what is an organizational structure

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. 

Understanding the organizational structure of a company allows understanding 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 imply 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 the 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 executive 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 about 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 a nonlinear information flows, where multiple touchpoints allow information to travel across the 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: 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: 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: 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: 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.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which he brought to reach over half a million business students, professionals, and entrepreneurs in the last year | Gennaro is also Head of Business Development at a tech startup, he helped grow at double-digit rate and become profitable | Gennaro is an International MBA with emphasis on Corporate Finance | Subscribe to the FourWeekMBA Newsletter | Or Get in touch with Gennaro here

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