Choosing the Right Organizational Structure: Pros and Cons Explored
Written by: Rinaily Bonifacio
Last updated: 24 May 2023
Table of contents
What is an organizational structure?
An organization's organizational structure describes how its resources and authority are arranged to achieve its goals. It involves defining the roles and responsibilities of employees' marketing teams, how tasks are divided, and how information flows within the organization. The organizational structure determines how information and responsibilities will be shared within your team and how your approval process will work.
A well-defined organizational structure provides clarity and direction, enabling employees to work together efficiently to achieve the organization's objectives. The best organizational structure can vary based on the organization's size, the industry it operates in, and its overall objectives. The organizational structure also helps to create a sense of order and consistency, which is essential for achieving the organization's goals and objectives.
Why is organizational structure important?
Organizational structure is essential for many reasons, with key elements including the following:
- Clarity of roles and responsibilities: A well-defined organizational structure clarifies employees' roles and responsibilities. It ensures that everyone knows what is expected of them and reduces confusion and duplication of efforts.
- Efficient decision-making: An organized structure helps in efficient decision-making as it defines the hierarchy of decision-making authority. This ensures that the appropriate level makes management decisions and eliminates delays caused by unnecessary consultations and approvals.
- Improved communication: A clear organizational structure promotes better communication among employees and departments. It helps establish communication channels, protocols, and lines of authority, making it easier for employees to communicate.
- Enhanced productivity: Organizational structure ensures that resources are allocated effectively, enabling employees to focus on their assigned tasks. The result is increased productivity as employees become more efficient.
- Better performance evaluation: With a clear structure, managers can easily monitor employee performance and evaluate their contributions to the company. It enables managers to identify improvement areas and reward employees who perform well.
- Adaptability to change: A well-structured organization can adapt quickly to changing market conditions, customer needs, and industry trends. This is because the structure defines the roles and responsibilities of each employee, making it easier to identify the necessary changes and implement them quickly.
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Types of organizational structures
Your research may tell you that decentralized and centralized organizational structures exist. There are many different types of team and functional organizational structures, though, so it might be difficult to apply only two classifications.
Therefore, experts have identified eight types of organizational structures: centralized and decentralized:
- Hierarchical structure
- Divisional structure
- Functional structure
- Flatarchy structure
- Team structure
- Matrix structure
- Network structure
- Projectized structure
All these are centralized except for the flat, team and network structures. A centralized organizational structure involves a chain of command from the top down to the owners and executives.
In contrast, decentralized organizational structures give far more power to non-executives and non-owners. We'll get more into how this works in just a moment.
Types of organizational structure to consider for your business
The organizational structures of teams vary according to the size and goals of a company. A clear organizational structure has benefits and disadvantages; nonetheless, establishing one is universally beneficial.
Employees can better manage expectations and goals when they understand their responsibilities within the structure that leads a company.
The organizational structure of a business is crucial to its success. We will explore nine different types of organizational structures that companies commonly use.
The hierarchical structure is a traditional organizational structure that follows a top-down approach. It is also known as a horizontal structure or a vertical organizational structure. In this structure, the organization is divided into different levels, each representing a different degree of authority and responsibility.
The top level of the hierarchy consists of executives or managers responsible for setting the organization's goals and making strategic decisions. The middle level consists of supervisors or department managers responsible for overseeing the day-to-day operations and ensuring that the goals set by the top level are being met. The lowest level consists of employees who carry out the tasks the middle management or their supervisors assign to them.
- Clear lines of authority and responsibility.
- Easy to implement and understand.
- Provides a sense of stability and order.
- The decision-making process is streamlined.
- Communication between different levels of the hierarchy can be slow.
- Creativity and innovation may be stifled.
- Employees at lower levels may feel disengaged or undervalued.
- This may lead to a rigid and inflexible work environment.
Divisional structure, also known as a "product-based structure," is a kind of organizational structure that groups employees by products, services, or markets they specialize in. In this structure, each division operates as a self-contained entity with its functional departments like marketing, sales, and operations. The head of each division is responsible for the performance of their division, and the corporate headquarters provides support services like accounting, legal, and HR.
- Provides more focused attention on product lines or markets
- Each division can operate independently and respond quickly to market changes
- Encourages innovation and creativity within each division
- Easier to measure divisional performance and profitability
- Duplication of functions across divisions can be costly and inefficient
- Difficult to maintain consistent corporate culture and communication across divisions
- This can lead to internal competition and conflicts between divisions
- This may result in inefficiencies due to a need for economies of scale.
Functional structure is an organizational structure in which employees are grouped based on their specialized functions or areas of expertise, such as marketing, finance, human resources, or production. Each department has its hierarchy of upper management, with the department head reporting to a higher-level executive or CEO. This structure is commonly used in organizations with a clear and defined division of labor and a focus on efficiency in performing specific tasks.
The main challenge facing companies with functional structures is the need for coordination between departments. Employees may lose sight of the larger company context if they focus solely on a specific task and fail to interact with colleagues from other departments. Leaders must be trained to see organizational behavior and foster cross-departmental collaboration to achieve a functional organizational structure.
- Clear division of labor and specialization
- Encourages skill development and expertise in specific areas
- Facilitates efficient communication and decision-making within departments
- Streamlined workflow and coordination within departments
- This can result in cost savings by eliminating duplication of tasks and resources
- This can lead to silos and limited cross-functional collaboration
- This may create a lack of overall strategic direction or vision
- Communication and coordination between departments may be more difficult
- This may lead to a lack of innovation and creativity
- Limited opportunities for career advancement or lateral movement within the organization.
The flat structure refers to a decentralized organizational structure in which the power is distributed evenly among all employees. The authority of executives may be higher than that of lower-level employees. Startups with a modern approach or those who need more employees to divide into departments tend to have this flat organizational structure. Flat structures are particularly suited to the technology industry, where many startups have flexible working arrangements. This type of structure is commonly used by startups and small businesses, where there is a need for flexibility and rapid decision-making.
- The employees are more independent and responsible.
- Employees can communicate and interact better.
- New ideas or practices are implemented faster, with less risk of error.
- Lack of supervision among employees.
- There could be confusion around reporting procedures.
- Lack of specialized skills among employees.
- The system needs to scale better as the company grows.
In this organization, a supervisor works with each employee and sets their work-related goals. The supervisor also monitors employee performance, provides feedback, and ensures that they are aware of any changes in policies and procedures. This type of organizational structure works excellently for large companies with multiple departments or for companies where each employee specializes in one area.
In a matrix structure, employees are assigned to functional and project teams. This matrix organizational structure means that employees have a functional manager, two bosses, and a project manager, and their work is divided between the two teams. The functional team focuses on the employee's skills and development, while the project team focuses on the specific goals and objectives of the project.
- Allows for cross-functional collaboration and knowledge-sharing.
- Employees can work on multiple projects and gain a variety of experiences.
- Increases flexibility in responding to changing business needs and customer demands.
- Efficient use of resources as employees are shared between different projects.
- This can lead to confusion and conflicts regarding roles and responsibilities.
- Requires effective communication and collaboration between functional and project managers.
- It can be time-consuming and complex to manage.
- This may result in slower decision-making processes as multiple managers must be consulted.
The team structure is a decentralized but formal organizational structure that allows department heads to collaborate with employees from other departments as needed as part of their duties. Matrix structures emphasize employee fluidity. However, decentralized organizational structures emphasize management fluidity, similar to matrix structures in their decentralized but formal structure. Companies with team structures are common in industries with flat or matrix structures.
- Streamlining labor leads to productivity, growth, and transparency.
- The experience takes priority over seniority.
- It makes employee management more effortless.
- A flip of traditional executive and lower-level roles could confuse employees.
- A corporate ladder that is obscured disincentivizes employees to work harder.
An organization that operates in the modern age is likely to have a network structure since it can cover multiple cities or even operate internationally. The system also manages relationships between departments in different offices and freelancers, suppliers, and third-party vendors outsourced to specific locations.
It may seem overwhelming to detail all of this in one type of network structure, but this decentralized structure can be beneficial for understanding your company's human resources. Often, the internal structure of distribution, technology, and logistics companies with international branches is network-based.
- Understanding how on-site, off-site, and freelance employees, freelancers, and third parties perform functional tasks.
- It improves flexibility for departments and locations.
- The network facilitates communication, collaboration, and innovation.
- Large businesses have clear workflows and chains of command.
- In particular, the out-of-office processes are complex.
- No one knows who should make the final decision - it's vague.
In a projected structure, the focus is on one project at a time. In this centralized organizational structure, project managers act as supervisors, not just resource allocators and decision-makers.
Unlike other structure types, a projectized organizational structure involves the demobilization of teams and resources upon a project's completion. But it's like different organizational structures in that an obvious hierarchy exists. Given the complexity of app or website development, software development teams may benefit from projected structures.
- It fosters more efficient decision-making and communication.
- The sense of urgency around project completion increases employee cooperation.
- It boosts employee flexibility and versatility.
- Strict deadlines may stress workers.
- Project managers might hold too much power.
- It lacks career development opportunities for employees.
How to design your organization's structure
Designing an organizational structure requires careful planning and execution. Here are the eight steps to create your organization's structure:
Create a charter:
Start by creating a clear and concise mission statement that outlines your business's goals, objectives, and values. This will help guide your organizational structure design and ensure all employees work towards a common goal.
Build your strategy:
Once you have your org structure and charter in place, build a strategy that outlines your business's overall direction, priorities, and key initiatives. This will help you identify the key roles and responsibilities needed to achieve your goals and create a structure that supports them.
Assess your internal processes & systems:
Conduct a thorough assessment of your business's internal processes and systems to identify areas that need improvement. Look for ways to streamline operations, eliminate redundancies, and increase efficiency.
Design your structure:
Based on your assessment, design a functional org structure that best fits your business needs. There are several organizational structures to choose from, such as functional, divisional, matrix, and network structures. Consider factors such as the size of your business, the nature of your industry, and the level of collaboration required between different teams.
Create a transition plan:
Implementing a new organizational structure can disrupt your business, so it's essential to create a clear transition plan that outlines the steps needed to make the switch. This should include a timeline, a communication plan, and any necessary employee training.
Implement your new structure:
Once you have your transition plan, it's time to implement your new structure. This may involve changes to job titles, reporting structures, or team assignments. Ensure that everyone knows the changes and understands their new roles and responsibilities.
Monitor the impact:
After implementing your new structure, monitor its impact on your business regularly. Look for areas where improvements can be made, and make adjustments as necessary to ensure your structure is working as intended.
Gather feedback & improve:
Finally, gather feedback from employees and stakeholders on the new structure and use this to make improvements. Reviewing and refining your organizational chart and structure can ensure that it remains effective and supports your business's goals over the long term.
Which organizational structure is best?
In conclusion, there is no one-size-fits-all approach to organizational structure. The best structure for your organization will depend on factors such as your company size, goals, and industry. It's important to carefully consider each structure's pros and cons and evaluate which aligns with your company culture and objectives.
Remember that designing and implementing an organizational structure is an ongoing process, and it's essential to monitor its effectiveness and make adjustments as needed regularly.
By following the steps outlined in this article and considering your organization's unique needs, you can design a structure that sets you up for success.
Rinaily is a renowned expert in the field of human resources with years of industry experience. With a passion for writing high-quality HR content, Rinaily brings a unique perspective to the challenges and opportunities of the modern workplace. As an experienced HR professional and content writer, She has contributed to leading publications in the field of HR.
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