Organizational Structure Types

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on June 08, 2023

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What Is an Organizational Structure?

An organizational structure is a workflow system that outlines how activities such as task allocation, coordination, and supervision are directed to achieve an organization’s goals.

An effective organizational structure is essential to any business, providing structure, clarity, and direction. It defines individual roles and responsibilities and promotes smooth communication. It also enhances collaboration, which leads to greater performance and efficiency.

Centralized vs Decentralized Organizational Structures

Organizational structures can be centralized or decentralized, depending on how power and decision-making authority are allocated within a company or organization.

Decision-Making

In a centralized organizational structure, decision-making power is concentrated at the top of the hierarchy and implemented through a clear chain of command. This means that a small group of individuals hold the authority to make decisions and issue directives.

On the contrary, a decentralized organizational structure distributes decision-making power and authority across the different levels and departments. Individuals or teams make decisions at various hierarchy levels rather than being centralized at the top.

Communication

Communication and information in a centralized organizational structure flow from the top down, with lower-level employees responsible for implementing decisions made by upper management.

Communication and information flow in a decentralized organizational structure can occur in any direction, allowing for greater employee collaboration and feedback.

Flexibility

Centralized organizations typically have less flexibility and limited employee engagement due to decision-making concentrated on the top management.

However, with decision-making distributed throughout the organization in a decentralized organization, there is improved collaboration and innovation.

Centralized vs Decentralized Organizational Structures

Key Elements of Organizational Structures

The effectiveness of an organizational structure heavily depends on the design and implementation of its key elements, which include:

  • Job Design - This involves breaking down complex tasks into smaller, more manageable ones that can be assigned to individual employees or teams.

This ensures that employees can focus on their specific roles and become highly skilled in their specialization.

  • Departmentalization - The process of grouping employees into functional areas such as marketing, operations, finance, and human resources, among others.

This ensures that employees with similar skills and expertise are grouped and can work together more effectively.

  • Chain of Command - It defines the flow of authority and responsibility from top-level management to front-line employees.

It establishes clear lines of communication, minimizes confusion, and ensures that everyone knows who they report to and who reports to them.

  • Span of Control - This refers to the number of employees that report to a single manager or supervisor.

This manages employee performance, facilitates decision-making, and ensures that employees receive appropriate supervision and support.

  • Delegation - This refers to the degree to which decision-making authority is delegated to lower levels of an organization. This balances the need for control and coordination with innovation and flexibility.

Types of Organizational Structures

There are several different types of organizational structures that businesses can adopt.

Vertical Structure

This is an organizational structure where the chain of command runs vertically from top to bottom. This means that decision-making power and authority flow from the top management down to the lower levels of the organization.

The vertical organizational structure has some drawbacks, including slow and inefficient communication. This can cause delays in decision-making and may impede innovation.

It can also create a rigid and inflexible organization that may struggle to adapt to changes in the market.

There are two types of vertical organizations: functional and divisional structures.

Functional Structure

In this structure, employees are grouped based on their specialized skills or functions. Each functional area is headed by a manager who oversees the work of their respective employees.

It allows employees to work with others with similar expertise, improving productivity and performance. It also ensures that work is standardized across the organization and can lead to cost savings through economies of scale.

Divisional or Multidivisional Structure

The divisional structure, or multidivisional structure, is a type of organizational structure that groups employees based on products, projects, or subsidiaries.

Each group has its functional area, such as marketing, finance, and operations. They operate independently and have their own set of goals, strategies, and decision-making authority.

Team-Based Structure

In this structure, employees are organized into teams or work groups based on their skills or functions, and each team is responsible for a specific project or area of the organization’s operations. Each unit has both leaders and workers who work collaboratively.

This structure allows for a more flexible and adaptable organization. Teams can be formed or disbanded as needed to respond to changes in the market or industry. This can lead to improved responsiveness to customer needs and changes in the competitive landscape.

However, the team-based structure also has its disadvantages. One of the main drawbacks is that managing and coordinating teams effectively can be difficult. This can lead to duplication of effort, a lack of consistency in work quality, and potential conflicts among team members.

Flat (Flatarchy) Structure

In a flat structure, decision-making is decentralized, and almost all employees have equal power to take the initiative and be creative in their work. This can lead to a more dynamic and responsive organization.

However, flat structures can also pose challenges to management, as there may be a lack of clear hierarchy and authority. Without well-defined roles and responsibilities, confusion and overlap may occur. This may lead to inefficiencies and conflicts.

A flat structure may be most effective for small to medium-sized organizations or teams prioritizing flexibility, collaboration, and innovation.

Matrix Structure

A matrix structure is a hybrid of functional and divisional structures that creates a dual-command system. In this structure, an employee may have two managers who share responsibility for his performance.

Typically, one manager works in an administrative function such as finance, human resources, or sales. At the same time, the other manages a business unit focusing on a product, service, or geographic region.

It encourages collaboration and cross-functional communication, as employees from different departments work together to achieve specific goals.

Network Structure

A network structure is an organizational structure in which a central hub works with a network of outside partners, suppliers, and vendors to deliver products or services. The network may comprise third-party vendors, freelancers, and other external partners.

This allows for a higher degree of flexibility, as the central hub can quickly bring new partners into the network as needed and adapt to changes in the market or industry.

However, managing a network structure can be difficult, requiring effective communication and coordination among diverse network partners.

Circular Structure

Circular structure is an organizational structure with no clear hierarchy or chain of command. Employees are organized into self-managing teams, each with their areas of responsibility and decision-making power. These teams work together to achieve the organization's goals.

Communication in a circular structure is often more open and transparent, with information flowing freely between teams and individuals. This allows for faster decision-making and greater collaboration between employees.

One potential advantage of a circular structure is that it can be more flexible and adaptable to changes in the business environment. Since there is no rigid hierarchy, decisions can be made more quickly, and the organization can respond more rapidly to new opportunities or challenges.

Benefits of Organizational Structures

Well-designed organizational structures provide several benefits to companies, including:

Establishes Hierarchy

Organizational structure establishes hierarchy by defining the roles, responsibilities, and reporting relationships of employees within a company. This hierarchical structure helps to create clear lines of authority and communication within the organization.

A clear hierarchy in an organization facilitates streamlined decision-making, enabling managers and executives to make prompt and effective decisions without the need for lengthy discussions or consensus building.

Clarifies Job Roles

Organizational structures are designed to define and clarify job roles within the company. This enables employees to comprehend their responsibilities, the expectations of their positions, and their contribution toward the organization’s broader objectives.

Organizational structures help managers to monitor and assess employee performance by clearly understanding each employee’s job responsibilities.

This enables managers to offer feedback and support, empowering employees to enhance their performance and achieve their goals.

Enhances Communication

Clear lines of communication are established through organizational structures, which can reduce confusion and misunderstandings. This enables employees to work together more efficiently, make decisions more quickly, and ultimately achieve better results.

Communication is enhanced when the organizational structure encourages collaboration and teamwork. For instance, matrix organizational structures enable employees to work in cross-functional teams, leading to a greater exchange of ideas, information, and expertise.

Sets Pay Structure

Organizational structures typically involve creating job descriptions and assigning job titles and levels. This allows for a more structured approach to compensation, where employees are compensated based on their level of responsibility, experience, and qualifications.

By establishing a clear pay structure, employees can better understand what they can expect to earn, increasing job satisfaction and reducing turnover. It can help attract and retain talented employees and promote fairness and equity within the organization.

Enhances Operational Efficiency and Effectiveness

By defining roles and responsibilities, establishing clear communication channels, and streamlining workflows, organizational structures can help eliminate redundancies, reduce errors, and boost productivity.

Furthermore, having a well-designed organizational structure makes it easier to identify areas for improvement and optimize processes, resulting in better overall performance and increased profitability.

Challenges of a Poorly Aligned Organizational Structure

A company with a poorly aligned organizational structure may experience several challenges. These are the following:

Structural Gaps

When companies remove middle management levels without eliminating the work, employees may be forced to assume additional responsibilities. This may lead to structural gaps in roles, work processes, and essential information flows.

Structural gaps can also lead to a lack of accountability and ownership, as employees may not know who is responsible for specific tasks or outcomes.

Diminished Capacity, Capability, & Agility Issues

The elimination of middle management levels may result in diminished company capacity, capability, and agility.

This may occur when lower-level employees, who take on additional responsibilities when middle management is eliminated, may not possess the necessary skills to perform the required duties.

This may also happen when higher-level executives assume tactical responsibilities. This may affect their capacity to provide strategic guidance.

Disorganization & Improper Staffing

A poorly aligned organizational structure results in disorganization and improper staffing. Inadequate staffing levels can lead to decreased productivity and efficiency, ultimately affecting the company’s ability to compete effectively in the marketplace.

When an organization is understaffed, employees often focus solely on their immediate responsibilities, leaving little time or energy to work outside of their scope. This can ultimately result in decreased profitability and cash flow.

Declining Workforce Engagement

When the employees do not feel connected to their work or the larger organizational mission, they may become disengaged and less committed to their jobs. This can lead to decreased productivity, higher turnover rates, and a loss of valuable skills and knowledge.

Declining workforce engagement may also decrease customer loyalty and limit organizational performance and stakeholder value.

Good vs Bad Organizational Structure

Final Thoughts

Organizational structure refers to the workflow system that outlines how task allocation, coordination, and supervision are directed to achieve an organization’s goals. It provides structure, clarity, and direction, and it promotes smooth communication.

Organizational structure can be centralized or decentralized. In centralized organizations, decision-making power is concentrated at the top of the hierarchy, while decentralized organizations distribute decision-making power across different levels and departments.

The key elements of an organizational structure include job design, departmentalization, chain of command, a span of control, and delegation. These elements balance efficiency, control, and flexibility and encourage clear communication, accountability, and employee engagement.

The main types of organizational structure are the vertical structure (which has two types, functional and divisional), team-based, flat (flatarchy) structure, matrix, network, and circular structure.

A well-designed organizational structure establishes hierarchy, clarifies job roles, promotes teamwork, enhances communication, improves efficiency, and increases productivity.

Organizational Structure Types FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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