Is your company’s current organizational structure the best option for reaching its goals? Company hierarchy is a critical component to operating a business efficiently, and modeling a successful organizational structure allows a company to lay out the relationships, roles, and responsibilities across the various levels of management and for all of its employees. There is no one-size-fits-all approach to running a company, and that is reflected in this organizational structure chart, created by the team at Cloud Peak Law Group, that explores the ten different ways a company can be structured internally. Each of the ten organizational structures types we’ve illustrated in this business guide has its own set of advantages and disadvantages to take into consideration when you’re deciding on the best way to structure your business. Factors like the size of the company, the industry it’s in, if employees have specialized skills, or if there are multiple office locations are all important things to consider when it comes to choosing the right organizational structure. Read on to learn more about the ten different ways that a business organization can be structured for success.Click the image to expand
What Is an Organizational Structure?
An organizational structure outlines the chain of command and the flow of information throughout a company. It is used to define the different levels of management and the decision-making authority of each employee within the company. There are ten types of organizational structures that are commonly used in business, each of which has a specific leadership hierarchy that companies can emulate. Each of the organizational structure types comes with its own advantages as well as potential disadvantages. You’ll find that some of the business structures encourage communication across multiple departments, while others may hinder it. Certain business models allow departments and employees to be flexible as the company works toward a common goal, while others are more rigid and department-focused.
10 Types of Organizational Structures
- Hierarchical Organizational Structure
- Functional Organizational Structure
- Matrix Organizational Structure
- Horizontal (or Flat) Organizational Structure
- Divisional Organizational Structure
- Network Organizational Structure
- Team-Based Organizational Structure
- Process-Based Organizational Structure
- Line Organizational Structure
- Circular Organizational Structure
What Are the Most Common Types of Organizational Structures Found in Business?
There are several organizational structure types that are more commonly found to be used in businesses. One common type of organizational structure is the hierarchical structure. In the hierarchical organizational structure, the power to make decisions flows from the top to the bottom through multiple levels of management. It is a common organizational hierarchy found in business, as its format is well-suited for companies of any size and in any industry.
The functional organizational structure is another model that is often used to organize a company’s leadership flow. Its centralized structure is similar to that of the hierarchical structure, although each department is more self-sufficient, with a manager who has a greater authority to make decisions within their department. A functional structure works well for companies that have several large departments. With so many employees having to report to a department manager, this business organizational structure allows each department to be more self-sufficient and innovative.
What Is the Difference Between a Centralized and Decentralized Organizational Structure?
The main difference between a centralized and decentralized organizational structure is where the authority to make decisions lies. A centralized organizational structure relies heavily on top-down leadership, with one person or an executive team in the organization responsible for making the major decisions. One example where the centralized company structure is commonly found is in small businesses, where one person makes the decisions, which are then easier to implement with a smaller workforce. In a decentralized organizational structure, the authority to make decisions is spread among several managers, departments, and even lower-level employees. An example of this type of organizational structure is a franchise chain where each franchise owner is able to run their store independently and make their own decisions about things like staffing, compensation, and hours of operation.
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The 10 Types of Organizational Structures
1. Hierarchical Structure
A hierarchical structure is the most common type of organizational structure. It is often visualized as a pyramid with multiple levels of leadership. The chain of command starts with the top position and flows downward through multiple levels of management. Each employee, aside from the top level, will have a supervisor.
- Levels of authority and responsibility are clearly defined.
- Encourages employee development and offers opportunities for promotion
- Cultivates a strong relationship among employees on the same team
- Increased bureaucracy can slow innovation or changes.
- Collaboration between departments can be limited.
- Employees may prioritize the interests of their department over those of the whole company.
2. Functional Structure
A functional structure is divided into multiple departments that each have specific responsibilities or skills, with the head of each department reporting directly to the top position.
- Encourages specialization and skill development
- Employees can focus on their role and responsibility.
- Allows each department to be innovative and self-sufficient
- Can be scaled to fit any size of company
- Limits communication between departments
- Creates barriers between functions
- Lessens collaboration and innovation
3. Matrix Structure
The matrix organizational structure resembles a grid that consists of a traditional hierarchy where employees with shared skills report to the same department, but they also report to a project that manages employees across different departments for special projects.
- Projects can choose the best employees for each task.
- Offers a flexible work environment where employees are encouraged to use their skills in different capacities
- Promotes communication and shared responsibilities across the company
- Increases the efficiency of organizational dynamics
- The organizational structure is prone to more changes.
- Could lead to conflict between departments and projects
- It can be difficult to track budgets and resources.
4. Horizontal (or Flat) Structure
The horizontal (or flat) structure eliminates middle management levels and instead has just one level that separates the employees from the top position. The employees have more responsibility and equal power without the usual hierarchical structure. This structure is often found in small startup businesses before they become big enough to build out their departments.
- Gives employees more independence and responsibility
- Promotes more communication and interaction between employees
- The decision-making process is faster and more straightforward.
- New ideas can be coordinated and implemented quicker.
- Can lead to confusion without a clear supervisor to make decisions
- Reporting procedures may not be consistent across the company.
- Employees may have more generalized skills rather than developing specialized skills.
- The structure can be difficult to maintain as the company grows.
5. Divisional Structure
With a divisional structure, organizations are broken down into divisions that each has its own leadership, departments, and resources. Each division essentially operates like its own company within the larger organization; they are often separated by market, products, or territories. This structure works best for larger companies, especially those in manufacturing industries.
- Each division can make its own decisions independently.
- Changes can be made quicker without having to go through many levels of approval.
- Large companies are able to be more flexible within different divisions.
- Allows for a customized approach to customers’ wants and needs
- Promotes a more focused approach to products, markets, and territories
- Lessens communication and interaction between different divisions
- Increases the risk of accidentally duplicating resources
- Competition across divisions rather than uniting the company as a whole
6. Network Structure
A network structure does not have a hierarchy; instead, a central organization works with various external organizations in different locations. It organizes the relationships between the departments in the core organization with those of other locations and their teams of freelancers and other third-party companies that tasks are outsourced to. This structure is typically found in large multi-city or international companies.
- Allows the organization to be flexible and agile
- Encourages communication and collaboration
- Lower costs through outsourcing
- Clearly outlines the workflow process
- The complexity of the structure can be difficult to manage as it grows.
- Employees may be confused about which department has final say in decisions.
7. Team-Based Structure
A team-based structure groups employees into skills-based teams to work on specific tasks that share a common goal. This flexible structure allows employees to collaborate with different teams on various projects as needed.
- Gives employees the power to make decisions with minimal management
- Puts more value on experience rather than seniority
- Increases productivity, performance, and transparency across the company
- Promotes growth and flexibility
- A lack of leadership roles may lead to confusion and conflict.
- Lessens the ability for upward movement, which may disincentivize employees from working harder to be promoted
8. Process-Based Structure
A process-based structure is organized based on the flow of the processes and moves from left to right instead of top to bottom. With this structure, each process cannot start until the one before it is completed. Each department is a step in the process and has its own supervisor, while the top position in the company oversees all of the different processes.
- Promotes teamwork within the departments as well as between departments
- Improves speed and efficiency
- Able to adapt quickly to market changes
- One department may become frustrated if another department has a slow process.
- Could create barriers and limit communication between departments
9. Line Structure
A line structure is one of the simplest organizational structures, with the authority flowing in a line from top to bottom, and does not include any specialized or supportive services. The top position oversees the different departments, and each department head supervises the employees within it. Each department works independently toward a common goal of the organization.
- Provides clear lines of authority and responsibilities
- Effective communication and a stable environment
- Able to adapt quickly to changes within the organization
- Limits specialization and innovation
- Structure is rigid and not flexible
10. Circular Structure
A circular structure has a hierarchy, but it differs in its ideology. The leaders are seen as being at the center of the circle sending orders outward rather than down the chain of command. The different departments are seen as being part of the same whole instead of separate, which allows ideas to be shared between different levels of the organization.
- Encourages communication across all departments and employee levels
- Promotes collaboration between departments
- Allows for free flow of information across the organization
- Confusion over who employees should report to
- New employees may be confused by the flow of information.
- Requires additional training and resources
- The decision-making process may be slowed down.