What Organizational Structure Is Right for Your SMB? - businessnewsdaily.com (2023)

• An organizational structure is the group of rules, roles, relationships and responsibilities that outline how your company’s activities are directed to meet its goals.
• There are eight types of organizational structures, each of which is either centralized or decentralized in terms of who has the power.
• Each structure has advantages and disadvantages that you should consider when choosing one for your company.
• This article is for business owners who have employees and are looking to decide the right organizational structure for their company.

Running a business means successfully delegating tasks among your employees. It also means having the final say on all projects or, if your company is on the larger side, hiring people whom you trust enough to give full approval powers. An organizational structure for your business can help you make sense of where and with whom your company’s responsibilities lie, and you have plenty of types from which to choose.

What is an organizational structure?

An organizational structure is a set of rules, roles, relationships and responsibilities that determine how a company’s activities should be directed to achieve its goals. It also governs the flow of information through levels of the company and outlines the reporting relationship among midlevel staff, senior management, executives and owners. It is effectively a hierarchy for a company, though some organizational structures emphasize a near-total lack of hierarchy.

Key takeaway: An organizational structure determines how information, responsibilities and approval will flow within your company.

How many types of organizational structures are there?

In your research, you may at first read that there are two types of organizational structures: centralized and decentralized. However, using just these two classifications for every possible team structure may paint with too broad a brush. That’s why experts have come up with eight types of organizational structures, each of which is either centralized or decentralized:

1. Hierarchical structure (also known as line structure)
2. Functional structure
3. Divisional structure (also known as multidivisional structure)
4. Flatarchy structure (also known as horizontal, or flat, structure)
5. Matrix structure
6. Team structure
7. Network structure
8. Projectized structure

All of these are centralized except for the flat, team and network structures. In a centralized structure, power flows up the chain of command to the executives and owners, whereas decentralized organization structures give far more power to non-executives and non-owners. We’ll get more into how this works in just a moment.

Types of organizational structure to consider for your business

Now that you know the eight types of organizational structures, you’re probably wondering which one is best for your business. The answer, as with many business matters, is that the right choice differs by company. Below, we’ll detail what each organizational structure entails so you can discern which model best fits your ongoing business practices and future business needs.

1. Hierarchical structure

A hierarchical structure, also known as a line organization, is the most common type of organizational structure. Its chain of command is the one that likely comes to mind when you think of any company: Power flows from the board of directors down to the CEO through the rest of the company from top to bottom. This makes the hierarchical structure a centralized organizational structure.

In a hierarchical structure, a staff director often supervises all departments and reports to the CEO. This structure is well suited for any business in any industry.

These are some advantages of a hierarchical structure:

• It clearly defines reporting relationships, project organization and division of authority.
• It details your company’s corporate ladder and promotional structure, thereby encouraging high-quality work.
• It helps to specialize each employee’s work.
• It cultivates stronger relationships among employees within a team.

There are also some drawbacks of choosing a hierarchical structure:

• Bureaucratic hurdles could delay project completion and discourage employees from taking risks.
• It may encourage employees to prioritize their own department and direct supervisors instead of the whole company.
• It can make employees feel like they have no say in how to approach their projects.

2. Functional structure

The functional structure is a centralized structure that greatly overlaps with the hierarchical structure. However, the role of a staff director instead falls to each department head – in other words, each department has its own staff director, who reports to the CEO. Any company with several modestly sized departments may find the functional structure to be a fit.

These are some advantages of a functional structure:

• It helps employees develop specific, specialized roles.
• It boosts individual departments’ and employees’ self-sufficiency and innovation.
• It scales easily to work for companies of all sizes.

These are some disadvantages of a functional structure:

• It doesn’t encourage communication and interaction among different departments.
• It hides key details of departmental processes and strategies from employees outside that department.

3. Divisional structure

The centralized structure, known as a divisional organization, is more common in enterprise companies with many large departments, markets or territories. For example, a food conglomerate may operate on a divisional structure so that each of its food lines and products can have full autonomy. In the divisional structure, each line or product has its own chief commanding executive. Large companies of any sort, but especially in manufacturing industries, are the best fit for this structure.

These are the main advantages of a divisional organization:

• The different departments have some flexibility to operate separately from the company at large.
• It’s more adaptable to customer needs.
• Individual departments have more autonomy and room for innovation.

These are some disadvantages of a divisional structure:

• It risks accidental duplication of resources.
• It encourages poor communication and low interaction among different departments.
• It encourages internal competition across departments rather than uniting the company against outside competitors.

4. Flat structure

A flat structure is a decentralized organizational structure in which almost all employees have equal power. At most, executives may have just a bit more authority than employees. This organizational structure is common in startups that take a modern approach to work or don’t yet have enough employees to divide into departments. That makes flat structures especially well suited to the tech industry, which is home to many small startups with flexible work arrangements.

These are some advantages of a flat structure:

• Employees have more responsibility and independence.
• It improves communication and interaction among employees.
• It’s faster to implement new practices or ideas, with less risk of error.

These are the main disadvantages of a flat structure:

• Employees lack supervision.
• There could be confusion around reporting procedures.
• Employees lack or don’t develop specialized skills.
• It has poor scalability as the company grows.

5. Matrix structure

The matrix structure is a fluid form of the classic hierarchical structure. This centralized organization structure allows employees to move from one department to another as needed. You might encounter this structure in industries home to highly skilled employees who might be their company’s only experts in their field.

These are the main advantages of a matrix organization:

• Supervisors have the flexibility to choose the best employees for a project.
• It allows a dynamic org chart with varying responsibilities for employees.
• Employees have the opportunity to learn and foster skills outside their primary roles.

These are some disadvantages of a matrix organization:

• There could be conflicts of interest between the needs for project organization and department organization.
• The organizational chart is prone to regular changes.

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6. Team structure

A team structure is a decentralized but formal structure that allows department heads to collaborate with employees from other departments as needed. It is similar to a matrix structure, but the focus is less on employee fluidity than on supervisor fluidity, leading to a decentralized functional structure. Any industry in which flat or matrix structures are common might also be home to many companies with team structures.

These are the advantages of a team structure:

• The lack of compartmentalized labor drives productivity, growth and transparency.
• It prioritizes employee experience over seniority.
• It minimizes employee management tasks.

These are some disadvantages of a team structure:

• It could confuse employees, given the potential subversion of traditional executive and lower-level roles.
• It obscures the corporate ladder and may disincentivize employees from working harder to be promoted.

7. Network structure

A network structure is especially suitable for a large, multicity or even international company operating in the modern era. It organizes the relationships not just among departments in one office location, but also among different locations and each location’s team of freelancers, third-party companies to whom certain tasks are outsourced, and more.

While this may sound like a lot for one type of network structure to detail, this decentralized structure can be useful for understanding the human resources your company has on hand. You’ll commonly encounter network structures among distributors, tech companies or logistics companies with international branches.

These are potential advantages of a network structure:

• It improves understanding of how functional roles are distributed among on-site employees, off-site employees, freelancers and outsourced third parties.
• It boosts flexibility for one department or location to delegate tasks to another.
• It drives employee communication, collaboration and innovation.
• It clearly outlines workflows and chains of commands in large businesses.

These are the possible disadvantages of a network structure:

• It’s complex, especially in regard to out-of-office processes.
• It’s vague as to which employee, department or office should make the final decisions.

8. Projectized structure

In a projectized structure, the focus is on one project at a time. In this centralized organizational structure, project managers act as supervisors, not just resource allocators and decision-makers.

Unlike other structure types, a projectized structure involves the demobilization of teams and resources upon a project’s completion. But it’s like other types of organizational structures in that an obvious hierarchy exists. Software development teams may benefit from projectized structures given the complexity that can go into app or website development.

These are some advantages of a projectized structure:

• It fosters more efficient decision-making and communication.
• The sense of urgency around project completion increases employee cooperation.
• It increases employee flexibility and versatility.

These are some disadvantages of a projectized structure:

• The strict deadlines could increase workers’ stress.
• The power might be too strongly centralized with the project manager.
• It lacks the opportunity for long-term skill development among employees.

Below is a chart summarizing the eight types of organizational structures.

Which organizational structure is best?

No one organizational structure is best for all businesses. When determining the right one for your company, think about how much power you would like to give your employees, how much room you would like to leave for innovation, how large your company is and how much interaction among employees matters to you. After weighing these factors, you’ll likely know which organizational structure is best for you – and if you get it wrong, you can always switch to another organizational structure.