What Type of Organizational Structure Is Right For Your Company?

Every company needs structure in order to thrive. You can have incredible leaders, qualified talent, and a competitive business plan, yet still struggle to live up to your potential without an intentional operation framework. 

Organizational structure has a huge impact on company culture, and influences both employee retention and performance. Your workforce is more productive, employees communicate more effectively, and everyone understands their roles and expectations. 

So, what is stopping your organization from using company structure to the fullest? 

Well, many companies simply don’t know what kind of organizational structure will fit their business and workforce best. What should startups focus on? What about if you’re a small business? How responsibilities are divided up, how employees communicate, and even how decisions are made throughout the entire company all depend on organizational structure. This in-depth overview will help you discover the best type of organizational structure for your company and your workforce. 

What Is Organizational Structure?

Organizational structure is exactly what it sounds like: a system that outlines an organization’s function and leadership that’s designed to increase workplace productivity and efficiency. Structure defines the rules, roles, and responsibilities within the company, determining employee experience and influencing company growth.

When you’re trying to determine which structure to use, you must consider how many managers there are, who they oversee and lead, how they lead, and how they fit in with other leaders in the organization. You also have to take into account the way your company directs the operations of your workforce to achieve your business goals.

At its core, organizational structure determines who does what in order to meet company objectives. How are positions created, and how does each role fit within the chain of command? How are responsibilities distributed among departments and teams? How are different jobs defined and then incorporated into your organization’s system? The structure of your organization affects every part of your workflow and every employee.

Elements of Organizational Structure

Because the organizational structure shapes the function of your company, it impacts your business in dozens of ways. We’ve narrowed down some of the fundamental aspects of organizational structure that you should understand when trying to figure out the best setup for your corporation.

• Chain of Command. The most obvious part of your business that an organizational structure should address is who reports to who. You must have an established line of authority to improve communication and delegate the many tasks of your company. The chain of command helps everyone know just how issues, requests, and proposals are handled and brought to the company’s attention.
• Departmentation. Organizations tend to group people that have similar roles and responsibilities so that everyone has the support and training they need to keep things running. A good structure improves communication not only within a department but interdepartmentally, too. Everyone in your organization, especially leaders, needs to understand how each department connects to everything else and the overall business objectives.
• Span of Control. The span of control indicates the reach of authority or responsibility of a manager or a department. For a manager, their span of control is about who falls under their management. For a department’s span of control, it’s about what tasks fall to them. A well-defined span of control helps companies avoid double work and lost productivity, and also reveals potential gaps in your structure.
• Centralization. Finally, there is centralization, which describes how and where specific decisions are made on the chain of command. Who has a say in decision-making from department to department? The more centralized your structure, the more that final decisions fall to one or two entities. Decentralized structures allow final decisions to be made from team to team or within each department, placing more emphasis on individual agency.

Centralized vs. Decentralized Organizational Structures

Let’s explore how centralized and decentralized frameworks differ. 

Centralized organizational structures rely heavily on a clear chain of command and offer clarity for specific roles, too. It’s easy to understand who you report to and employees often default to the decision-making of superiors. The military, for example, functions in a very centralized organizational structure with a defined hierarchy of authority responsible for subordinates.

Decentralized organizational structures have been growing in popularity, especially among startups. These types of enterprises focus less on firm hierarchies and more on individual and agile decision-making. This tends to make companies more adaptable and autonomous from department to department since it doesn’t require as much approval and guidance from “higher-ups.”

There isn’t anything inherently wrong with either of these elements of organizational structures. Each has pros and cons when it comes to operations, culture, and the employee experience, so it’s a matter of deciding which works best for your organization’s work and scale.

Types of Organizational Structures

The type of organizational structure you select for your company should support the goals of your organization and the culture you want to cultivate. If, for example, you want to encourage your employees to be more independent and have greater control over the work they do, you’ll lean towards decentralization. Some types focus on teams, others focus on fulfillment, and some prioritize creativity over consistency. 

Here are the most common types of organizational structures that your company will likely fall under.

Matrix Structure

A matrix organizational structure uses a dual-command framework where an employee will report to two managers who are both responsible for the employee’s work and performance. One manager tends to deal with more administrative functions, such as HR, sales, marketing, and finance, while the other manager is in the weeds with the product, service, customers, etc.

The pros:

• Minimizes costs since key people can take on different roles.
• More balance between time of completion and cost.
• Greater emphasis on the work being done over micromanagement.

The cons:

• Difficult for employees to know who they should come to with concerns.
• Two supervisors must coordinate and cooperate on management, such as priorities, standards, or conflicts.
• Added stress on employees when dealing with two managers with conflicting priorities or instructions.
• Unclear governances and span of control.
• Too much time is spent coordinating between managers.

The matrix structure is one of the more confusing structures, though it can work well for project-driven organizations since it provides a lot of visibility for even the most complex companies. It can take a toll on employees since it isn’t always easy to ensure equity and fairness across the board.

Functional Structure

Functional organizational structures are vertical structures, meaning that there is a defined hierarchy from “top to bottom.” In a functional setup, employees are separated into groups based on specialization, like departments. It works best if you’re looking for standardization across the organization for specific processes. This is a fairly traditional approach to structure, with departments that specialize in a specific task with separate functions, who all report to their department manager.

The pros:

• Easy to develop expertise.
• Clear and logical chain of command.
• Employees excel at their tasks and only focus on where they are most proficient.

The cons:

• People tend to fall into silos and may not have great interdepartmental communication.
• This structure tends to avoid change, even when certain changes could be beneficial.
• Working with other departments can be limited since people focus on just their specific responsibilities.

Small-to-medium-sized companies can use a functional approach when they want a centralized structure and when the company has clear and separate objectives from group to group.

Divisional Structure

The divisional framework is similar to the functional structure, as it is also a vertical organizational structure. It organizes the company based on output. Instead of dividing things up by traditional departments — like sales, HR, or fulfillment — the divisional structure breaks things up using products, projects, or subsidiaries they operate. Each business unit basically operates as its own company with its own president.

The pros:

• More flexibility and autonomy for each division so each product or entity has a more tailored focus.
• More coordination than a functional organizational structure.
• Easy to share information between specializations while still developing specific skills.
• Quick and customized decision making.

The cons:

• Potentially poor efficiency or duplication of work when different divisions need access to the same resources.
• Less sharing of information, research, data, marketing, and development between different divisions.
• May pay more for each item instead of bulk purchasing across multiple divisions.

This type of organizational structure works best with large companies with a lot of business units. It can also be divided up based on geographic location.

Flat Structure

Flat or flatarchy structure, sometimes called horizontal structure, focuses less on a chain of command and takes a flexible approach to decision-making. As a newer design to organizational structure (and more commonly found in startups), this approach “flattens” what we would consider a vertical hierarchy so that employees have much more autonomy. Everyone, both managers and employees, have a say in the decision-making process.

The pros:

• Easier to leverage the talents and insights of all employees.
• Better adaptation to market trends.
• More cooperation and collaboration between divisions, departments, etc.

The cons:

• Difficult to overcome silos inside the organization.
• Time-consuming decision-making.
• Potential lack of leadership and less cohesive objectives.

These structures can be good options for companies that require a high speed of implementation where status and rank can take the back seat. Ensuring there is still enough leadership and guidance in this structure is a critical challenge to address when using this approach. 

Circular Structure

Circular organizational structures take a unique approach to the hierarchical structure. Higher-level employees and managers are at the center of the organization in the middle-mist ring. Lower-level staff is distributed among concentric rings expanding outward from the center ring. The idea here is that managers and leaders aren’t placed “higher” than other employees or aren’t put in a position that lords over the rest of the organization. Instead, they sit at the center of the organization and “spread” their vision and goals out to the rest of the organization.

The pros:

• Promotes communication and helps information flow freely from division to division.
• Keeps everyone easily aligned in operations and goal-setting.
• Encourages collaboration between departments.

The cons:

• Can have a confusing structure where employees, especially newcomers, don’t understand the hierarchy.
• Not everyone knows where they fit into the organization.

Companies with this structure tend to be more collaborative and inclusive while keeping management more accessible. To protect employees from confusion and to protect your company culture, still define who employees should report to.

Network Structure

Another option for your company is the network organizational structure, which outsources certain functions to third-party vendors or contractors. This means the organization has a fairly small headquarters with other satellite offices in different locations that fulfill certain functions and responsibilities.

The pros:

• Easy to respond to quickly changing environments and markets.
• More flexibility and agility within the organization.
• More power to employees to innovate and collaborate as needed.
• Eliminates any physical boundaries.

The cons:

• Lack of organizational identity and trust between divisions.
• Potential hiccups in communication and standardization.
• Can become too convoluted when coordinating with offsite processes.
• Not always clear on reporting or final decision making.

For companies that can outsource certain processes or functions, a network structure may be a good option. It also tends to foster more creativity and autonomy among employees, so this kind of culture should emphasize and reward innovation and initiative rather than always looking to management for answers.

What Does Your Company Culture Need?

Employees that are supported and given clear expectations can do their job more effectively. This not only makes your business more successful, but also makes your workforce happier and healthier. After all, implementing the right organizational structure is where that support and leadership starts! Higher performance, better internal functioning from top to bottom, and satisfying work experiences for your employees are all possible with the right structure.

As you find the best framework for your business and workforce, you’re creating the foundation needed to achieve an organizational culture. Once that basic structure is established, you can start seeking more ways to offer support to your employees, who deserve a healthy workplace.

Did you know, for example, that one-third of employees are considering changing companies for the sake of their mental health? In addition to a supportive work structure, employees need the right tools to thrive in their roles at work. Set them up for success with Wellhub’ global network of gyms, studios, and apps to maximize their work-life wellness. To learn more about how you can offer better benefits to your employees, talk with a Wellbeing Specialist today!

Resources

• Devaney, Erik. (October 6, 2022). HubSpot. 9 Types of Organizational Structure Every Company Should Consider. Retrieved January 26, 2023 from https://blog.hubspot.com/marketing/team-structure-diagrams.
• Hirsch, Arlene S. (November 29, 2021). Don’t Let Mental Health Support Weaken Post-Pandemic. SHRM. Retrieved January 26, 2023 from https://www.shrm.org/ResourcesAndTools/hr-topics/employee-relations/Pages/Dont-Let-Mental-Health-Support-Weaken-Post-Pandemic.aspx.
• Kenton, Will. (July 26, 2022). Organizational Structure for Companies With Examples and Benefits. Investopedia. Retrieved January 26, 2023 from https://www.investopedia.com/terms/o/organizational-structure.asp.
• Understanding Organizational Structures. (January 5, 2023). SHRM. Retrieved January 26, 2023 from https://www.shrm.org/resourcesandtools/tools-and-samples/toolkits/pages/understanding-organizational-structures.aspx.