An organizational structure creates a framework for how a company operates, including the division of responsibilities and authority.
Together with culture, strong org structures can keep companies aligned with organizational goals and objectives, moving forward as one.
Types of Organizational Structures
Here are the most common alternative org structures in use:
- Top-down organizational structure
- Bottom-up organizational structure
- Functional organizational structure
- Divisional organizational structure
- Tall organizational structure
- Flat organizational structure
- Matrix organizational structure
You may ask, what is the best organizational structure?
The answer depends on the type of organization you want to run. Let’s break each one of these down.
1. Top-down Organizational Structure
A top-down organizational structure is how most companies have operated for centuries. At the top of the organization is the owner, founder, CEO, Board of Directors, or business leader.
Underneath the boss are arranged various executives, 'middle' managers, supervisors and employees, shown in various layers (or levels that correspond to seniority). The higher up the structure, the more senior you are, with more responsibility and (usually) higher remuneration.
The person at the top has the ultimate authority and sets the agenda and strategy. The managers create the plan and the employees execute the plan.
Top-down orgs have functioned in an orderly and easy-to-understand hierarchy for hundreds of years. Everyone has a clear line of reporting and understanding of the chain of command.
Key features of a top-down org structure include:
- Ranking authorities set strategy
- Management sets plans for execution
- Employees are given tasks
You may also hear a top-down org structure referred to as a 'hierarchal' org structure, or as an 'autocratic' leadership structure with 'Theory X' management. Some have argued that this style of structure is outdated, in a world that is moving so fast.
The view may be good from the top, but what about the rest of your company?
Pros and Cons of a Top-Down Org Structure
Benefits of a top-down org structure include:
- A clear focus on direction and activities
- Centralized decision-making
- Roles and responsibilities are clear
- Familiar and comfortable workflow
Disadvantages of a top-down org structure include:
- Team members have little control or input into the work product
- Managers may not see gaps between expectations and team capacities until it’s too late
- Less independent thinking at lower levels
- Low employee engagement and enthusiasm
2. Bottom-up Organizational Structure
A bottom-up organizational structure works much differently. Everyone in the organization has a voice in company goals. Tasks and responsibilities change over time.
Lower-level employees within an organization are granted greater authority to solve problems, set directions, and take on tasks. The goal is to allow for greater input from the employees closest to the customers or problems and create a more collaborative environment.
Instead of strategy, ideas, and assignments being handed down from the top, ideas and insights are formed at the bottom and flow upwards in the bottom-up org structure.
In his seminal management book, Good to Great (2001), Jim Collins found that "getting the right people on the bus" was only half the job, but "working out where to drive the bus, together" was an important element in successful organizations.
Key features of a bottom-up org structure include:
- Employees provide input
- Company-wide collaboration
- Tasks completed and set up the chain
Many startups and smaller organizations use this approach to keep everyone in the organization engaged and vested in success.
Pros and Cons of a Bottom-Up Org Structure
Benefits of a bottom-up org structure include:
- Increased communication and collaboration
- More employee motivation
- Better alignment
- Faster innovation
Disadvantages of a bottom-up org structure include:
- Dependent on highly-engaged team members for success
- Decisions may take longer due to the need for consensus-building
- Potential disharmony when team members don’t come to an agreement
- Team members may not have the necessary expertise or knowledge
3. Functional Org Structure
A functional org structure is similar to a hierarchical org structure, but focuses on job functions rather than titles.
Employees are classified by their skills and organized by the corresponding functions they play within the organization for process efficiency.
Departments are managed independently, although managers report to upper management.
Key features of a functional org structure include:
- Employees report to managers, who have oversight authority
- Mangers create structure, culture, and make assignments
- Managers report to top-level management
Pros and Cons of a Functional Org Structure
Benefits of a functional org structure include:
- Allows employees to focus on roles
- Encourages specialization and skills development
- Teams and departments have a say in execution
- Easy to scale
Disadvantages of a functional org structure include:
- Can create silos and fiefdoms
- May hurt inter-departmental communication
- Lack of coordination across departments
- May create conflicts due to separate goals and objectives
4. Divisional Org Structure
In a divisional org structure, employees are organized into divisions that have control over their own resources. In large companies, these divisions often operate like their own companies within a larger organization. In mid-size and smaller companies, employees may be organized by departments.
There are several different types of divisional organizational structures, including:
- In a geographical divisional org structure, divisions are typically separated by location or sales territories.
- In a product-based divisional org structure, divisions are organized by product line. Employee units typically work on single products.
- In a market-based divisional org structure, employees are organized by industry, market, or customers.
Dividing the organization into divisions can make sense
Pros and Cons of a Divisional Org Structure
Benefits of a divisional org structure include:
- Allows for highly specialized employees
- Promotes independence and autonomy
- Creates clear lines of authority and responsibility
- Help companies organize and distribute workloads
Disadvantages of a divisional org structure include:
- Can encourage duplication of resources
- Can create company rivalries or competition over resources
- May limit inter-company communication
- Costs more to operate due to the size of the organization
5. Tall Organizational Structure
A tall organizational structure is typically used in complex or layered organizations. As companies grow, they start to add in additional management levels and can have complicated chains of command.
While employing the same principles as the top-down structures, it further delegates responsibility and authority to managers. Most often used in large companies, responsibilities may be divided into divisions or units which managers oversee and set strategy in their respective areas. Subordinate managers create the execution strategy and lower-level employees are assigned tasks.
In a tall org structure, lower-level employees make significantly fewer independent decisions. They may not have the experience or knowledge to make informed decisions and, therefore, need greater direction and supervision.
Key features of a tall org structure include:
- Top-down management
- Layers of management
- Little decision-making at lower levels
- A tall org structure creates a greater level of internal control.
Pros and Cons of a Tall Org Structure
Benefits of a tall org structure include:
- Tight controls and closer supervision
- Allows for more advanced specializations
- More opportunities for promotion and career growth
- More structured
Disadvantages of a tall org structure include:
- Communication can be difficult due to multiple layers
- Decision-making may take significantly longer
- More expensive because of additional management layers
- Less agile
6. Flat Organizational Structure
A flat organizational structure has very few, if any, management layers between the leadership and employees.
Small companies and startups often launch with this kind of flat hierarchy. Every employee will take part in significant decisions and have greater responsibility for success.
A flat org structure can also significantly enhance transparency due to limiting bureaucracy and management layers. It can help streamline and speed up decision-making. A flat org structure, however, can be difficult to maintain as companies grow and evolve.
In small companies, nearly every employee is involved in different aspects of the business. As organizations grow, they need people to focus more energy on specific areas, such as sales, marketing, and operations.
As things become more complex, management layers are typically added which eliminates the flat org structure.
Key features of a flat org structure include:
- Little or no management layers
- Group responsibility
- Focused on team success
A flattened organization can work well when small, but as it grows layers may need to be added
Pros and Cons of a Flat Org Structure
Benefits of a flat org structure include:
- Faster decision-making process
- Requires less supervision
- Cost-efficient due to lack of management layers
- Develops cross-functional skills
Disadvantages of a flat org structure include:
- Management can easily lose control
- Poorly performing team members can impact the rest of the team
- Can create power struggles
- May prevent opportunities for promotions or career advancement
7. Matrix Organizational Structure
In a matrix organizational structure, resources and employees are spread across multiple functional areas. For example, employees may work in one department but have responsibilities in another. There may be multiple lines of reporting, which may change depending on job duties.
In other words, rather than people reporting to one manager, they may report to others as part of their routine job duties or for different projects.
- In a weak matrix org structure, a functional manager will oversee all aspects of a project and is the primary decision-maker. A project manager or lead reports to the functional manager, but guides other employees.
- In a balanced matrix org structure, the project manager or lead has more authority. The functional manager is still the ultimate authority.
- In a strong matrix org structure, the project manager is granted equal (or more) power than the functional manager. The project managers have control over resources and task assignments.
Pros and Cons of a Matrix Org Structure
Benefits of a matrix org structure include:
- Increased communication efficiency
- Improved employee motivation due to additional autonomy
- Increased teamwork and collaboration from cross-functional area interactions
- Maximization of resources and sharing
- Increased employee development
Disadvantages of a matrix org structure include:
- Potential conflicts between managers and projects due to conflicting objectives
- Confusion over who has authority to make decisions
- Reduced employee effectiveness when employees are assigned to multiple tasks
- Increase management overhead costs due to multiple management layers
For more on matrix structures, please read this article.
: Create Better Org Structures!
Whatever your chosen structure - or even if you want to experiment and strength test a few alternatives - you can create intelligent org designs with Functionly to help you navigate the future.
Easily map your organizational structure and workflows for greater alignment and accountability. Use our drag and drop tools to easily create and modify org charts and run scenarios to see the impact of changes on your structure.
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- Elements of Organizational Structure, A. Sisk, Biz Fluent, 22 Nov 2018
- 4 Steps to Elevate Functional Effectiveness & Operational Maturity, A Mani, Functionly