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  • Organizational Structure: Types, Definition and Examples

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    Culture Change

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    The Organizational Structure of a business has a tremendous impact on how the day-to-day operations are run, and can help shape the course of the future for many years to come.

    But if the Organizational Structure defines the shape of the future, it also defines the shape of the present, literally mapping out the direction information and responsibility flows within the business.

    In this article, we take a closer look at the Organizational Structures you might choose to use for your business, explaining the strengths and weaknesses of each one. As always, the specific goals and purpose of your business have a huge impact on the choices you should be making. Keep the entirety of your plans in mind as you consider which Organizational Structure will work best for you and your business.

    What Is an Organizational Structure?

    An organizational structure describes the arrangement of responsibilities and activities that facilitate a business meeting its goals. That includes job titles and descriptions, reporting order, authority, and other elements that ultimately decide who’s in charge and who gets final say in decision-making.

    Often, Organizational Structures are depicted like family trees that show the relationships between different people. Those with greater responsibility and authority are shown at a higher level.

    You can learn a lot about a business and its priorities by analyzing its organizational structure. For example, if the Diversity and Inclusion Officer is placed high in the business’s hierarchy, we can assume that they have a great deal of authority and the company values the work a person does.

    Digital Leadership can help you analyze your Organizational Structure to make sure it’s right for you and your company’s business model. Call today to schedule your free one-on-one consultation with one of our global innovation experts!

    Organizational Structure
    Organizational Structure

    Key Elements of Organizational Structure

    Organizational Structures tend to have some common elements, even if the specific arrangement of responsibilities is different from one business to the next. Let’s review some of the common ingredients you’re likely to find in every Organizational Structure.

    (1) Job Description: what does each employee do in their specific roles?

    Clear expectations ensure that applicants as well as current employees know what’s expected of them.

    (2) Department Establishment: where do specific job roles live within the overall organization of the business?

    Ideally, these positions support each other in working toward a common goal with an overall benefit to the company. Departments should unite shared expertise.

    (3) Delegation: who is in charge of assigning projects?

    Organizational Structures make the relationship between department heads and their subordinates clear so authority is understood but not abused.

    (4) Responsibilities: what are the expected outcomes of everyone’s work?

    We all do better when expectations are made clear and when we’re given responsibilities that include something to accomplish. The feeling of success is a powerful motivator.

    (5) Authority and Accountability: who gets credit when things go right, and what happens when things go wrong?

    Most Organizational Structures clearly describe who’s in charge and empowers those people to reward success and address failures.

    Related: Organizational Development: Everything you Need to Know

    Types of Organizational Structure

    Most experts agree that there are several shapes an organization can take. Depending on who you ask, they may have different names, but the overall concepts remain the same.

    Let’s describe some of the potential Organizational Structures your business might use.

    1. Hierarchical Organizational Structure
    2. Functional Organizational Structure
    3. Flat Organizational Structure
    4. Matrix Organizational Structure
    5. Team-Based Organizational Structure
    6. Network Organizational Structure
    7. Divisional Organizational Structure

    (1) Hierarchical Organizational Structure

    Hierarchical Organizational Structure
    Hierarchical Organizational Structure

    This is the pyramid shape that most people are familiar with. Typically, information flows down and authority builds going up.

    A Hierarchical Organizational Structure offers clearly defined levels of authority and responsibility. The bureaucracy established in this structure can be helpful in showing career paths, but it can also slow down innovation. Lower-level employees might feel buried beneath a pile of bosses, but they may feel of sense of ownership within their department.

    (2) Functional Organizational Structure

    Functional Organizational Structure
    Functional Organizational Structure

    On the surface very similar to a Hierarchical Structure, in a Functional Organizational Structure, workers are sorted by skill, and authority is increased as you move up the structure. Departments and teams are self-running.

    While this format allows people to focus on their roles and specialize their skills, it tends to create silos within an organization that can be difficult to crack, especially during periods of innovation.

    (3) Flat Organizational Structure

    Flat Organizational Structure.
    Flat Organizational Structure.

    Businesses use a Flat Organizational Structure when there’s very little difference between employees in terms of authority. People have roles, but no departments. This is typically the case in very young companies that have not expanded much farther beyond their initial hires. This is a very open Organizational Structure that encourages communication and gives everyone a lot of responsibility. But without clear supervisors, it can be challenging to know who to report to or who to address with questions. As a company builds, it’s very difficult to maintain a Flat Organizational Structure.

    (4) Matrix Organizational Structure

    If a company finds itself frequently lending people from one team to another, a Matrix Organizational Structure is a good choice. Its grid represents the cross-functional teams many companies build, especially during times of innovation.

    While this approach might be good for the overall company, allowing it to best use available human resources, it can create conflict between managers when one is constantly poaching the other’s talent. A Matrix Organizational Structure frequently changes as teams are created and dissolved.

    (5) Team-Based Organizational Structure

    Businesses familiar with SCRUM will recognize the Team-Based Organizational Structure. It focuses on cooperation and collaboration to drive innovation as well as daily operations. Employees have more control than in traditional organizational schemes.

    A Team-Based Structure can increase productivity, but because it disrupts the usual way companies are organized, it can create some confusion.

    (6) Network Organizational Structure

    Promoting communication rather than authority, a Network Organizational Structure assembles the company into pods that have their own internal structures. This is a useful strategy when the company is divided, either geographically or by specialty, but the teams still rely on each other for vital services.

    While this strategy can be empowering and lead to some useful efficiencies, it can quickly become complex as more teams are added to the network. It can be difficult, too, for employees to know who is ultimately in charge.

    (7) Divisional Organizational Structure

    Divisions have control over their own decision-making in a Divisional Organizational Structure. Each division has its own sub-set of teams like Marketing, IT, and Sales. Divisions can be arranged geographically, by product, or by market.

    This is a powerful strategy for large companies because it facilitates efficient decision-making. For small- to mid-sized companies, however, a Divisional Organizational Structure may create costly redundancies across divisions.

    Benefits of Organizational Structure

    Your company’s Organizational Structure represents a commitment to doing business a certain way. But most importantly, an Organizational Structure reveals the pattern of communication and authority the business expects workers will follow. As a result, there are many benefits to having a clearly described Organizational Structure.

    • Good Organizational Structures streamline operations. By departmentalizing business functions, you make sure important needs are met as efficiently as possible. This saves money and improves a company’s bottom line.
    • Good Organizational Structure can boost employee performance. Departments can offer specific training. Additionally, employees understand where to take concerns or questions, making them more confident and more efficient.
    • Good Organizational Structure improves the company’s decision-making. A clear structure makes it easier to share the information needed to make good decisions. Once decisions are made, they are easily shared throughout the organization thanks to the clear pathway for the flow of information.
    • Good Organizational Structure creates useful consistency. In the case of businesses with multiple locations, standard Organizational Structures within divisions make it easier to run the entire corporation. The chain of command rises from each division into the centralized, decision-making offices.

    Some things to consider when creating your Organizational Structure

    Choosing the Organizational Structure of your company is an important process. It determines a lot of how your daily operations will happen as well as how special circumstances will be handled. It’s not a decision to make lightly.

    There are some important questions to consider:

    • Which departments are vital to the on-going success of the business? Does your structure reflect their importance?
    • Does the compensation of individual employees properly reflect their position in the Organizational Structure of your company?
    • Have you empowered mid-level decision-makers appropriately?
    • What is your policy for “going over someone’s head?”
    • How will you change structure if necessary?

    Closing Thoughts

    The wrong Organizational Structure can do a lot of harm to your business. It can severely limit your opportunities for growth and innovation, ultimately depriving the marketplace of your ideas.

    Select the structure that’s right for you today, and continuously re-evaluate your decision. Most successful companies recognize what’s right for them, even if it’s not easy, and bravely take action where necessary.

    Frequently Asked Questions

    What Is an Organizational Structure Chart?

    An Organizational Structure chart is a visual representation of the decision-making and informational flow a company uses. It shows the internal structure of a business and its people.

    What is the purpose of an Organizational Structure?

    A business’s Organizational Structure describes the directions information and authority flow. It charts responsibilities and expectations and reveals the company’s priorities.

    What is the best organizational structure?

    The Hierarchical Organizational Structure is typically the easiest for a business to establish. People tend to be familiar with its pattern. As the business develops, another, more complex organizational scheme can be adopted.

    The UNITE Business Model Framework: A Framework for Innovation Success

    How to Create Innovation includes a number of canvases that focus on value creation and finding the right business model to meet your customer segment and customer needs. The framework is built to inspire drastic changes that help you find a competitive advantage. Our hope is that your company grows through business model innovation, and so we again encourage you to look deeper into our website and the book.

    Here is a summary of the key ingredients of the Business Model Framework:

    Business Model framework
    The UNITE Business Model Framework
    Designed By: Digital Leadership AG

    Business Models

    The centerpiece is the Business Model Canvas, which covers the six main areas of a Business Model (the Operating, Value, Service, Experience, Cost, and Revenue Models).

    The eXtended Business Model Canvas adds the immediate business context, including Business Drivers, customers, and the team, as well as the Unfair Advantage.

    Detailed Models

    A Business Model can be broken out into its numerous aspects. Depending on what challenges you face, you can zoom in on your area of interest using an appropriate tool or canvas:

    • Your Business Intention and objectives as well as your Massive Transformative Purpose summarize your drivers and give direction to what you do.
    • The Value Proposition Canvas details the central components of your offering (the product or service).
    • To dig into your Customer Segments, work with data-driven Personas.
    • The JTBD Customer Job Statement and Job Map frame the JTBD of your customers.
    • The Business Model Environment puts your Business Model in a market context composed of emerging trends and disruptive forces.
    • The Innovation Culture Canvas helps you understand and consciously shape a culture that supports innovation.
    • The Innovation team structure enables you to draft a team structure for your innovation initiative.
    • Using learning and growth metrics, you can measure progress at the initial stages of development. These metrics help you focus on what really matters instead of creating a detailed business plan that will not really help you. Later on, you can expand the financial aspect of the Revenue and Cost Models with a full business case.
    • The Operating Model Canvas helps you think through the Operating Model.
    • Business Capability Map: A Practical Business Approach

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