Organizational Structure – Explained

What is Organizational Structure?

An organization structure is a visual diagram that represents the hierarchy, roles, and responsibilities of the employees in the company. 

Organizational structures use markets, geographical locations, products, functions, or processes to guide them depending on various business sizes. 


How does Organizational Structure Work? 

Every company needs an organizational structure to help define the elements the business needs for it to run properly. The elements include: 

Chain of command

The chain of command defines the tasks that the management delegates to every employee within the organization. It also helps to know the ranks of leadership that every business department will need. Generally, it helps employees understand how to communicate through the leadership ladder. 

Span of control

The span of control in an organizational structure gives an understanding of the mangers and their management roles in the organization. 


Centralization concerns the extent to which decision making is centralized in key figures or whether it is dispersed more broadly at various levels of the organization.

Types of Organizational Structure

Companies implement many organizational structures in the real world, these include: 

Functional organization structure

Functional structure, also known as bureaucratic structure, divides the company into departments according to the job functions of the employees. For example, a company that uses a functional structure will divide marketers, salespeople, auditors, and customer care into separate departments. A functional structure allows only specialized employees in the departments. In this case, the employees are not able to grow as they stay in one department forever. A functional structure can also create communication barriers between the departments, especially if the company has different products. 

Divisional organizational structure

Large companies that have different business units incorporate the divisional structure. The company using this structure has different leadership teams on different products or projects. An example of a company using the divisional structure is the Johnson & Johnson company. The company has different lines of business and products. Each business unit will be operating as its own company, having its sales, marketing, and customer service department. 

Hiearchical Structure

This is a traditional structure where decision making authority is allocated at various hierarchies within the organization. 

Flatarchy organizational structure

Flatarchy organizational structure is a structure common with a start-up or small company. It allows employees from different levels to make decisions in the organization. An example of this type of structure is when an organization has an internal hub or innovation center. The company lets the employees pitch any new ideas that might help the company grow. The company will continue running using its normal structure, but this encourages creativity among employees. 

Matrix organizational structure

A matrix structure is a structure that allows the employees to report to other bosses depending on the project. For example, a construction company could be having an engineer working on one project. Later on, a new project comes up, and they need his brains on that project. The engineer will have to report to two bosses at the same time. Matrix organizational structure allows the employees to share their knowledge within different divisions in the company. The employees also get to improve their skills and grow professionally. However, the employee needs to understand their roles at the different divisions, as it can be challenging to communicate with the various bosses. 

Network organizational structure

Companies that work together to share common resources often use the network structure. A company can also use this type of structure to describe its activities if it outsources most of its services from freelancers. For example, a company may be outsourcing its website for developing services. Any employee who requires these services will know the contact person for the job from the network structure.

What is an Organizational Chart?

These formal structures of organizations can be represented in the form of an organization chart. Sometimes also referred to as organizational chart, organigram, organogram, or org chart. It graphically shows the hierarchical authority, roles and responsibilities, functions and relations within an organization. For a new employee, the organization chart helps to understand what should happen within the firm. (The informal structure represents what is actually occurring within the organization.)

  • Defining the roles and responsibilities of all personnel within the organization.
  • Establishing a hierarchical structure of authority, power and, hence, decision-making.
  • Establish communication channels and information flows, incorporating a chain of command with specific rules and regulations relating to reporting procedures and accountability methods.
  • Establishing control mechanisms, such as the degree of centralization and the span of control. 
  • Establishing strategies for co-ordination of work practices.
  • Establishing decision-making processes.
  • Establishing specific operational functions and tasks.

How to Create an Organizational Chart?

Robert Simons (Levers of Organization Design, 2005) suggests that there are four main tensions or levers underlying any organization design:

  1. Strategy (structure follows strategy) versusStructure (organization design influences future strategies)
  2. Accountability (for today's goals) versus Adaptability (to future changes)
  3. Ladders (vertical hierarchies) versus Rings (horizontal networks)
  4. Self-Interest (individual) versus Mission Success (department, business unit, corporation).