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.
|Functional Structure||Organizes employees based on their functional roles and expertise. Departments are specialized, and decision-making is centralized.||IBM uses a functional structure with distinct divisions for sales, marketing, research, and development, led by experts in each field.|
|Divisional Structure||Groups employees into self-contained divisions, each responsible for its own functions, products, or geographic regions.||Procter & Gamble (P&G) employs a divisional structure with divisions for beauty, grooming, healthcare, and other product categories.|
|Matrix Structure||Combines functional and divisional structures, allowing employees to work under multiple managers and across different projects or teams.||Microsoft utilizes a matrix structure, with employees reporting to both functional managers and project managers.|
|Flat Structure||Has few or no middle managers, with a focus on employee empowerment and decision-making authority pushed to lower levels.||Zappos, an Amazon subsidiary, employs a flat structure, encouraging employees to self-organize and make decisions collectively.|
|Network Structure||Relies on strategic alliances and partnerships with external organizations to perform key functions. The core organization is small and focuses on coordination.||Alibaba Group operates using a network structure, connecting a vast network of businesses and partners through its platforms.|
|Team-Based Structure||Teams or self-managed workgroups are central to the organization, and employees collaborate to achieve common goals.||In a team-based structure, employees work in self-managing teams without formal hierarchy.|
|Holacracy||Employs a decentralized approach with self-organizing teams and no traditional managers. Instead, roles and responsibilities are defined by “circles.”||Buffer, a social media management company, adopted holacracy to promote transparency and employee empowerment.|
|Hybrid Structure||Combines elements of multiple organizational structures to meet specific needs, often resulting in a unique design.||General Electric (GE) has experimented with hybrid structures, blending elements of functional, divisional, and matrix structures.|
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.
Create business innovation units not necessarily aligned with the core organization
Business model innovation is not an easy game.
Indeed, innovation spurs from the most unexpected places in many cases, 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 can adapt more quickly to changing times. Large corporations might not survive and adapt fast enough.
In part, that’s because large corporations are extremely well aligned with their key customers.
And as highlighted in the book, The Innovator’s Dilemma, 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 “innovation units” or small teams of people that operate independently and 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.
For instance, large tech companies like Google have innovation units comprised of bets that seem completely unrelated to the company’s current business model.
Google calls them moonshots.
Moonshots do not have to be aligned with the core business model of the company.
Quite the opposite, those are ventures with a high rate of failure, yet high potential, which, if they turn out to work, might end up as whole new industries, opening up the way to build a whole new company on top.
To create moonshots, you want to have a team organized around a few core principles:
- Create exigency
- Context is king for the moonshot thinking
- Give up on incremental changes
- Embrace the 10X attitude
- It all starts by reasoning from first principles
- Target the impossible but make it actionable
- Fail most of the time
- Do the hardest thing first
- Take massive actions
- Forget T-shaped; it’s all about X-shaped people
- Why 10X thinking is cheaper than incremental thinking, in the long-run
In some cases, organizations design their company to empower employees to take action as they are 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.
Another example is Amazon.
In general, a centralized company is 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 are kept, independent.
Flattening organizational structures
With the advent of the web, many of the dominant organizations were challenged by startups that used a much flatter organizational structure.
Those startups managed to build products much faster, with much less politicized, an iterative approach to growth, thus disrupting the incumbents.
Yet while flatter organizational structure proved quite effective in scaling things up.
As things scale, many of those former startups, now becoming tech giants (Apple, Google, Amazon), became much more hierarchical organizations!
In short, after a certain threshold of the scale of a product into a company, which starts to hire thousands of employees, it seems there is no going back from hierarchy to flatarchy.
We learned this in these three decades of development for the Internet, where we were lean startups taking over large and established players.
And yet, over time, while with a tweaked organizational structure, they also turned into more hierarchical organizations!
- Organizational Structure’s Importance: An organizational structure allows companies to design their business model based on criteria such as products, segments, and geography. It enables information flow, decision-making, culture development, and goal alignment across employees, managers, and executives.
- Understanding Decision-Making: Organizational structure provides insights into how decisions are made within a company and aids executives in shaping their organization toward desired goals and long-term objectives.
- Impact on Business Model Execution: A proper organizational structure enables the execution of a company’s business model, leading to various organizational shapes.
- Benefits of Organizational Structure: Organizational structure is critical for defining roles, aligning goals, developing culture, optimizing productivity, efficient resource allocation, and facilitating information flow for better decision-making.
- Consequences of Lacking Structure: Absence of a proper organizational structure can hinder efficient growth, lead to employee confusion about roles, impede top-level understanding of the company, and create accountability issues.
- Centralized vs. Decentralized Structures: Organizations can be centralized or decentralized. Centralized structures involve top-down information flow, while decentralized structures aim for agility and flexibility through nonlinear information flow.
- Types of Organizational Structures: Different organizational structures include functional (bureaucratic), divisional (based on projects or products), matrix (blending functional and divisional), flatarchy (reduced middle management), and others that balance hierarchy and flexibility.
- Holacracy: Holacracy is a management strategy where decision-making power is distributed throughout an organization, emphasizing self-organization and collaborative work toward common goals.
- Flattening Structures: Flattening organizational structures, as seen in startups, can enhance communication and agility. However, as companies grow, they often transition back to more hierarchical structures to manage scale effectively.
- Business Model Alignment: Aligning organizational structure and business model is crucial for building a culture aligned with long-term goals and ensuring business model viability.
- Moonshot Thinking: Encouraging innovation through “moonshot thinking” involves pursuing ambitious, unconventional goals, even if they don’t align with the core business model. Small innovation units can explore these opportunities.
- Intrapreneurship: Intrapreneurship involves empowering employees to act as entrepreneurs within the organization, fostering innovation and creative solutions.
- Centralization vs. Decentralization Debate: Organizations often adopt a hybrid approach, centralizing certain aspects while decentralizing others to strike a balance between efficient operations and flexibility.
Organizational Structure Case Studies
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.
What are other types of organizational structure?
What is the best organizational structure?
The organizational structure will highly depend on the strategy of the company and the scale needed to achieve that. Traditional organizations opt for a hierarchical structure, where people are organized in a pyramid-shaped structure, with top executives in charge of the strategic decision-making process. Startups, on the contrary, opt more for a flatter organizational structure. When startups scale, they also tend to opt for a more hierarchical structure, as it becomes harder to keep a flat organizational structure at a large scale.
Types of Organizational Structures
Siloed Organizational Structures
Open Organizational Structures
Other resources for your business:
- Types of Business Models You Need to Know
- Marketing Strategy
- Blitzscaling Business Model Innovation Canvas In A Nutshell
- How To Create A Business Model
- What Is Business Model Innovation