Organizational structure defines how activities like task allocation, coordination and supervision are directed toward the achievement of organizational goals.
The structure of an organization will determine the modes in which it operates and performs.
An organization’s structure depends entirely on the organization’s objectives and the strategy chosen to achieve them.
Learn more about how Tallyfy helps you define and track your organization’s structure and processes here.
Who is this article for?
- Small to medium-sized businesses in any industry that need to formalize and define their organizational structure
- Startups that are growing and need to put a clear structure in place
- Any organization undergoing change or transformation that needs to rethink its structure
- CEOs, COOs, HR leaders, department heads and managers who are responsible for defining and implementing organizational structure
A clear organizational structure is essential for businesses of any size to ensure efficiency, accountability and the achievement of goals. Without a formalized structure, important activities can fall through the cracks, efforts get duplicated, and information fails to flow to the right people. This article will explore why organizational structure matters and outline some of the most common types of structures used by businesses today.
Why Does Organizational Structure Matter?
An organizational structure defines how activities like task allocation, coordination, and supervision are directed toward the achievement of organizational aims (Fredrickson, 1986). It provides a framework through which an organization operates and performs.
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Structure is a valuable tool in achieving coordination, as it specifies reporting relationships, delineates formal communication channels, and describes how separate actions of individuals are linked together.
Some of the key reasons to establish a clear organizational structure include:
- Designating formal reporting relationships
- Identifying groupings of individuals into departments
- Designing systems to ensure effective communication and coordination
- Assigning authority and responsibility
Without a defined structure, employees may find it difficult to know who they officially report to in different situations, and it may become unclear exactly who has the final responsibility for what. Organizational structure provides clarity on specific human resource issues, such as managerial authority.
Fact
A global survey by Deloitte found that organizational design is a top priority for 92% of companies, with nearly half planning to restructure to support their strategic direction. (Source)
5 Types of Organizational Structures
While there are many potential ways to structure an organization, let’s look at 5 of the most common organizational structure examples:
1. Line Organizational Structure
The line organizational structure is one of the simplest and most traditional. It’s a top-down, hierarchical structure with executives at the top, followed by directors and managers overseeing each department.
Advantages: Simple chain of command, clear lines of authority, specialized units.
Disadvantages: Rigid, slow information flow, little collaboration between departments.
Tip
Line structures work best for small organizations with a single product line that rarely changes.
2. Functional Organizational Structure
Similar to the line structure, a functional structure groups employees by their specific skills and the function they provide. Each functional group has a manager who reports to a top-level executive.
Advantages: Efficiency, in-depth skill specialization, clear career paths within functions.
Disadvantages: Poor communication across functions, narrow points of view, limited flexibility.
3. Divisional Organizational Structure
In a divisional structure, a company’s divisions have control over their own resources and are accountable for their own performance. Each division essentially operates as its own company, controlling its own resources and how much money it spends on certain projects or aspects of the business (Argyres & Silverman, 2004).
Advantages: Flexibility, autonomous decision-making, customization to local markets.
Disadvantages: Duplication of resources, lack of coordination, internal competition.
Tip
Divisional structures are well-suited for large companies with multiple products or markets.
4. Matrix Organizational Structure
A matrix structure is a type of organizational structure in which individuals are grouped simultaneously by two different operational dimensions, such as function and product. This structure can combine the best of both separate structures (Gosselin, 1997).
Advantages: Efficient use of resources, increased information flow, shared best practices.
Disadvantages: Multiple bosses, conflicting loyalties, high stress.
5. Network Organizational Structure
A network structure is often created when one company works with another to share resources – or if your company has multiple locations with different functions and leadership. You may also use this structure to outsource some of your business processes.
Advantages: Flexibility, focus on core competencies, increased innovation.
Disadvantages: Loss of control, communication challenges, cultural barriers.
Fact
According to McKinsey, the COVID-19 pandemic has accelerated the adoption of fully digitized approaches to organizational structure and operating models by 3-4 years. (Source)
Choosing the Right Organizational Structure
There is no one-size-fits-all organizational structure. The optimal structure depends on the organization’s goals, industry, and operating environment (Damanpour & Gopalakrishnan, 1998).
Some key factors to consider when designing an organizational structure include:
- Strategy and objectives
- Size and age of the organization
- Technology and business environment
- Power and control dynamics
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The optimal organizational structure is one that maximizes the organization’s ability to achieve its strategic goals and objectives.
Risks and Warnings
- Overcomplicating the structure can lead to confusion, bureaucracy, and slow decision-making
- Failing to align structure with strategy can hinder the achievement of organizational goals
- Imposing an inappropriate structure can damage employee morale and productivity
- Neglecting to adapt the structure as the organization grows and changes can lead to inefficiency and missed opportunities
Tip
Regularly review and adjust your organizational structure to ensure it supports your current goals and operating environment.
How Tallyfy Can Help
No matter what type of organizational structure you choose, you need a clear way to define, communicate and track responsibilities and processes. That’s where Tallyfy can help.
With Tallyfy, you can:
- Explain processes once and ensure everyone follows the same steps, no matter their role or department
- Set conditional rules to route tasks and decisions to the right people automatically
- Track the real-time status of any process to identify bottlenecks and optimize performance
- Create process templates to standardize best practices across the organization
No matter how you decide to structure your organization, Tallyfy provides the clarity and visibility you need to keep everyone coordinated and aligned. By mapping out processes, automating workflows, and tracking progress, you can ensure your organizational structure is fully implemented and driving maximum value.
How Does Organizational Structure Impact Decision-Making and Innovation?
Organizational structure plays a crucial role in shaping the strategic decision process and innovation within companies. The way an organization is structured can significantly influence how decisions are made, the types of innovations pursued, and the overall effectiveness of the organization.
Research has shown that the characteristics of an organization’s strategic decision process are directly impacted by its structure. For example, organizations with high vertical differentiation (i.e., many layers of management) are more likely to adopt activity-based costing (ABC) over other forms of activity management (Gosselin, 1997). This suggests that the hierarchical nature of such organizations may favor more complex and detailed cost accounting methods.
Fact
A study by Gosselin (1997) found that organizations with high vertical differentiation are positively associated with the adoption of activity-based costing (ABC) over other forms of activity management.
The level of centralization and formalization within an organization also impacts innovation adoption. Damanpour and Gopalakrishnan (1998) propose that the structural characteristics that facilitate the adoption of innovations vary depending on the type of innovation, its radicalness, and the stage of adoption. They argue that different environmental conditions, such as stability and predictability, require different organizational structures to effectively adopt and implement innovations.
Can Centralized R&D Lead to More Impactful Innovations?
The choice between a centralized or decentralized R&D structure can have significant implications for the type of innovation a company produces. Argyres and Silverman (2004) suggest that centralized R&D reduces internal transaction costs associated with coordination across units, leading to innovations that have a larger and broader impact on subsequent technological evolution compared to decentralized research.
Centralized R&D may also facilitate more distant “capabilities-broadening” search, resulting in innovations that draw on a wider range of technologies. However, the evidence for this is mixed, and further research is needed to fully understand the relationship between R&D structure and the breadth of technological search (Argyres & Silverman, 2004).
How Can Jazz Improvisation Help Us Understand Organizational Structure?
The metaphor of jazz improvisation can provide a fresh perspective on organizational structure. Hatch (1999) uses elements of jazz performance, such as soloing, comping, trading fours, listening and responding, and groove and feel, to redescribe organizational structure as ambiguous, emotional, and temporal.
Just as jazz musicians must listen and respond to each other in real-time, organizations must be able to adapt and improvise in the face of changing circumstances. The jazz metaphor highlights the importance of flexibility, collaboration, and creativity in organizational structure and decision-making.
The Future of Organizational Structure: Embracing Agility and Adaptability
As technology continues to evolve at a rapid pace, organizations will need to adapt their structures to remain competitive. Future technologies such as artificial intelligence, blockchain, and the Internet of Things will likely require organizations to become more agile, decentralized, and network-oriented.
By embracing these technologies and adopting more flexible and adaptive structures, organizations can better respond to changing market conditions, customer needs, and technological disruptions. This may involve flattening hierarchies, empowering cross-functional teams, and fostering a culture of experimentation and continuous learning.
Ultimately, the organizations that thrive in the future will be those that can effectively balance structure and flexibility, leveraging technology to drive innovation and maintain a competitive edge in an increasingly dynamic business environment.
Tallyfy Tango – A cheerful and alternative take
Scene: Two coworkers, Olivia and Steve, are chatting by the watercooler in their office.
Olivia: Hey Steve, did you hear the big announcement? The boss is shaking up our entire organizational structure!
Steve: (sarcastically) Oh joy, another reorg. Just when I finally figured out who reports to who around here.
Olivia: I know, right? But apparently this new structure is going to “streamline decision-making” and “break down silos.” Whatever that means.
Steve: Sounds like a bunch of corporate mumbo-jumbo to me. I bet it’ll just make things more confusing.
Olivia: Yeah, like that time they reorganized us into a “matrix structure” and no one knew who their real boss was anymore.
Steve: Well, I guess we’ll have to embrace the chaos once again. Cheers to surviving another restructuring!
Olivia: I’ll drink to that! Here’s hoping this new org structure actually makes sense…for once.
They clink their coffee mugs together and sip, exchanging knowing looks as they ponder the unpredictable yet inevitable reorganization to come in their company.
Related Questions
What are the four 4 types of organizational structures?
The four main types of organizational structures are functional, divisional, matrix, and flatarchy. Each has its own advantages and disadvantages, and the choice depends on factors like company size, industry, and goals. Understanding these structures helps leaders design an organization that maximizes efficiency and effectiveness.
What are 7 organizational structures?
Beyond the main four, there are several other organizational structures worth knowing: team-based, network, projectized, virtual, bureaucratic, and holocratic. These less common structures often blend elements of the main types to create hybrids tailored to a company’s unique needs. The diversity of options shows there’s no one-size-fits-all approach to structuring a business.
What are the 5 best types of organizational structure?
While “best” is subjective, five effective organizational structures for modern companies are matrix, flat, team-based, network, and holocratic. These tend to be more flexible, adaptable, and conducive to collaboration than traditional hierarchical models. However, the optimal structure always depends on the specific company, its people, and its objectives.
What is the best definition of organizational structure?
Organizational structure is the framework a company uses to arrange its people and resources to achieve its goals. It defines reporting relationships, communication channels, and decision-making authority. In essence, structure provides the blueprint for how work gets done. The best structure aligns with strategy, clarifies roles, and facilitates effective operations.
What is a matrix organizational structure?
In a matrix structure, people typically report to both a functional manager and a project manager, creating a “matrix” of intersecting lines of authority. This allows for flexible resource sharing and collaboration across departments. Matrix structures work well for companies with complex projects requiring diverse skill sets, but they can also lead to confusion over roles and priorities.
What is a flat organizational structure?
A flat or horizontal structure minimizes levels of management between executives and employees. Decision-making is decentralized, with power distributed among largely autonomous teams. Flat structures can spur innovation, engagement, and rapid response to change. However, they can become chaotic as a company grows, and they rely heavily on hiring skilled, self-directed workers.
Why is organizational structure important?
Structure is the backbone of an organization. A well-designed structure provides clarity on roles, reporting, and objectives. It facilitates communication and collaboration. And it ensures the right people and resources are in place to execute strategy. Without a coherent structure, even the best business plans fall apart. Structure is the bridge that turns aspirations into results.
References and Editorial Perspectives
Argyres, N., & Silverman, B., S. (2004). R&D, Organization Structure, and the Development of Corporate Technological Knowledge. Strategic Management Journal, 25, 929 – 958. https://doi.org/10.1002/smj.387
Summary of this study
This study explores the relationship between a firm’s choice of R&D structure (centralized or decentralized) and the type of innovation it produces. The authors propose that centralized R&D reduces internal transaction costs associated with cross-unit coordination, leading to innovations with a larger and broader impact on subsequent technological evolution. They also suggest that centralized R&D facilitates more distant “capabilities-broadening” search, resulting in innovations that draw on a wider range of technologies.
Editor perspectives
At Tallyfy, we find this study intriguing as it sheds light on how organizational structure can significantly influence innovation outcomes. Understanding the impact of centralized versus decentralized R&D on the breadth and depth of technological knowledge development is crucial for optimizing workflow and driving impactful innovation.
Damanpour, F., & Gopalakrishnan, S. (1998). Theories of Organizational Structure and Innovation Adoption: The Role of Environmental Change. Journal of Engineering and Technology Management, 15, 1 – 24. https://doi.org/10.1016/s0923-4748(97)00029-5
Summary of this study
This paper develops a complex model for structure-innovation relationships by defining four environmental conditions based on stability and predictability variables of environmental change. The authors articulate organizational structure and innovation characteristics that would hold for firms under each set of conditions. They then compare and extend three theories of structure and innovation, advancing propositions to predict the structural characteristics that facilitate the adoption of different types of innovations at different stages, under varying conditions of environmental change.
Editor perspectives
We at Tallyfy appreciate the comprehensive approach this study takes in examining the interplay between organizational structure, innovation adoption, and environmental change. The proposed framework provides valuable insights for tailoring workflow structures to specific innovation goals and external conditions, enabling organizations to adapt and thrive in dynamic environments.
Fredrickson, J., W. (1986). The Strategic Decision Process and Organizational Structure. The Academy of Management Review, 11, 280 – 297. https://doi.org/10.5465/amr.1986.4283101
Summary of this study
This study synthesizes contributions from the strategic decision process literature and integrates them with literature on organizational structure. The authors propose that an organization’s strategic decision process characteristics are affected by its structure. They also discuss patterns of strategic process characteristics likely to be associated with different types of structures, reaching conclusions on issues such as the accuracy of alternative models of the strategic decision process and the appropriate unit of analysis for studying that process.
Editor perspectives
At Tallyfy, we recognize the critical role organizational structure plays in shaping strategic decision-making processes. This study’s insights into the relationship between structure and decision-making are invaluable for designing workflows that support effective strategy formulation and execution, ultimately driving organizational success.
Gosselin, M. (1997). The Effect of Strategy and Organizational Structure on the Adoption and Implementation of Activity-Based Costing. Accounting, Organizations and Society, 22, 105 – 122. https://doi.org/10.1016/s0361-3682(96)00031-1
Summary of this study
This study examines the effect of strategic posture and organizational structure on the adoption and implementation of activity management (AM) approaches, particularly activity-based costing (ABC). The results show that strategy influences the extent to which strategic business units (SBUs) adopt an AM approach, with vertically differentiated organizations being positively associated with ABC adoption. Furthermore, centralization and formalization are associated with organizations that implement ABC after adopting it. The study provides insight into the paradox of low ABC adoption and implementation rates despite its theoretical benefits.
Editor perspectives
We at Tallyfy find this study’s exploration of the relationship between organizational structure, strategy, and the adoption of innovative costing methods like ABC highly relevant. Understanding the structural and strategic factors that influence the successful implementation of new workflow approaches is crucial for driving organizational efficiency and effectiveness.
Hatch, M., J. (1999). Exploring the Empty Spaces of Organizing: How Improvisational Jazz Helps Redescribe Organizational Structure. Organization Studies, 20, 75 – 100. https://doi.org/10.1177/0170840699201004
Summary of this study
This paper uses jazz as a metaphor to redescribe the concept of organizational structure in ways that align with the emerging vocabulary of organization studies. The author describes basic elements of jazz performance, such as soloing, comping, trading fours, listening and responding, groove, and feel, and builds on these to redescribe organizational structure as ambiguous, emotional, and temporal. The paper demonstrates the concepts it engages and presents a jazz-like performance of Rorty’s method of redescription via metaphor.
Editor perspectives
At Tallyfy, we are intrigued by the use of jazz as a metaphor for understanding organizational structure. The improvisational and responsive nature of jazz resonates with the need for modern workflows to be adaptable, collaborative, and attuned to the dynamic rhythms of the business environment. This creative perspective offers valuable insights for designing agile and harmonious organizational structures.
Sahlman, W., A. (1990). The Structure and Governance of Venture-Capital Organizations. Journal of Financial Economics, 27, 473 – 521. https://doi.org/10.1016/0304-405x(90)90065-8
Summary of this study
This paper describes and analyzes the structure of venture-capital organizations, focusing on the relationships between investors and venture capitalists, and between venture-capital firms and the ventures they invest in. The author emphasizes the agency problems in these organizations and the contracts and operating procedures that have evolved in response. Venture-capital organizations are contrasted with large, publicly traded corporations and leveraged buyout organizations.
Editor perspectives
We at Tallyfy find the unique structure and governance of venture-capital organizations fascinating. The complex relationships and potential agency issues inherent in these setups highlight the importance of well-designed workflows and operating procedures. Understanding how venture-capital firms navigate these challenges offers valuable lessons for streamlining processes and aligning incentives in any organization.
Glossary of terms
Organizational Structure
Organizational structure refers to the formal arrangement of roles, responsibilities, and relationships within an organization. It defines how tasks are divided, grouped, and coordinated, and establishes lines of authority, communication, and decision-making. The structure of an organization can significantly impact its efficiency, adaptability, and ability to achieve its goals.
Centralization
Centralization is a characteristic of organizational structure that refers to the degree to which decision-making authority is concentrated at the top of the hierarchy. In a highly centralized organization, most decisions are made by senior management, while in a decentralized structure, decision-making power is distributed among lower-level managers and employees.
Formalization
Formalization refers to the extent to which an organization relies on rules, procedures, and written documentation to guide employee behavior and decision-making. Highly formalized organizations have explicit, detailed policies and procedures, while less formalized organizations allow for more discretion and flexibility in how tasks are performed.
Vertical Differentiation
Vertical differentiation refers to the number of hierarchical levels within an organization. An organization with many layers of management is considered to have high vertical differentiation, while a flatter structure with fewer levels has low vertical differentiation. The degree of vertical differentiation can impact communication, decision-making speed, and employee autonomy.
Innovation Adoption
Innovation adoption is the process by which an organization decides to implement a new idea, technology, or practice. It involves recognizing the potential benefits of the innovation, evaluating its fit with the organization’s needs and capabilities, and taking steps to integrate it into existing workflows and systems. The success of innovation adoption often depends on factors such as organizational structure, culture, and resources.
