What’s it: An organizational chart is a graphical representation of an organizational structure. It describes the units and positions within the company. In the diagram, we can see the roles, responsibilities, and relationships between positions in a company. Thus, we know who is responsible for completing certain jobs and to whom they report.
As organizations grow, companies need a clear structure. Top management then creates a chart to visualize it and communicate it to employees. Thus, they understand each other’s roles and responsibilities, encouraging more accountability.
Why is an organization chart important?
Organizational charts are important for understanding how a company’s organization is arranged. First, it allows employees to prioritize the work they receive. In certain cases, employees may receive orders or tasks outside their command line. They may be reluctant to reject it because it comes from a higher position.
And the chart lays out the chain of command clearly. Thus, employees understand who they are responsible for and report to. And, from whom are they supposed to receive instructions? Therefore, they had strong reasons to refuse the order.
Second, the lines of communication are clearer. For example, employees want to discuss a work problem they are facing. The organizational chart shows them who they should contact first and have the capacity to make decisions.
Third, employees understand every job in the company. It allows them to know where they fit within the company structure. So, when the company holds a job rotation program, they can participate in getting the job they want.
Fourth, the chart gives an idea about their career. Employees have clear direction and goals about which position they want to achieve with their current career. It motivates them to work better to get the desired position.
Fifth, eliminate overlap in decision making. Charts explain who has the most authority to make certain decisions.
What are the features of an organization chart?
An organizational chart shows us how management organizes and links the various jobs and departments within a company. It becomes a framework for showing chains of authority and lines of communication. The chart contains several features such as:
- Division of work
- Level of hierarchy
- Chain of command
- Span of control
- Centralization vs. decentralization
Division of work
The company divides activities within the organization into several groups or units. It is based on work specialization, where each unit performs a specific job and, therefore, requires specific skills and knowledge. Then, the units are coordinated, and their relationship is established.
Grouping jobs into several units is what we call departmentalization. It can be based on business function, product, customer, or geography.
Take grouping by function as an example. Companies group tasks based on business functions such as operations, marketing, human resources, and finance. Each handles a different job in the value chain. And they require special knowledge and skills.
Levels of hierarchy
Levels of hierarchy represent different levels for positions in the organization. Each has different authorities and responsibilities.
For example, a company might divide its hierarchy into three, from top to bottom: top-level, middle-level, and lower-level managers. The three have different authorities and responsibilities, which increase as the hierarchy level increases. In other words, top-level managers have the greatest authority and responsibility.
Chain of command
The chain of command describes a hierarchy of authority and reporting relationships. It reveals how power and authority are passed down from the top to the lower levels within the company. Through it, we know who reports and is responsible to whom.
The decision-making power within the company flows through the line of command. And every decision must follow these formal lines. For example, top-level managers in the previous three hierarchy levels have the highest decision-making power.
How long the chain of the command is depends on how big the company is. In addition, there is a span of control as another factor, which indicates how many subordinates are under responsibility for a position.
Larger companies with tall structures tend to have more hierarchy levels due to more complex organizations and narrower spans of control. And as such, they have a longer chain of command.
Span of control
The span of control shows how many subordinates there are for a position. A manager may have more or fewer subordinates. It depends on the organizational structure factor adopted.
For example, the company has many managers under a tall organizational structure, and each has fewer subordinates. Therefore, their span of control is narrower.
This structure tends to complicate communication up and down the organization. That’s because it involves multiple hierarchies or layers.
On the other hand, a flat structure has few hierarchy levels. Each manager oversees many subordinates. Thus, they have a wide span of control. Moreover, this type tends to be more efficient because fewer managers are needed.
Centralization vs. decentralization
Centralization and decentralization explain the extent to which authority and decision-making power are delegated to lower levels. For example, decision-making power is concentrated at the top level when a company adopts a centralized structure.
Indeed, centralization allows for fast, controlled, and consistent decision-making. But, it can demotivate those at lower levels because they are less empowered. In addition, more senior management bears a heavier burden.
In contrast, a decentralized structure allows more authority to lower levels. Managers empower employees to make decisions.
It is useful for motivating employees by involving them more in making decisions about their work. In addition, they are also supposed to better understand the appropriate solutions to their problems than managers, enabling effective decision-making.
However, decision inconsistencies may occur frequently. Their individual decisions may not be coordinated with one another.
What are the types of organizational charts?
The type of organizational chart will vary between companies, depending on the structure adopted by each. For example, a company might adopt the following structure:
- Functional hierarchical structure
- Flat structure
- Matrix structure
- Divisional structure
Functional hierarchical structure
The functional hierarchical structure divides the organization into several departments such as operations, finance, marketing, and human resources. It places the highest-ranking individuals at the top and places the lower-ranking individuals below them.
For example, the top position is the president director. He oversees several top positions for each department, such as director of operations, director of finance, director of marketing, and director of human resources. In addition, he may also oversee several other units, such as an internal audit.
Then, the command is connected downwards for each department for the lower positions. Take the operations department as an example. Positions below the director of operations may be division head, manager, assistant manager, and staff.
Flat structure or horizontal structure positioning individuals on the same level. They have equality in decision-making power.
This structure has few levels of hierarchy and a short chain of command. And therefore, it has a wide span of control.
Decision-making is decentralized. Companies delegate more authority and give employees more autonomy.
Take the operations department in the previous example. Successively, positions below the director of operations may be managers and staff, eliminating another level between the two positions.
The matrix structure is complex. It may combine two axes. For example, the vertical axis represents a grouping by function. Meanwhile, the horizontal axis represents the grouping by product. Thus, employees have more than one boss. For example, employees in the operations division must report to the project manager for new product development and the operations division manager for their routine activities.
This structure is important for creating more innovative products and services. Companies can assign employees with different skills to participate in development projects. For example, the team could include those working in the marketing, finance, operations, and human resources departments.
However, this structure makes the employees’ workload increase. They may also find it difficult to prioritize work because they have to report to two bosses. In addition, work becomes uncoordinated where power struggles can occur between product managers and division managers.
The divisional structure divides the organization into several independent entities, each with a complete set of business functions. The division may be by product line or geographic area.
For example, car manufacturers organize their organizations by product type: SUVs, sedans, and electric cars. Each unit has its own functional divisions: research and development, manufacturing, marketing, finance, and customer service.
This structure allows employees to apply their skills and knowledge to more specific products. In addition, it can make them more productive because they benefit more from learning by doing.
In addition, companies can clearly allocate costs and benefits for each unit and then calculate their profit. Lastly, units can respond quickly to any changes in their specialist area.
However, this structure can lead to higher costs. For example, many jobs are duplicated. Thus, companies have to spend more money recruiting employees and buying resources.
In addition, individual units may compete, leading to product cannibalization, where one unit succeeds by eating or weakening the other unit.
What to read next
- Levels of Hierarchy: Definition and Brief Explanation
- Chain of Command: Importance, Element, Advantages
- Span of Control: Importance, Types, Advantages, Disadvantages
- Delegation in Management: How it Works, Advantages, Disadvantages
- Accountability: Importance, Examples, Components
- Centralization: Importance, How it Works, Determinants, Pros, Cons
- Decentralization: Importance, Advantages, Disadvantages
- Bureaucracy: Importance, How it Works, Advantages, Disadvantages
- Delayering: Importance, How it Works, Strengths, Disadvantages
- Downsizing: Importance, Reason, Type, Pros, Cons
- Authority: How It Works, Sources, Types, Examples
- Organizational Chart: Importance, Features, and Types