Every organization has a structure that directs how employees are managed and ordered. There are four main organizational structures that every leader needs to know about. Let’s explore the advantages and disadvantages of each in more detail. Show
What is organizational structure?All organizations are formed of different elements like, for example, markets, functions, products, geographies, or processes. An organizational structure visualizes these elements into a diagram that helps explain how these elements fit together as a whole, in order to meet an organizational goal. If someone wants to understand what an organization does, what it is made up of or how it operates, they may look at an organizational structure to see the details. Crucially, it describes the placement of people and how they interact. The way an organizational structure is formed, tells you a number of things:
There are five types of organizational structures that we’ll be exploring: functional structures, flatarchy structures, matrix structures, divisional structures, and circular structures. How organizational structures affect the employee experienceIn having an established organizational structure, leaders and managers can see at a glance the human influence over an individual employee, a team, a whole department, or a whole area of the company. This can be a very important tool for understanding how employees are impacted by the organization’s setup, which can help you improve the overall employee experience. For example, an employee that feels unhappy may attribute their situation to feeling stifled by their place in their team or unable to make decisions that affect their work-life balance. Employee experience is the employee’s understanding of their work environment and how this impacts them positively or negatively. In this way, an org structure can be seen as a window to how an individual employee views their environment. Using the example above, how empowered they are to make decisions could be directly related to where they sit in the organizational structure. Getting the environment and organizational structure right is therefore important to keep employee experience high, which has these benefits:
Benefits of organizational structuresWhat are the benefits of having an organizational structure set up in your business?
When would you consider creating an organizational structure?You could implement an organizational structure for many reasons:
Centralized vs decentralized organizational structuresIt’s important at this stage to understand that there are two kinds of organizational structures to be aware of: centralized and decentralized. Centralized organizationsCentralized organizations are structured with a central point of leadership and information usually flows from this point of command down to all other employees. Centralized organizations are also known as mechanistic, as they resemble a mechanism that has lots of parts that all work together at different levels of importance, yet in tight formation to achieve a goal. These are also called bureaucratic structures as well, as there is a defined control point that then defines each employee’s role and level of authority in a rigid way. Pros:
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Decentralized organizationsOn the other side are decentralized organizations, which are looser on authority chains and allow for informal authority relationships across different areas. Also known as organic and flat structures, people are free to work across tasks and areas, and work responses are according to need or requirement at the time. Pros:
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Four types of organizational structuresFunctional structureA functional organizational structure occurs where the company is split into specialization, based on the function of the teams. For example, there can be specific teams for marketing or sales functions, which have common sets of roles and responsibilities. There is a centralized point of authority, which can range from managers to leaders. Then each function has its own management lead. Levels of responsibility travel downwards through the organizational hierarchy. Pros:
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Matrix structureA matrix organizational structure is where teams are cross-functional and employees can report to more than one manager or leader. For example, one employee can belong to the marketing function doing one function (email marketing), but also be involved in product engagement work as well (product content creation). Their work is reviewed by two different function leads. Employees working for companies using the matrix structure have the potential to widen their skill set since they might be assigned to various projects requiring different levels of expertise or skills. Pros:
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Divisional structureA divisional organizational structure, also known as a multidivisional structure, is made up of divisions that each have their own functional structures. For example, a company can have three divisions, which all have their own internal functions of IT, sales, and marketing teams. Management of each division has a lot of authority to make business decisions, based on the needs of their division. There is a common goal that the division is working towards, based on the organizational goals. Pros:
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Depending on your organization’s focus, there are a few variations to consider. Product-based divisional – divisions are separated by product line, so resources can individually look at how to boost product lines. Pros:
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Market-based divisional – divisions are separated by markets, so resources can individually look at how to work in different markets or industries. Pros:
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Geographic divisional – divisions are separated by geographical order, so resources can individually look at each geographical area in turn. Pros:
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Process-based divisional – divisions are separated by process order, so resources can individually look at each process area in turn. For example, process-based divisions can be based on stages in product development, like research, product design, sales, and so on. Pros:
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Flatarchy structureFlatarchy is an organizational structure that flattens the way that authority and tasks are assigned, by removing upwards management levels. These structures enable all employees to be involved in various teams and tasks that help achieve the organization’s goals. Pros:
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Circular structureA circular structure works with leaders and department heads having access to all managers a level down, across all functions. This helps senior leaders join up the activities across functions. Having a circular structure means that senior managers and leaders start at the center and their authority spans outwards, with employees receiving it at the lower levels of the circle (the outskirts). Pros:
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Network structureA network structure looks at the full network of employees, irrespective of whether they’re part of the company or not. This usually takes into account all freelancers, services, and third parties that are needed for the company to function. Pros:
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Choosing the right organizational structure for employee experienceThese organizational structures can be used by businesses to help define their hierarchy and support their business goals. However, it’s hard to know which is the right one for you. There’s no clear cut answer, but there are a few things that may help. What is your business objective?If your company is keen to improve every section of their department for the best optimal performance, you might want to explore a process-based divisional structure or a functional structure that has high levels of authority to guide important changes into each area. A more controlled area is easier to change or review for performance. However, if your business goal is to build a company where innovation and ideas generation are key, having a flatarchy or a matrix style structure, that prioritizes having more of a say or free movement of employees across departments. This can help achieve your goal. Explore what your goal is, your ideal working scenario and outputs, and see which structure might support that vision. What organizational structures are similar companies using?There are many companies that are using organizational structures, which can be a model for you to consider. For example, divisional structures are more useful with larger companies that have multiple offices across the world, multiple markets to enter, and products they cater for. This allows for more autonomy by the division, which can help management to spread the management load. Flat structures might be useful in a startup business, where each employee is doing a lot of activities and working together to get things off the ground. Companies that are small and medium-sized may benefit from functional structures that help define roles and authority chains of commands. What are the current weaknesses or problems you’re facing?If you recognize that your business functions aren’t communicating or there are silos, then this could be a weakness in sharing messages and avoiding duplicate activities. Explore what isn’t working or where ideally you’d like to take the organization and choose your organizational structure to support changes that would help your problem. How fast does your organization plan to grow or adapt?Flexibility is a key consideration as your business evolves. If you’re able to adapt to your customers, markets, competitors, and your own goals, you can be agile and outperform lesser organized businesses. Maybe a decentralized organization structure, like a flat structure, might help your employees react faster to changes and communicate quicker without hierarchy boundaries? Or is a centralized organization structure still needed for clarity and order, but you might need to consider how to improve your internal communications processes or technology? You may have to make do and experiment sometimes. When the pandemic changed consumer behavior and shifted the focus to digital services, companies had to adjust and apply the structures innovatively. Ways to help your organizational structure improve your employee experienceDon’t forget the importance of employee experience during this time. This is important in these scenarios:
To help you keep employee experience front and center of mind when improving your organizational structure, we’ve developed and validated a more modern view of employee experience. This helps make the employee experience easier to understand and act on. How does it work? Our in-house team of organizational psychologists identified 5 key KPIs to measure EX:
And there are 25 drivers that influence them, which come together as a framework called EX25, an industry-leading holistic approach to measuring and optimizing employee experience: With EX25, management can holistically understand employee experience and where to focus and lead employees in order to drive impact. It’s crucial to know as you make more changes to the organizational structures and to the future of your company. Learn more about EX25 and how to encourage top talent by downloading our Ebook. What organizational structures work best in unstable complex changing environments?Organic organizational structures and systems, however, have opposite characteristics from mechanistic ones. As Exhibit 4.4 shows, these organizational forms work best in unstable, complex, changing environments.
Which is the most effective organizational structure?The project-based structure features the best of both the traditional line and functional organizational structures: it's simple, with the first tiers answering only to a direct supervisor. The final tier is the team responsible for completing whatever project is set before them.
What is an effective organizational structure?A successful organizational structure defines each employee's job and how it fits within the overall system. Put simply, the organizational structure lays out who does what so the company can meet its objectives.
What is configuration in organizational structure?Organizational configurations are defined as groups of firms sharing a common profile of organizational characteristics.
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