Understanding Organizational Structure: A Comprehensive Guide

What is organizational structure?

By structure, we mean the framework around which the group is organized, the underpinnings which keep the coalition functioning. It's the operating manual that tells members how the organization is put together and how it works. More specifically, structure describes how members are accepted, how leadership is chosen, and how decisions are made.

Six Elements of Organizational Structure

Geography - How your organization is structured can depend on how many corporate locations you need to account for in your planning. The more spread out an organization is, the more autonomy each location will need to be given in order for the company to run efficiently. Hierarchy communication is also a challenge when creating an organizational structure over a large geographic area. Managers who report to executives in another location need to establish a clear line of communication in order to receive guidance and instruction.
Number of Employees - A large employee population can necessitate that there be several layers of management for a company to run efficiently. As a company grows, the organizational structure needs to be elastic enough to accommodate more employees and the potential need for a larger management structure.
Product Evolution - A company may start off with a small line of products that cover a general part of the industry. As the company grows, the need to create specified departments for product development and manufacturing can have an effect on the company's organizational structure.
Distribution of Authority - According to a study done by a group of college students known as Group A-Plus, a company's organizational structure is affected by whether the company wants centralized management or decentralized management. Centralized management keeps all major decisions with one specific executive group, while decentralized management allows company managers to have more said in the decision-making process.
Control - According to Management Guru, a company that requires a higher product quality will have stricter rules and a more regimented environment. This would apply to companies that manufacturer high tech product, hand-crafted products or critical products such as medical equipment. Companies that engage in the mass production of products may not exert as much control over the quality of their products and, subsequently, may create a different organizational structure.
Marketplace - The marketplace also has a bearing on how a company is structured. For example, a manufacturer may decide to sell products through wholesalers as well as directly to end users. In order for this model to be successful, the organizational structure of the company would need to be set up so as to keep these elements separate, including a separate marketing team and a separate sales force.

Types of Organizational Structures

"Every company has two organizational structures: The formal one is written on the charts; the other is the everyday relationship of the men and women in the organization." - Harold S. Geneen

Every organization, to be effective, must have a structure. Let us first understand what an organization structure is. It is the setup that determines the hierarchy and reporting structure in an organization. It is represented by a drawing known as an organizational chart. There are different types of organizational structures that companies follow, depending on a variety of factors like leadership style, type of organization, geographical regions, work flow and hierarchy. To put it simply, an organizational structure is the plan of the hierarchy and arrangement of work.

Here is a list of the different types of organizational structures.

1. Traditional Structures - These structures are based on functional division and departments. They are the kind of structures that follow the organization's rules and procedures to the T. They are characterized by having precise authority lines for all levels in the management. The various types of structures that fall under traditional structures are:

Line Structure - This is the kind of structure that has a specific line of command. The approvals and orders in this kind of structure come from top to bottom in a line. Hence it is known as a line structure. This kind of structure is suitable for smaller organizations like small accounting firms and law offices. This structure allows easy decision-making and is informal in nature.

Merits

It is the simplest kind of organizational structure.
Strict authority results in a stronger discipline.
Prompt decisions result in quick and effective actions.
There is clarity in the structures of authority and responsibility.
As the control rests with one superior, it accords him the flexibility to adjust the department.
There are good career advancement prospects for individuals who deliver quality work.

Demerits

There are chances of the department head being biased.
Lack of specialization is a persistent problem.
The department head may be burdened with lots of work.
Communication only happens from top to bottom.
Superiors with authority can misuse it for their benefit.
Decisions are taken by a single person and can go wrong.

Line and Staff Structure - Though a line structure is suitable for most organizations, especially the small ones, it is not effective for larger companies. This is where the line and staff organizational structure come into play. Line and staff structure combines the line structure where information and approvals come from top to bottom, with staff departments for support and specialization. Line and staff organizational structures are more centralized. Managers of line and staff have authority over their subordinates, but staff managers have no authority over line managers and their subordinates. The decision-making process becomes slower in this type of organizational structure because of several layers and guidelines. Also, there is formality involved.

Merits

It enables the employees to perform at a faster rate.
It helps employees to accept responsible jobs and specialize in a particular area.
It helps line managers to concentrate on the task at hand.
Little or no resistance is met when organizational changes take place.
It results in less operational wastage and increases productivity.
Employees feel that they are given the due credit for their contribution.

Demerits

Confusion may be created among employees.
Employees lack operational knowledge to give result-oriented suggestions.
There are too many levels of hierarchy.
Employees may have differences of opinions and this may slow down the work.
As staff specialists exist, it is costlier than a simple line organization.
Decision-making may be time-consuming.

2. Functional Structure - This kind of organizational structure classifies people according to the function they perform in their professional life or according to the functions performed by them in the organization. The organization chart for a functional organization consists of a Vice President, a Sales Department, a Customer Service Department, Engineering or Production Department, an Accounting Department, an Administration Department, etc.

Merits

It has high degrees of specialization.
It has clear lines of authority.
It facilitates easy accountability for the work.
It accords a high level of speed and efficiency.
The need for duplication of work is eliminated.
All the functions command equal importance.

Demerits

Communication has several barriers which makes coordination difficult.
More focus is laid on individuals rather than the organization.
The decisions taken by a single person may not always work in favor of the organization.
As the organization expands, it gets difficult to exercise control on its operations.
There may be lack of teamwork between different departments or units.
As all the functions are separated, employees may not gain knowledge about other specializations.

3. Divisional Structure - These are the kinds of structures that are based on different divisions in the organization. They group together employees based on the products, markets and geographical locations covered. Here is a detailed description of a divisional structure.

Product Structure - A product structure is based on organizing employees and work on the basis of the different products. If the company produces three different products, they will have three different divisions for these products. This type of structure can be best utilized for retail stores with a number of products.

Merits

Units which are not working can be closed down easily.
Each unit can be operated and treated as a separate profit center.
It accords rapid and easy decision-making.
It also gives a lot of independence to the decision makers.
Individual products get separate attention as per the problems they face.
It enables the organization to have a high productivity and efficiency quotient.

Demerits

As each unit operates on its own, organizational goals may not be achieved.
Unhealthy competition may exist among internal business units.
As it has too many managerial levels, it may hamper the business.
Accounting work and taxes may increase considerably.
All the units may not be considered as equal.
Marketing individual products may add up to the cost significantly.

Market Structure - Market structure is used to group employees on the basis of the specific market the company sells in. A company could have five different markets they use and according to this structure, each would be a separate division.

Merits

Employees can communicate with customers in the local language.
They are available for the customers, if need is felt.
The problems in a particular market can be isolated and dealt with separately.
As individuals are responsible for a particular market, tasks are completed on time.
Employees are specialized in catering to a particular market.
New products for niche markets can be introduced.

Demerits

There can be intense competition among the employees.
Decision-making can cause conflicts.
It is difficult to determine the productivity and efficiency.
All the markets may not be considered as equal.
There may be lack of communication between the superiors and the employees.
Employees may misuse their authority.

Geographic Structure - Large organizations have offices at different places, for example, there could be a north zone, south zone, west zone and east zone. The organizational structure, in such a case, follows a zonal structure.

Merits

There is better communication among the employees at the same location.
Locals are familiar with the local business environment and can cater to geographical and cultural differences.
Customers feel a better connection with local managers who can speak their language.
A record of the work of individual markets and groups can be maintained.
Decisions are taken thoughtfully and work when implemented.
New products or product modifications catering to a specific area can be introduced.

Demerits

It may give rise to a feeling of division among the employees of the organization.
There may be unhealthy competition among different zones.
Core company ethics, beliefs and practices may differ from location to location.
Tracing the performance and profits of each region may be time-consuming and tedious.
There may be poor communication among the employees at different locations.
Collaboration and cooperation between employees at different locations may not work out.

4. Matrix Structure - This structure is a combination of function and product structures. It combines the best of both worlds to make an efficient organizational structure. This structure is the most complex structure. It uses teams of employees to accomplish work by capitalizing on their strengths while creating weaknesses which are of functional form. The different types of matrix structures are:

Weak/Functional Matrix- In this type of matrix structure, a project manager is assigned to look over the cross-functional aspects of the project. However, he has a very limited authority and it is the functional manager who actually controls the inventory, resources and the project.

Merits

Employees are not attached to temporary staff or temporary work.
The functional manager controls the project.
The functional manager is responsible in case anything goes wrong.
The more the project manager communicates with the employees, the better are the results.
The project manager can make things happen without being in control.
The decision-making rests in the hands of the functional manager.

Demerits

The project manager may face strong apathy from his workers.
The project manager does not have complete authority.
If not supervised, workers can reduce the productivity of the entire unit.
The project manager is a weak authority who has no control over the employees.
He has no control over workload management and task prioritization.
He cannot even give a performance review.

There are two more structures namely balanced/functional matrix and strong/project matrix. In the balanced/functional matrix, the responsibility and power are shared equally by both the project manager and the functional head. This may create a power struggle between them. In the strong/project matrix, the project manager is primarily responsible for the work while the functional head gives technical advice and allocates resources.

5. Other Organizational Structures

Bureaucratic Structure - This kind of structure can be seen in tall organizations where tasks, processes and procedures are all standardized. This type of structure is suitable for huge enterprises that involve complex operations and require smooth administration of the same. It is highly recommended for industries like food, beverage, etc. as they have to adhere to stringent rules and regulations.

Merits

As the complete control rests in the hands of one person, it is easy to achieve organizational goals.
Strict hierarchies ensure timely completion of tasks and quality.
It helps in easy cooperation and coordination among the employees.
Standardization and the best practices can be implemented easily.
Employees have to adhere to policies and procedures.
Production takes place efficiently and effectively.

Demerits

A centralized authority can discourage employees.
It does not encourage innovative ideas.
It can lead to employee dissatisfaction and attrition.
It cannot adapt to changes in the business environment.
One person cannot be responsible for coming up with creative ideas every time.
It can trigger a power struggle in the organization.

Pre-bureaucratic Structure - This structural form is best-exemplified in organizations where administration and control are centralized, and there is very little, if any, standardization of tasks. This structure is highly recommended for small-scale industries and start-ups.

Merits

It has a centralized structure with only one decision maker.
The founder has complete control on decisions and their implementation.
Communication mostly happens on a one-on-one basis.
Decisions are made and implemented quickly.
Productivity and profits are closely monitored.
If an employee works hard, he gets noticed.

Demerits

Decisions taken by one person stand the risk of going wrong.
It is only applicable to small businesses and cannot sustain once they expand.
Lack of standardization can lead to inconsistencies.
Employees are not part of the decision-making process and this can demoralize them.
Effective communication may not take place as people do not open up in front of the authority.
Due to lack of flexibility, employees may feel frustrated.

Network Structure - In this structure, organization managers are required to maintain and coordinate business/professional relations with third parties such as clients, vendors and associates in order to achieve a collective goal of profitability and growth. Most of the time, these relations are maintained and tasks are coordinated via telecommunication and electronic media and, hence this structure is also known as a virtual structure.

Merits

The employees can be closer to the location of the customer.
It helps in optimizing the knowledge potential of the organization.
Even if something like a natural disaster occurs, the work of network employees can continue.
It can be dynamic and easily adaptive to changes in the business environment.
There is a certain level of flexibility for the employees.
There can be a collaborative relationship between the supervisor and the employee.

Demerits

An employee may have to report to too many supervisors and this may affect his work.
As a formal hierarchy is missing, it can lead to conflicts.
Too much dependence on technologies like the Internet, phone, etc. can cause problems.
As there is no physical place for employees, it affects communication.
It can lead to increased work stress among the employees.
An intense competition exists among the supervisors, to get a high-performing employee.

Team Structure - Organizations with team structures can have both vertical as well as horizontal process flows. The most distinct feature of such an organizational structure is that different tasks and processes are allotted to specialized teams of personnel in such a way that a harmonious coordination is struck among the various teams.

Merits

It facilitates practical decision-making and implementation.
Decisions are taken unanimously and not by an individual.
It eliminates traditional scalar chains of command for getting approvals.
The relationships and communication between employees improve.
If one employee in the team fails to work, the other can take his place.
It enables the heads to staff resources which complement each other.

Demerits

There is very less contact with teams of other functions.
If teams undergo constant changes and alterations, it can affect work.
Each team contributes on its own and may not be in alignment with the organizational goals.
Team members need to be proactive and incorporate better project management.
The need for an effective leader can be felt.
As decisions are given by many people, they may take a long time.

6. A Few More Organizational Structures

Entrepreneurial Structure - The authority of such organizations oftentimes is heavily centralized and lies with one person. It only comprises two to three vertical levels and the duties of the employees overlap. It is suitable for small or new organizations where the decision of one person matters the most. It also exhibits easy responsiveness and adaptability to change in the business environment.
Horizontal Organization Structure - It is also known as a flat structure. In this type, there is absolutely nil or very less interference from the senior management which allows the employees to conduct their tasks smoothly. Employees are also involved in the decision-making process. As it eliminates the need for middle management, it contributes towards giving a quick response to customer feedback. However, it may not be applicable and practical for big organizations.
Vertical Organization Structure - It relies on the middle management to monitor and control the work of the employees. These structures have well-defined roles and responsibilities for the employees. Hence, delegating tasks to the employees becomes easier. It requires a strong leader at the top of the hierarchy as he is the one to take all the decisions. As a hierarchy exists, it ensures that the work is done in a disciplined manner.
Mechanistic Structure - This is the most formal and the strictest kind of structure with a clear distinction in the hierarchy and roles. Hence, these structures are vertically oriented. The hierarchy of the authority is well defined. Decision-making rests in the hands of the senior management. As a lot of bureaucracy is involved in these structures, the leaders find it difficult to deal with competition. Also, innovation oftentimes is hampered due to red-tapeism. Employees work separately and are specialists of a task.
Organic Structure - It is the exact opposite of a mechanistic organizational structure. In an organization following the organic structure, the authority is delegated and is decentralized. Hence, communication takes place laterally. There is a lot of flexibility in this type of an organization. Employees generally work together and coordinate different tasks. They are highly flexible to adapt to the changes in the external business environment.
Post-bureaucratic Structure - This is a structure that is not bureaucratic in nature while bureaucratic organizations are too controlled, post-bureaucratic ones offer more freedom to the employees. Though there is hierarchy, the leaders are open to new ideas. The decisions are taken after discussion and consensus is not dependent on hierarchy. This encourages employee participation, trust, personal treatment, responsibility and empowerment. This type of structure is often used in housing cooperatives and non-profit organizations. It also incorporates techniques like total quality management (TQM) and culture management.

Now that you know about the various organizational structures, implement the right one based on its applicability, advantages and disadvantages. It is important to find an organizational structure that works best for the organization as a wrong setup can hamper functioning and be detrimental to organizational success.

FAQs

Four Basic Elements of Organizational Structure

Functional Structure - People who do similar tasks, have similar skills and/or jobs in an organization are grouped into a functional structure. The advantages of this kind of structure include quick decision making because the group members are able to communicate easily with each other. People in functional structures can learn from each other easier because they already possess similar skill sets and interests.
Divisional Structure - In a divisional structure, the company will coordinate inter-group relationships to create a work team that can readily meet the needs of a certain customer or group of customers. The division of labor in this kind of structure will ensure greater output of varieties of similar products. An example of a divisional structure is geographical, where divisions are set up in regions to work with each other to produce similar products that meet the needs of the individual regions.
Matrix Structure - Matrix structures are more complex in that they group people in two different ways: by the function they perform and by the product team they are working with. In a matrix structure the team members are given more autonomy and expected to take more responsibility for their work. This increases the productivity of the team, fosters greater innovation and creativity, and allows managers to cooperatively solve decision-making problems through group interaction.
Project Organization Structure - In a project-organizational structure, the teams are put together based on the number of members needed to produce the product or complete the project. The numbers of significantly different kinds of tasks are taken into account when structuring a project in this manner, assuring that the right members are chosen to participate in the project.