An organizational structure allows companies to shape their business model according to several criteria (like products, segments, geography, and so on) that would enable information to flow through the organizational layers for better decision-making, cultural development, and goal alignment across employees, managers, and executives.
Understanding the organizational structure of a company allows an understanding of how decisions are made. It is also a powerful tool for executives to shape their organization toward desired goals and long-term objectives.
For that sake, designing a proper organizational structure also allows the execution of a company’s business model. Based on the organizational structure the company will also have a different shape.
For instance, some organizations are typically hierarchic, which implies a top-down approach of information flow and definition of roles.
Theoretically, the organizational structure is critical for several reasons. Some of them might be:
Definition of roles within the organization, so that each employee knows its place and where she belongs.
Goals alignment that makes groups of people work in coordination to achieve common business objectives.
Culture development based on the shape of the organization.
Productivity via a system meant to use the people part of the organization in the best possible way.
Efficiency in the use and allocation of resources within the organization.
Better decision-making process by allowing the flow of information within and across several departments.
Lacking an organizational structure might make it difficult for the organization to grow efficiently.
It might make it difficult for employees to understand their place in the organization. It might make it difficult for managers and executives to have a big picture of the company.
It might make it difficult for owners and shareholders to understand who’s accountable for what.
Traditionally, one of the critical differentiators of an organizational structure is centralized vs. decentralized. Wherein a centralized organization the information flows from the top to the bottom of the organization linearly.
In a decentralized organization, companies try to remain more agile and flexible via nonlinear information flows, where multiple touchpoints allow information to travel across several parts of the organization.
Typically organizational structure can be categorized based on several parameters and priorities.
Based on the parameters and preferences the organization will take into account, it will also get shaped by these. More specifically an organizational structure can be organized in:
Functional organizational structure
It is a type of organization where people are grouped according to their area of professional competence and specialization. Typically this kind of organization is very bureaucratic and has a top-down approach.
This implies that each department will have his manager or director. This kind of organization allows employees to specialize at best in specific functions. However, it will also limit their flexibility.
While most traditional companies run this kind of organizational structure, many startups that need to make sure its small teams remain flexible and adaptable might opt for a different structure, where people are incentivized to form cross-functional teams.
Divisional organizational structure
It is a type of organization where groups are organized according to the projects, or products the company focuses on.
This structure is more flexible to the hierarchical organization, as each division will run almost as an independent business, that has independent control over resources and money spent. Each division working as an independent organization can be grouped by product line but also geography.
Matrix organizational structure
It is a type of organization that blends elements of a functional and divisional structure. While it sounds appealing in theory, it might be hard to implement.
As it might make people report to several bosses within the same organization and the communication flow might become too challenging as this might also generate confusion in the executive and management.
It is a type of organization born from the startup way of acknowledging more independence and autonomy to employees, where they are closer to the chain of command, and the decision-making process.
This type of organization still benefits from hierarchies, but it flattens them by generating an adaptable model for organizations. While this kind of approach might work well with small and medium-size organizations, it might be difficult to implement for quite large organizations.
Other types of organizational structure might also be based on several factors. For instance, in between the hierarchical and flatarchy, there might be several levels of organizations based on how loose are those hierarchies.
Also how far employees are from top management and how freely the information flows. Besides whether employees are involved in the decision-making process.
Choosing the kind of structure of your organization is very important, as based on that your company will be able to achieve a long-term objective, create a culture that fits those goals and it makes employees happy and efficient.
A holacracy is a management strategy and an organizational structure where the power to make important decisions is distributed throughout an organization. It differs from conventional management hierarchies where power is in the hands of a select few. The core principle of a holacracy is self-organization where employees organize into several teams and then work in a self-directed fashion toward a common goal.
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.
A U-form (unitary form) organizational structure describes a company managed as a single unit along functional lines such as marketing and finance. Conversely, an M-form (multidivisional) structure describes a company divided into multiple semi-autonomous units. Financial targets from a central authority control each unit.
A circular organizational structure is a form of hierarchical structure where senior-level employees occupy the inner rings of a circle and lower-level employees the outer rings. Unlike a traditional hierarchical structure where directives are sent down a linear chain of command, leaders in a circular structure are not considered to sit at the top of the organization.
A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.
Organizations with a mechanistic structure are best characterized by rigid departmentalization, numerous layers of management (particularly middle management), and a relatively high degree of job specialization.
In his 1978 book entitled The Structuring of Organizations, author and management expert Harry Mintzberg explained that the “structure of an organization can be defined simply as the sum total of the ways in which it divides its labor into distinct tasks and then achieves coordination among them.”
When does organizational structure really matter?
Aligning organization and business model
A business model is a framework for finding a systematic way to unlock long-term value for an organization while delivering value to customers and capturing value through monetization strategies. A business model is a holistic framework to understand, design, and test your business assumptions in the marketplace.
Where the organizational structure and design are critical to building a culture congenial to the company’s long-term vision and mission. A business model is a machine, the engine that will propel that organization toward the goal.
Indeed, any company which has a great organizational structure, but lacks the viability of its businessmodel, won’t go far. Where culture matters to create valuable companies able to scale (remember culture might work as the glue that keeps a large number of people working together), a business model is an enabler for that.
It is important to highlight that the more a company grows the more culture and organizational design might matter compared to business model innovation. In fact, a large organization has to keep its operations as efficient as possible to keep its operations make sense.
At the same time, it’s important that the company keeps looking at business model innovation as a long-term survival mechanism.
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.
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.
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.
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).
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.
Spotify has an N-form organizational structure with an emphasis on knowledge sharing and integration across business activities. Spotify’s N-form organizational structure emphasizes knowledge sharing and integration.
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.
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).
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.
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).
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).
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.
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.
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.
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.
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.
Create business innovation units not necessarily aligned with the core organization
Business model innovation is not an easy game. Indeed, in many cases, innovation spurs from the most unexpected places, and an organization that is not ready to capture it might be well disrupted in the future.
But how do you structure a large company for business model innovation? Where a small company is able to adapt more quickly to changing times. Large corporations might not survive and adapt fast enough.
In part that’s due to the fact that large corporations are extremely well aligned with their key customers. And as highlighted in the book, The Innovator’s Dilemma, in most cases managers in those companies make sound decisions in not pursuing certain opportunities.
That’s because often opportunities that don’t make sense in terms of the bottom line and key customers might also be those that in the long run will turn out to succeed.
That is why it’s important to have within any organization “innovation units” or small teams of people that operate independently and that are not necessarily aligned with the overall organization’s goal and vision.
That bit of “messiness” might be well repaid when those small innovation units stumble upon a new business line, which will become the core business in the years to come.
Intrapreneurship
The intrapreneur is an employee which is usually assigned to innovative projects that can impact the company’s future success. As such, the intrapreneur is an employee that acts as an entrepreneur within the organization. While the intrapreneur has access to the resources of the organization she does not bear the risks connected to it.
In some cases, organizations design their company to empower employees to take action as they were entrepreneurs.
While this sounds interesting in theory, for larger organizations – where most of the activities are focused on keeping and maintaining existing processes – intrapreneurship might not be viable, if applied to the whole organization.
Instead, the company will have a dedicated group of people that will be more independent or assigned to specific projects, that are highly innovative. Or the company, still in a scale-up stage, can assign part of the time of its employees to run projects they like.
For instance, Google’s 20% Project used to give its employees the freedom to pursue the products and projects they loved the most.
Centralization vs. Decentralization
The debate over centralization vs. decentralization is still open. Classic examples of extremely centralized organizations are represented by Government and bureaucracies in general.
Companies, especially at a large scale use a hybrid approach, where one part of the business is highly centralized, and other parts are instead, highly decentralized.
For instance, Coca-Cola uses what I defined as a franchained business model where its corporate structure is centralized. However, at the level of the bottler, once operations are established, Coca-Cola leaves them independent to run the business.
Coca-Cola follows a business strategy (implemented since 2006) where through its operating arm – the Bottling Investment Group – it invests initially in bottling partners operations. As they take off, Coca-Cola divests its equity stakes, and it establishes a franchising model, as long-term growth and distributionstrategy.
Another example is Amazon. In general a centralized company, mostly run in hierarchies. To run some parts of its business it uses a different approach. In last-mile delivery, Amazon relies on an army of “independent drivers” or partners, that are not directly tied to Amazon’s hierarchy, but kept independent.
Last-mile delivery consists of the set of activities in a supply chain that will bring the service and product to the final customer. The name “last mile” derives from the fact that indeed this usually refers to the final part of the supply chain journey, and yet this is extremely important, as it’s the most exposed, consumer-facing part.
What are the 4 types of organizational structures?
The four main types of organizational structures can be divided into functional, divisional, matrix, and flatarchy. Organizational structures can move from vertical and pyramidal structures, with a rigid structure, to more horizontal, flat systems, which are way more fluid, and with much less space between employees and management.
What is organizational structure example?
In the Internet era, organizations have been more horizontal and flat, thus reducing the space between employees and management. An example is Google’s early days, a flat organization with functional teams organized around projects. The startup culture has introduced flatter organization patterns. Yet, as some of these startups have scaled to a much bigger size, they have become more centralized and hierarchical.
Why is organizational structure important?
Organizational design is a critical puzzle for making a company successful. Indeed, suppose we identify a corporation or startup as comprised of three main layers (product, business model, and organizational design). In that case, how these companies structure their organization will also determine their ability to execute their mission. Thus, in a sense, the organizational structure is critical for executing the overall business strategy.
What is the impact of organizational structure?
Organizational structure, product, and business model are critical to enabling a company to scale up. Indeed, when a company has established a viable business model, scaling up the employee base through organizational structure might enable the organization to operate at a much broader scale. Take the case of Google, which transformed from a startup to a massive organization with over a hundred thousand employees as Google established its operations worldwide.
How does Organisational structure lead to success?
The organizational structure becomes critical when trying to achieve a broader scale. Indeed, as startups become established organizations, they might need to become way more structured as they have to tackle much broader engineering, administrative, legal, marketing, and sales problems. From that perspective, organizational structure helps address a broader scaling level for companies.
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Gennaro is the creator of FourWeekMBA, which reached about three million business students, executives, and aspiring entrepreneurs in 2021 alone | He is also Head of Enterprise Sales for a high-tech startup, which he helped grow at a double-digit rate since the onset | In 2012 Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
