Organizational Structure: Why It Matters and What are the types

What’s it: Organizational structure is about how a company is arranged and how certain activities are directed towards achieving organizational goals, including organizing tasks, responsibilities, decision making, workflows, communication channels, and hierarchies. It determines the mode in which the company operates and works. And choosing the right structure is one of the important decisions because it impacts effectiveness in achieving goals.

There are various organizational structures, including flat and tall structures. Then, based on how far authority is delegated along the chain of command, there are centralized and decentralized structures. And the structure can be organized in several ways, perhaps built around business units, functions, products, projects, geographies, or a matrix approach.

Then, when we graphically represent the organizational structure, it will form an organizational chart. It describes the units and positions within the company and how they relate to each other.

Why is organizational structure important?

Several reasons explain why organizational structure is important. First, structure affects effectiveness in achieving goals. It provides an overview of how the company is organized and how best to move forward in achieving its goals. On the other hand, it is difficult to operate smoothly without a formal structure.

For example, employees may have difficulty knowing their roles. Finally, they are confused about what they should do. Or they don’t know who to report to. As a result, there is uncertainty about who is responsible for what.

Second, structure affects how physical and human resources are managed. It defines how jobs and tasks, roles, responsibilities, and supervision are divided and integrated, describes hierarchical reporting relationships, and governs how individuals and teams coordinate their work efforts. Simply put, it lays out who does what and how they relate to each other.

Third, a structured organization allows the company to remain efficient and focused. The company separates employees and functions into different departments. It provides clarity to everyone at every level about their roles and responsibilities. Finally, they can be more productive because they focus their energy and time on what they should be doing.

Fourth, it determines how information flows between levels within the organization. For example, decisions flow from top to bottom under a centralized structure. And, decisions are concentrated on a few people. The top-level managers have more power to make decisions, with the highest authority being under the top managers.

Instead, decision-making is distributed among different levels of the organization under a decentralized structure. Upper managers delegate some decisions to lower managers.

Fifth, a clearly defined structure allows the company to develop a salary structure for employees. They can decide salary levels and ranges for each position according to their level in the organization.

Consequences of a bad organizational structure

In general, a bad structure causes the company to be ineffective in achieving its goals. The operation does not work as intended due to issues such as:

• Ineffective decision-making, for example, due to overlapping decisions.
• Disharmony, for example, results from the struggle for power because authority is not clearly regulated.
• Confusion among employees, for example, because the roles and duties in each position are not clearly defined.
• Low motivation and morale because employees do not see a clear career path or job accumulation at a certain level.
• Lack of coordination and control, for example, results from inconsistent decisions between lower-level managers and upper-level managers.
• Poor communication because messages don’t flow on track or take a long time because they have to go through many managerial layers.
• Duplicated activities or work, for example, due to poor distribution of roles, thus making efforts and resources wasted.
• Slow decision-making, so the company is unable to respond to changing conditions.

Is the organizational structure static?

The organizational structure may change over time, depending on management needs. In addition, changes in the business environment, such as changes in product demand, can also encourage companies to change their structure.

Alternatively, a change in management style could also have an effect. For example, the new management may reorganize and introduce a new structure by adding or removing some positions.

Finally, changes in organizational structure also occur along with business growth. At the start of operations, small businesses usually adopt a flat structure due to the limited workforce. They often do not have a managerial layer. And in its structure, the owner directly supervises the workers and makes all business decisions.

It is costly for a small business to adopt a tall structure. Why? A tall structure requires several managers to manage a functional area. And hiring and paying managers is more expensive than hiring staff, perhaps more than the dollars they make selling products or providing services.

Then, gradually the organization gets bigger as the business grows. Finally, owners restructure the organization and move to a taller structure. It had to be done because they began to find it difficult to manage the organization and take all the decisions. They then recruited several people to manage key functional areas such as human resources, finance, production, and marketing.

What does the organizational structure represent?

The organizational structure tells us how the company is arranged. Specifically, it shows some information, including:

• Who reports and is responsible to whom (chain of command). The chain of command can be tall with many managerial layers involved or flat with few layers.
• How decisions should be made. It shows who has the authority to make decisions and how much power they have.
• How formal communication flows within the company. Communication flows along the chain of command. If a problem arises, an employee must report it to his superior, one level above him in the chain of command.
• How many subordinates each manager is responsible for (span of control). A wide span of control means each level has fewer subordinates. Conversely, a narrow span of control means fewer subordinates.
• How the company organizes jobs. A common one is to organize them by business function. They separate work into departments such as production, marketing, finance, and human resources.

What are the types of organizational structures?

There are several ways to classify organizational structures, depending on which dimensions we use to group. For example, based on:

• How long is the chain of command, and how many managerial layers? We can distinguish organizational structures into tall structures and flat structures.
• How is decision-making concentrated within the organization? There is a centralized structure and a decentralized structure.

Then, some companies might organize their organization around business units, business functions, product lines, customers, projects, or geographies. Others may combine more than one of these dimensions – called a matrix structure.

Tall structure

Tall structures have many hierarchical levels or managerial layers. It has a long chain of command. As a result, communication and decision-making must go through many layers.

Then, the tall structure has a narrow span of control. Each manager will supervise a relatively few subordinates.

Large companies generally adopt this structure. They need a tall structure to be effective. Their complex operations require more control. Thus, they will need multiple managers to oversee day-to-day operations.

More distributed and clearly defined roles and authority are among the advantages of tall structures. As a result, it allows for higher control over the business.

But, because it has to flow through many managerial layers, communication and decision-making are slow. Moreover, delegation to lower management is relatively little under this structure, resulting in job dissatisfaction and demotivating employees.

Flat structure

A flat structure is the opposite of a tall structure. The company has few managerial layers. Thus, the chain of command and hierarchical levels tend to be short. Each manager has many subordinates (a wide span of control).

Managers give subordinates more authority and delegate some decisions to them. Thus, they are more accustomed to and trained to make decisions and manage their work area. Likewise, subordinates have the independence to do work and achieve targets in their own way.

The flat structure opens up opportunities for employees to develop themselves. They are independent in managing their work life. Likewise, they can actualize themselves in their daily routine work. And they can do that without being bothered by the intense scrutiny of the manager.

Another advantage is fast decision-making. Because it involves few managerial layers, managers can make decisions quickly. Likewise, lower-level managers have more decision-making authority than those under higher-level structures. Finally, it allows organizations more flexibility to respond to changing business environments.

Centralized structure

A centralized structure concentrates decisions on top-level managers. As a result, upper managers have a great deal of authority and delegate little to lower managers.

The degree of centralization depends on factors such as:

• Organization size
• Management style
• Business environment
• Geographical distribution of operations
• Quality managers at every level

A centralized structure is important for controlled decision-making. It is because the authority is under a few people. In addition, decision-making responsibilities are clearly defined.

Minimizing decision inconsistencies is another advantage. Lower-level managers only need to carry out what their superiors have decided.

However, if the leadership qualities of top-level managers are poor, it can be disastrous. Another drawback is low motivation. Less delegation means less room for subordinates to participate in making decisions about their work area. Thus, they have fewer opportunities to self-actualize and develop competencies.

Decentralized structure

Under a decentralized structure, authority is delegated as far as possible along the chain of command. In other words, lower-level managers have more opportunities to make decisions. And responsibilities are distributed across the levels. For example, top-level managers make strategic decisions such as the company’s vision and strategic plans. Meanwhile, lower managers take on the remaining responsibilities, such as decisions about day-to-day operations.

The decentralized structure allows for fast decision-making. Lower-level managers can take immediate action when problems arise, not just wait for a decision from their superiors. In addition, the decisions taken are more relevant to the context because they are made by those closest to the source.

Another advantage is motivation. Delegation is one way to empower employees and increase their job satisfaction. The boss trusts them to take the necessary action. It allows them to self-actualize. As a result, they are motivated to give their best.

However, decentralized structures carry several risks. Decision inconsistencies by top-level managers and lower-level managers are among them. That can lead to problems, ranging from the disharmony of relationships between them to disrupted operations.

Another problem is poor decision quality. Lower-level managers may be incompetent to be effective decision-makers. They may have expertise in a functional area but not in decision-making.

Divisional structure

Under a divisional structure, the company designs the organization into several divisions or strategic business units. Each operates independently and has a complete structure separate from the headquarters.

Usually, management at headquarters provides targets as a guide to managers in business units. They also oversee and control the performance of each unit while leaving the rest to the unit manager.

This structure is common for multinational companies. They operate in several countries through subsidiaries. In addition, conglomerates or other giant companies also adopt this structure to manage their business portfolios. An example is The Walt Disney Company, which operates several business segments such as theme park resorts, television, broadcasting, streaming media, consumer products, publishing, and international operations.

The divisional structure allows the company to grow through diversification. They can pursue some business. And at the same time, they can manage each one effectively through this structure as it reduces coordination and control problems.

Functional structure

Under the functional structure, the company structures the organization into several business functions. Jobs in functional areas are grouped into departments such as operations, marketing, finance, and human resources – and as such, each department requires employees with specific skills.

Departments will vary greatly between companies. Some may only involve the four types above. Others may add other departments such as research and development, procurement, and information technology.

The advantage of the functional structure is specialization. Employees work based on their specific skills. Hence, it enables high productivity.

However, this structure is not without risks. Ego and coordination problems often arise. For example, individual managers are more concerned with their department than the organization’s interests.

Geographical structure

Geographical structure divides organizations into groups based on their location. As a result, businesses have reporting systems and functionalities in multiple locations.

Large or multinational companies usually adopt this structure. They have subsidiaries or business units operating in several different regions. Then, they group the units according to their regional area. For example, Coca-Cola divides its area of ​​operations into several groups: Europe, Middle East, and Africa Group; Latin America Group; and the Asia Pacific Group.

Adopting this structure allows the company to be more adaptive to the local environment. Management in each unit manages day-to-day operations independently. So, they can make decisions quickly and develop appropriate strategies, adapting to their respective business environments.

However, this structure carries risks. For example, headquarters management may lose control of business units due to coordination and oversight issues. In addition, the potential for duplicated resources, jobs, and functions is another drawback.

Matrix structure

Under a matrix structure, a company is organized based on vertical and horizontal relationships; it can be based on business units, functions, projects, products, or regions. Therefore, this structure combines two or more organizational structures and is the most complex and the least widely adopted.

For example, a company might structure its organization based on business functions and projects. The company allocates physical and employee resources into functional and project areas. Thus, an employee will have two bosses: a functional manager and a project manager.

The extent to which functional managers and project managers have power, there are three categories of matrix structure: strong matrix, balanced matrix, and weak matrix. Under a strong matrix, the project manager has strong authority over resources and employees. On the other hand, functional managers play a larger role under a weak matrix.

Large companies with several large projects usually adopt this strategy. They launch new projects to support long-term growth – such as new product development – while maintaining existing operations.

In addition, this structure plays a role in creating flexible human resources. Employees are accustomed to multiple roles: functional staff and project teams. Finally, the company can place them when there is a new project. And for employees, joining a project team is a way to develop competence and self-actualize.

However, organizational complexity can create problems. For example, employees are confused because they have to face more than one boss and play several roles. Which boss and task should come first?

In addition, employees’ workload becomes heavier because they have to work on functional tasks and projects. Therefore, it can lead to stress and demotivation, especially if not accompanied by adequate compensation.

What to read next

• Organizational Structure: Why It Matters and What are the types
• Tall Organizational Structure: Characteristics, Advantages, Disadvantages
• Flat Organizational Structure: Characteristics, Advantages, Disadvantages
• Organizational Structure By Hierarchy: Advantages, Disadvantages
• Organizational Structure by Function: Advantages and Disadvantages
• Organizational Structure By Product: Advantages and Disadvantages
• Organizational Structure by Region: Advantages and Disadvantages
• Organizational Structure by Customers: How It Works, Advantages, Disadvantages
• Matrix Structure: How It Works, Advantages, Disadvantages
• Horizontal Organizational Structure: Characteristics, Advantages, Disadvantages
• Vertical Organizational Structure: Characteristics, Advantages, Disadvantages
• Shamrock Organization: How it Works, Advantages and Disadvantages 
• Project-Based Organizational Structure: Strengths and Weaknesses
• Centralized Organizational Structure: Advantages, Disadvantages
• Decentralized Organizational Structure: Advantages, Disadvantages
• Formal Organizational Structure: Characteristics, Advantages, Disadvantages
• Informal Organizational Structure: Characteristics, Advantages, Disadvantages
• Multidivisional Structure: Importance, How it Works, Pros, Cons