What is an 'Organizational Structure'

An organizational structure is a system that outlines how certain activities are directed in order to achieve the goals of an organization. These activities can include rules, roles and responsibilities. The organizational structure also determines how information flows from level to level within the company. For example, in a centralized structure, decisions flow from the top down, while in a decentralized structure, the decisions are made at various levels.

BREAKING DOWN 'Organizational Structure'

Organizational structure defines a specific hierarchy within an organization, and businesses of all shapes and sizes use it heavily. A successful organizational structure defines each employee's job and how it fits within the overall system. This structuring provides a company with a visual representation of how it is shaped and how it can best move forward in achieving its goals. Organizational structures are normally illustrated in some sort of chart or diagram.

Why Have an Organizational Structure?

Not having a formal structure in place may prove difficult for certain organizations. For instance, employees may have difficulty knowing to whom they should report. That can lead to uncertainty as to who is responsible for what in the organization. Having a structure in place can help improve efficiency and provide clarity for everyone at every level. That also means that each and every department can be more productive, as they are likely to be more focused on energy and time. 

Centralized vs. Decentralized Organizational Structures

At its highest level, an organizational structure is either centralized or decentralized. Traditionally, organizations have been structured with centralized leadership and a defined chain of command. The military, for example, is an organization famous for its highly centralized structure, with a long and specific hierarchy of superiors and subordinates. However, there has been a rise in decentralized organizations, as is the case with many technology startups. This allows the companies to remain fast, agile and adaptable, with almost every employee receiving a high level of personal agency.

Common Types of Organizational Structures

Four types of common organizational structures are implemented in the real world. The first, and most common, is a functional structure. This is also referred to as a bureaucratic organizational structure and breaks up a company based on the specialization of its workforce. Most small-to-medium sized businesses implement a functional structure. Dividing the firm into departments consisting of marketing, sales and operations is the act of using a bureaucratic organizational structure.

The second type is common among large companies with many business units. Called the divisional or multidivisional structure, a company that uses this method structures its leadership team based on the products, projects or subsidiaries they operate. A good example of this structure is Johnson & Johnson. With thousands of products and lines of business, the company structures itself so each business unit operates as its own company with its own president.

Flatarchy, a newer structure, is the third type and is used among many startups. As the name alludes, it flattens the hierarchy and chain of command and gives its employees a lot of autonomy. Companies that use this type of structure have a high speed of implementation.

The fourth and final organizational structure is a matrix structure. It is also the most confusing and the least used. This structure matrixes employees across different superiors, divisions or departments. An employee working for a matrixed company, for example, may have duties in both sales and customer service.

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