In the skeleton of a business’ success, the right organisational structure could arguably be called the backbone. While a strong product and an effective mission statement can be important factors, a company’s organisational structure is perhaps the overarching element, one that constitutes where your business is heading and how it’s going to get there.
Much like how each business is set up in a specific way to accomplish different goals, the structure of an organisation can help or hinder its progress toward achieving these goals. Therefore, choosing the right type of organisational structure is a massively important part of running a business.
And while each type of structure has its own advantages and disadvantages, and may only be applicable to certain companies, getting it right can mean avoiding some of the more unnecessary complexities and conflicts that come with running a business.
So, to help you align your business’ aims with its success, we’ll go through what an organisational structure entails, the different types of organisational structure available, their pros and cons, and how each kind of structure can be applied.
An organisational structure is a system that outlines how certain activities are directed to achieve the goals of an organisation. It defines the hierarchy of employers and employees, and identifies each job, its function and where it reports to within the organisation itself.
These structures determine how information flows between different levels of a company. We'll go into this in more detail below, but in centralised structures such as Functional and Hierarchical varieties, decisions flow from the top down, whereas in decentralised structures such as the Flat type, decision-making power is distributed among various levels of the organisation.
Organisational structures are important because they provide companies with the following benefits when properly implemented:
Clearly defined authority relationships: Organisational structures allocate authority and responsibility in a discrete manner, specifying who directs to who and who is accountable for what results. It helps every member of the organisation know what their role is and how it relates to others within the business.
Greater patterns of communication: By grouping together activities and people, it more readily benefits communication between people linked by their job activities; people who have the same or similar problems and challenges thus need to share information to solve these problems.
Determines the location of decision centres: The locus of decision-making within an organisation is easily locatable through an organisational structure. For example, in a retail store, a structure that leaves pricing and sales promotions to individual departments may be followed. However, in something like an oil refinery, a structure that leaves production, scheduling and maintenance decisions to top levels will likely be used.
Proper balancing: Those who are more critical to a business' success may be placed higher in the organisation. Organisational structures can mete out the balance of influence and authority accordingly, i.e. duties of comparable importance tend to be given roughly equal levels within the structure, in order to give them equal emphasis.
Encourages growth: The varying types of structure provide the framework within which an enterprise can function; if it's flexible than it's in a better position to meet its challenges and create opportunities for growth. Such growth allows an organisation to increase its capacity to handle greater levels of business activity.
Perhaps the most common variety, a functional organisational structure departmentalises a business based on its respective common job functions. Businesses with this kind of structure would, for example, group all its marketers in one department, then its salespeople in another, and customer service team in another.
Larger companies are particularly well-suited to this kind of structure, especially if they produce tangible goods. Smaller companies, however, may feel constrained by the structure and should look elsewhere to other, more suitable structures.
If your business works on projects where the depth of knowledge is more important than the breadth of information, then a functional organisational structure is appropriate. Take, for example, a fundamental research and development programme; a functional organisational structure can be applied since the project is able to use the expertise of each department to its fullest in order to successfully complete the project.
In this structure, employees are ranked at various levels within the organisation, with each level above the other. Except for those in positions at the very top, such as owners or directors and those in entry-level positions, employees will have both a manager and subordinates.
Hierarchical structures work well in businesses with few products that are sold at high volume, since it's a structure which allows for tight control that can be maintained throughout the design, quality, production and distribution of goods.
Say, for instance, a company makes a popular product – its only product - that’s in high demand across many different countries. The president can control the quality of this product in a single, large-scale facility, and then sell it through a chain of distributors, showing how a hierarchical structure can control all aspects of production and distribution.
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Whereas the previous two examples are more akin to a pyramid shape thanks to their tiers of supervisors and managers, a flat structure limits the levels of management in a way that all staff are in proximity to a degree of leadership. In such a structure, there are very few tiers of seniority, with some even exhibiting no set levels. Employees will be given their key responsibilities and produce work in-line with their expertise, giving employees the chance to become increasingly involved in all activity and have an influence over decision-making processes as a result.
A risk of the flat structure is that it can grant greater responsibility to inexperienced members of the team. However, it can also help breed creativity and encourage different ways of thinking throughout all areas of the business.
The flat approach is often favoured by big companies such as Google, LinkedIn and Adobe, organisations that have made a name for themselves through creative and innovative employees, who's ideas have led to a boost in company growth.
Often suited to startups and small companies where there is naturally less of a hierarchy, flat structures work if the business has some sort of internal innovation programme. Within such systems, companies can continue with existing structures, but employees are free to suggest ideas and run with them, crediting additional flat teams in the process.
Used by larger companies that operate in a wide geographic area or have separate smaller organisations within an umbrella group that covers different products or markets. Under this structure, each division essentially operates as its own company, controlling resources and the amount of money it spends on projects and aspects within said divisions.
Divisional structures are best suited to organisations that need to be near sources of supply and/or its customers. Additionally, any company with a variety in product offerings or regions of geographic operation could, in theory, thrive within a divisional structure.
In this structure, all employees have dual reporting relationships, reporting to two (or sometimes more) bosses depending on the situation or project. Typically, this takes the form of functional reporting and product-based reporting. For instance, an employee works for one boss but when a new project arises where they’re needed, they’ll then have to also report to that project’s manager too.
Matrix structures are well suited to companies that have both a diversity of products and markets and are required to complete large, complicated projects. Anything that requires vast amounts of information to be processed efficiently, and the deployment of specialised knowledge quickly, could benefit from matrix structures.
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