Types of Organizational Structures: Explained

All organizations, from sports teams to businesses, come into existence for a specific purpose. In order to achieve that purpose, the company needs a team of staff, resources, time, information, and insights. Research and development, testing, optimization, and a range of other things are also necessary to make it possible for the organization to grow and eventually obtain its goals.

Organizational structures help a company better organize these different things at its disposal. It also makes it easier for people within the organization to understand what they are doing and how they should be doing it. Some companies have no formal structure in place at all, but as organizations get larger and operations get more complex, it is vital to have a formal structure to act as the skeleton of the organization. All kinds of decisions are made on the basis of this structure but at the same time, the structure can also act as a resource for the organization, which makes choosing the right one critical for long-term success. Read on to learn everything you need to know about the different types of business structures.

Centralized vs. Decentralized

One of the main differences in terms of organizational structure is whether a company is using a centralized or a decentralized chain of command. All business structures are basically customized or specialized versions of either a centralized or decentralized organizational structure. Generally, smaller businesses, such as family businesses, tend to be centralized operations whereas businesses that require multiple professionals are decentralized. The military is a good example of a centralized organization.

In centralized organizations, the main decision-maker is a single person or a very small group of partners, and the workforce implements the directions received from the top of the hierarchy. In decentralized organizations, different individuals are operating with a higher level of autonomy. They make decisions on their own while staying within a broader guideline set by those higher up. In some decentralized organizations, there is no higher position and everyone is operating at a fairly equal standard in terms of how much freedom they have in the work they do.

Functional Structure

The functional structure is one of the most common kinds of organizational structures used today. Most businesses and even research organizations use the functional layout. In this style of organization, people are divided into groups based on the function that the group provides the organizations. For instance, in businesses, there are marketing teams, sales teams, accounting departments, research and development departments, and so on. These are all different parts of the business that perform a specialized function.

This type of structure is known as the bureaucratic structure and is also seen in government structures. The government has a ministry for each important thing such as foreign affairs, industry, and law. Within these different units, people perform relatively freely and do what is needed to improve that function of the organization, in this case, the government.

Matrix Structure

This is one in which individuals, or teams, report to more than one person and can serve in more than one position. This is why it is referred to as the matrix structure, as a person, or team can be seen moving around a “matrix” changing direct and indirect bosses and becoming part of different rows and columns doing different things. This structure is not a necessity for all types of businesses; however, every type can benefit from it. Not only does the matrix structure make it easier to have open communication and better resources, but this dynamic provides more opportunities for employees to enhance their skills in a more fertile environment. For instance, a group of software developers can be employed by the marketing team to help optimize their software just like how they can also be hired by the accounting team to improve their accounting system.

When working for marketing, they will report to marketing, and their own team leader, and when working for accounting they will report to the accounting head as well their own team leader. In some cases, there can be more than two leaders that they are reporting to and they can be working on multiple projects at once.

Flatarchy Structure

As the name implies this is an organizational structure with a flat hierarchy and is most common in decentralized organizations. This kind of structure aims to eliminate layers of management, it increases communication speed, improves performance, and creates happier customers and workers. However, the flat organizational structure depends on highly competent staff to pull it off right. It also needs a high level of teamwork, strong group culture, high personal work ethics, and professionalism.

As things change with the hybrid organizational model, people are now leaning more towards the flatarchy structure. Since businesses can’t operate out of a single office anymore, having a manager who can keep an eye on things is becoming more challenging. It is much easier and more efficient to have a professional who can successfully perform their duties without much input from the rest of the team. As long as they have a clear idea of what to do, they can get it done.

Divisional Structure

This form of organizational structure focuses on splitting the company based on leadership rather than on workers. For instance, a CEO might create a few different sections or divisions for the company and then hire managing directors to head each division. Essentially the managing director is performing the same role as the CEO but the scope of operations is limited to a single division rather than the entire company.

This is a common technique used by companies that have a diverse portfolio of offerings and is also used by holding companies and investment funds that own multiple businesses within their ecosystem. This allows for each division to focus on its own operations and makes the entire process more efficient and easier to manage. This form of organization pairs well with the flatarchy structure in hybrid organizations.

When it comes to choosing an organizational structure for your business, there is no right or wrong way to go about it. It is all about what works for your particular situation and how versatile your plan is, as this can very well change in the future. The coronavirus was a prime example of how things can change in a matter of days and companies found themselves scrambling to restructure their hierarchy and remain functional. Different organizational structures can also be incorporated into one another and many of the best companies use a mixture of organizational techniques to get the best possible results.