Running a business means successfully delegating tasks among your employees. It also means having the final say on all projects or, if your company is on the larger side, hiring people whom you trust enough to give full approval powers. An organizational structure for your business can help you make sense of where and with whom your company’s responsibilities lie, and you have plenty of types from which to choose.
An organizational structure is a set of rules, roles, relationships and responsibilities that determine how a company’s activities should be directed to achieve its goals. It also governs the flow of information through levels of the company and outlines the reporting relationship among midlevel staff, senior management, executives and owners. It is effectively a hierarchy for a company, though some organizational structures emphasize a near-total lack of hierarchy.
An organizational structure determines how information, responsibilities and approval will flow within your company.
In your research, you may at first read that there are two types of organizational structures: centralized and decentralized. However, using just these two classifications for every possible team structure may paint with too broad a brush. That’s why experts have come up with eight types of organizational structures, each of which is either centralized or decentralized:
All of these are centralized except for the flat, team and network structures. In a centralized structure, power flows up the chain of command to the executives and owners, whereas decentralized organization structures give far more power to non-executives and non-owners. We’ll get more into how this works in just a moment.
Now that you know the eight types of organizational structures, you’re probably wondering which one is best for your business. The answer, as with many business matters, is that the right choice differs by company. Below, we’ll detail what each organizational structure entails so you can discern which model best fits your ongoing business practices and future business needs.
A hierarchical structure, also known as a line organization, is the most common type of organizational structure. Its chain of command is the one that likely comes to mind when you think of any company: Power flows from the board of directors down to the CEO through the rest of the company from top to bottom. This makes the hierarchical structure a centralized organizational structure.
In a hierarchical structure, a staff director often supervises all departments and reports to the CEO. This structure is well suited for any business in any industry.
These are some advantages of a hierarchical structure:
There are also some drawbacks of choosing a hierarchical structure:
The functional structure is a centralized structure that greatly overlaps with the hierarchical structure. However, the role of a staff director instead falls to each department head – in other words, each department has its own staff director, who reports to the CEO. Any company with several modestly sized departments may find the functional structure to be a fit.
These are some advantages of a functional structure:
These are some disadvantages of a functional structure:
The centralized structure, known as a divisional organization, is more common in enterprise companies with many large departments, markets or territories. For example, a food conglomerate may operate on a divisional structure so that each of its food lines and products can have full autonomy. In the divisional structure, each line or product has its own chief commanding executive. Large companies of any sort, but especially in manufacturing industries, are the best fit for this structure.
These are the main advantages of a divisional organization:
These are some disadvantages of a divisional structure:
A flat structure is a decentralized organizational structure in which almost all employees have equal power. At most, executives may have just a bit more authority than employees. This organizational structure is common in startups that take a modern approach to work or don’t yet have enough employees to divide into departments. That makes flat structures especially well suited to the tech industry, which is home to many small startups with flexible work arrangements.
These are some advantages of a flat structure:
These are the main disadvantages of a flat structure:
The matrix structure is a fluid form of the classic hierarchical structure. This centralized organization structure allows employees to move from one department to another as needed. You might encounter this structure in industries home to highly skilled employees who might be their company’s only experts in their field.
These are the main advantages of a matrix organization:
These are some disadvantages of a matrix organization:
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A team structure is a decentralized but formal structure that allows department heads to collaborate with employees from other departments as needed. It is similar to a matrix structure, but the focus is less on employee fluidity than on supervisor fluidity, leading to a decentralized functional structure. Any industry in which flat or matrix structures are common might also be home to many companies with team structures.
These are the advantages of a team structure:
These are some disadvantages of a team structure:
A network structure is especially suitable for a large, multicity or even international company operating in the modern era. It organizes the relationships not just among departments in one office location, but also among different locations and each location’s team of freelancers, third-party companies to whom certain tasks are outsourced, and more.
While this may sound like a lot for one type of network structure to detail, this decentralized structure can be useful for understanding the human resources your company has on hand. You’ll commonly encounter network structures among distributors, tech companies or logistics companies with international branches.
These are potential advantages of a network structure:
These are the possible disadvantages of a network structure:
In a projectized structure, the focus is on one project at a time. In this centralized organizational structure, project managers act as supervisors, not just resource allocators and decision-makers.
Unlike other structure types, a projectized structure involves the demobilization of teams and resources upon a project’s completion. But it’s like other types of organizational structures in that an obvious hierarchy exists. Software development teams may benefit from projectized structures given the complexity that can go into app or website development.
These are some advantages of a projectized structure:
These are some disadvantages of a projectized structure:
Below is a chart summarizing the eight types of organizational structures.
Centralized or decentralized
How it works
Chain of command starts with board of directors and flows downward from CEO through a staff director
Higher-quality, more specialized work
Potential lack of independence
Each department head is the staff director
Specialized, self-sufficient teams
Each product or service team has full autonomy
More autonomous departments
Competition internally rather than externally
Almost all employees have equal power, with executives perhaps slightly more powerful
More independent, engaged employees
Lack of mentorship or supervision
Employees can move between departments
Dynamic employees with diverse skill sets
Potential for constant changes and conflicts of interest
Supervisors can borrow from other departments
Productivity, growth and transparency
Employee confusion and disorganization
Organizes relationships across several locations
Clarifies chains of command in large, multilocation businesses
Potentially vague on decision-making processes
Assemble teams for projects and disassemble teams upon project completion
More urgency, engagement, flexibility and versatility
Potentially stressful for employees, with fewer opportunities for professional development
No one organizational structure is best for all businesses. When determining the right one for your company, think about how much power you would like to give your employees, how much room you would like to leave for innovation, how large your company is and how much interaction among employees matters to you. After weighing these factors, you’ll likely know which organizational structure is best for you – and if you get it wrong, you can always switch to another organizational structure.