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The way a company is set up can influence decision-making, communication and accountability, so it’s important to put a lot of thought into the structure. Learn how companies can structure their leadership and workforce to best align with their vision and goals.

An organizational structure is a framework used by businesses, which defines a company’s hierarchy. It shapes how companies coordinate certain activities to meet goals, determines the flow of information between levels, and defines workforce duties and how each employee’s role fits into the structure.

Such a framework provides a clear picture of how a company is organized and how it can progress toward its objectives. It’s often depicted with organizational charts or diagrams, such as a pyramid where leaders are positioned at the top and individuals with the least authority sit at the bottom.

The key components of an organizational structure include:

• Hierarchy: All organizations, even those that don’t take a top-down approach, typically have various degrees of authority.
• Divisional segmentation: Large and midsize companies use structures to divide responsibilities and interactions across multiple departments. Small businesses, however, may be easier to organize without the need for separate departments.
• Workplace roles: Companies use job architecture to group similar roles into families and organize them by responsibility level.
• Degree of management responsibility: A company’s structure determines how many people a manager oversees, which depends on the manager’s abilities, what tools they use, how skilled their employees are, and how complex the company is.
• Formalization: High formalization means strict rules that lead to predictable outcomes. Low formalization gives workers more autonomy and freedom to innovate but can potentially lead to inconsistencies.
• Company culture: A company’s workplace environment and communication tools—whether in-office or remote—can affect workplace effectiveness, efficiency and the overall structure.

An organization’s structure can take several forms. Each one defines how work is assigned, decisions are made and information is shared. Some structures are hierarchical, where a small number of individuals have the most decision-making power, and responsibilities are passed down from top leadership to employees. Other structures allow for more employee involvement in decision-making.

A functional structure organizes a company around its employee specializations. It’s used by businesses of every size and typically categorizes departments as sales, operations and marketing. While employees are encouraged to build competency within one field, silos can lead to friction among teams when they attempt to collaborate. 

Large companies with multiple business units commonly use a divisional or multidivisional structure, where they organize leadership teams to align with their projects, products or subsidiaries.

While these structures are ideal for companies with multiple sales channels and products, they can also come with scaling challenges linked to duplicate resources, decentralized decision-making and bottlenecks caused by administrative red tape.

Under this type of structure, a company is divided into teams that handle certain functions and aim for specific goals. Each team has a leader who oversees workers. The potential advantages of a team-based structure include better communication, efficient processes, greater collaboration and a flexible workforce empowered to innovate. 

The disadvantages can include a lack of effective management and a lack of policies that outline how goals are met. It also lacks organizational consistency, and alignment among teams isn’t guaranteed.  

Adopted by many startups, this type of organizational structure eschews the traditional hierarchy to instead give employees a significant amount of autonomy. It promotes productivity and transparency, but companies can face challenges with team alignment and consensus regarding the company’s direction.

In a matrix structure, employees’ duties may span multiple departments, divisions and superiors. For example, an employee who handles customer service may also work in sales. There’s no defined hierarchy. Instead, this structure comes with a dual reporting system for function-based and product-based communication.

Communication and collaboration are the key strengths of the matrix structure. Both can enable resource sharing and better skill development within an organization.

Since employees typically answer to two bosses, conflict can arise. Plus, the complex nature of this structure can lead to difficulties with controlling and monitoring, information flow and slow reaction times from project managers.

This structure can work well for companies shifting to contract-based recruiting. It coordinates external vendors and independent contractors to perform specific tasks. It typically consists of a lean headquarters with branch locations and key functions delegated to outside consultants and firms.

Due to an undefined hierarchy, companies may face challenges in understanding who makes the final decision.

The traditional organizational structure is centered on top-down leadership and a clear chain of command. An example would be the military, which is known for having a strong centralized structure overseen by specific superiors and subordinates. Each role is given clearly defined duties, and subordinates must take directions from their superiors.

Some advantages of a centralized structure include a clear hierarchy, focused vision, fewer operational costs, quicker decision-making and improved work quality. However, this approach also comes with bureaucratic leadership, increased decision-making pressure, work delays and limited employee loyalty.

Decentralized structures, on the other hand, allow employees and lower- and midlevel managers to be involved in decision-making through collaboration or popular vote. This approach is primarily adopted by technology startups that view it as a path to workplace agility, adaptability and efficiency.

One key benefit of a decentralized structure is the ability for company leadership to concentrate on high-level organizational goals and respond to crises, while teams and lower-level managers focus on specific, production-focused tasks. Plus, research shows that decentralization works especially well when paired with a .

However, a decentralized approach can potentially lead to disagreements between staff, confusion around roles and the emergence of unofficial hierarchies.

Companies using a divisional structure can be decentralized. For example, a large company comprising multiple business units that operate across a variety of industries might give each of its units full autonomy.

That doesn’t mean decentralized companies operate without hierarchies. While teams may be enabled to make decisions autonomously, a senior level employee may have more decision-making power than someone in an entry-level position.

Having a structure in place can:

• Help organizations clarify their hierarchy and design a pay system for employees, including salary ranges and grades for each role
• Improve how efficiently and effectively a company runs by grouping workers and functions into discrete departments
• Guide employees on how to perform their jobs most effectively, how tasks are assigned and how departments and teams convey information

Furthermore, agile structures allow companies to more quickly adapt to market changes and react to emerging opportunities. Structures with fewer decision-making layers, meanwhile, can allow for faster innovation and responses to market trends

No matter which structure a company takes, it can help to remember that a structure isn’t set in stone. Companies can replace or adjust their structure as market changes occur.

When choosing a structure, organizations should consider company culture, their business plans and where they are in the growth stage. Small companies or emerging startups might benefit from a structure that enables employees to provide input and have some degree of decision-making power. 

Once a company decides on a structure, leaders should create a visual representation, such as a chart, to ensure it aligns with organizational goals. This visual representation should be accessible to everyone within an organization, from entry-level talent to top leadership. It should also clearly communicate who does what within the organization, so all employees know where they fit and the goal they are working toward.

After a visual representation of a structure is established, companies should maintain, update and evaluate it at least once a year to ensure it still aligns with organizational goals. For example, as a company grows and evolves, it can adopt a more formal or traditional organizational structure. A growing workforce may call for new workflows and approval processes facilitated through a hierarchical structure.

For example, a major online retail company decides it wants to cut out middle managers and increase individual contributions as its teams grow. As a result, choosing a more decentralized structure may help the company reach its goals since it grants employees more ownership and internal mobility.

In another example, the CEO of a large technology company may switch from decentralization to centralization in response to communication challenges and conflicts between teams that hurt revenue growth. The result can be a leaner and more collaborative organization that could compete effectively for major clients.

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