There are several types of organizational structure that a business can choose. This decision is a strategic decision that is generally made early in the business development process and it will shape, influence, and guide organizational decision making as the business matures into the future. Keep in mind that while a particular structure may be implemented, it will evolve and can be reshaped; albeit significant changes will require extensive change management.
There are three primary factors, or questions, that should be taken into consideration as part of the decision making process. Do you want your organization to have a long or short chain of command? Will the span of control be wide or narrow? And, will decision making in the organization be centralized, or decentralized? There are many other factors to consider, but the way you answer these primary questions will assist with developing the overal structure of your organization.
There are seven primary types of organizational structure:
- Functional Organizational Structure
- Matrix Structure
- Circular Structure
- Product-Based Division Structure
- Market-Based Division Structure
- Geographical Division Structure
- Process-Based Structure
Functional Organizational Structure
This type of organizational structure relies on a bureaucratic system where departments are divided into functional areas. For example, human resources, sales, marketing, and accounting departments are each lead by managers that specialize and guide the resources available in their respective area. Managerial responsibility is specific and expectations are focused for each particular area of responsibility. This enables, and requires, leaders of each area to be subject matter experts and a lot of trust is placed on them to make strong business decisions. Not to complicate this explanation, but keep in mind that in this type of oganization decision making can be either top-down, or bottom-up.
In top-down decision making senior leaders make decisions then distribute "orders" down through the hierarchy, and the lower levels carry out whatever decisions are being made. In a bottom-up approach there is a lot of latitude given to lower level employees (they are empowered to make decisions), and communication flows from the bottom to the top of the organization; lower level employees influence the strategic and tactical decisions the company makes.
The matrix structure is much more complicated than a functional structure. While there is a business hierarchy based on functional departments, there are also cross-functional responsibilities (or divisions) that interact with the different areas. An employee will have a primary manager (i.e. marketing manager), but they may also interact with, and report to, a product division manager, a project manager for an IT project in accounting, and a manager in the Finance division. Employees will have a larger scope of responsibility and ensuring priorities are clearly defined is critical.
One of the benefits to a matrix structure is a very diversified workforce that gains knowledge and experience in many different areas of the business; they gain a better view of the inter-relationships of how the business operates between functional areas. However, because things can become convoluted and focus can be difficult to define, employees may feel like they are getting pulled in many different directions, which can adversely impact morale, and it may make it difficult to close the loop on competing tasks.
A circulare structure is primarily about shaping the perception of the organizational structure. Rather than conveying a hierarchical structure (depicting top to lower levels), the organization is illustrated like a pie-chart where senior leaders of the business are at the core, and lower level specialists of the organization are shown on the outer perimeter. Visually this illustrates the structure more like a team with cohesion, which can have a positive impact on organizational perception.
This structure in an organization is still defined by functional departments with managers reporting inward to senior managers, but rather than guidance being distributed "downward" through the hierarchy, decisions are spread outward from the center (or heart) of the business.
For larger companies that have multiple products, multiple markets, or that cover large geographic areas (i.e. international) it may make sense to implement a divisional organization structure. Doing so helps leadership get more granular by implementing more specific and focused control based on organizational divisions. The structure can still be based on functional responsibility, but an additional layer is added to include divisional areas of responsibliity.
Product-Based Division Structure
Maintaining a product based division structure is an approach where the business is divided into different product types the business offers (i.e. electronics, home goods, outdoor goods). Each product division leader will report up to senior leadership, but they will also have their own departmental managers; for example the manager/executive responsible for the electronics division may report to the CEO, but s/he will also have subordinate managers for sales, marketing, accounting. Each divisional leader will have their own set of departmental managers.
Market-Based Division Structure
Market based divisional structure is where a business groups, or categorizes, responsibility based on the markets they serve. These markets, or customers, can come in the form of government, commercial, and non-profit.. or it can be divided based on the various industries they serve.
Geographical Division Structure
As the name implies, this type of structure organizes a business based on geographic region. While international divisions would comprise of different global areas, for example N. America, Europe, and Asian markets, a business may also structure the business based on a domestic territories. North America may be divided into western, southern, central, and eastern territories. Again, as will the other structures, each geographic region may have sub-reporting managers based on functional responsibility.
An alternative to structuring a business around functions, a business can align the business based on processes. For example, a business may have a Contracting division, Orders division, and an R&D division. This form of structure places an emphasis on the activities performed by the employee rather than just the functional responsibility. This type of structure allows employees to interact with multiple functions and can improve the efficiency of the business. Structuring based on processes is ideal for industries that change quickly.