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I know that behind every great company, department or team is a great organizational structure — a structure tailored to the goals of the company, department or team and one that helps employees understand how they fit into the bigger picture. These are the fundamental building blocks of your business.
A few months ago, I drew my own organization chart for the first time and I was quite proud when I saw the outline of my company’s structure in front of me.
![→ Download Now: An Illustrated Guide to Organization Charts [Free Guide + Templates]](https://no-cache.hubspot.com/cta/default/53/7cbd0328-6c8c-40e0-98dd-c3b6e6be96f0.png)
In addition to my fulfillment, the organizational structure helped the team understand their position within the company, the team they are a part of (even though they don’t always work together) and the significant role each person plays.
Without proper structure and building blocks, a business may not function effectively or even fail. However, new or rapidly growing business owners may not know which organizational structure is best for them and why.
So how do you decide which type of organizational structure is best for your company, department or team? Before we can answer that question, we must first understand how the organizational structure is built.
Let’s explore the nine key components of organizational structure using some visual examples.
9 Building blocks of the 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 runs from the top of the organization (eg the CEO) all the way down. The chain of command clarifies who answers to whom within the organization.
2. Span of control
Span of control refers to the number of subordinates that a superior can effectively manage. The higher the ratio of subordinates to superiors, the wider the span of control.
3. Centralization and decentralization
Who makes decisions in the organization? If the decision-making power is concentrated in one point, the organizational structure is centralized. If decision-making power is spread, the structure is decentralized.
Although a decentralized structure promotes a more democratic decision-making process, it can also slow it down, making it difficult for organizations to operate effectively.
4. Specialization
Also known as division of labor, specialization is the degree to which activities or tasks in an organization are broken down and divided into individual jobs.
High specialization can be beneficial to an organization, as it allows employees to become “masters” in certain areas, increasing their productivity as a result.
However, low specialization allows for greater flexibility, as employees can more easily tackle a wider range of tasks (as opposed to specializing in a single task).
5. Formalization
Similar to specialization, formalization deals with how jobs are structured within an organization. The key difference here is that formalization also takes into account the degree to which rules, procedures, and other mechanisms govern the tasks and activities of employees.
A formal organizational structure tends to separate the individual from the role or position, since the role or position remains the same regardless of who holds it. An informal organization, on the other hand, values the individual more. It allows for the evolution of a role or position based on an individual’s preferences, skill set, etc., and places less importance on the team or department that the individual is a part of.
6. Departmentalization
Departmenting refers to the process of grouping jobs in order to coordinate common activities and tasks.
If the organization has a rigid department, each department or team is highly autonomous, and there is little (or no) interaction between different teams. In contrast, loose divisions mean that teams have more freedom to interact and collaborate.
It is worth noting that the way an organization is divided into departments is often used as a proxy for the overall type of organizational structure that organization has.
7. Functional structure
The functional structure organizes the company into departments such as sales, marketing, finance, HR, etc.
A functional structure creates defined roles and specialists, but it can also lead to teams working in silos and create communication problems.
8. Divisional structure
A divisional structure organizes teams by product, market, or geographic location, allowing each department to operate independently and focus on specific needs.
This structure offers flexibility and encourages departmental accountability, with departments acting like small businesses, usually with their own management and departments, as you can see in the infographic below.
A divisional structure can be intensive and inefficient if roles are duplicated across departments without proper coordination. It it is best suited to large organizations such as global brands McDonalds, Pepsi or Johnson & Johnson.
9. Matrix structure
The matrix structure combines functional and divisional structures.
Employees report to project managers, which promotes collaboration and flexibility and enables cross-functional teamwork.
However, it can become complex, create conflicting requirements and lead to confusion. It works best for organizations that need cross-departmental collaboration or managing multiple projects simultaneously.
The right organizational structure for you
Currently, my business probably uses a centralized structure, which is fine because my business 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 something to strive for.
It is important to note that the size of the company is not what determines the right structure for you. Before deciding on your company structure, you should think about a number of things such as your company culture, product/service, industry, projected growth and more.
If you want to learn more about functional organizational structures, as well as other types of structures, download the full resource below.
Editor’s note: This post was originally published in November 2014 and has been updated for comprehensiveness.
