In a hierarchical structure, you have a company organized vertically, where groups follow a top-down decision-making approach, where most decisions flow from the top to the bottom of the organization. One example is Apple’s organizational structure today.
Elements
Description
Example
1. Tall Hierarchy
Multiple levels of management and a clear chain of command. Decision-making authority is centralized at the top, and communication typically flows through formal channels.
General Electric (GE) follows a tall hierarchy with numerous management levels, clear reporting structures, and well-defined roles.
2. Centralized Decision-Making
Decisions are made at the upper echelons of the organization, often by top executives or a single leader. Lower-level employees have limited decision-making authority.
McDonald’s operates with centralized decision-making, where menu changes and major business decisions are typically made by corporate executives.
3. Clear Reporting Structure
Employees report to specific supervisors or managers. There is a well-established hierarchy of reporting relationships, making it clear who is in charge.
IBM maintains a clear reporting structure with employees reporting to their respective managers and teams, following a traditional hierarchy.
4. Specialization of Roles
Employees have specialized roles and responsibilities based on their job titles and positions within the hierarchy. Each role has a specific function.
Boeing employs a hierarchical structure, especially in its manufacturing divisions, where engineers, technicians, and assemblers have specialized roles.
5. Limited Autonomy
Lower-level employees have limited autonomy and are expected to follow established procedures and guidelines. Most decisions are referred upward for approval.
Walmart operates with limited autonomy among store employees, who follow corporate guidelines and policies for daily operations.
6. Efficient Control
Hierarchical structures enable efficient control and supervision of employees. Managers oversee subordinates, ensuring adherence to policies and goals.
Bank of America utilizes a hierarchical structure in its banking operations, with branch managers overseeing bank tellers and other employees to maintain efficient operations.
7. Bureaucratic Processes
Hierarchies often involve bureaucratic processes, with formal rules and regulations governing various aspects of the organization. This can sometimes lead to slower decision-making.
Government agencies like the U.S. Department of Defense operate with a hierarchical structure, characterized by formal bureaucracy and extensive regulations.
8. Well-Defined Roles
Roles and responsibilities are well-defined within the hierarchy, reducing ambiguity and ensuring that each employee knows their job and reporting relationships.
Procter & Gamble (P&G) maintains a well-defined hierarchical structure, with clear roles for brand managers, product developers, and sales teams.
Table of Contents
When does it make sense to have a hierarchical organizational structure?
A hierarchical organizational structure might be the rule for many traditional small businesses (take many family businesses, where the family is in charge, and decisions flow hierarchically within the organization) to larger corporations.
Usually, hierarchies tend to form the more people aggregate around an organization.
Thus, while hierarchies are pretty popular on a small scale, as they enable faster decisions (since there are fewer group discussions), they can also be popular on at large scale.
There is a tricky part of hierarchical structure.
When no added bottom-up forces are built within the organization, the hierarchy might collapse on itself, as employees at the base of the pyramid might not feel comfortable sharing their findings about changing consumer behaviors.
Hover time, this might translate into a loss of market dominance from the hierarchical player, which might lose control of the organization and employees’ morale.
How to balance hierarchy with bottom-up innovation
A key drawback of hierarchical structures is their top-down nature, which might constrain valuable information sharing, especially from the bottom.
Indeed, most consumer changes happening on the market are usually watched by people at the bottom of the organization who are much closer to the final customer.
Customer support representatives, which might not be hierarchically high within the organization, are an incredible source of understanding customers’ pain points and changing behaviors.
Thus, for a hierarchical organization to work at scale, either the top of the organization is also tied to the final customers (to say, customer support is also part of the top hierarchy), or it’s critical to establish bottom-up units, which can override the hierarchical organizational structure, to enable a flow of information from the bottom.
In other words, some people within the organization should be devoted to enabling the information to flow from the bottom to understand when breakthrough opportunities are coming.
But also when disruption forces are getting shaped in the market, which might suddenly deteriorate the organization’s competitive advantage.
Only by balancing out the top-down hierarchy with bottom-up forces it’s possible to create a competitive hierarchical organization, at scale, in the long run.
Case Studies
Large Corporations: Many multinational companies, such as General Electric and IBM, employ hierarchical structures. These structures allow for clear lines of authority and responsibility in complex, global organizations.
Military: The armed forces worldwide use a strict hierarchical structure to maintain discipline, ensure orders are followed without question, and facilitate efficient decision-making on the battlefield.
Government Agencies: Government organizations, from federal to local levels, often adopt hierarchical structures. This helps in maintaining order, adhering to regulations, and managing public services effectively.
Family-Owned Businesses: Small businesses often have a hierarchical structure, especially if they are family-owned. Family members at the top make key decisions, and roles and responsibilities are clearly defined.
Education Institutions: Schools and universities typically have hierarchical structures, with principals or presidents at the top, followed by administrators, faculty, and support staff.
Hospitals: Healthcare institutions, including hospitals, clinics, and medical centers, use hierarchical structures to ensure efficient patient care and decision-making among medical professionals.
Manufacturing Companies: Manufacturing organizations like Toyota utilize hierarchical structures to manage production lines, quality control, and supply chain logistics.
Religious Institutions: Many religious organizations have hierarchical structures, with leaders, clergy, and members following a defined hierarchy.
Legal Firms: Law firms employ hierarchical structures with partners, associates, paralegals, and support staff to manage caseloads and client services.
Retail Chains: Large retail companies like Walmart or Target have hierarchical structures to oversee multiple store locations, distribution centers, and corporate functions.
Banks and Financial Institutions: Hierarchical structures are common in the financial sector, allowing for efficient management of banking operations, investment strategies, and customer service.
Sports Teams: Sports organizations often have hierarchical structures, with coaches, players, and support staff working together to achieve success on and off the field.
Airlines: Airlines use hierarchical structures to manage flight crews, ground staff, maintenance teams, and customer service personnel across multiple locations.
Restaurant Chains: Chain restaurants, like McDonald’s, employ hierarchical structures to ensure consistency in operations, menu offerings, and customer experience.
Technology Companies: Tech giants like Microsoft and Google have hierarchical structures to oversee various product divisions, research and development teams, and global operations.
Automotive Industry: Automotive manufacturers like Ford and Honda use hierarchical structures to manage design, production, marketing, and sales functions.
Pharmaceutical Companies: Pharmaceutical firms employ hierarchical structures to oversee drug research, development, clinical trials, and regulatory compliance.
Nonprofit Organizations: Many nonprofits use hierarchical structures with executive directors, program managers, and volunteers to deliver services and achieve their missions.
Law Enforcement Agencies: Police departments and law enforcement agencies have hierarchical structures to maintain order, enforce laws, and protect communities.
Consulting Firms: Consulting companies like McKinsey & Company follow hierarchical structures with partners, consultants, and analysts to deliver client solutions.
Key Highlights:
Hierarchical Structure: A hierarchical organizational structure involves top-down decision-making where authority flows from the top to the bottom of the organization.
Examples: Apple employs a hierarchical structure, which is common in traditional small businesses, family-owned enterprises, and large corporations.
Advantages: Hierarchies facilitate faster decision-making, coordination, and organization as an organization grows.
Challenges: Hierarchical structures may hinder information flow from customer-facing roles to decision-makers at the top.
Bottom-Up Innovation: To address information flow challenges, organizations should encourage bottom-up innovation and insights sharing.
Customer-Centricity: Connecting top management with customer-facing roles ensures direct insights from customers reach decision-makers.
Dedicated Units: Establish teams focused on monitoring market trends and customer behavior to provide insights to decision-makers.
Long-Term Success: Balancing hierarchical structure with bottom-up innovation creates a competitive advantage, adaptability, and improved employee morale.
Adaptability: A well-balanced hierarchical organization can effectively adapt to market changes, disruptive forces, and customer demands.
Employee Morale: Inclusion of bottom-up insights enhances employee engagement, loyalty, and motivation within the organization.
In a functional organizational structure, groups and teams are organized based on function. Therefore, this organization follows a top-down structure, where most decision flows from top management to bottom. Thus, the bottom of the organization mostly follows the strategy detailed by the top of the organization.
In a flat organizational structure, there is little to no middle management between employees and executives. Therefore it reduces the space between employees and executives to enable an effective communication flow within the organization, thus being faster and leaner.
Project portfolio management (PPM) is a systematic approach to selecting and managing a collection of projects aligned with organizational objectives. That is a business process of managing multiple projects which can be identified, prioritized, and managed within the organization. PPM helps organizations optimize their investments by allocating resources efficiently across all initiatives.
Harvard Business School professor Dr. John Kotter has been a thought-leader on organizational change, and he developed Kotter’s 8-step change model, which helps business managers deal with organizational change. Kotter created the 8-step model to drive organizational transformation.
The Nadler-Tushman Congruence Model was created by David Nadler and Michael Tushman at Columbia University. The Nadler-Tushman Congruence Model is a diagnostic tool that identifies problem areas within a company. In the context of business, congruence occurs when the goals of different people or interest groups coincide.
McKinsey’s Seven Degrees of Freedom for Growth is a strategy tool. Developed by partners at McKinsey and Company, the tool helps businesses understand which opportunities will contribute to expansion, and therefore it helps to prioritize those initiatives.
Mintzberg’s 5Ps of Strategy is a strategy development model that examines five different perspectives (plan, ploy, pattern, position, perspective) to develop a successful business strategy. A sixth perspective has been developed over the years, called Practice, which was created to help businesses execute their strategies.
The COSO framework is a means of designing, implementing, and evaluating control within an organization. The COSO framework’s five components are control environment, risk assessment, control activities, information and communication, and monitoring activities. As a fraud risk management tool, businesses can design, implement, and evaluate internal control procedures.
The TOWS Matrix is an acronym for Threats, Opportunities, Weaknesses, and Strengths. The matrix is a variation on the SWOT Analysis, and it seeks to address criticisms of the SWOT Analysis regarding its inability to show relationships between the various categories.
Lewin’s change management model helps businesses manage the uncertainty and resistance associated with change. Kurt Lewin, one of the first academics to focus his research on group dynamics, developed a three-stage model. He proposed that the behavior of individuals happened as a function of group behavior.
OpenAI is an artificial intelligence research laboratory that transitioned into a for-profit organization in 2019. The corporate structure is organized around two entities: OpenAI, Inc., which is a single-member Delaware LLC controlled by OpenAI non-profit, And OpenAI LP, which is a capped, for-profit organization. The OpenAI LP is governed by the board of OpenAI, Inc (the foundation), which acts as a General Partner. At the same time, Limited Partners comprise employees of the LP, some of the board members, and other investors like Reid Hoffman’s charitable foundation, Khosla Ventures, and Microsoft, the leading investor in the LP.
Airbnb follows a holacracy model, or a sort of flat organizational structure, where teams are organized for projects, to move quickly and iterate fast, thus keeping a lean and flexible approach. Airbnb also moved to a hybrid model where employees can work from anywhere and meet on a quarterly basis to plan ahead, and connect to each other.
The Amazon organizational structure is predominantly hierarchical with elements of function-based structure and geographic divisions. While Amazon started as a lean, flat organization in its early years, it transitioned into a hierarchical organization with its jobs and functions clearly defined as it scaled.
The Coca-Cola Company has a somewhat complex matrix organizational structure with geographic divisions, product divisions, business-type units, and functional groups.
Costco has a matrix organizational structure, which can simply be defined as any structure that combines two or more different types. In this case, a predominant functional structure exists with a more secondary divisional structure.
Costco’s geographic divisions reflect its strong presence in the United States combined with its expanding global presence. There are six divisions in the country alone to reflect its standing as the source of most company revenue.
Compared to competitor Walmart, for example, Costco takes more a decentralized approach to management, decision-making, and autonomy. This allows the company’s stores and divisions to more flexibly respond to local market conditions.
Dell has a functional organizational structure with some degree of decentralization. This means functional departments share information, contribute ideas to the success of the organization and have some degree of decision-making power.
eBay was until recently a multi-divisional (M-form) organization with semi-autonomous units grouped according to the services they provided. Today, eBay has a single division called Marketplace, which includes eBay and its international iterations.
Facebook is characterized by a multi-faceted matrix organizational structure. The company utilizes a flat organizational structure in combination with corporate function-based teams and product-based or geographic divisions. The flat organization structure is organized around the leadership of Mark Zuckerberg, and the key executives around him. On the other hand, the function-based teams are based on the main corporate functions (like HR, product management, investor relations, and so on).
Goldman Sachs has a hierarchical structure with a clear chain of command and defined career advancement process. The structure is also underpinned by business-type divisions and function-based groups.
Google (Alphabet) has a cross-functional (team-based) organizational structure known as a matrix structure with some degree of flatness. Over the years, as the company scaled and it became a tech giant, its organizational structure is morphing more into a centralized organization.
IBM has an organizational structure characterized by product-based divisions, enabling its strategy to develop innovative and competitive products in multiple markets. IBM is also characterized by function-based segments that support product development and innovation for each product-based division, which include Global Markets, Integrated Supply Chain, Research, Development, and Intellectual Property.
McDonald’s has a divisional organizational structure where each division – based on geographical location – is assigned operational responsibilities and strategic objectives. The main geographical divisions are the US, internationally operated markets, and international developmental licensed markets. And on the other hand, the hierarchical leadership structure is organized around regional and functional divisions.
McKinsey & Company has a decentralized organizational structure with mostly self-managing offices, committees, and employees. There are also functional groups and geographic divisions with proprietary names.
Microsoft has a product-type divisional organizational structure based on functions and engineering groups. As the company scaled over time it also became more hierarchical, however still keeping its hybrid approach between functions, engineering groups, and management.
Nestlé has a geographical divisional structure with operations segmented into five key regions. For many years, Swiss multinational food and drink company Nestlé had a complex and decentralized matrix organizational structure where its numerous brands and subsidiaries were free to operate autonomously.
Nike has a matrix organizational structure incorporating geographic divisions. Nike’s matrix structure is also present at the regional and sub-regional levels. Managerial responsibility is segmented according to business unit (apparel, footwear, and equipment) and function (human resources, finance, marketing, sales, and operations).
Patagonia has a particular organizational structure, where its founder, Chouinard, disposed of the company’s ownership in the hands of two non-profits. The Patagonia Purpose Trust, holding 100% of the voting stocks, is in charge of defining the company’s strategic direction. And the Holdfast Collective, a non-profit, holds 100% of non-voting stocks, aiming to re-invest the brand’s dividends into environmental causes.
Samsung has a product-type divisional organizational structure where products determine how resources and business operations are categorized. The main resources around which Samsung’s corporate structure is organized are consumer electronics, IT, and device solutions. In addition, Samsung leadership functions are organized around a few career levels grades, based on experience (assistant, professional, senior professional, and principal professional).
Sony has a matrix organizational structure primarily based on function-based groups and product/business divisions. The structure also incorporates geographical divisions. In 2021, Sony announced the overhauling of its organizational structure, changing its name from Sony Corporation to Sony Group Corporation to better identify itself as the headquarters of the Sony group of companies skewing the company toward product divisions.
Starbucks follows a matrix organizational structure with a combination of vertical and horizontal structures. It is characterized by multiple, overlapping chains of command and divisions.
Tesla is characterized by a functional organizational structure with aspects of a hierarchical structure. Tesla does employ functional centers that cover all business activities, including finance, sales, marketing, technology, engineering, design, and the offices of the CEO and chairperson. Tesla’s headquarters in Austin, Texas, decide the strategic direction of the company, with international operations given little autonomy.
Toyota has a divisional organizational structure where business operations are centered around the market, product, and geographic groups. Therefore, Toyota organizes its corporate structure around global hierarchies (most strategic decisions come from Japan’s headquarter), product-based divisions (where the organization is broken down, based on each product line), and geographical divisions (according to the geographical areas under management).
Walmart has a hybrid hierarchical-functional organizational structure, otherwise referred to as a matrix structure that combines multiple approaches. On the one hand, Walmart follows a hierarchical structure, where the current CEO Doug McMillon is the only employee without a direct superior, and directives are sent from top-level management. On the other hand, the function-based structure of Walmart is used to categorize employees according to their particular skills and experience.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
