What Is Organizational Structure?

Organizational structure is the backbone of all operating procedures and workflows at any company.
It determines each employee’s place and role in the business and is key to organizational
development.

A clear structure allows every team member to be involved. When employees know what they’re
responsible for and who they report to – which isn’t the case in many fast-growing companies –
they’re more likely to take ownership of their work.

Having a documented organizational structure in place enables employes to improve efficiency and
provides clarity for each individual employee and business unit. With this clarity, departments can
become more focused on how their actions and goals drive business outcomes.

To build an org structure, you need to consider your business size, life cycle, goals, and positioning.
Apart from considering the current environment your company operates in, you should also think of
where you want to see the organization in five years, a sign of organizational health.

Basic Elements of Organizational Structure Design

An organizational structure is based on a range of elements, including:

 Work specialization
  Departmentation

 Chain of command

 Span of control

 Centralization/Decentralization

 Formalization

Work specialization

Work specializations define how responsibilities are split between employees based on the job
description. It’s used to split projects into smaller work activities and assign digestible tasks to
individual employees. The most common results of improper specialization are low efficiency and
burnout.

Documentation

Documentation is an act of grouping specialists on the basis of the job description, skills, location, or
other factors that connect them.

The biggest challenge is choosing the criteria for departmentation. In many cases, it’s no more
enough to apply functional departmentation – where employees are grouped based on the tasks
they perform. Startups often go for matrix departmentation that involves combining two types of
departmentation and takes the best out of both worlds. For instance, functional departmentation
can be joined by geographical departmentation to better serve clients in different locations.

Chain of command

Chain of command represents a system for passing instructions and reporting within an organization.
Ideally, it distributes the power, supports knowledge sharing, and encourages employee
accountability.

The traditional chain of command makes decision-making more complex and does not allow for
much flexibility. On the contrary, modern approaches strive to enhance employee autonomy and
avoid micromanagement.

Span of control

Span of control regulates the number of direct reporters managed by a single supervisor. It heavily
depends on the three aforementioned elements of organizational structure. Furthermore, to identify
the right span of control, you need to evaluate your leaders’ capacity, workplace size, and
experience level of employees.

Centralization and decentralization

Centralization and decentralization are the concepts defining how managers, as well as employees,
give input on company goals and strategy. While centralization gives leaders the ultimate control
over decision-making processes, decentralization allows employees to impact business decisions.

Formalization

Formalization determines to which extent business processes, policies, and job descriptions are
standardized. It may regulate communication between employees and managers, workplace culture,
operational procedures, etc.
Centralized vs. Decentralized Organizational Structures

All organizational structures are either centralized or decentralized. When designing an

organizational structure, leaders must decide which is best for your company. Here are the
differences between the two:

Centralized organizational structure

In a centralized organizational structure, decisions are made by high-level managers and are
distributed down the chain of command.

Centralized organizational structures have a range of advantages, like clear responsibilities,

better process governance, and a straightforward chain of command. It places decision-making
responsibilities on leadership who can foresee the long-term impact of important decisions.

The biggest drawback of a centralized organizational structure is the time the decision-making
process takes in large companies. For example, individual team managers must run requests up the
chain of command before going forward.

For GTM and customer-facing teams, this can slow down the customer experience, resulting in
missed opportunities and poor service. It can also hamper companies’ ability to innovate, with
centralized organizations being less agile and nimble than decentralized ones.

Often, it’s recommended that early-stage startups and small businesses design a centralized
organizational structure.

Decentralized organizational structure

In a decentralized structure, lower-level employees identify issues and make decisions without
communicating them up the chain of command to upper management. Greater autonomy
empowers employees to take action, eliminating process delays, enabling employees with
confidence to make decisions, and driving growth.

Even in decentralized organizations, clear hierarchies still exist. The c-suite, directors, and other
leadership roles still operate at a higher capabilities than new and entry-level employees. However,
teams can make decisions without approval from centralized leadership, allowing them to act fast
and take ownership of their areas of expertise.

This type of structure is common for fast-growing companies, companies with regional markets, and
emerging industries. A decentralized structure makes it more accessible for employees to navigate
different roles and work on what’s most impactful at that time in a company’s lifecycle.

How do they compare? Quick differences:

Centralized Organization Decentralized Organization

Directors and management at different

One high-level management body at the
levels (whether that’s regional-based,
top of the command creates company
Decisions department-based, subsidiary-based)
strategies, builds procedures, assigns
makes decisions for their specific
roles and acts as decision-makers.
department and teams.

Information and decisions come from Inter-departmental communication

the top down. Employees down the org happens openly and freely. Allows for
Communication
chart follow orders from c-suite and different teams to experiment and
executives. share results with other business units.

Overall company strategy (and success) Department leaders, managers, and

comes from a small group of c-suite employees are all responsible for the
Responsibilities executives who design and execute this success of the company. Enables
vision with little input or feedback from employees to innovate, share input,
others. and provide feedback.

Best for large organizations with

Company size Best for smaller organizations.
sprawling business units.
Types of Organizational Structures

1. Hierarchical org structure

Hierarchical org chart example

The pyramid-shaped organizational chart we referred to earlier is known as a hierarchical org chart.
It’s the most common type of organizational structure—the chain of command goes from the top
(e.g., the CEO or manager) down (e.g., entry-level and lower-level employees), and each employee
has a supervisor.

Pros

 Better defines levels of authority and responsibility

 Shows who each person reports to or who to talk to about specific projects

 Motivates employees with clear career paths and chances for promotion

 Gives each employee a specialty

 Creates camaraderie between employees within the same department

Cons

 Can slow down innovation or important changes due to increased bureaucracy

 Can cause employees to act in the interest of their department instead of the company as a
whole

 Can make lower-level employees feel like they have less ownership and can’t express their
ideas for the company

2. Functional org structure

Functional org chart example

Similar to a hierarchical organizational structure, a functional org structure starts with positions with
the highest levels of responsibility at the top and goes down from there. Primarily, though,
employees are organized according to their specific skills and their corresponding function in the
company. Each separate department is managed independently.

Pros

 Allows employees to focus on their role

 Encourages specialization
  Help teams and departments feel self-determined

 Is easily scalable in any sized company

Cons

 Can create silos within an organization

 Hampers interdepartmental communication

 Obscures processes and strategies for different markets or products in a company

3. Horizontal or flat org structure

Horizontal or flat org chart example

A horizontal or flat organizational structure fits companies with few levels between upper
management and staff-level employees. Many startup businesses use a horizontal org structure
before they grow large enough to build out different departments, but some organizations maintain
this structure since it encourages less supervision and more involvement from all employees.

Pros

 Gives employees more responsibility

 Fosters more open communication

 Improves coordination and speed of implementing new ideas

Cons

 Can create confusion since employees do not have a clear supervisor to report to

 Can produce employees with more generalized skills and knowledge

 Can be difficult to maintain once the company grows beyond startup status

4. Divisional org structure

In divisional organizational structures, a company’s divisions have control over their own resources,
essentially operating like their own company within the larger organization. Each division can have its
own marketing team, sales team, IT team, etc. This structure works well for large companies as it
empowers the various divisions to make decisions without everyone having to report to just a few
executives.

Depending on your organization’s focus, there are a few variations to consider.

Market-based divisional org structure

Divisions are separated by market, industry, or customer type. A large consumer goods company, like
Target or Walmart, might separate its durable goods (clothing, electronics, furniture, etc.) from its
food or logistics divisions.

Market-based divisional org chart example

Product-based divisional org structure

Divisions are separated by product line. For example, a tech company might have a division
dedicated to its cloud offerings, while the rest of the divisions focus on the different software
offerings—e.g., Adobe and its creative suite of Illustrator, Photoshop, InDesign, etc.
Product-based divisional org chart example

Geographic divisional org structure

Divisions are separated by region, territories, or districts, offering more effective localization and
logistics. Companies might establish satellite offices across the country or the globe in order to stay
close to their customers.
Geographical divisional org chart example

Pros

 Helps large companies stay flexible

 Allows for a quicker response to industry changes or customer needs

 Promotes independence, autonomy, and a customized approach

Cons

 Can easily lead to duplicate resources

 Can mean muddled or insufficient communication between the headquarters and its
divisions

 Can result in a company competing with itself

5. Matrix org structure

Matrix org chart example

A matrix organizational chart looks like a grid, and it shows cross-functional teams that form for
special projects. For example, an engineer may regularly belong to the engineering department (led
by an engineering director) but work on a temporary project (led by a project manager). The matrix
org chart accounts for both of these roles and reporting relationships.

Pros

 Allows supervisors to easily choose individuals by the needs of a project

 Gives a more dynamic view of the organization

 Encourages employees to use their skills in various capacities aside from their original roles

Cons

 Presents a conflict between department managers and project managers

 Can change more frequently than other organizational chart types

6. Team-based org structure

Team-based org chart example

It’ll come as no surprise that a team-based organizational structure groups employees according to
teams—think Scrum teams or tiger teams. A team organizational structure is meant to disrupt the
traditional hierarchy, focusing more on problem-solving, cooperation, and giving employees more
control.

Pros

 Increases productivity, performance, and transparency by breaking down silo mentality

 Promotes a growth mindset

 Changes the traditional career models by getting people to move laterally

 Values experience rather than seniority

 Requires minimal management

 Fits well with agile companies with Scrum or tiger teams

Cons

 Goes against many companies’ natural inclination of a purely hierarchical structure

 Might make promotional paths less clear for employees

See why forming tiger teams is a smart move for your organization.

Learn more

7. Network org structure

Network org structure example

These days, few businesses have all their services under one roof, and juggling the multitudes of
vendors, subcontractors, freelancers, offsite locations, and satellite offices can get confusing. A
network organizational structure makes sense of the spread of resources. It can also describe an
internal structure that focuses more on open communication and relationships rather than hierarchy.

Pros

 Visualizes the complex web of onsite and offsite relationships in companies

 Allows companies to be more flexible and agile

 Give more power to all employees to collaborate, take initiative, and make decisions

 Helps employees and stakeholders understand workflows and processes

Cons

 Can quickly become overly complex when dealing with lots of offsite processes

 Can make it more difficult for employees to know who has final say

Consider the needs of your organization, including the company culture that you want to develop,
and choose one of these organizational structures.

8. Process-based structure
Process-based structure example

A process-based structure organizes employees into groups or departments based on steps of a

process. The leader of the company is listed at the top, as they oversee all processes. Each step of
the process has a supervisor and employees who do work in that process. The chart reads from left
to right. One process can not begin until the process before it is completed.

Pros

 Can lead to faster and more efficient processes

 Promotes teamwork within departments and across departments

Cons

 Can lead to barriers between departments

 Can lead to miscommunication between departments, especially during handoffs

9. Circular structure
Circular org chart example

A circular organizational structure puts leaders of the organization at the center rather than the top
so they can share information outward rather than pass it down a chain of command. Employees in
different departments are also seen as part of a larger whole rather than siloed off by department.

Pros

 Promotes the flow of information across the organization

 Promotes communication and collaboration between employees and departments

Cons

 Can cause confusion around who to report to, especially for new employees

 Can take longer to make decisions

10. Line structure

A line structure is one of the simplest organizational structures as authority flows from top to
bottom. Each department is ran by a manager and works toward a common organizational goal.

Pros

 Reporting structure is clear

  Stable environment

Cons

 Can be inflexible

 Can limit innovation and specialization

 Can lead to managers having a lot of power

Departmentalization and Span of Control are two key concepts in organizational structure, both
crucial in determining how a company or organization is managed and how work is divided.

1. Departmentalization

Departmentalization refers to the process of grouping activities and tasks within an organization into
specific departments, divisions, or teams. The purpose of departmentalization is to achieve
efficiency, better control, and specialization in different areas of work. There are several types of
departmentalization:

Types of Departmentalization:

1. Functional Departmentalization:

o Groups employees based on specialized functions, such as marketing, finance,

human resources, production, etc.

o Example: A company may have a marketing department, a finance department, and

a human resources department.

2. Product Departmentalization:

o Groups employees based on the products or product lines the organization

produces.

o Example: A company that sells both electronics and home appliances may have
separate departments for each product type.

3. Geographical Departmentalization:

o Groups employees based on their geographical locations, such as regions, countries,

or districts.

o Example: A multinational company may have departments for North America,

Europe, Asia, etc.

4. Customer Departmentalization:

o Focuses on the types of customers the organization serves (e.g., corporate clients,
individual consumers, government contracts).
 o Example: A bank may have separate departments for personal banking and
corporate banking.

5. Process Departmentalization:

o Grouping based on the production process or specific tasks.

o Example: A manufacturing plant may have separate departments for assembly,

packaging, and shipping.

2. Span of Control

Span of control refers to the number of subordinates or employees a manager or supervisor is

responsible for overseeing. It impacts the efficiency of management, communication, and decision-
making within an organization. The span of control can be classified as either wide or narrow.

Types of Span of Control:

1. Wide Span of Control:

o A manager supervises a larger number of subordinates.

o This structure is often seen in organizations with standardized tasks or a high degree
of employee autonomy.

o Advantages: Greater cost efficiency, quicker decision-making, and more direct

communication.

o Disadvantages: Managers may become overwhelmed, less personalized supervision,

and reduced ability to give individual attention.

2. Narrow Span of Control:

o A manager supervises a smaller number of subordinates.

o This is common in organizations where tasks are complex, requiring more

supervision and attention.

o Advantages: Closer supervision, better control, and more communication with

subordinates.

o Disadvantages: Increased managerial costs, slower decision-making, and less

employee autonomy.

Factors Affecting Span of Control:

1. Complexity of the Work: More complex work usually requires a narrower span of control.

2. Level of Competence of Employees: Highly skilled and competent employees may need less
supervision, resulting in a wider span of control.

3. Managerial Style: Some managers prefer to work closely with their teams, resulting in a
narrower span of control.
 4. Geographical Distribution: If employees are spread over a large geographical area, it may
require a narrower span of control due to logistical challenges.

5. Technology and Communication: Advances in technology and communication may enable a

wider span of control due to better management tools and faster information exchange.

Relationship between Departmentalization and Span of Control

 Departmentalization defines the structural division of the organization into various

specialized groups, whereas Span of Control determines how many individuals a manager
will oversee within these departments.

 A wide span of control might work well in functional departmentalization, where tasks are
standardized and employees are specialized. However, narrow spans of control may be
necessary for product or customer-based departmentalization, where more detailed
oversight is needed.

1. Authority

Definition:

 Authority is the legitimate power granted to a person to make decisions, give orders, and
command resources within the scope of their position in an organization. It is the right to
direct and control the activities of others.

Objectives of Authority:

 Control and Directing: Authority helps managers control and direct their subordinates to
achieve organizational goals.

 Decision-Making: It allows managers to make decisions and take action in line with
organizational objectives.

 Establishing Order: Authority ensures there is clarity in roles and responsibilities, reducing
confusion and promoting efficiency.

 Providing Accountability: With authority comes accountability, which ensures that decisions
are made responsibly and with due consideration of the outcomes.

Types of Authority:
  Line Authority: The direct authority to command and make decisions in the hierarchical
structure of an organization.

 Staff Authority: The advisory authority to provide expertise and support to line managers.

 Functional Authority: The authority given to certain employees to perform specific

functions, even if they are not part of the direct line of command.

2. Responsibility

Definition:

 Responsibility refers to the duty to perform a task or duty assigned to an individual. It is the
obligation to complete a task or activity as required, and to meet expectations in a timely
and effective manner.

Objectives of Responsibility:

 Accountability: Responsibility ensures that employees are answerable for the tasks assigned
to them.

 Task Completion: It ensures that work is done efficiently and to the standard required by the
organization.

 Goal Achievement: Responsibility aligns individual tasks with the organization’s larger goals,
ensuring each task contributes to overall success.

 Promoting Efficiency: Assigning responsibility ensures that tasks are carried out
systematically, avoiding duplication and confusion.

Types of Responsibility:

 Personal Responsibility: The obligation of an individual to complete their own tasks.

 Collective Responsibility: Shared responsibility within a team or department for completing

group tasks.

3. Delegation

Definition:

 Delegation is the process by which a manager assigns responsibility and authority for specific
tasks to subordinates. It involves transferring the right to make decisions and the
accountability for the task’s outcome.

Objectives of Delegation:

 Workload Distribution: Delegation helps in distributing work across employees, preventing

overload on managers and enhancing productivity.

 Development of Employees: It allows employees to gain new skills, experience, and

authority, contributing to their personal and professional growth.
  Fostering Efficiency: By delegating tasks to the most appropriate individuals, organizations
can achieve greater efficiency and focus on higher-level priorities.

 Empowerment: Delegation empowers employees by giving them the responsibility to make

decisions within their scope of work.

 Focus on Critical Tasks: Managers can focus on strategic decisions and high-priority tasks,
leaving routine tasks to subordinates.

Principles of Effective Delegation:

 Clarity of Task: Clear and concise explanation of the task.

 Authority with Responsibility: Ensure that the delegated individual has the necessary
authority to perform the task and make decisions.

 Accountability: The delegate remains accountable for the task’s outcome.

 Proper Supervision: Regular monitoring and guidance to ensure progress and achievement
of objectives.

Relationship Between Authority, Responsibility, and Delegation

 Authority and Responsibility: These two concepts are intrinsically linked. A person with
authority is given the right to make decisions, while responsibility holds them accountable
for the outcomes of those decisions. For authority to be effective, responsibility must also be
assigned, creating a system of checks and balances.

o Balance: If a person is given authority without responsibility, they can make

decisions but are not accountable for them. Similarly, if someone has responsibility
but no authority, they may be unable to complete tasks or make effective decisions.

 Delegation: Delegation is the process that involves both authority and responsibility. When a
manager delegates a task, they transfer authority to the subordinate to carry out the task
while maintaining overall responsibility for the outcome.

o Delegation and Authority: In delegation, authority is transferred along with

responsibility to perform the task. However, the manager still retains ultimate
accountability for the results.

o Delegation and Responsibility: When a task is delegated, the employee receives

responsibility for completing the task, but the manager remains responsible for
ensuring the task aligns with organizational objectives.

 Delegation vs. Authority: When a manager delegates, they give the subordinate authority to
make decisions within the scope of the task. However, the final accountability (responsibility)
remains with the manager.

 Delegation vs. Responsibility: Responsibility is the duty to perform a task, and when a
manager delegates a task, they transfer the responsibility of completing it to the
subordinate, though they still oversee the overall execution.
Summary of the Relationship:

1. Authority enables employees to make decisions and direct others.

2. Responsibility ensures that tasks are completed and individuals are answerable for their
performance.

3. Delegation involves transferring authority and responsibility to others, allowing tasks to be

carried out effectively.

Comparison Chart

Basis for Authority Responsibility

Comparison

Meaning Authority refers to the power or right, Responsibility denotes duty or obligation to
attached to a particular job or undertake or accomplish a task successfully,
designation, to give orders, enforce assigned by the senior or established by one's
rules, make decisions and exact own commitment or circumstances.
compliance.

What is it? Legal right to issue orders. Corollary of authority.

Results from Formal positon in an organization Superior-subordinate relationship

Task of Delegation of authority Assumption of responsibility

manager

Requires Ability to give orders. Ability to follow orders.

Flow Downward Upward

Objective To make decisions and implement it. To execute duties, assigned by superior.

Duration Continues for long period. Ends, as soon as the task is accomplished.