What Is An Organizational Structure And Why It Matters

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 goals alignment across employees, managers, and executives.

Contents

Introduction to organizational design
Aligning organization and business model
Create business innovation units not necessarily aligned with the core organization
Intrapreneurship
Centralization vs. Decentralization
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Introduction to organizational design

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

Flatarchy organizational structure

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 structures

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.

Aligning organization and business model

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 business model, it 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 work 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.

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 to 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 new business line, which will become the core business in the years to come.

Intrapreneurship

In some cases, organizations design their company to empower employees to take actions 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 is represented by Government and bureaucracies in general.

Companies, especially at large scale use an hybrid approach, where one part of the business is highly centralized, and other parts are instead, highly decentralised.

For instance, Coca-Cola uses what I defined 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-business-strategy — 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 distribution strategy.

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.