structure, especially startups. The primary intention of this structure is to have as little hierarchy as possible. It typically has a few middle managers in charge of staff.
- Team-based: As the name would suggest, this structure divides staff into teams dedicated to reaching specific goals. Teams consist of both workers and managers.
- Network: A network structure involves third parties that help complete company operations. It uses freelancers, contractors and other organizations.
5 Essential Factors to Keep in Mind
As stated, choosing the appropriate organizational structure is vital. Here are a few essential factors to consider:
One vital factor companies need to consider is the strategy they are planning to employ. In this case, strategy refers to how the organization wants to position itself on the market in relation to the products or service they offer.
For the company to reach its set business goals, the structure would need to work well with the chosen strategy.
2. Company Size and Life Cycle
The structure the company chooses should match with the organization’s overall size. Smaller businesses typically have more simplified structures — often, they don’t have any formal structure in place if they are very tiny. While this could serve them well, as the company grows, it can start creating challenges.
Whereas larger organizations have more complex and well-planned structures. Another thing to take note of is the life cycle of the business. In other words, the stage the company is in. If they just started, they might require a less intricate structure.
That said, as the business grows and switches to a new stage in its life cycle, it might be time to revisit the structure again. Before selecting an organizational structure, companies should consider the size of their operations and their life cycle.
Another essential factor to keep in mind is the environment in which the business operates. The industry, technology, economy, social culture and other conditions can influence the type of design structure a company requires.
Pay careful attention to whether the business environment is stable or constantly changing. For example, organizations in the technology sector are in a dynamic environment.
The needs of their consumers will not stay the same because technology frequently changes. They will need to choose a structure that considers these conditions.
The company’s technology can directly impact the structure they will need. For example, many companies are well-equipped with different technological systems, allowing them to operate with a fully remote workforce.
They will have chosen a structure that works well with how they operate. Carefully consider the company’s technology, such as automation in HR software or virtual conferencing tools, as this can influence the type of structure the organization will need.
5. Communication Needs
Excellent communication is essential for a business to ensure operations run smoothly. The structure the company wants would need to work well around the level of communication the organization has. The business will need to design the structure to support effective communication between the workforce.
Choosing the Company’s Organizational Structure
Choosing the correct business structure is extremely vital. Companies should base their decisions on a few essential factors, such as company size, strategy, technology and the environment they operate. With organizations paying attention to these components, they can choose a structure that aligns with their needs and goals.
Devin Partida writes about investor technologies, big data and apps. She is also the Editor-in-Chief of ReHack.com.