The 9 constituent elements of the organizational structure of a company [With Diagrams]
I know that behind every great company, division or team is a great organizational structure: one that fits the goals of a company, division or team and helps employees understand how they fit into the whole. These are the fundamental elements of your business.
A few months ago, I drew my own organizational chart for the first time and I was quite proud to see the structure of my company taking shape in front of me.
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In addition to my growth, the organizational structure helped the team understand their position within the company, the team they are a part of (even if they don’t always work together), and the important role each person plays.
Without the proper structure and building blocks, a business may not operate effectively or even collapse. However, new business owners or companies experiencing rapid growth may not know which organizational structure is best for them or why.
So how do you decide what type of organizational structure is best for your company, division, or team? Before we can answer this question, we must first understand how an organizational structure is built.
Let’s explore nine key elements of organizational structure using some visual examples.
9 building blocks of organizational structure
Chain of command Span of control Centralization and decentralization Specialization Formalization Departmentalization Functional structure Divisional structure Matrix structure
1. Chain of command
One of the most fundamental elements of an organizational structure, the chain of command, is exactly what it sounds like: an unbroken line of authority that extends from the top of the organization (e.g., a CEO) down to the base. The chain of command specifies who reports to whom within the organization.
2. Scope of control
Span of control refers to the number of subordinates a superior can manage effectively. The higher the ratio of subordinates to superiors, the wider the span of control.
3. Centralization and decentralization
Who makes decisions in an organization? If decision-making power is concentrated in a single point, the organizational structure is centralized. If decision-making power is dispersed, the structure is decentralized.
While a decentralized structure promotes a more democratic decision-making process, it can also slow it down, making it more difficult for organizations to function effectively.
4. Specialization
Also known as division of labor, specialization is the degree to which an organization’s activities or tasks are broken down and divided into individual jobs.
High specialization can be beneficial to an organization because it allows employees to become “masters” in specific areas, thereby increasing their productivity.
However, low specialization allows for greater flexibility, as employees can more easily tackle a wider range of tasks (instead of being specialized for a single task).
5. Formalization
Similar to specialization, formalization concerns how jobs are structured within an organization. The key differentiator here is that formalization also takes into account the extent to which rules, procedures, and other mechanisms govern an employee’s tasks and activities.
A formal organizational structure seeks to separate the individual from the role or position, because the role or position remains the same regardless of who holds it. On the other hand, an informal organization places more value on the individual. It allows the evolution of a role or position based on preferences, skills, etc. of an individual, and places less importance on the team or department of which that individual is a part.
6. Departmentalization
Departmentalization refers to the process of grouping jobs together to coordinate common activities and tasks.
If an organization has rigid departmentalization, each department or team is highly autonomous and there is little (or no) interaction between different teams. In contrast, loose departmentalization means teams have more freedom to interact and collaborate.
It should be noted that the way an organization is departmentalized is often used as an indicator of that organization’s overall type of organizational structure.
7. Functional structure
A functional structure organizes a business into departments such as sales, marketing, finance, HR, etc.
A functional structure creates defined roles and specialists, but can also lead to teams working in silos and create communication problems.
8. Divisional structure
A divisional structure organizes teams by products, markets, or geographic locations, allowing each division to operate independently and focus on specific needs.
This structure provides flexibility and promotes accountability by division, and the divisions act like mini-companies, usually with their own management and departments, as you can see in the infographic below.
The divisional structure can be resource intensive and inefficient if roles are duplicated between divisions without adequate coordination. He best suited for large organizations such as global brands McDonalds, Pepsi or Johnson & Johnson.
9. Matrix structure
A matrix structure combines functional and divisional structures.
Employees report to project managers, which promotes collaboration and flexibility and enables cross-functional teamwork.
However, this can become complex, create conflicting demands and cause confusion. This works best for organizations that need cross-department collaboration or are managing multiple projects simultaneously.
The organizational structure that suits you
Currently my company probably uses a centralized structure, which is good since my company is very small. However, all decisions come back to the central point (me), which I don’t like!
Researching the types of organizational structures helps me see where I would like to take my business and gives me a goal.
It’s important to note that the size of the business is not what determines which structure is right for you. Before deciding on your business structure, you need to think about a range of factors such as your company culture, product/service, industry, projected growth and more.
If you would like to learn more about functional organizational structures, as well as other types of structures, download the full resource below.
Editor’s note: This article was originally published in November 2014 and has been updated for completeness.
