I know that behind every great company, department or team there is a great organizational structure – a structure that is tailored to the goals of a company, department or team and helps employees understand how they fit into that Overall picture fits. These are the basic building blocks of your business.
A few months ago I drew my own organizational chart for the first time and was pretty proud when I saw the structure of my company in front of me.
Aside from my fulfillment, the organizational structure helped the team understand their position within the company, the team they are a part of (even if they don’t always work together), and the important role each individual plays.
Without the right structure and building blocks, a business may not function efficiently or even collapse. However, new business owners or companies experiencing rapid growth may not know which organizational structure is best for them and why.
So how do you decide what type of organizational structure best suits your company, department or team? Before we can answer that, we must first understand how an organizational structure is built.
Let’s explore nine key components of organizational structure with some illustrative examples.
9 building blocks of organizational structure
- Chain of command
- Span of control
- Centralization and decentralization
- specialization
- Formalization
- Departmental division
- Functional structure
- Departmental structure
- Matrix structure
1. Chain of command
One of the most fundamental elements of an organizational structure, the chain of command, is exactly what it sounds like: an unbroken line of authority that extends from the top of the organization (e.g. a CEO) all the way down. The chain of command clarifies who reports to whom within the organization.
2. Span of control
Span of control refers to the number of subordinates a manager can effectively manage. The higher the ratio of subordinates to superiors, the greater the span of control.
3. Centralization and decentralization
Who makes the decisions in an organization? When decision-making authority is concentrated at a single point, the organizational structure is centralized. When decision-making authority is distributed, the structure is decentralized.
While a decentralized structure promotes a more democratic decision-making process, it can also slow it down, making it more difficult for organizations to operate efficiently.
4. specialization
Specialization, also known as division of labor, refers to the degree to which activities or tasks in an organization are broken down and divided into individual activities.
High specialization can be beneficial to a company because it allows employees to become “masters” in certain areas and thereby increase their productivity.
However, low specialization allows for more flexibility because employees can more easily handle a broader range of tasks (rather than specializing in a single task).
5. Formalization
Similar to specialization, formalization is about how jobs are structured within an organization. The main distinguishing feature is that formalization also takes into account the degree to which rules, procedures and other mechanisms control an employee’s tasks and activities.
A formal organizational structure aims to separate the person from the role or position because the role or position remains the same regardless of who holds it. An informal organization, on the other hand, places more emphasis on the individual. It allows for the development of a role or position based on a person’s preferences, skills, etc. and places less emphasis on which team or department that person belongs to.
6. Departmental division
Departmentalization is the process of grouping workstations to coordinate common activities and tasks.
When an organization has a rigid departmental structure, each department or team is highly autonomous and there is little (or no) interaction between different teams. In contrast, looser departmentalization means teams have more freedom to interact and collaborate.
It is worth noting that the way an organization is divided into departments is often used as a proxy for the general nature of that organization’s organizational structure.
7. Functional structure
A functional structure organizes a company into departments such as sales, marketing, finance, human resources, etc.
A functional structure creates defined roles and specialists, but can also cause teams to work in silos and cause communication problems.
8. Departmental structure
A departmental structure organizes teams by product, market, or geographic location, allowing each department to operate independently and focus on specific needs.
This structure provides flexibility and promotes departmental accountability, and departments behave like micro-businesses, usually with their own management and departments, as you can see in the infographic below.
The departmental structure can be resource-intensive and inefficient when roles are duplicated across departments without proper coordination. It is best suited for large companies such as global brands McDonalds, Pepsi or Johnson & Johnson.
9. Matrix structure
A matrix structure combines functional and area structures.
Employees report to project managers, which promotes collaboration and flexibility and enables cross-functional teamwork.
However, it can become complex, create conflicting requirements and lead to confusion. It is best suited for companies that need cross-departmental collaboration or need to manage multiple projects at the same time.
The right organizational structure for you
Currently my company probably uses a centralized structure, which is fine since my operation is very small. However, all decisions come back to the central point (me), which I don’t love!
Researching the types of organizational structures helps me see where I want to take my company and gives me something to aspire to.
It’s important to note that company size does not determine which structure is right for you. Before you decide on the structure of your business, you should think about a number of things, such as: B. Your company culture, your product/service, the industry, planned growth and much more.
If you would like to learn more about functional organizational structures and other types of structures, download the full resource below.
Editor’s Note: This post was originally published in November 2014 and has been updated for completeness.