5 different types of organisational structure explained

18 August 2020

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.


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What is an organisational structure?

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.

image of business colleagues having a meeting

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. 


Why is an organisational structure important?

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.

 image of colleagues in business meeting

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.


The different types of organisational structure

Functional Organisational Structure

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.

What are the pros of a functional organisational structure?

  • Allows for a high degree of specialisation amongst employees
  • Is easily scalable should the organisation experience growth
  • Skill-based departments allow employees to explore their field and identify what they’re good at
  • Facilitates clear accountability of everyone’s work
  • Each department has defined responsibilities, ensuring no duplication of work


What are the cons of a functional organisational structure?

  • Can be inefficient if the business has a variety of products or target markets
  • Can create barriers between different functions, limiting employees’ knowledge of -and communication with - other departments
  • Departments may be distracted by departmental goals as opposed to organisational ones
  • Work can become rigid and repetitive, leading to a loss of morale and enthusiasm


How can a functional organisational structure be applied?

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.

image of colleagues talking in meeting room

Hierarchical Structure

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.


What are the pros of a hierarchical structure?

  • Clearly defined positions of authority and responsibility
  • Paths for promotion and progression are made clear, which serves to boost motivation
  • Encourages the effective use of specialist managers
  • Often fosters loyalty from employees to their department, as well as a culture of loyalty towards teams, departments and the organisation as a whole


What are the cons of a hierarchical structure?

  • Can be bureaucratic and result in slow responses to market and customer need
  • Poor communication through the organisation, particularly between departments that are at the same level in the hierarchy
  • Departments may make decisions that only benefit them as opposed to the whole organisation
  • A hierarchical structure with multiple managers and departments can be expensive
  • Can result in potential disconnect between employees from different levels
  • Difficult to collaborate outside of the team


How can a hierarchical structure be applied?

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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Flat Structure

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.


What are the pros of a flat structure?

  • Greater decision-making amongst the levels of an organisation
  • Reduces the red tape that can stand in the way of progression and innovation
  • Staff and managers are on a comparatively more equal footing
  • Facilitates coordination and speed of communication
  • Less need for middle management, which reduces an organisation’s overheads


What are the cons of a flat structure?

  • Can create generalists instead of specialists, leaving employees’ duties unclear
  • Could limit the long-term growth of an organisation as management decides against new opportunities in order to maintain the structure
  • Since employees may lack a specific senior to report to, it can create confusion and possible power struggles amongst management
  • Lack of executive decisions can lead to projects losing focus


How can a flat structure be applied?

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.

image of colleagues talking in meeting

Divisional Structure

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.


What are the pros of a divisional structure?

  • Allows for greater flexibility within large companies
  • Brings together several forms of business expertise, allowing geographical divisions to make decisions from more diverse points of view
  • Comparative independence allows needs to be met more rapidly


What are the cons of a divisional structure?

  • Distance between divisions can make communication difficult
  • The same departments across divisions may create unnecessary competition and schism between geographical locations e.g. different marketing departments competing with and weakening each other’s efforts
  • Size and scope makes this structure particularly costly


How can a divisional structure be applied?

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. 


Matrix 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.

image of group of colleagues walking up the stairs

What are the pros of a matrix structure?

  • Provides flexibility and more balanced decision-making
  • Employees can share knowledge across different functional divisions, providing better communication and understanding of each function’s role
  • Through working across functions, employees can broaden their skills and knowledge


What are the cons of a matrix structure?

  • Reporting to multiple managers can create its fair share of conflict and confusion over what should be reported.
  • Such conflicts can lead to issues over who is responsible for what, and if things go wrong, creates a blame game culture as a result

How can a matrix structure be applied?

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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