What is an Organisational Structure

An organisational structure is something that all successful businesses will have – or will develop once they reach a certain scale. It is a term that describes the hierarchy of workers/employees, employers, jobs and their related responsibilities, and who they report to within the organisational structure.

Often these structures will affect the flow of information through the company, as each layer of the structure will be linked to another, and vice-versa. There is no one type-fits-all structure as that would ignore all the nuances and differences that come with individual industry sectors. Often you will find that the organisational structure will differ hugely between businesses, based upon more factors than you can shake a stick at!

Why are they important to me, as a business owner?

Before we take a really deep dive into the topic, it is probably a good idea to acquaint you with the reasons why you should continue reading. It’s always more fun to start at the juicy bits, and work forwards from there. So, lets start at the benefits!

BenefitDescription
Clear definition of authority relationshipsAvoids potential confusion between ‘who is in charge of who’. A greater understanding of the hierarchy within the company is beneficial for everyone.
Improved pattern of communicationBy grouping into departments or layers allows communication to remain within relevant channels. By grouping based on work-type allows for rapid information sharing.
Defined location of decision-makersClarity provided on who makes operational decisions and at what level.
BalancingIt may seem a little callous – but those who are more important to the success of the business should be placed nearer the top of the business, and those with lesser should be placed lower. With this balancing should come influence and authority related to position.
Improved growthSuccessful structures are a great vector for growth – if the foundation of your business is efficient and streamlined, then often other areas will improve too.

The benefits seem great, but are there more than one type of structure to choose from?

Yes – absolutely. There a fair handful of choices in structure types, each coming with their own unique benefits and drawbacks. If you are a business owner looking to employ an organisational structure in your own company, have a quick read of the following pro/con tables. It’s an incredibly simple breakdown of each type and should be used to help balance your decision.

Functional:

ProsCons
Increased specialisation amongst employeesIf business has too much variety in products or target markets, then could lead to inefficiency
Easily flexible in response to growthCan create inter-departmental barriers in knowledge and understanding
Basing departments on skill allows talent identification and explorationIncreasing specialisation can lead to higher emphasis placed on departmental goals, as opposed to business goals
Increased work accountabilityLack of variety in work can be unrewarding and sap morale
Clearly defined departmental responsibilities 

Functional organisational structures are very common – and are categorised by departmentalisation based upon job type. For businesses who have already achieved moderate to large scale this type of structure is the go-to, and is especially successful if the business manufactures or produces tangible goods. Conversely, smaller companies may find this structure restrictive.

Hierarchical:

ProsCons
Clearly defined positions of authorityCan be overly bureaucratic and slow to respond to market forces
Career progression paths are clear within businessNot great for communication through business
Potential for specialist managers to be introducedDepartment decision-makers tend to favour decisions that benefit them, rather than whole business
Encourages work-place and departmental loyaltyCan lead to increased expenses on manager’s wages
 Potential for a serious disconnect between employees on different levels
 Makes it difficult to collaborate with others outside of team.

Hierarchical structures are essentially ranked throughout all levels of the organisation. Barring top-level individuals, everybody else within this structure will report to a manager and also have subordinates. This structure is particularly successful for businesses that sell huge volume of a narrow range of products. This structure fosters incredible control from start to finish.

Flat:

ProsCons
Better decision making through all levelsGeneralisation rather than specialisation – leading to a workforce who can either become jack-of-all-trades… or masters of none.
Increases innovation by removing red tapeLimits long-term growth through maintenance of structure
More equal-footing between all employeesFosters confusion and creates potential power-struggle scenarios, as employees have no specific manager to report to
Emphasis on facilities coordination and communication speedLack of executive decisions
Less lower-level management, reducing costs on manager wages. 

Flat structures are quite self-explanatory. Characterised by very few senior staff members or managers. This type of structure is very well suited to start-ups, new businesses, and small businesses. This helps create a communal workplace environment where all employees are able to suggest innovative ideas, and creates better overall understanding of the business.

Divisional:

ProsCons
Large companies gain access to uncharacteristic flexibilityHorrible for communication between divisions
Geographical decision makers can base decisions off of more diverse points of viewHighly competitive culture between similar departments in different divisions
Independence within divisions allows rapid problem solving to meet needsIncredibly costly

This type of structure is really only accessible to companies who have reached large operational scale already. Quite often different divisions will appear to operate almost as their own company -with their own budgets, needs, and goals. The main driving factor is to be located near to a means of production or customers.

Matrix:

ProsCons
Good balance between flexibility and decision makingConfusion and conflict from reporting to multiple managers
Potential for knowledge sharing between divisionsBlame culture – nobody knows who is directly responsible for what
Employees are able to improve their skills and knowledge 

This is probably the most complex structure that we have described – as often employees will have to report to multiple bosses dependant on the situation. This quite often leads to split responsibilities, and employees juggling work for different projects at the same time. Often seen in businesses who offer services and products in a huge variety of markets, or focus on incredibly complex large-scale projects.

Now I know the different types of structure, how do I pick?

That is a question that there is really no right answer to.

Every business is different and will require different things from one another – identify the most important things to you and your company, and hopefully, it will help you narrow down your shortlist a little. This article is only a guide to help equip you with a basic understanding of the various common structure types – and should not be treated as gospel!