What Organizational Structure Is Right for Your SMB? - businessnewsdaily.com (2022)

  • 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.

What Organizational Structure Is Right for Your SMB? - businessnewsdaily.com (1)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.

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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.

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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:

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  • 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.

What Organizational Structure Is Right for Your SMB? - businessnewsdaily.com (2)Tip: In hierarchical or centralized structures, employee monitoring software may be necessary to reach peak productivity. Visit our employee monitoring software reviews page to find the right fit for your company. Or you can start with our full BambooHR review since this brand is our top pick for employee management.

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.

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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.

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Organizational structure

Centralized or decentralized

How it works

Main advantages

Main drawbacks

Hierarchical

Centralized

Chain of command starts with board of directors and flows downward from CEO through a staff director

Higher-quality, more specialized work

Potential lack of independence

Functional

Centralized

Each department head is the staff director

Specialized, self-sufficient teams

Silos departments

Divisional

Centralized

Each product or service team has full autonomy

More autonomous departments

Competition internally rather than externally

Flat

Decentralized

Almost all employees have equal power, with executives perhaps slightly more powerful

More independent, engaged employees

Lack of mentorship or supervision

Matrix

Centralized

Employees can move between departments

Dynamic employees with diverse skill sets

Potential for constant changes and conflicts of interest

Team

Decentralized

Supervisors can borrow from other departments

Productivity, growth and transparency

Employee confusion and disorganization

Network

Decentralized

Organizes relationships across several locations

Clarifies chains of command in large, multilocation businesses

Potentially vague on decision-making processes

Projectized

Centralized

Assemble teams for projects and disassemble teams upon project completion

More urgency, engagement, flexibility and versatility

Potentially stressful for employees, with fewer opportunities for professional development

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.

FAQs

What kind of structure is best for a small entrepreneurial firms? ›

Sole proprietorships are the easiest business structure to form. And, they have the least amount of government regulation. Partnerships are also relatively easy to form. You can start a partnership with as little as a handshake.

Which type of organizational structure is best for a company? ›

A traditional line organizational structure is truly the place to start for most companies, especially the smaller ones that don't necessarily comprise a vast number of departments or require a major number of links in the chain of command/communication.

What are the 4 types of organizational structures? ›

The four types of organizational structures are functional, multi-divisional, flat, and matrix structures.

What kind of an organizational structure is best suited for a smaller organization? ›

Flat Organizational Structure

A flat organization has either very few or no levels of middle management at all. That means you could potentially find junior employees directly below the executive level. Of course, this is a structure that makes more sense for startups or smaller organizations.

What is the most common structure for a small business? ›

Sole Proprietorship

A type of business entity that is owned and run by one individual – there is no legal distinction between the owner and the business. Sole Proprietorships are the most common form of legal structure for small businesses.

How do you develop an organizational structure for a small business? ›

The process for creating an organizational structure
  1. Plan the future. ...
  2. Consider the past. ...
  3. Build your organizational structure. ...
  4. Fill in the people. ...
  5. Balance authority and responsibility. ...
  6. Fill in employee data and metrics. ...
  7. Practice robust performance management of employees. ...
  8. Review your organizational structure annually.

What is the most important organizational 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.

Which organizational structure is the most widely used? ›

Functional organizational structure is the most common organization structure companies use. This popular model groups people into teams and departments based on specific functions.

What is the best organizational structure for a startup? ›

In general, most of the startups have adopted a flat organizational structure in the early years which turns out to be a good result. They expand three to four times faster than their competitors with complex layers of management.

What is a simple organizational structure? ›

Also known as the flat structure, the simple organizational structure doesn't have multiple layers of management or formal departments. Instead, a simple organizational structure usually has one owner that delegates tasks to employees directly.

What are the different types of organizational structure and give example? ›

7 Types of Organizational Structures
  • Functional structure. A functional structure groups employees into different departments by work specialization. ...
  • Divisional structure. ...
  • Matrix structure. ...
  • Team structure. ...
  • Network structure. ...
  • Hierarchical structure. ...
  • Flat organization structure.
15 Mar 2022

Which type of organizational structure would you recommend to the local bank in your area? ›

Answer and Explanation: Divisional structure by product will be the best strategy for a local bank.

Why do most small companies use functionally organized departments? ›

Functional organizational structure is best for smaller companies or those that focus on a single product or service. Not designed to change quickly, functional structure works well in a stable environment where your business strategies are less inclined to need changes or updating.

Why is a company the best business structure? ›

Company. A company structure is ideal when you are looking to grow and scale your business. A company is its own legal entity. Therefore, individual shareholders are only liable for debts or liabilities that the company incurs up to the amount unpaid on their shares (which is commonly zero).

Why is IT important to choose the right business structure? ›

Your business structure affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability. You'll need to choose a business structure before you register your business with the state.

Why partnership is the best form of business? ›

Advantages of a partnership include that: two heads (or more) are better than one. your business is easy to establish and start-up costs are low. more capital is available for the business.

Is there a need to have an organizational structure for a small business Why? ›

Structure will give employees more clarity, help manage expectations, enable better decision-making and provide consistency. Organizational charts also assign responsibility, organize workflow and make sure important tasks are completed on time.

How do you determine organizational structure? ›

How to choose an organizational structure
  1. Review the different organizational structures. ...
  2. Determine the company's strategy. ...
  3. Consider the business' environment, size and age. ...
  4. Review the information. ...
  5. Create a visual chart and make a decision.
23 Nov 2021

What is the organizational structure of a business? ›

Organizational structure is the method by which work flows through an organization. It allows groups to work together within their individual functions to manage tasks.

What are the features of good organizational structure? ›

  • Basic Characteristics of Organizational Structure.
  • Hierarchy of Authority.
  • Span of Control.
  • Line vs Staff Positions.
  • Decentralization.
  • Functional Structure.
  • Advantage: efficiency, communication.
  • Disadvantage: isolation of units.

Why is structure important in life? ›

Having structure in all aspects of your life can potentially help to reduce stress and create a sense of balance in the everyday hustle and bustle. Structure does not always have to be a specific time-table of events (however if that's what works for you, then go ahead!).

Which organizational structure is the most simple and inexpensive? ›

The functional or centralized type structure is most widely used because it the cheapest & simplest among all other alternative organizational structures.

What are the three common types of organisational structure used by companies most often? ›

Three forms of organizations describe the organizational structures that are used by most companies today: functional, departmental and matrix. Each of these forms has advantages and disadvantages that owners must consider before deciding which one to implement for their business.

What are the two most common management structures? ›

A functional structure is arguably the most common type of organizational structure. Divisional structures are used by smaller companies. Finally, small companies with diverse product lines may consider a product structure.

Why is the functional organizational structure so common? ›

Built for organizational efficiency: Large companies often favor functional structures because each department can hum along independently, which leads to greater efficiency. A conflict in one department will not necessarily lead to a bottleneck throughout the company.

What is an ideal organization? ›

An Ideal Organization is productive. The combination of openness, job fit, and other defining characteristics result in an environment where high-quality work is done efficiently. Each employee is working much nearer full capacity and the coordination among employees is highly developed.

Why is organizational structure important in startups? ›

It helps different departments to coordinate, exchange data, and work together to achieve business goals. A team structure also determines how information flows between various teams. A clear startup team structure is essential for the smooth functioning of every business.

What is an entrepreneurial structure? ›

Entrepreneurial structure

This is when the major decisions are made by one or two key personnel. Usually in small businesses this will be the owner or the entrepreneur.

Which organizational structure is best for startups? ›

Flat structure

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.

What are the 4 types of entrepreneurial business? ›

Most often, the types of entrepreneurship are broken into four categories:
  • small business.
  • scalable startups.
  • large company or intrapreneurship.
  • social entrepreneurship.
7 Apr 2022

Is there a need to have an organizational structure for a small business Why? ›

Structure will give employees more clarity, help manage expectations, enable better decision-making and provide consistency. Organizational charts also assign responsibility, organize workflow and make sure important tasks are completed on time.

What type of organizational structure does an entrepreneur employ? ›

An entrepreneurial organization holds regular team meetings to discuss ideas before a decision is made, while a more traditional organizational structure uses meetings of department heads to announce their progress and tell subordinates what has been decided.

What are the main characteristics of an entrepreneurial organisation? ›

Entrepreneurial organizations differ from managerial organizations by their structures and characteristics; they have a specific innovation model, decision/financial model, selection process, human resource management and resources gathering, and utilization scheme.

What are characteristics of an entrepreneurial structure? ›

META's research identifies four key characteristics of the entrepreneurial personality: Creativity, opportunism, proactivity and vision.

What is an ideal organization? ›

An Ideal Organization is productive. The combination of openness, job fit, and other defining characteristics result in an environment where high-quality work is done efficiently. Each employee is working much nearer full capacity and the coordination among employees is highly developed.

Why is organizational structure important in startups? ›

It helps different departments to coordinate, exchange data, and work together to achieve business goals. A team structure also determines how information flows between various teams. A clear startup team structure is essential for the smooth functioning of every business.

What is organizational structure examples? ›

Organizational structure examples of this type include insurance companies, engineering firms, law firms, regulatory agencies, etc. In other words, organizations that need isolated technical advice to assist employees who handle or manage the day-to-day operations on the front line.

What is a common type of small business for entrepreneurs? ›

This, sole proprietorships, is one of the common types of entrepreneurial businesses you would have encountered in your daily lives. Usually, small businesses are categorized under sole proprietorships, but some large entrepreneurial firms can also be sole proprietorships.

What are the types of small entrepreneurship? ›

What are the Different Types of Small Businesses Structures?
  • Partnership. When ownership responsibilities are shared among two or more people, a partnership can be formed. ...
  • Corporation. ...
  • Sole proprietorship. ...
  • Limited Liability Corporation (LLC) ...
  • S-corporation. ...
  • Cooperative.
28 Dec 2018

What are 5 examples of entrepreneurship? ›

Here, we'll discuss the five types of entrepreneurs and how their respective priorities and goals create unique businesses and distinctly affect consumers.
  • Social entrepreneurship. ...
  • Scalable startup entrepreneurship. ...
  • Small business entrepreneurship. ...
  • Large company entrepreneurship. ...
  • Innovation entrepreneurship.
21 Jan 2022

How do you choose an organizational structure? ›

How to choose an organizational structure
  1. Review the different organizational structures. ...
  2. Determine the company's strategy. ...
  3. Consider the business' environment, size and age. ...
  4. Review the information. ...
  5. Create a visual chart and make a decision.
23 Nov 2021

What is the structure of a small business? ›

A small business can use one of three primary organization structure options: functional, divisional or matrix. Essentially, the organizational structure creates a business hierarchy to increase the efficiency and effectiveness of the business operations.

Which type of organizational structure would you recommend to the local bank in your area? ›

Answer and Explanation: Divisional structure by product will be the best strategy for a local bank.

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