Explore business organizational structures. Learn the definition of a business organizational structure, including flatarchy, and discover the pros of cons of the types of organizational structures of a company.
Business Organizational Structure | Overview, Types & Examples
Table of Contents
- What is the Business Organizational Structure of a Company?
- Types of Business Organizational Structures
- Pros and Cons of Business Organizational Structures
- Business Organizational Structure Examples
- Lesson Summary
- FAQs
- Activities
Writing Prompts about Organizational Structure
The following writing prompts are designed to help you reflect on what you learned in this lesson. After you complete them, you can check your conclusions in the ''Hints and Solutions'' section.
Story Prompt
Write a story about your first day of work as a newly hired employee at a large company that sells athletic footwear for men, women, and children. As you are introduced to people from different departments, what do you learn about the company's organizational structure?
Journal Prompt
Imagine you have recently relocated to a new city and several of your family members are looking to open a restaurant together. Write a journal about how you would explain the organizational structure section of the business plan in order to obtain bank financing. Include a discussion about the characteristics of the business and what organizational structure it would lend itself to.
Short Essay Prompt:
Write a short persuasive essay (3-5 paragraphs) about what type of organizational structure millennials would prefer when entering the workforce. Would they prefer more structure or more freedom in the workplace? What do they expect and value in the workplace?
Hints and Solutions
Story Prompt: Since this large company sells different lines of athletic footwear to three types of consumers, you would quickly learn that the company has a matrix structure. The need for departmentalized leadership would be self-evident when you are introduced to the directors for each division of footwear.
Journal Prompt: Since the restaurant is a small start-up and a family business, the nature of the business would lend itself to a flat structure. With family members as employees, everyone contribute to the business as necessary without significant emphasis placed on job titles and seniority. However, if the business were to grow over time and take on more employees who are not family members, eventually, there may be a need for some level of hierarchy in order to streamline processes during daily operations.
Short Essay Prompt
While millennials value a degree of structure in order to receive support and guidance for achieving career goals, they generally expect more freedom and flexibility in the workplace. Therefore, they usually prefer to avoid workplaces with a hierarchical structure. Since they value creativity and innovation, a ''flatarchy'' structure would empower them to think freely and make decisions.
How do you structure an organization?
When a company is going to be launched, the majority owner(s) and stakeholder(s) will need to plan how the organization will be structured. They can choose how they want to operate and which structure to use based on the goals of the business and the employees they wish to have.
What is an Organisational structure of a company?
An organizational structure of a company is the method used to help manage a company better. The organizational structure of a company will organize the hierarchy, projects, employees, finances, and operations as a management strategy system to best fit the company's needs.
Table of Contents
- What is the Business Organizational Structure of a Company?
- Types of Business Organizational Structures
- Pros and Cons of Business Organizational Structures
- Business Organizational Structure Examples
- Lesson Summary
The business organizational structure of a company is a management strategy used in businesses to better organize to achieve efficiency. The business organizational structure will vary from company to company to meet the needs of that company. Companies need to establish their organizational structure before they launch their business so that communication, hierarchy, and the supply chain are established. This does not mean a company cannot change during its lifetime, as many companies adapt and adjust their organizational structure to better meet the new demands of external or internal factors.
There are several main types of businesses that can be created including sole proprietorship, partnerships, corporations, limited liability companies, and non-profits. All these types of businesses can choose a business organizational structure that best suits their company.
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There are six types of business organizational structures which include hierarchical, flat, flatarchy, functional, divisional, and matrix.
Hierarchical Structure
A hierarchical structure is a very linear organizational method used in a business with a strong chain-of-command. There is often a sole leader with assistant managers underneath them and the rest of the employees below that level. Below is an example displayed as a numbered list with number one being the boss and number five being the lowest ranking employee:
- Owner and Chief executive
- Vice Presidents
- Regional Managers
- Store Managers
- Employees
The importance of hierarchical structure lies for very large corporations to use this organizational structure to better streamline the line of communication and understand the levels of authority because the business is so large.
Flat Structure
Flat structures are businesses that have little to no levels of business management. In a flat business structure model, employees are usually at the same level or at least very close to in authority as managers are. This is because the owners or stakeholders of the business want to increase responsibility and decision-making among all their employees.
A great example of this is within the video game industry. Some video game companies have no job titles and employees can choose which projects to work on. Employees can see the projects of all teams and if they want to create a new video game, they are responsible for the team, funding, and operations of it, away from management restrictions and structures.
This gives importance to creating a strong sense of ownership among the employee base and generates a sense of pride with each project.
Flatarchy Structure
A flatarchy structure is a hybrid business organization that implements a hierarchy structure and a flat structure. Flatarchy will have two groups, teams, or departments within their business. One part will follow a hierarchy structure while the other will be organized in the flat structure. This is usually used in a business when a company needs to have most of it to be organized in a hierarchy, but a smaller team operates in a flat structure model so that they have the flexibility and independence to perform certain actions.
This type of structure can best be used in a company that is expanding into a new region or market. The traditional part of the company can remain focused on the "bread and butter" of its revenue stream while the "flat team" can be the experimental part of the company that is seeking new markets or new interests in other areas of the world.
Functional Structure
A functional structure is used in business to organize employees into departments depending on their specific business activity or purpose. There is a hierarchy within each department and all the teams are working independently of one another. For example, a new technology start-up would need several independent teams organized to accomplish various tasks to get the business going. Departments like information technology (IT), marketing, sales, finance, and production would be essential in a functional structure business model.
Divisional Structure
Like functional structure, divisional structure groups employees into large departments based on a product, service, or type of consumer. The difference in a divisional from a functional structure is that each division group receives all the needed teams to function independently. For example, each department consists of a marketing team, IT team, sales team, finance team, and production team. An example of departments that can be found within a divisional organization structure of a consumer goods business is the Electronics department, kitchen equipment department, and large household appliances department.
Divisional structures can be found in national or international companies that have multiple headquarters from which they conduct business. Instead of waiting for the main corporate division to communicate on small, day-to-day operations, divisional structures can react and maneuver in their unique markets.
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Matrix Structure
A matrix structure organizational method is used for businesses that want to share skills across various teams. In a matrix structure, an employee may report to multiple managers overseeing the project they are working on. For example, an employee could report to the project manager and the chief operations manager for a project.
Matrix structure is used a lot in start-ups or companies in transition with product or service offerings. The matrix structure allows resources and labor to flow more efficiently between projects upon the different levels of production.
Each business organizational structure has advantages and disadvantages. It's up to the majority owners and stakeholders to choose a business structure and adapt to the goals of the business. The following sections are a list of the pros and cons of each of the six business organizational structures.
Pros and Cons of Hierarchical Structure
Pros of Hierarchical:
- Easy-to-follow levels of authority and reporting structure.
- Shows a clear career path and promotion possibilities.
- Gives level of control to various steps in hierarchy.
Cons of Hierarchical:
- Costs will be increased because of the need to pay executives, middle managers, and so on.
- Because of all the levels and heavier bureaucracy, it may slow down the decision-making process.
- Poor communication can occur because of all the people involved.
Pros and Cons of Flat Structure
Pros of Flat Structure:
- Encourages self-ownership and entrepreneurship for employees because of increased autonomy.
- Speeds up the communication process because of the very little amount of people involved in levels of communication.
- Because of eliminating excess management, companies can save costs.
Cons of Flat Structure:
- Confusion occurs sometimes when no one knows who to report to for executive decision-making.
- Job descriptions could be blurred because all the employees are doing a little bit of everything and may have an increased workload compared to other structures.
- Difficult for smaller companies to expand and larger companies cannot effectively use flat structures.
Pros and Cons of Flatarchy Structure
Pros of Flatarchy:
- Able to have an organized structure as well as an independent flat team to operate in unconventional operations.
- Be able to weigh the pros and cons of either the hierarchy team or flat team to see which one is performing better or worse, then adapt allowing for more flexibility.
- Can utilize the strengths of both business structures to the benefit of the company
Cons of Flatarchy:
- The flat team is usually an inner company start-up that was granted autonomy and may operate away from the main goals of the larger business.
- Possible rivalry created between the flat and main teams.
- Could be very difficult to manage for the main business executives with the creation of the flat team and still overseeing the main hierarchy part of the business, limiting strong leadership.
Pros and Cons of Functional Structure
Pros of Functional Structure:
- Work is directed to be most efficient with individual teams.
- Everyone is doing something in the business that they are best at.
- Very little room for confusion on project steps and who to report to.
Cons of Functional Structure:
- Because of teams being separate, this could increase rivalry between the various teams and even resentment.
- Conflicts could arise within the company cause a lag in production.
- Not much room to adapt to a functional structure.
Pros and Cons of Divisional Structure
Pros of Divisional Structure:
- If one division or department fails, other departments are probably not affected.
- Departments can independently pursue a business action without risking harm to other departments.
- All departments can benefit from the parent company's marketing brand and capital resources.
Cons of Divisional Structure:
- If a company separates any tasks to other departments, then there is a possibility every department suffers because of inefficiencies.
- Since each division is essentially "on its own" overhead costs increase because of separate financing, accounting, fees, and taxes.
- The parent company could lose employee loyalty because of isolation in departments and a lack of accountability.
Pros and Cons of Matrix Structure
Pros of Matrix Structure:
- Can diversify skills and talents of various employees.
- Increases the focus on completion of project quality of time of completion.
- Focus of work is on product or service the business is offering, and less on the workers.
Cons of Matrix Structure:
- Organizational complexity can be confusing and hard to follow.
- Lack of cooperation between two or more managers.
- Because of the complex management structure, more meetings may have to happen to maximize communication efforts.
In the business world today, all types of business structures are being used and adapted. Two of the most contrasting business structures are hierarchical and matrix each with its specialties and drawbacks.
Below is what could be found in a consumer and household business with a matrix structure:
- A computer technician working on a product for computers and programming the business software.
- This matrix business would most likely have several sales manager positions for its various products like large household equipment sales manager or small kitchen appliances sales manager. They would still have regional managers that oversee operations.
- The business is low on resources because either in start-up or transition mode
- The business could be attempting to be more efficient and utilize its resources as best as possible
An example of the most common traits found in a company using a hierarchical structure:
- Hierarchical businesses are usually older companies and more traditional in most business aspects.
- They have many opportunities for advancement for employees.
- They are usually older and traditional companies which mean they are popular or respected in the community.
- Hierarchically structured companies focus on a small niche in the market and become specialized in that area. This is not necessarily true for all companies using this model.
The organizational structure of a company is a system used to help manage a business. Business organizational structure is different in each business and some businesses may even change multiple times what management system they are going to use during their lifetime. The six main types of business organizational structures are: hierarchical, flat, flatarchy, functional, divisional, and matrix. Each type has its pros and cons, and each type can function better in certain environments or personnel than others.
A functional organizational structure has departments that focus on specific business activity or purpose. Specifically, a marketing department is an example of a functional organizational structure. A divisional organizational structure separates a company based on a product, service, or type of consumer. For example, a Large Household Appliances Department is an example of a divisional organizational structure. Also, a matrix structure would have a large household equipment sales manager.
Video Transcript
Organizational Structure
Every system in the world has a structure that defines how it works. Thank goodness for structure! What if the plants and trees decided they were tired of supplying oxygen and had the freedom to pick up another job? I wonder how long we'd last?
The organizational structure of a business defines its entire culture. It affects how its employees communicate and operate to achieve the goals of the company. Organizational structure also influences productivity, employee relations, and marketing strategies. It is important for a company to define the most strategic organizational structure that will allow it to effectively and efficiently accomplish its goals. The organizational structure of a small company may differ from that of a large company. Let's take a look at some of the most common organizational structures.
The Hierarchy, Flat, & Flatarchy
Almost all organizations have some form of a hierarchy in its organizational structure. The hierarchical structure is linear in nature as authority, information, and tasks flow from the top down. Generally, there is a top executive that filters information to subordinate employees without regard to the employee's ability to contribute or improve work processes. This type of structure is good for maintaining authority, but does not allow for free thinking, work efficiency, or collaboration.
The flat structure is totally opposite from the hierarchy. This structure doesn't implement titles, seniority, or job descriptions and allows for employees to freely contribute to the work as they feel necessary. Flat structures are most common in start-ups and small to mid-size businesses. However, most organizations that start off with a flat structure eventually end up taking some form of a hierarchy. As the business grows, it becomes less practical as the need for streamlined processes increases.
The flatarchy structure is a hybrid of a hierarchy and flat structure. Organizations that operate under a flatarchy have linear authority and specialized teams that allow for creativity and innovation. This type of structure is common when an organization is developing a new product, service, or business process that requires input from different individuals from different parts of the organization. Although this structure doesn't reassign job duties or titles, it allows the organization to effectively address market and industry changes without having to restructure the organization's personnel.
Functional & Divisional Structure
This one's pretty easy to remember. A functional structure organizes a business by activity or purpose. Most businesses that use this structure have departments dedicated to a single function. Some common examples are the accounting, marketing, and human resources departments that exist at almost every company.
A major benefit of this type of structure is that it fosters focus and the use of specialized skills for one function. The accounting department employs skilled accountants that focus on the company's financial data and do not have to worry about producing goods or providing services. The production department manufactures the goods and does not spend its time analyzing financial statements. If they did, there would not be any goods to sell.
As a company grows and increases its line of products or services, a functional structure may become less beneficial. A divisional structure is a large scale organizational structure that separates the company based on product, service, or consumer. A company that produces and sells clothing may have a designer clothing division, a ready-to-wear division, and a low cost apparel division. The clothing company could also have a menswear, ladies, and children's division.
One of the benefits of this structure is the ability to cater production, marketing, and accounting functions specifically to the product and type of consumer in the market. When a consumer's resources, needs, and interests vary with each product the company offers, a divisional structure enables these efforts to be performed more effectively.
Matrix Structure
What if the company would benefit most from the use of both a functional and a divisional organizational structure? The matrix structure incorporates aspects of a functional and divisional organizational structure all in one. In most large companies, it's beneficial to have leadership and departments based on purpose and type of consumer.
Let's refer back to our example about the clothing company. Most large clothing companies have a sales director and a menswear division director. The two positions could be on the same level and would work together when implementing strategies specific to selling men's clothing. Although this type of structure capitalizes on product and market focus, there could be confusion regarding hierarchy and authority when blended issues arise.
Pros & Cons of Common Organizational Structures
Each type of organizational structure has pros and cons. Let's examine the pros and cons of each.
Pros of the hierarchical structure include:
- Clear reporting structure
- Clear lines of communication
Cons of the hierarchical structure include:
- Limited cross-team collaboration since employees must send all requests 'up the chain'
- Increased bureaucracy, including more paperwork, more approval requirements and more bottlenecks
Pros of the flat structure include:
- Quick, effective communication
- Increased autonomy for employees
Cons of the flat structure include:
- Fewer progression opportunities for employees
- Increased workload for managers, who may have too many people to manage every day
Pros of the flatarchy structure include:
- Increased flexibility for employees and managers
- Leaner organizations with increased ability to innovate
Cons of the flatarchy structure include:
- Lack of a single constant structure could cause role confusion
- Lack of solid leadership could lead to poor decision making
Pros of the functional structure include:
- Fosters focus and the use of specialized skills for one function
- Increased ability to direct work to appropriate employees
Cons of the functional structure include:
- Lack of access to people outside your functional division
- Increased conflict due to cliques and department loyalty
Pros of the divisional structure include:
- Yields faster responses to local market conditions
- Increased accountability due to the ability to easily identify loss bearing divisions and profit earning divisions
Cons of the divisional structure include:
- Competing strategic directions can occur if the strategic direction of a division differs from the strategic direction of the company as a whole
- Increased overhead since each division needs it own production, marketing, and financial teams
Pros of the maxtrix structure include:
- Efficient use of human resources
- More collaborative working environment
Cons of the matrix structure include:
- Increased organizational complexity
- Confusion regarding hierarchy and authority when blended issues arise
Lesson Summary
Let's review what we've learned…
Companies come in different sizes, have different resources, and set different goals. Establishing the most effective organizational structure can either help the company reach its goals or hinder its progress toward achieving its goals. A business must analyze its objective, resources, industry, and customers in order to adopt the best organizational structure.
Examples of organizational structures that we covered in this lesson include:
- Hierarchical structure: Linear in nature as authority, information, and tasks flow from the top down
- Flat structure: Totally opposite from the hierarchy and doesn't implement titles, seniority, or job descriptions
- Flatarchy structure: A hybrid of a hierarchy and flat structure and has linear authority and specialized teams that allow for creativity and innovation
- Functional structures: Organize a business by activity or purpose
- Divisional structures: Large scale organizational structures that separate the company based on product, service, or consumer
- Matrix structures: Incorporate aspects of functional and divisional organizational structures all in one
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