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Organizational Structure for Companies

With Examples and Benefits
By WILL KENTON Updated March 16, 2023
Reviewed by AMY DRURY

Fact checked by ARIEL COURAGE

Investopedia / Julie Bang

What Is an Organizational Structure?

An organizational structure is a system that outlines how certain activities are
directed in order to achieve the goals of an organization. These activities can
include rules, roles, and responsibilities.

The organizational structure also determines how information flows between

levels within the company. For example, in a centralized structure, decisions
flow from the top down, while in a decentralized structure, decision-making
power is distributed among various levels of the organization. Having an
organizational structure in place allows companies to remain efficient and
focused. [1]

KEY TAKEAWAYS
An organizational structure outlines how certain activities are directed
to achieve the goals of an organization.
Successful organizational structures define each employee's job and
how it fits within the overall system.
A centralized structure has a defined chain of command, while
decentralized structures give almost every employee receiving a high
level of personal agency.
Types of organizational structures include functional, divisional,
flatarchy, and matrix structures.
Senior leaders should consider a variety of factors before deciding
which type of organization is best for their business, including the
business goals, industry, and culture of the company.
Understanding an Organizational Structure
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Businesses of all shapes and sizes use organizational structures heavily. They
define a specific hierarchy within an organization. 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.

This structuring provides a company with a visual representation of how it is

shaped and how it can best move forward in achieving its goals. Organizational
structures are normally illustrated in some sort of chart or diagram like a
pyramid, where the most powerful members of the organization sit at the top,
while those with the least amount of power are at the bottom.

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Not having a formal structure in place may prove difficult for certain

organizations. For instance, employees may have difficulty knowing to whom
they should report. That can lead to uncertainty as to who is responsible for
what in the organization.

Having a structure in place can help with efficiency and provide clarity for
everyone at every level. That also means each and every department can be
more productive, as they are likely to be more focused on energy and time.

Centralized vs. Decentralized Organizational Structures

An organizational structure is either centralized or decentralized. Traditionally,
organizations have been structured with centralized leadership and a defined
chain of command. The military is an organization famous for its highly
centralized structure, with a long and specific hierarchy of superiors and
subordinates. In a centralized organizational system, there are very clear
responsibilities for each role, with subordinate roles defaulting to the guidance
of their superiors.

There has been a rise in decentralized organizations, as is the case with many
technology startups. This allows companies to remain fast, agile, and
adaptable, with almost every employee receiving a high level of personal
agency. For example, Johnson & Johnson is a company that's known for its
decentralized structure. [2]

As a large company with over 200 business units and brands that function in
sometimes very different industries, each operates autonomously. Even in
decentralized companies, there are still usually built-in hierarchies (such as the
chief operating officer operating at a higher level than an entry-level associate).
However, teams are empowered to make their own decisions and come to the
best conclusion without necessarily getting "approval" from up top.

Types of Organizational Structures

Functional Structure
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Four types of common organizational structures are implemented in the real
world. The first and most common is a functional structure. This is also referred
to as a bureaucratic organizational structure and breaks up a company based
on the specialization of its workforce. Most small-to-medium-sized businesses
implement a functional structure. Dividing the firm into departments consisting
of marketing, sales, and operations is the act of using a bureaucratic
organizational structure.

Divisional or Multidivisional Structure

The second type is common among large companies with many business units.
Called the divisional or multidivisional (M-Form) structure, a company that uses
this method structures its leadership team based on the products, projects, or
subsidiaries they operate. A good example of this structure is Johnson &
Johnson. With thousands of products and lines of business, the company
structures itself so each business unit operates as its own company with its own
president.

Divisions may also be designated geographically in addition to specialization.

For instance, a global corporation may have a North American Division and a
European Division.

Team-Based
Similar to divisional or functional structures, team-based organizations
segregate into close-knit teams of employees that serve particular goals and
functions, but where each team is a unit that contains both leaders and
workers.

Flat (Flatarchy) Structure

Flatarchy, also known as a horizontal structure, is relatively newer, and is used
among many startups. As the name alludes, it flattens the hierarchy and chain
of command and gives its employees a lot of autonomy. Companies that use
this type of structure have a high speed of implementation.

Matrix Structure
Firms can also have a matrix structure. It is also the most confusing and the
least used. This structure matrixes employees across different superiors,
divisions, or departments. An employee working for a matrixed company, for
example, may have duties in both sales and customer service.

Circular Structure
Circular structures are hierarchical, but they are said to be circular as it places
higher-level employees and managers at the center of the organization with
concentric rings expanding outward, which contain lower-level employees and
staff. This way of organizing is intended to encourage open communication and
collaboration among the different ranks.

Network Structure
The network structure organizes contractors and third-party vendors to carry
out certain key functions. It features a relatively small headquarters with
geographically-dispersed satellite offices, along with key functions outsourced
to other firms and consultants.

Benefits of Organizational Structures

Putting an organizational structure in place can be very beneficial to a
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company. The structure not only defines a company's hierarchy but also allows
the firm to lay out the pay structure for its employees. By putting the
organizational structure in place, the firm can decide salary grades and ranges
for each position.

The structure also makes operations more efficient and much more effective.
By separating employees and functions into different departments, the
company can perform different operations at once seamlessly.

In addition, a very clear organizational structure informs employees on how

best to get their jobs done. For example, in a hierarchical organization,
employees will have to work harder at buying favor or courting those with
decision-making power. In a decentralized organization, employees must take
on more initiative and bring creative problem solving to the table. This can also
help set expectations for how employees can track their own growth within a
company and emphasize a certain set of skills—as well as for potential
employees to gauge if such a company would be a good fit with their own
interests and work styles.

What Are Some Types of Organizational Structures?

The four types of organizational structures are functional, multi-divisional, flat,
and matrix structures. Others include circular, team-based, and network
structures.

What Are the Key Elements of an Organizational Structure?

Key elements of an organizational structure include how certain activities are
directed in order to achieve the goals of an organization, such as rules, roles,
responsibilities, and how information flows between levels within the company.

What Is an Organizational Structure Example?

An example of an organizational structure is a decentralized structure, which
gives individuals and teams high degrees of autonomy without needing a core
team to regularly approve business decisions. A good example of this
decentralized structure is Johnson & Johnson. With thousands of products and
lines of business, the company structures itself so each business unit operates
as its own company with its own president.

What Is an Organizational Structure Chart?

Organizational structures are normally illustrated in some sort of chart or
diagram like a pyramid, where the most powerful members of the organization
sit at the top, while those with the least amount of power are at the bottom.

What Is the Best Organizational Structure?

There is no one best organizational structure, as it depends on the nature of the
company and the industry it operates in.

The Bottom Line

There are entire fields of study based on how to optimize and best structure
organizations to be the most effective and productive. Senior leaders should
consider a variety of factors before deciding which type of organization is best
for their business, including the business goals, industry, and culture of the
company.
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Related Terms
Organizational Chart Types, Meaning, and How It Works
An organizational chart visually outlines the internal structure of a company. more

Corporate Culture Definition, Characteristics, and

Importance
Corporate culture refers to the beliefs and behaviors that determine how a company's
employees and management interact. more

What Is Organizational Behavior (OB), and Why Is It

Important?
Organizational behavior (OB) is the study of how people interact within groups and its
principles are used to make businesses operate more effectively. more

Corporate Hierarchy: Definition, How It Works, and

Configuration
Corporate hierarchy refers to the arrangement of individuals within a corporation
according to power, status, and job function. more
Operations Management: Understanding and Using It
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Operations management (OM) is the administration of business practices to create the
highest level of efficiency possible within an organization. more

Operational Risk Overview, Importance, and Examples

Operational risk summarizes the chances a company faces in the course of conducting its
daily business activities, procedures, and systems. more

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