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7 Types of Organizational Structures +examples, Key Elements - Whatfix

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Digital Transformation

7 Types of Organizational Structures


+Examples, Key Elements
Published March 15, 2022 Updated: June 6, 2024

Hiring skillful employees is only the first step towards


building a high-performing organization. You need to
make every team member fit in. You need a clear
organizational structure.

Large enterprises require an established, organized


structure to coordinate large numbers of employees
and avoid chaos. But smaller businesses and startups
rarely think of designing an organizational structure in
the first place.

This lack of structure leads to miscommunication, work


delays, poor process flows, low morale, and other
serious consequences that stunt business growth. In
contrast, a strong organizational structure helps to
coordinate teamwork, reduce conflicts, and boost
productivity.

How do you build one? What’s the right type of


structure for your company? Read on to learn more.

What are the common


types of organizational
structures?
1. Functional structure
2. Divisional structure
3. Matrix structure
4. Team structure
5. Network structure
6. Hierarchical structure
7. Flat organization structure

What Is Organizational
Structure?
Organizational structure is the backbone of all the
operating procedures and workflows at any company. It
determines the place and the role of each employee in
the business, and is key to organizational development.

A clear structure allows every team member to be


involved. When employees know what they’re
responsible for and who they report to – which isn’t the
case in many fast-growing companies – they’re more
likely to take ownership of their work.

To build an org structure, you need to consider your


business size, life cycle, goals, and positioning. Apart
from considering the current environment your
company operates in, you should also think of where
you want to see the organization in five years – as its a
pillar of organizational health.

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Basic Elements of
Organizational Structure
Design
An organizational structure is based on a range of
elements, including:

Work specialization

Departmentation

Chain of command

Span of control

Centralization/Decentralization

Formalization

Work specialization

Work specializations define how responsibilities are


split between employees based on the job description.
It’s used to split projects into smaller work activities
and assign digestible tasks to individual employees. The
most common results of improper specialization are
low efficiency and burnout.

Documentation

Documentation is an act of grouping specialists on the


basis of the job description, skills, location, or other
factors that connect them.

The biggest challenge is choosing the criteria for


departmentation. In many cases, it’s no more enough to
apply functional departmentation – where employees
are grouped based on the tasks they perform. Startups
often go for matrix departmentation that involves
combining two types of departmentation and takes the
best out of both worlds. For instance, functional
departmentation can be joined by geographical
departmentation to better serve clients in different
locations.

Chain of command

Chain of command represents a system for passing


instructions and reporting within an organization.
Ideally, it distributes the power, supports knowledge
sharing, and encourages employee accountability.

The traditional chain of command makes decision-


making more complex and does not allow for much
flexibility. On the contrary, modern approaches strive to
enhance employee autonomy and avoid
micromanagement.

Span of control

Span of control regulates the number of direct


reporters managed by a single supervisor. It heavily
depends on the three aforementioned elements of
organizational structure. Furthermore, to identify the
right span of control, you need to evaluate your leaders’
capacity, workplace size, and experience level of
employees.

Centralization and decentralization

Centralization and decentralization are the concepts


defining how managers, as well as employees, give input
on company goals and strategy. While centralization
gives leaders the ultimate control over decision-making
processes, decentralization allows employees to impact
business decisions. We’ll dive into centralized and
decentralized organizational structures in the further
section.

Formalization

Formalization determines to which extent business


processes, policies, and job descriptions are
standardized. It may regulate communication between
employees and managers, workplace culture,
operational procedures, etc.
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Centralized vs. Decentralized


Organizational Structures
Back to centralization and decentralization. When
designing an organizational structure, you’ll need to
choose a side. Do you want to implement top-down or
bottom-up management?

Centralized organizational structure

As has been said, in a centralized organizational


structure, decisions are made by top managers and are
distributed down the chain of command.

For sure, the structure has a range of advantages. It


ensures greater control over business processes. But
most importantly, it only includes highly experienced
professionals that are able to foresee the effect of
decisions made in the long run.

The biggest drawback of a centralized organizational


structure is the amount of time the decision-making
process takes in large companies. Imagine a customer
support manager being asked to implement an
exclusive package for a high-ticket customer. To get
permission, they’d need to run the request up the chain
of command and wait for it to be processed by top
management. When the request is approved, a high-
ticket customer might no longer be there.

Decentralized organizational structure

To avoid this issue, large organizations turn to


decentralization. In a decentralized structure, lower-
level employees pinpoint issues and make decisions
before communicating it to upper management.
Greater autonomy not only empowers employees but
also eliminates process delays, which are common for
centralized systems.

However, decentralization also brings coordination


challenges and higher expenses.

Often, it’s recommended that early-stage startups and


small businesses go after a centralized organizational
structure. Fast-growing companies and enterprises
usually choose a decentralization framework.

Organizational Structure

7 Types of Organizational
Structures
The key purpose of any organizational structure is to
make the processes more straightforward. However,
there are many ways to achieve that.

Let’s look into the seven common types of enterprise


organizational structures to help you decide how you
want to develop your company and its various
departments and teams.

1. Functional structure

A functional structure groups employees into different


departments by work specialization. Each department
has a designated leader highly experienced in the job
functions of each employee supervised by them.

Most often, it implements a top-down (centralized)


decision-making process where department managers
report to upper management. Ideally, leaders of
different teams communicate regularly and coordinate
their strategies while lower-level employees have little
idea of the processes taking place outside their
department.

The main challenge companies with a functional


structure face is the lack of coordination between
departments. Employees may lose the larger company
context when focusing on very specific tasks and failing
to interact with members of other departments.

To create a functional organizational structure that


works, you’ll need to train leaders to foster collaboration
across departments.

Examples of organizations with a functional


structure include: Amazon, Starbucks.

Pros

Scalable.

Operational efficiency.

Encourages employees to specialize their skillsets.

Empowers employees to focus on their specific role


and responsibilities.

Empowers teams and departments with clear, specific


goals that they can work towards.

Cons

2. Divisional structure
A divisional structure organizes employees around a
common product or geographical location. Divisional
organizations have teams focused on a specific market
or product line.

Examples of companies applying a divisional structure


are McDonald’s Corporation and Disney. These brands
can’t help but split the entire organization by location
to be able to adjust their strategies for audiences
representing different markets.

These smaller groups are relatively independent and


mainly follow a decentralized framework. Still, the
leaders of each department are likely to operate under
centralized corporate management. It means that
company culture is dictated by top management, but
operational decisions can be made by each division
independently.

Giants such as McDonald’s and Disney also add


functional units to their structure for better control.

Examples of organizations with a divisional structure


include: Disney, GM, McDonalds.

Pros

Understand individual markets better.

Promotes flexibility.

Faster responses to changes or needs that are locality


or regional-based.

Autonomous approaches lead to team


experimentation and allow organizations to test
multiple strategies, driving innovation.

Cons

3. Matrix structure

Within a matrix organizational structure, team members


report to several managers at once. Wait, what’s the
point?

Having multiple supervisors allows for company-wide


interaction and faster project delivery. For instance,
when answering to functional managers and project
managers, employees have a chance to collect
experience outside their team. While functional
managers can help to solve job-specific issues, project
managers can bring in knowledge or talents from other
departments.

If you go after a matrix organizational structure, you’ll


need to find a way to avoid authority confusion and
prevent conflicts between managers.

Examples of organizations with a matrix structure


include: Caterpillar, Phillips, Texas Instruments.

Pros

Flexibility to pull employees into more important


projects at will.

Empowers employees to build and test skillsets


outside of their pre-determined roles.

Faster project deliverables.

Cons

4. Team structure

A team-based organizational structure creates small


teams that focus on delivering one product or service.
These teams are capable of solving problems and
making decisions without bringing in third parties.

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