There are many different types of organisational structure in use by businesses. This article looks at the differences between the key structures used, and their advantages and disadvantages.
What is an Organisational Structure?
The organisational structure of a business refers to how the business is arranged, what framework is used. The structure will show how different departments are related to each other; it may show hierarchies and links between different areas of the business.
Why do You Need an Organisational Structure?
- Everyone knows where they are and how they fit into the overall picture of the business.
- A clear organisational structure gives clear guidelines to all employees and shows reporting lines.
- It helps in decision-making, as it shows linkages between areas of the business and can show hierarchical relationships.
Most types of organisational structure are bureaucratic. This means there is likely to be several different levels of management and decision-making within the business and a certain amount of standardisation of tasks and roles. There will be clearly defined policies and procedures and a management team at the ‘top’ of the business who are the major decision-makers.
There are advantages and disadvantages of these types of structures, as follows:
Clearly defined roles and responsibilities – all employees are clear on what they are responsible for, and who they report to.
Clear decision-making process – there is a clear line of responsibility, to the top level management team, who have ultimate responsibility and decision making authority.
Control for senior management – as decision-making mostly rests with high-level management, they retain a high level of control over the business.
Fixed structure can be restrictive – as the bureaucratic structure is fixed in place, it is less likely to encourage new ideas or creativity.
Less flexibility in the face of change – where change is needed, the lack of flexibility can lead to resistance to change.
Types of Organisational Structures
Most types of hierarchical structure involve arranging the business into different groupings. These groups can vary, depending on the type of business and the environment they are operating in.
The functional structure groups an organisation based on job functions. So all those in sales are grouped in the sales department, all those in production in another department. This allows a high degree of specialisation within the staff and is relatively adaptable in terms of growth – new functions can be added fairly easily. However, it can lead to barriers between functional departments, and if there are several different target markets, it can give rise to inefficiencies.
An example of a functional structure would be as follows:
Product based divisional structure
In a product based divisional structure, the organisation is divided into divisions by product line. Each of these divisions will then have their own functional structure. An example might look as follows:This structure works where a business has many different products, but there can be a possibility of doubling up on resources or departments, and communication can be difficult between divisions.
Market-based divisional structure
If a business operates in several different markets, they may use a market-based divisional structure where the divisions are based on markets, customer groups or industries. The downside of such a structure is that you can end up with divisions developing systems that don’t work with other divisions, or duplicating processes.
A typical structure might look like this:
Geographical based structure
This structure groups the business around geographical areas. These might be regions, countries or continents, depending on the size of the business. It is ideal for those organisations that need to be near either suppliers or customers, for example, IT support. The main issue with this structure is that decision- making can become too decentralised, particularly if the geographic divisions are physically a long way from each other and from head office/management.
This is not a hierarchical model like the others covered so far. In a matrix model, the employees have two reporting relationships, generally functional and product based, although geography or market may be involved instead. In a standard matrix structure chart, solid lines will represent direct reporting relationships, and dotted lines show a secondary reporting relationship. An example is shown below:
The key advantage of the matrix structure is the flexibility it offers and the opportunity for more balanced decision-making. However, it can feel complex for employees and lead to confusion over who is actually in control and making decisions.
The choice of organisational structure is an important one, and there are pros and cons for each of them. Consider the type of business you have and which structure would best suit your needs.