Organizational structure is crucial for the smooth running of any business. The best organizational structure provides clarity and engagement for its workers while also maximizing profits for the corporation. The need to meet the demands of others has pushed humans to develop more efficient and effective ways of manufacturing products. This desire led us from small family-run businesses to the industrial age, then the bureaucratic structure.
Today, companies are favoring a more employee-centered organizational structure. Promoting this structure doesn’t mean organizations don’t use other designs. It only means the business’s values, goals, and culture contribute to the organizational structure that suits it best.
This article will highlight the different organizational structures, why identifying the right one is essential, and the elements of it. We would also discuss the best one in this era.
What is an Organisational Structure?
Minterberg defined organizational structure as the “framework of the relations on jobs, systems, operating processes, people, and groups making efforts to achieve the goals.” An organizational structure defines the reporting structure of a company. We must have all experienced this kind of structure when working in any organization. For example, when one is asked to report to a specific manager or if you are a manager and asked to supervise a team and have them report back to you. It’s also the case when starting a new job; the company gives you a job description and a list of activities your role covers. These activities highlight the presence of an organizational structure within a company.
What are the Elements of an Organisational Structure?
Every organizational structure possesses elements that make them work. When setting up your organizational structure, you look at these elements. Taking these elements into consideration helps establish a network that supports the company values, culture, and goals. There are six elements, and they are:
Formalization is how flexible a job description is. For example, a factory employee on an assembly line. The person has little to no room for creativity, reinventing, or improving it, making it a monotonous job. Many companies today are more flexible and give some room for creativity. Although, some organizations need the repetitive approach – think Amazon packaging warehouses.
Chain of Command
The chain of command defines and clarifies the line of authority and whom each employee ought to report to within the organization. The two ideas behind this element are that the superior should be obeyed, and the employee should only report to one manager to avoid confusion. Today, this element isn’t as rigid as in the past. Later in the article, we will look at some organizational structures with a loser chain of command compared to others.
Work specialization is the idea of being good at a particular activity. Henry Ford was one of the early adopters of specialization in the 1920s, and this idea served him well on the assembling line. Having a worker concentrate on the front tires, another the back, and another on the brake pedals improved productivity because each man specialized in their skill. Today, specialization introduced division of labor, which created the idea of having specific job titles and functions within a functional unit.
An example is a sales department. It can have separate people working on cold emailing and receiving orders from customers. To avoid boredom, disengagement, and absenteeism of employees, they can be rotated or given more responsibility to keep engagement high.
Departmentalization is bringing specialized jobs or activities together to coordinate a common task. We can group them in the following ways:
- Function: Grouping by function is the most popular method in big cooperations today. Examples of these functions are having a finance function, a supply chain function, or a human resource function.
- Geography: Some companies can group their activities based on geographical location. This method is popular with companies with branches and customers scattered across a country or the world.
- Product: It isn’t unheard of to find companies grouped according to their products. This method is popular in the manufacturing sector – where a single raw material can produce various end products. An example is a tree. It can make different end products like paper, clothing, tissue, hard hats, etc. A company can produce all or some of these items, deciding to create its department based on the different products.
- Process: Companies can choose to use similar processes to group a department. An example is a petroleum company. They ordinarily carry out the following activities; exploration, extraction, refining, and transportation. They can form a department based on each process.
- Customer: A business can group itself into departments based on the services rendered to its customers. An example is offering different packages to organizations, households, and individuals.
A large organization can use some or all of this departmentalization in its structure.
Centralization and Decentralization
Centralization means the decision-making process lies at a single point, typically with a few people in top management. A decentralized system means that the decision-making process is at different points. It allows the distribution of authority throughout the organization, unlike a centralized system where all the decision-making power lies with a few. In modern times, companies favor a decentralized system because of fast decision-making and engagement of workers at different levels.
Span of Control
The span of control commonly speaks about the number of employees a manager has control over. The rule of thumb is to have a manager take control of more people. This is because it supports less hierarchical layers for workers to report to and receive information. Fewer layers also mean fewer managers and less money to pay them.
Today, this element has gone through some changes. One of them is companies prefer to work in smaller, more effective teams. They are also more fluid in receiving and giving information.
Also read: 7 Reasons Why Goal Setting Is Important
Why is Having the Right Organisational Structure Important?
We cannot stress on the importance of an ideal organizational structure enough. The idea of not knowing who to report to, what your job entails, or what project you are working on, can lead to confusion and inefficiency. This section highlights some of the importance of having an efficient organizational structure.
Facilitates meeting objectives through proper coordination
An efficient organizational structure allows the company to plan clearly and coordinate when executing them. Each department and individual has set goals, and having an ideal structure allows the organization to hold the departments responsible for achieving those goals. An efficient organizational system supports the company in coordinating and monitoring the progress of each individual and department.
Removes Overlapping and Duplicate Jobs
One thing a company doesn’t want is to waste resources replicating the same jobs. If a company doesn’t have a structure to help define the roles and duties of employees, there will be cases of their work overlapping or, worse, duplicating their jobs. A proper system ensures this doesn’t become a norm in the company.
Provides a Clear Communication Channel
Communication is an integral part of any organization. Without proper communication channels, a company will be ineffective in its operations. A good structure clearly defines the communication flow, so the employees know who they report to.
It Improves Productivity
Having the ideal structure ensures employees know their roles are and are engaged in those duties. Having a clear and defined description of jobs can help improve their productivity.
Identifying the Right Organisational Structure for Your Business in This Era
Before identifying which organizational structure is suitable for your company, let’s first look at the various organizational structures.
The hierarchical structure is the oldest and most familiar structure used by companies. It is a centralized structure with all the decision-making power in the hands of the board and senior management. Workers are to report to the senior management and cannot make business decisions. If we use the elements to describe this structure, we would say they are;
- Very formalized
- Rigid and define a chain of command
- Little specialization
- Narrow span of control
Most organizations in the 1900s until the early 1940s used this structure. Even today, some industries that require a lot of regulation and strict rules still use this model.
The functional structure is like the hierarchical structure but with more division of labor involved. The hierarchical structure has a top-to-bottom chain of command, with everyone reporting to top management. It was an early answer to employees crying out about the hierarchicalstructure in Americain the 1950s and 1960s.
Functional, on the other hand, allows for departments and departmental managers. This structure means different employees report to specific managers. An example is an accounting department focusing on accounting-related activities. This system came to be to make hierarchical management more efficient.
A flat structure is the opposite of the hierarchical, and entails little or no middle management. This type of structure is popular with startups, where there are a handful of staff and a single person in the top management position. This structure allows creativity, proactiveness, and some degree of decision-making power. As the company grows, there should be aclear reporting structureto avoid confusion in the long run.
Divisional structure is when a company or organization breaks down the company according to a product, market, or service rendered to customers. Under the type of departmentalization under elements, the divisional structure allows a large company to allocate its resources based on other divisions to improve productivity. It is a decentralized system that gives decision-making power to branch managers. Only highly strategic decisions go through the headquarters.
A real-life example of this isCoca-Cola. It has divisions for its products based on various regions. The leaders there have a certain level of autonomy based on the demand of their customers and government.
The matrix structure sees employees report to two managers. A typical example is if an employee reports to a functional manager and a product manager. Another example is if a software engineer from the engineering department is also on a team working on a new product for the company. The software engineer reports to both their line and product manager.
This is an ideal structure for organizations that often take on projects.
Philips, the Dutch multinational company, set up a matrix structure in the 1970s.
Companies that outsource several functions easily fall into this category. They usually have a core team and then lots of subcontractors and contractors. It’s a decentralized system that’s flexible and allows the company to concentrate on its primary core processes. It can also be a cheaper option since the subcontractor specializes in that activity.
Examples of companies are Nike and H&M (Hennes & Mauritz) that outsource their manufacturing procedures to subcontractors.
A team-based structure entails bringing a group of employees together to accomplish organizational goals (long term) or work on a project (short term). A team-based structure is fluid, less defined like hierarchical structures, and decentralized. We should note that team-based structures have a management team that assigns their targets and goals but allows them to choose how they will meet that goal. A good example here would be Google.
It is good to note that large companies can adopt more than one organizational structure for a different aspect of their business. For example, Nike also has a geographical divisional structure for its products.
Also read: 6 Trends That Will Shape Hr Strategies In 2022
Now that we have described the organizational structures available, we go back to the question; What is the best organizational structure in this era?
We have already mentioned the internal factors that affect strategic decisions. They include the values, culture, and goals of the company. But that’s not all that affects an organization’s structure – external factors affect as much as its internal factors and sometimes more.
Since no company is an island and operates in an industry, the trending factors will also shape and change the organizational structure. Astudyby Deloitte in 2016 found that 92% of participants believe redesigning their current structure was important or very important. The same research noticed that organizations are moving to be more decentralized and are more product and customer-centered. So what external factors have brought about this change?
The first is technology. Technology has allowed information to travel faster, creating a fast-paced environment. This tech has made the functional and hierarchical structures obsolete when passing instructions.Engagement softwarehas improved the flow and speed of communication, allowing us to do so in real-time.
More companies combine functional structures with team-based designs likeAppleand Cleveland Clinic. This ensures that there is still a form of the hierarchic system but has quick responsive teams.
The second is the empowerment of the labor force and the benefits of engaging this force. In recent times, industries leaders and management have witnessed the gains ofhaving an engaged workforce. Millennials and Generation Z want to be more involved in their workplace. Because of this, companies have had to rethink their strategies.
The best organizational structure for this era seems to be decentralized, employee or customer-empowered, and flexible to adapt to changes. Most companies are happy to have top management set the goals and targets and leave it to the team assigned the job to be creative with how they are to achieve the goals.
Uber, the famous car transport service, usually appoints a general manager, city manager, and driver operations manager when it arrives in a city. They give the team the freedom to adopt a strategy unique to that city, which will involve developing a practical organizational structure in the city.
In conclusion, the fast pace of the market, changing views on employees, and the need to surpass competition have made the modern-day organizational designs decentralized, compact, engaging, and information hubs. Although some large firms have still kept their functional organizational structure, it’s only a matter of time before most companies adopt traits to stay relevant in the market.
Want to know how Engagedly can help you manage your employees better? Request a live demo from our experts!
Request A Demo
The project-based structure features the best of both the traditional line and functional organizational structures: it's simple, with the first tiers answering only to a direct supervisor. The final tier is the team responsible for completing whatever project is set before them.What is the current organizational structure? ›
The four types of organizational structures are functional, multi-divisional, flat, and matrix structures. Others include circular, team-based, and network structures.What is the organizational design for the 21st century? ›
Therefore, organizational design in the 21st century has become a step-by-step methodology which identifies dysfunctional aspects of workflow, procedures, structures, and systems, and realigns them to fit current business realities/goals according to Keidel before developing plans to implement the new changes.Which organizational structure is most efficient? ›
A flat structure is often more effective in completing tasks and projects faster. Small companies are often in a rapid growth state. Company owners and employees must make quick decisions.What is the most effective type of business organization? ›
A corporation is a legal entity separate from the person who owns it. It creates an extra legal barrier between you and your business entity that you can't get as a sole proprietor or with a general partnership. This is one of the reasons why it's a popular form of business organization choice for entrepreneurs.What makes the best organization? ›
A good organization has a clearly defined purpose and cultivates the attitude that purpose is more important than process. That means that supervisors stay focused on how effective employees are in doing their job, not just whether or not they followed procedure to the letter.What is the most widely used organizational structure in the world today? ›
Functional Organizational Structure
Functional organizational structure is the most common organization structure companies use. This popular model groups people into teams and departments based on specific functions.
The functional reporting structure is one of the most common types of org structures. It groups employees together based on their function, or role, within the organization. For instance, the sales team works in one department, the IT team in another and the finance team works in a third group.What is the newest organizational structure developed in the 20th century? ›
Team. One of the newest organizational structures developed in the 20th century is team and the related concept of team development or team building. In small businesses, the team structure can define the entire organization. Teams can be both horizontal and vertical.Why organizational structure is important for the company in the 21st century? ›
Structure doesn't only allow an organization to run smoothly; it also helps prescribe how an organization runs. In fact, organizational structure can help dictate culture, values, and success.
The World Economic Forum predicts that AI and automation will create 97 million jobs by 2025. The acceleration of digital transformation across multiple industries will create new business models and ways of working, while also changing many employees' jobs.What are the differences of organizations in the 21st century from the traditional organizations? ›
Unlike traditional organizations which are fixed, inflexible and planned, modern organizations are more flexible for change in every aspect of their work environment: from knowledge and skills, to approaches and workflows.Why functional organizational structure is the best? ›
Businesses commonly operate under functional structure because it groups people who have similar knowledge, and when used in a team environment, helps companies achieve their goals. The functional organizational structure typically works best for larger companies that employ multiple people with similar roles.Which form of business Organisation is best and why? ›
The sole proprietorship and the partnership are the most straightforward business organization types. When one partner leaves the business, it is dissolved unless there is an agreement in place that allows it to continue.What is the best factor to make the organization successful? ›
Clear vision, a measurable plan, culture of urgency, best people, and superior customer service…How do I choose the right organization? ›
- Paperwork requirements as well as initial and ongoing costs.
- Liability protections so you do not become personally responsible for debts and judgments.
- Tax implications.
- Future transferability of the business.
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.What is a good organization culture? ›
A great organizational culture is what the organization believes in and stands for. Organizations must have strong recognition for their employees' efforts and make them feel part of something bigger and better. A healthy working environment can transform an employee into an advocate.Which organization structure is the most popular form used by businesses? ›
The sole proprietorship is the most common form of business organization. One person conducts business for him or herself.What is redesigning organizational structure? ›
Organizational redesign involves the integration of structure, processes, and people to support the implementation of strategy and therefore goes beyond the traditional tinkering with “lines and boxes.” Today, it comprises the processes that people follow, the management of individual performance, the recruitment of ...
The four basic forms of organizational structure are functional, divisional, matrix, and flat structures. Functional organizational structures divide your company teams based on job functions and responsibilities.What kind of leadership is needed in the 21st century? ›
Strong strategic compass: The 21st century requires leaders and executive teams to have a strong strategic compass. Great leaders need to have strong self-awareness, need to be passionate visionaries, should have great clarity of purpose and should have a clear sense of direction while leading their teams.Why are organizations important in modern society? ›
As important components of the social and physical environments, organizations exert considerable influence over the choices people make, the resources they have to aid them in those choices, and the factors in the workplace that could affect health status (e.g., work overload, exposure to toxic chemicals).What is the importance of modern organization? ›
Management ensures optimum utilisation of resources. Through planning and organisation, management eliminates all types of wastages and achieves efficiency in all business operations. Management motivates workers to put in their best performance. This would lead to the effective working of the business.What are the key emerging trends of 2022? ›
- Artificial Intelligence (AI) and Machine Learning (ML)
- Robotic Process Automation (RPA)
- Edge Computing.
- Quantum Computing.
- Virtual Reality (VR) and Augmented Reality (AR)
- Internet of Things (IoT)
Modern organizational designs include project organization, matrix design and adhocracy design.What are today's organizational design challenges? ›
These include keeping employees connected, managing global structural issues, building a learning organization, and designing flexible work arrangements.How modern organizational structure is different from the traditional organizational structure? ›
Always traditional organization is fixed and rigid. Modern Organization means a boundaryless organization which are networking together and collaborating more than ever before. They are well-suited for rapid innovation and therefore ideal for companies in the growing technology industry.What is the difference between modern and traditional management? ›
Comparing two management model
Stability: Traditional organizations usually are stable in business activities and progress, while modern organizations are more dynamic with multiple business strategy, which need multiple process to deal with constant changes.
The main purpose of such a structure is to help the organization work towards its goals. It brings members of the organization together and demarcates functions between them. Secondly, the structure also helps in ensuring smooth and efficient functioning. In other words, it reduces time, money and efforts.
Job specialization is the first and the most important tool of all. Job specialization is similar to the concept of 'division of labor'. Job specialization means; breaking down the entire job or task into smaller parts and divide them accordingly.Why is a good structure important? ›
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.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.Which is better tall organization or flat organization? ›
Flatter structures are flexible and better able to adapt to changes. Faster communication makes for quicker decisions, but managers may end up with a heavier workload. Instead of the military style of tall structures, flat organizations lean toward a more democratic style.Which organizational structure is best for small business? ›
The functional reporting structure is one of the most common types of org structures. It groups employees together based on their function, or role, within the organization. For instance, the sales team works in one department, the IT team in another and the finance team works in a third group.What is the easiest organizational structure? ›
Line organizational structure is one of the simplest types of organizational structures. Its authority flows from top to bottom. Unlike other structures, specialized and supportive services do not take place in these organizations. The chain of command and each department head has control over their departments.Why is flat organization better? ›
A flat structure elevates each employee's responsibility inside the organization and eliminates excess management layers to improve coordination and communication. Fewer levels between employees improve the decision-making process among staff. The lack of need for middle management boosts the organization's budget.Why is flat organization good? ›
Advantages of a Flat Structure
It elevates the employees' level of responsibility in the organization. It removes excess layers of management and improves the coordination and speed of communication between employees. Fewer levels of management encourage an easier decision-making process among employees.