Choosing the best organizational structure for your company, division, or team is a lot like picking out a new car.
At the most basic level, you’re always looking for something road-worthy — something that can take you (and your passengers) from point A to point B without a hitch.
But beyond that, there are a lot of options to consider. Automatic or manual? Four-wheel drive or two? Built-in GPS? Leather interior? Flux capacitor? (Only if you’re going back in time, of course.)
In the world of organizational structures, the options you have to choose from include things like chain of command (long or short?), span of control (wide or narrow?), and centralization (centralized or decentralized decision-making?), just to name a few.
An organizational structure is a visual diagram of a company that describes what employees do, whom they report to, and how decisions are made across the business. Organizational structures can use functions, markets, products, geographies, or processes as their guide, and cater to businesses of specific sizes and industries.
What’s the point of an organizational structure? As a business leader, do you even need one? As I said, org structures help you define at least three key elements of how your business is going to run.
As your company gets bigger, an organizational structure can also be helpful for new employees as they learn who manages what processes at your company.
Then, if you need to pivot or shift your leadership, you can visualize how the work flows would work by adjusting your organizational structure diagrams.
To put it simply, this chart is like a map that simply explains how your company works and how its roles are organized.
Here’s what each of those elements means to an organization:
Chain of Command
Your chain of command is how tasks are delegated and work is approved. An org structure allows you to define how many “rungs of the ladder” a particular department or business line should have. In other words, who tells whom to do what? And how are issues, requests, and proposals communicated up and down that ladder?
Span of Control
Your span of control can represent two things: who falls under a manager’s, well, management … and which tasks fall under a department’s responsibility.
Centralization describes where decisions are ultimately made. Once you’ve established your chain of command, you’ll need to consider which people and departments have a say in each decision. A business can lean toward centralized, where final decisions are made by just one or two entities; or decentralized, where final decisions are made within the team or department in charge of carrying out that decision.
You might not need an org structure right away, but the more products you develop and people you hire, the harder it’ll be to lead your company without this crucial diagram.
(To dive deeper into what all of these different organizational structure components are, check out my earlier post, “The 6 Building Blocks of Organizational Structure.”)
Free Illustrated Guide to Organizational Structures
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In this post, we’ll explore how you can combine those components to form different types of organizational structures. We’ll also highlight the benefits and drawbacks of different structure types so you can evaluate which is the best option for your company, division, or team. Let’s dive in.
Mechanistic vs. Organic Organizational Structures
Organizational structures fall on a spectrum, with “mechanistic” at one end and
“organic” at the other.
Take a look at the diagram below. As you’ll probably be able to tell, the mechanistic structure represents the traditional, top-down approach to organizational structure, whereas the organic structure represents a more collaborative, flexible approach.
Here’s a breakdown of both ends of the structural spectrum, their advantages and disadvantages, and which types of businesses are suited for them.
Mechanistic structures, also called bureaucratic structures, are known for having narrow spans of control, as well as high centralization, specialization, and formalization. They’re also quite rigid in what specific departments are designed and permitted to do for the company.
This organizational structure is much more formal than organic structure, using specific standards and practices to govern every decision the business makes. And while this model does hold staff more accountable for their work, it can become a hindrance to the creativity and agility the organization needs to keep up with random changes in its market.
As daunting and inflexible as mechanistic structure sounds, the chain of command, whether long or short, is always clear under this model. As a company grows, it needs to make sure everyone (and every team) knows what’s expected of them. Teams collaborating with other teams as needed might help get a business off the ground in its early stages, but sustaining that growth — with more people and projects to keep track of — will eventually require some policymaking. In other words, keep mechanistic structure in your back pocket … you never know when you’ll need it.
Organic structures (also known as “flat” structures) are known for their wide spans of control, decentralization, low specialization, and loose departmentalization. What’s that all mean? This model might have multiple teams answering to one person and taking on projects based on their importance and what the team is capable of — rather than what the team is designed to do.
As you can probably tell, this organizational structure is much less formal than mechanistic, and takes a bit of an ad-hoc approach to business needs. This can sometimes make the chain of command, whether long or short, difficult to decipher. And as a result, leaders might give certain projects the green light more quickly but cause confusion in a project’s division of labor.
Nonetheless, the flexibility that an organic structure allows for can be extremely helpful to a business that’s navigating a fast-moving industry, or simply trying to stabilize itself after a rough quarter. It also empowers employees to try new things and develop as professionals, making the organization’s workforce more powerful in the long run. Bottom line? Startups are often perfect for organic structure, since they’re simply trying to gain brand recognition and get their wheels off the ground.
Now, let’s uncover more specific types of organizational structures, most of which fall on the more traditional, mechanistic side of the spectrum.
Types of Organizational Structure
- Functional Organizational Structure
- Product-Based Divisional Structure
- Market-Based Divisional Structure
- Geographical Divisional Structure
- Process-Based Structure
- Matrix Structure
- Circular Structure
- Flat Structure
- Network Structure
Depending on the size of a business and its goals, the organizational structure of the team will vary. Each type has its advantages and disadvantages; however, there is a universal benefit to establishing a clear organizational structure. It helps employees understand their role within a company, which enables them to manage expectations and goals.
A business needs to have an organizational structure in place to be successful. There are several types of organizational structures commonly used by companies, nine of which we expand upon below.
1. Functional Organizational Structure
One of the most common types of organizational structures, the functional structure departmentalizes an organization based on common job functions.
An organization with a functional org structure, for instance, would group all of the marketers together in one department, group all of the salespeople together in a separate department, and group all of the customer service people together in a third department.
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The functional structure allows for a high degree of specialization for employees, and is easily scalable should the organization grow. Also this structure is mechanistic in nature — which has the potential to inhibit an employee’s growth — putting staff in skill-based departments can still allow them to delve deep into their field and find out what they’re good at.
Functional structure also has the potential to create barriers between different functions — and it can be inefficient if the organization has a variety of different products or target markets. The barriers created between departments can also limit peoples’ knowledge of and communication with other departments, especially those that depend on other departments to succeed.
Functional organization increases efficiency, provides stability, and boosts accountability. It allows departments — with employees who share similar skills and knowledge — to focus on their specialized tasks within their respective fields. Because the roles and responsibilities of this organizational structure example rarely change, department employees can consistently work on similar assignments and hone their skills.
The fixed structure of functional organization also operates through management. It provides employees with a chain of command. It guides communication between the team and keeps the team accountable.
2. Product-Based Divisional Structure
A divisional organizational structure is comprised of multiple, smaller functional structures (i.e. each division within a divisional structure can have its own marketing team, its own sales team, and so on). In this case — a product-based divisional structure — each division within the organization is dedicated to a particular product line.
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This type of structure is ideal for organizations with multiple products and can help shorten product development cycles. This allows small businesses to go to market with new offerings fast.
It can be difficult to scale under a product-based divisional structure, and the organization could end up with duplicate resources as different divisions strive to develop new offerings.
Companies and their employees can experience the benefits of the product-based divisional structure. If one division performs poorly, this does not automatically translate across the organization. Because of their separation, divisions may flourish (or fail) concurrently. This system allows companies to mitigate risk.
3. Market-Based Divisional Structure
Another variety of the divisional organizational structure is the market-based structure, wherein the divisions of an organization are based around markets, industries, or customer types.
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The market-based structure is ideal for an organization that has products or services that are unique to specific market segments, and is particularly effective if that organization has advanced knowledge of those segments. This organizational structure also keeps the business constantly aware of demand changes among its different audience segments.
Too much autonomy within each market-based team can lead to divisions developing systems that are incompatible with one another. Divisions might also end up inadvertently duplicating activities that other divisions are already handling.
Because this organizational structure focuses on specific market segments, it provides each division with autonomy. The divisions work separately, which allows employees to work independently and enables them to focus on the needs of their particular industry.
4. Geographical Divisional Structure
The geographical organizational structure establishes its divisions based on — you guessed it — geography. More specifically, the divisions of a geographical structure can include territories, regions, or districts.
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This type of structure is best-suited to organizations that need to be near sources of supply and/or customers (e.g. for deliveries or for on-site support). It also brings together many forms of business expertise, allowing each geographical division to make decisions from more diverse points of view.
The main downside of a geographical org structure: It can be easy for decision- making to become decentralized, as geographic divisions (which can be hundreds, if not thousands of miles away from corporate headquarters) often have a great deal of autonomy. And when you have more than one marketing department — one for each region — you run the risk of creating campaigns that compete with (and weaken) other divisions across your digital channels.
Geographical divisions allow companies the advantage of catering to a specific customer. Based on the differences in language, culture, and customs one would find across the world, companies cannot necessarily expect the same operations to work in different locations. Not only does it allow organizations to tailor their approach based on geography, but it allows the division to react quickly and efficiently to any geographical market changes.
5. Process-Based Structure
Process-based organizational structures are designed around the end-to-end flow of different processes, such as “Research & Development,” “Customer Acquisition,” and “Order Fulfillment.” Unlike a strictly functional structure, a process-based structure considers not only the activities employees perform, but also how those different activities interact with one another.
In order to fully understand the diagram below, you need to look at it from left to right: The customer acquisition process can’t start until you have a fully developed product to sell. By the same token, the order fulfillment process can’t start until customers have been acquired and there are product orders to fill.
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Process-based organizational structure is ideal for improving the speed and efficiency of a business, and is best-suited for those in rapidly changing industries, as it is easily adaptable.
Similar to a few other structures on this list, process-based structure can erect barriers between the different process groups. This leads to problems communicating and handing off work to other teams and employees.
As mentioned, one of the most significant benefits of the process-based structure is that it increases efficiency and speed. If Department B cannot start its processes until Department A finishes, this compels Department A to work promptly and proficiently. This organizational model also promotes intradepartmental (within the department) and interdepartmental (across multiple departments) teamwork.
6. Matrix Structure
Unlike the other structures we’ve looked at so far, a matrix organizational structure doesn’t follow the traditional, hierarchical model. Instead, all employees (represented by the green boxes) have dual reporting relationships. Typically, there is a functional reporting line (shown in blue) as well as a product- based reporting line (shown in yellow).
When looking at a matrix structure org chart, solid lines represent strong, direct-reporting relationships, whereas dotted lines indicate that the relationship is secondary, or not as strong. In our example below, it’s clear that functional reporting takes precedence over product-based reporting.
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The main appeal of the matrix structure is that it can provide both flexibility and more balanced decision-making (as there are two chains of command instead of just one). Having a single project overseen by more than one business line also creates opportunities for these business lines to share resources and communicate more openly with each other — things they might not otherwise be able to do regularly.
The primary pitfall of the matrix organizational structure? Complexity. The more layers of approval employees have to go through, the more confused they can be about who they’re supposed to answer to. This confusion can ultimately cause frustration over who has authority over which decisions and products — and who’s responsible for those decisions when things go wrong.
An advantage of a matrix structure is that it promotes collaboration and communication. This open line of communication ultimately allows businesses to share resources and allows employees to develop new skills from working with different departments.
7. Circular Structure
While it might appear drastically different from the other organizational structures highlighted in this section, the circular structure still relies on hierarchy, with higher-level employees occupying the inner rings of the circle and lower-level employees occupying the outer rings.
That being said, the leaders or executives in a circular organization aren’t seen as sitting atop the organization, sending directives down the chain of command. Instead, they’re at the center of the organization, spreading their vision outward.
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From an ideological perspective, a circular structure is meant to promote communication and the free flow of information between different parts of the organization. Whereas a traditional structure shows different departments or divisions as occupying individual, semi-autonomous branches, the circular structure depicts all divisions as being part of the same whole.
From a practical perspective, the circular structure can be confusing, especially for new employees. Unlike with a more traditional, top-down structure, a circular structure can make it difficult for employees to figure out who they report to and how they’re meant to fit into the organization.
Most examples of organizational structure have a top-down hierarchy. Alternatively, this type of structure follows an outward flow and contributes to information flowing freely across the business. Its benefits include keeping all employees aligned with the processes and goals of the company and encouraging employees to collaborate between departments.
8. Flat Structure
While a more traditional organizational structure might look more like a pyramid — with multiple tiers of supervisors, managers and directors between staff and leadership, the flat structure limits the levels of management so all staff are only a few steps away from leadership. It also might not always take the form or a pyramid, or any shape for that matter. As we mentioned earlier, It’s also a form of the “Organic Structure” we noted above.
This structure is probably one of the most detailed, It’s also thought that employees can be more productive in an environment where there’s less hierarchy-related pressures. This structure might also make staff feel like the managers they do have are more like equals or team members rather than intimidating superiors.
If there’s a time when teams in a flat organization disagree on something, such as a project, it can be hard to get aligned and back on track without executive decisions from a leader or manager. Because of how complicated the structure’s design is, it can be tricky to determine which manager an employee should go to if they need approval or an executive decision for something. So if you do choose to have a flat organization, you should have a clearly marked tier of management or path that employers can refer to when they run into these scenarios.
The elimination of middle management employees defines the flat structure type. Its advantages are instantaneous. First, it reduces the expenses of the company. Second, it allows staff to build direct relationships with upper management. And lastly, it shortens the decision-making process.
9. Network Structure
A network structure is often created when one company works with another to share resources — or if your company has multiple locations with different functions and leadership. You might also use this structure to explain your company workflows if much of your staffing or services is outsourced to freelancers or multiple other businesses.
The structure looks nearly the same as the Divisional Structure, shown above. However, instead of offices, it might list outsourced services or satellite locations outside of the office.
If your company doesn’t do everything under one roof, this is a great way to show employees or stakeholders how outsourcing of off-site processes work. For example, if an employee needs help from a web developer for a blogging project and the company’s web developers are outsourced, the could look at this type of chart and know which office or which person to contact outside of their own work location.
The shape of the chart can vary based on how many companies or locations you’re working with. If it’s not kept simple and clear, there may be a lot of confusion if multiple offices or freelancers do similar things. If you do outsource or have multiple office locations, make sure your org chart clearly states where each specific role and job function lies so someone can easily understand your basic company processes.
The outsourcing nature of the network structure provides companies with the advantages of lower costs, more focus, and increased flexibility. Outsourcing allows organizations to save money, as they don’t have to bear the expense of setting up a department for the same purpose. It also gives companies the flexibility to change their processes and the ability to focus on their core functions.
Why is having an organizational structure important?
Imagine a business that has no organizational structure. Instantly, questions arise about the systems and processes. Who makes the decisions? How are employees held accountable? What are the company’s goals? These questions are practically impossible to answer without a functional organizational structure.
Organizational structure is necessary for running a successful business because it improves workflow and efficiency, promotes communication, identifies company needs, and aligns employees with company goals. It directly affects how a business operates daily. When a company establishes a structure that works, the combined efforts of its employees, in conjunction with its systems and processes, allow the company to make better decisions for its future.
Navigating Organizational Structures
Organizational structures are central to a successful team. Employees can move comfortably, confidently, and efficiently when given a clear definition of their role within an organization.
Structure types will vary from business to business, so it’s important to remember that these structures are not one size fits all. Every type may not suit your organization, but chances are, one of them will. Use this post to determine which organizational structure works for you, and then it’s time for the real work to begin.
Editor’s note: This post was originally published in December 2014 and has been updated for comprehensiveness.