What is an organizational structure?

An organizational structure is a system that describes how certain activities are directed in order to achieve the goals of an organization. These activities can include rules, roles and responsibilities.

Organizational structure also determines how information flows between levels within the business. For example, in a centralized structure, decisions flow from the top down, while in a decentralized structure, the decision-making power is distributed among different levels of the organization.

Having an organizational structure in place keeps businesses efficient and focused.

Key points to remember

  • An organizational structure describes how certain activities are directed to achieve the goals of an organization.
  • Successful organizational structures define each employee’s job and how it fits into the overall system.
  • A centralized structure has a defined chain of command, while decentralized structures give almost every employee a high level of personal agency.
  • Types of organizational structures include functional, divisional, flatarchy, and matrix structures.
  • Senior executives should consider a variety of factors before deciding which type of organization is best for their company, including business goals, industry, and company culture.

Understand an organizational structure

Businesses of all shapes and sizes make heavy use of organizational structures. They define a specific hierarchy within an organization. A successful organizational structure defines each employee’s job and how it fits into the overall system. Simply put, the organizational structure defines who does what so that the business can achieve its goals.

This structuring provides a business with a visual representation of how it is shaped and how best to move forward in achieving its goals. Organizational structures are normally illustrated in some kind of chart or diagram like a pyramid, where the most powerful members of the organization sit at the top, while those with the least power sit at the bottom.

Not having a formal structure in place can be difficult for some organizations. For example, employees may have difficulty knowing who to report to. This can lead to uncertainty about who is responsible for what in the organization.

Putting a structure in place can contribute to efficiency and bring clarity to everyone at all levels. It also means that each department can be more productive, as they are likely to be more focused on energy and time.

Centralized or decentralized organizational structures

An organizational structure is either centralized or decentralized. Traditionally, organizations have been structured with centralized direction and a defined chain of command. The military is an organization famous for its highly centralized structure, with a long and specific hierarchy of superiors and subordinates. In a centralized organizational system, there are very clear responsibilities for each role, with subordinate roles being guided by their superiors by default.

There has been an increase in decentralized organizations, as is the case with many tech startups. This keeps businesses fast, nimble, and adaptable, with nearly all employees benefiting from a high level of personal agency. For example, Johnson & Johnson is a company known for its decentralized structure. As a large company with over 200 business units and brands that operate in sometimes very different industries, each operates independently. Even in decentralized companies, there are still typically built-in hierarchies (such as the COO operating at a higher level than a junior associate). However, teams are empowered to make their own decisions and come to the best conclusion without necessarily getting “approval” from above.

Types of organizational structures

Functional structure

Four types of common organizational structures are implemented in the real world. The first and most common is a functional structure. This is also called a bureaucratic organizational structure and breaks down a company according to the specialization of its workforce. Most small and medium-sized businesses set up a functional structure. Dividing the business into departments including marketing, sales and operations is like using a bureaucratic organizational structure.

Divisional or multidivisional structure

The second type is common to large companies with many business units. Called a divisional or multidivisional structure, a company that uses this method structures its management team based on the products, projects, or subsidiaries it operates. A good example of this structure is Johnson & Johnson. With thousands of products and lines of business, the company is structured so that each business unit operates as its own company with its own president.

Structure of flatarchy

Flatarchy, a newer structure, is the third type and is used by many startups. As its name suggests, it flattens the hierarchy and chain of command and gives its employees a lot of autonomy. Companies that use this type of structure have a great speed of implementation.

Matrix structure

The fourth and final organizational structure is a matrix structure. It is also the most confusing and least used. This structure distributes employees among different superiors, divisions or departments. An employee working for a matrix company, for example, may have roles in both sales and customer service.

Benefits of Organizational Structures

Setting up an organizational structure can be very beneficial for a business. The structure not only defines the hierarchy of a company, but also allows the company to lay out the salary structure of its employees. By setting up the organizational structure, the company can decide on salary levels and ranges for each position.

The structure also makes operations more efficient and much more efficient. By separating employees and functions into different departments, the business can perform different operations at once seamlessly.

In addition, a very clear organizational structure informs employees on the best way to do their job. For example, in a hierarchical organization, employees will have to work harder to buy favors or woo those with decision-making power. In a decentralized organization, employees need to take more initiative and creatively solve problems. It can also help set expectations for how employees can track their own growth within a company and emphasize a certain skill set, as well as for potential employees to assess whether such business would fit well with their own interests and working styles.

What are the four types of organizational structures?

The four types of organizational structures are functional, divisional, flatarchy, and matrix structures.

What are the key elements of an organizational structure?

Key elements of an organizational structure include how certain activities are directed to achieve an organization’s goals, such as rules, roles, responsibilities, and how information flows between levels within of the company.

What is an example organizational structure?

An example of an organizational structure is a decentralized structure, which gives individuals and teams a high degree of autonomy without the need for a central team to regularly approve business decisions. Johnson & Johnson is a good example of this decentralized structure. With thousands of products and lines of business, the company is structured so that each business unit operates as its own company with its own president.

What is an organizational chart?

Organizational structures are normally illustrated in some kind of chart or diagram like a pyramid, where the most powerful members of the organization sit at the top, while those with the least power sit at the bottom.

What is the best organizational structure?

There is no best organizational structure, as it depends on the nature of the business and the industry in which it operates.

The essential

There are entire fields of study based on how to optimize and better structure organizations to be the most efficient and productive. Senior executives should consider a variety of factors before deciding which type of organization is best for their company, including business goals, industry, and company culture.