A business’s organizational structure describes how projects are completed and how information is shared throughout that organization. An organizational structure outlines how jobs are designed and how work is delegated. It dictates how teams are organized. A company’s org structure also determines how much control or independence each person has over themselves, their projects and other members of the organization. Some organizations are formally structured with explicitly defined roles and chains of command, while others are designed to be flexible and agile. In our recent blog post “What is an Org Chart, and Why Do You Need One?,” we identified five basic organizational structures. These include matrix, flat or horizontal, hierarchical, functional and divisional org structures. The five listed above might be the most common. However, there are other types of org structures with which business owners should familiarize themselves. It is important to understand all types of org structures before determining which aligns best with your company’s values, operations and internal culture. Keep in mind that a company’s structure might evolve over time as it adds new employees, diversifies its offerings or expands into new markets. Follow below for our guide to the different types of organizational structures. We identify their key elements and weigh the pros and cons of each. That way, you can figure out which makes the most sense for your growing business.
Understanding Organizational Structures
An organizational structure establishes hierarchy, defines roles, allocates decision-making power and determines who reports to whom. Org structure describes how a business should function from person to person, team to team, department to department or tier to tier. A company’s organizational structure might also provide insight into the founder’s core values. As we explain in a post on the Design Dash blog, an org chart is a graphical representation of a company’s organizational structure.
Centralization vs. Decentralization
Business leaders take either a centralized or decentralized approach to allocating decision-making power to members of their organizations. In a centralized organizational structure, decision-making power is allocated to a single person or group. When decisions are made primarily by C-suite executives, board members, directors and senior managers, control is “centralized.” When middle managers, team leaders and other employees are afforded significant decision-making power, control is “decentralized.”
Centralized decision-making was once the norm. However, some companies have responded to the growing popularity of flex work – i.e. remote and hybrid arrangements – by restructuring. Many are evolving from a very traditional, centralized approach to a more modern, decentralized approach.
Defining “decentralization” as the opposite of “centralization” seems to imply that each team member has total independence and equal authority. However, decentralization is more of a sliding scale. Some organizations totally decentralize decision-making power. A decentralized organizational structure places all employees on equal footing. Each team member is afforded the same influence and control as every other worker. While it is becoming more common, completely decentralized decision-making is still fairly rare.
Most businesses allow managers and team leaders to make important decisions about upcoming projects and delegate to the employees under their purview. These leaders might encourage team members to work independently on certain project elements and provide actionable feedback. Decision-making is somewhat — but not totally — decentralized in this type of organization.
Potential Consequences of Choosing the Wrong Organizational Structure
Improperly structuring your organization can negatively impact its efficiency, prosperity and longevity. It can interrupt or obstruct lines of communication, silo certain employees and damage company culture. A badly structured organization is rarely agile or informed enough to respond challenges when they arise. In her article “The Importance of Organizational Design and Structure” for Harvard Business Review, Gill Corkindale elaborates. Corkindale writes that “poor organizational design and structure results in a bewildering morass of contradictions.”
It can lead to “confusion within roles, a lack of co-ordination among functions, failure to share ideas, and slow decision-making.” The wrong structure can also create gaps and/or redundancies which can impact employee retention and overwhelm the company’s budget. The value of a well-designed structure and the consequences of a poorly-designed one are both clear. However, this HBR article estimates “only 10% of organizations [successfully align] their strategy with their org design.”
Seven Organizational Structures to Know
As noted above, organizational structures are either centralized or decentralized. According to this resource from SHRM, most organizations are also structured “vertically, vertically and horizontally or with open boundaries.” Hierarchical, functional and divisional organizational structures are considered “vertical.” Matrix org structures are both horizontal and vertical. Both vertical and vertical/horizontal org structures are fairly formalized. Open-boundary org structures — on the other hand — are typically more organic. They might not have a clear organizational structure at all. Some org structures do not fall into any of the above categories. We describe seven common organizational structures below.
Of all the organizational chart examples on this list, the hierarchical org structure is most common. This is because a significant share of businesses arrange their staff in a top-down structure. Shareholders, a C-suite and/or a board are in the upper tiers of hierarchy charts, followed by directors and senior managers. Towards the other end of the chart are middle managers and other employees or contractors.
As James Chen writes in an article for Investopedia, organizations that arrange themselves hierarchically include “corporations…nonprofits, governments, schools and universities and the military.” Hierarchical org structures not only show how members of the organization rank. They also show relationships between equals.
Pros of a Hierarchical Organizational Structure
According to Alexandra Eremina in her 2017 Master’s Thesis for Oulu Business School, there are four key advantages to structuring an organization hierarchically. Hierarchical organizational structures clearly define the chain of command and each employee’s role within the company. This makes on-boarding new employees much simpler.
They also provide “a clear promotion path for employees.” The phrase “climbing the corporate ladder” implies an obvious trajectory for employees within hierarchically structured organizations. Because that path is expressly defined for employees, the possibility of promotion could motivate workers.
Third, hierarchical organizational structures enable specialization and can take advantage of “high levels of expertise at [the] managerial level.” Lastly, well-managed hierarchical organizations can foster camaraderie and loyalty. Because hierarchical organizations define objectives, operations and roles, redundancies are less common. Eremina argues that knowing your work contributes to “specific objectives” can boost an employee’s feeling “membership and importance.”
Cons of a Hierarchical Structure
Of course, there are also disadvantages to a hierarchical model. One common complaint about hierarchical models is the bureaucracy that tends to develop. When power is centralized — as in a hierarchical model — it can take a long time to arrive at important decisions. Team members have less independence and less decision-making authority, meaning they must repeatedly contact supervisors. The supervisors might then need to reach upper echelons of the company — like the board or C-suite — to keep a project moving along. When team members have very little autonomy, projects can suffer.
Second is lack of innovation and interdepartmental cooperation. For example, managers and other employees vying for promotion or resources for their department might sabotage or refuse to work with other teams.
Third is the imbalance of authority — and often an imbalance of respect — for employees in “lower tiers.” In some cases, the upper tiers of the pyramid are constantly rewarded, but lower tiers are ignored. This could impact employee retention as the latter employees might lose motivation or loyalty to the organization.
A matrix org structure is very similar to a hierarchical org structure, but is typically more detailed in its depictions of interdepartmental relationships. Matrix structures are also more agile than hierarchical structures. They are designed to flex. Opting for a matrix org structure might be the best choice if relationships between teams in your company are fairly complicated.
For example, matrix structures work well when managers and employees frequently move between projects. They also make sense when one department relies heavily on another to complete a project. In a matrix organizational structure, employees often have more than one manager and teams are often interdepartmental.
Matrix org structures demonstrate both direct and indirect relationships between employees and team leaders. To limit confusion, the graphic designers you hire or the software you use might suggest using different symbols to describe different types of relationships. For example, a matrix chart might use dotted lines to describe looser relationships and solid lines to represent direct relationships.
Pros of a Matrix Organizational Structure
Unlike hierarchical structures, matrix structures encourage collaboration between teams and departments. There are fewer breakdowns in communication because there are multiple points of contact for each team member — usually defined by a specific project. The flexibility of a matrix structure — in which employees frequently work with other teams and project managers — empowers those employees to learn new skills. This makes the employees themselves more adaptable.
Matrix org structures are often more efficient, adaptable and responsive than hierarchical structures. According to Patrick Gleeson, Ph.D. in an article for The Houston Chronicle, other advantages include “clear articulation of project objectives” and efficient resource allocation. These structures can also produce higher morale and boost employee engagement because they engage workers with a variety of projects.
Cons of a Matrix Organizational Structure
The flip-side of flexibility is lack of definition. Both manager roles and team member roles can become blurry, potentially delaying fulfillment of project goals. Working under both project managers and functional managers can be confusing for employees. It can also make on-boarding new employees and contractors far more complicated.
In some cases, a matrix structure can actually slow down communication because there are too many moving parts. There are fewer boundaries in a matrix organizational structure, which can make it difficult to allocate work fairly. This can lead to uneven distributions of either complex or menial tasks, thereby overwhelming some team members and isolating others.
Virtual or Network Structure
Next on our list is the network or virtual organizational structure. A network organizational structure is usually defined as one with a very small primary staff. Instead of fleshing out its internal structure, a virtual or network organizational structure relies heavily on independent contractors and other third parties. Participants are connected through virtual means of communication, meaning they also rely heavily on technology.
Alternatively, some network organizations have many employees, but these employees are broken down into small independent modules. In either case, network or virtual structures are examples of decentralized organizational structures.
Pros and Cons of Network Organizational Structures
Advantages of a network organizational structure include lower startup and operational costs, greater flexibility and the ability to source talent globally. Employees, contractors and other third parties require less direct supervision and can focus on a single, explicitly defined task. Network structures can also breed competition and encourage innovation.
Disadvantages include the need to create a special group of managers to inform and control independent contractors. There can also be breakdowns in communication. This is especially common between employees and contractors who work vastly different hours or have varying levels of commitment to the organization.
Having a mix of employees and IC’s can make an organization more diverse and agile. However, it can also make employees feel insecure in their positions. As such, it can be difficult to establish and foster company culture or create loyal employees.
Functional org structures are similar to both divisional and hierarchical org structures. A functional org structure is perhaps best described as a more fleshed-out hierarchical org structure. It typically provides more information about a company’s various roles and reporting structure.
In an article for The Thriving Small Business, Patricia Lotich explains. Lotich writes that a functional org structure separates individuals “by specific functions performed” and by expertise. In a corporation best represented by a functional chart, “managers of different functional areas all report up to one director or vice president.” That director or VP then “has responsibility for all of the operational areas.” The org chart designed by Daniel McCallum for the Erie Railway back in the 1800s described a functional structure.
Pros and Cons of a Functional Organizational Structure
Functional structures can make organizations more efficient and make each department more targeted in its approach to problem-solving. Instead of stretching certain workers too thin or misallocating work to the wrong team, functional structures provide the “right person for the job.” Reporting structures, roles and project goals are all clear, so redundancies are far less likely.
As with the other structures on this list, there are some disadvantages to a functional org structure. In another article for The Houston Chronicle, Patrick Gleeson, Ph.D. identifies four key disadvantages to functional structures. According to Dr. Gleeson, teams can become cut-off from other teams — just like in a hierarchical structure. They are not as integrated as employees in a matrix structure. This isolation can erode an employee’s loyalty to the company and eat away at the company’s culture. Isolation can also lead to “lack of coordination” and “territorial disputes” between departments.
As you might have guessed, a divisional org structure breaks an organization down into divisions based on a certain function or location. A divisional org structure might divide the organization along geographic lines or by different product types that company manufactures or distributes.
Divisional charts are also common in businesses with multiple departments — e.g. R&D, marketing, finance and others. “Divisional org structure” is also an umbrella term for more specific org structures like process, geographic, product and customer. Divisional structures are typically better suited to larger organizations than to small businesses.
Pros and Cons of a Divisional Organizational Structure
Like functional org structures, divisional organizational structures allocate responsibility in a more targeted way. Roles are clearly defined, each team has its own manager and every division is empowered to fulfill its own specific goals. This makes tracking progress and rewarding employees far easier.
If an issue arises, employees know which division is responsible for fixing that problem. This increases efficiency and makes a business more responsive to its clients. According to this resource from Indeed, a divisional structure “creates more accountability” and “improves company culture.” If arranged geographically, a divisional org structure can also help a business “gain local competitive advantage.”
Unfortunately, businesses that opt for divisional organizational structures are more expensive to maintain. This is because they require a robust central command that oversees the entire operation — plus many managers, multiple HR departments and other personnel. Like hierarchical structures, divisional structures can isolate one division from the next and foster damaging rivalries between those divisions.
Next on our list of organizational charts is the horizontal or flat org structure. A flat organizational structure is the direct opposite of a hierarchical structure. Horizontal and flat organizational structures imply that all members of the company are on equal footing. Startups, co-ops and collectives are most likely to utilize this type of org chart.
A flat or horizontal org structure might identify formal relationships within the organization. For example, it might describe relationships between teams or those between a manager and the employees he or she supervises. However, roles and departments are arranged horizontally rather than vertically. This reinforces the idea that no employee ranks higher than another and no team is more important than another.
Pros and Cons of a Flat Organizational Structure
Benefits of a flat structure include employee independence, autonomy and shared decision-making authority. Leading a business with a flat organizational structure can be less expensive. This is because employees self-monitor rather than requiring direction from a middle manager or direct supervisor. The flow of information in a flat organizational structure is free, so communications between employees are streamlined. This allows for faster decision-making, more efficient project fulfillment and less bureaucracy. It also means less delegating for business owners.
Of course, it can be incredibly difficult to maintain a flat organizational structure as your business expands. Flat organizational structures require a certain type of business owner and a certain type of employee. Employees must be able to manage themselves and their workload without much input. They must also be able to advocate for benefits and promotions, which are less available in a flat org. Business owners must be comfortable giving up a certain degree of control and trusting their employees’ intuition, expertise and creative process.
Without managers to resolve disputes, flat org structures can also lead to interpersonal issues. This resource from org chart management platform Organimi explains that when all employees are “equal,” they tend to “decision-making another for control.” According to Organimi, “if power struggles are left unchecked, they can erode motivation, stifle efficiency and harm your culture.”
Last on our list is the circular organizational structure, which is a type of hierarchical structure. The primary difference between circular and traditional hierarchical structures is the intention behind them. Visually, a traditional hierarchical structure places a board of directors or C-suite at the top. It then organizes other employees in declining order of importance and authority. A circular structure still allocates most control to executives, but seeks to equalize team members, increase collaboration and create a free flow of information. Different teams, departments are not siloed. Instead, they are encouraged to collaborate with each other.
Pros and Cons of a Circular Organizational Structure
As one might imagine, circular structures can boost morale by integrating departments. It can also make the transfer of information from one department to the next much more efficient. This spirit of collaboration and clear definition of roles within the organization can make retaining existing employees easier. However, a non-traditional take on the formal hierarchical structure can also make onboarding new employees more complicated.
Still, the pros often outweigh the cons as long as management explains the system properly. According to this post from software company Planergy, a circular organizational structure can “improve resource sharing and decision-making.” It can also insulate the company “against disruptions due to staff changes.”