Business organisational structure
Organisational structure determines the assignment and coordination of roles, power and responsibilities within a business. It also defines how information flows between the different levels of management.
Every business, from a sole trader to the largest company, is organised in a particular way. You can organise a business by function, geographical area, product or project. You can also organise a business in a hierarchical or a flat structure, or even a matrix structure. Introducing a formal organisational structure can help put your business in a better position to achieve its objectives.
This guide explains the different types of organisational structure and the advantages and disadvantages of each. It also describes some of the main reasons for changing your organisational structure.
Note: Organisational structure is different from a legal structure, which relates to business ownership. See legal structures: the basics.
Flat organisational structure
Flat organisational structure is an organisational model with relatively few or no levels of middle management between the executives and the frontline employees. Its goal is to have as little hierarchy as possible.
How does a flat organisational structure work?
For a small business with a handful of employees, having a flat or horizontal structure is often the logical approach. The staff-level employees usually report directly to the business owner without a formal management structure.
If a management level does exist, the chain of command from top to bottom in a flat structure is typically very short. The span of control is wide with each management level controlling a broad area or group. Employees all report to one or few overall managers and are empowered to contribute to decision-making. Managers are given significant authority to make business decisions with little to no involvement from the top.
What are the advantages of a flat organisational structure?
While it will not suit all types of organisations, the benefits of a flat structure are:
- better communication and relationships between different roles
- better team spirit as there is less hierarchy
- simple, faster decision making as the chain of command is shorter
- better ability for the business to change and adapt
- greater job satisfaction when employees are given more autonomy
- more self-direction can lead to more innovation and efficiencies
- ability to lower operational costs
Flat structure is suitable for small to medium-size organisations or companies that start flat and scale this approach gradually as they grow. The lack of hierarchy is rarely practical or scalable for larger organisations with hundreds or thousands of employees. Those types of companies tend to have a hierarchical organisational structure.
What are the disadvantages of a flat organisational structure?
Like any other organisational model, flat hierarchies have their downsides. The common disadvantages of a flat organisational structure are:
- risk of generalisation and confusion if it's not clear who to report to
- lower sense of accountability as employees may have more than one boss
- risk of power struggles arising in absence of a formal system
- lack of employee specialism and specific job functions
- lack of long-term growth or opportunity for promotion
- difficulties in scaling up and growing the company
If they want to flatten their organisational structure, hierarchical organisations will need to invest significant time, resources and investment in order to achieve this.
What does flattening an organisation mean?
Flattening an organisation or transforming a hierarchical organisation into one with a flatter structure is known as delayering. This process involves:
- opening up lines of communication and collaboration
- removing one of more levels of hierarchy from the organisational structure
Often, it is the middle management layer that is removed. Delayering doesn't necessarily mean cutting jobs and overheads, but it does usually increase the average span of control of the senior management within the business.
Although challenging and time consuming, flattening can be an effective strategy for boosting operational efficiency, decreasing the wage costs and removing red tape.
If you decide to change your organisational structure, make sure that you manage the process correctly. See best practices in change management.
Hierarchical organisational structure
Organisational structures define a hierarchy within an organisation. The two most common arrangements include:
- a flat organisational structure
- a hierarchical organisational structure
Each structure has its advantages and disadvantages. The most appropriate arrangement will depend on the size and the type of your business, and the number of management levels that you need. See reasons for changing your organisational structure.
How does a hierarchical organisational structure work?
Hierarchical structure is typical for larger businesses and organisations. It relies on having different levels of authority with a chain of command connecting multiple management levels within the organisation.
The decision-making process is typically formal and flows from the top down. This creates a tall organisational structure where each level of management has clear lines of responsibility and control. As the organisation grows, the number of levels increases and the structure grows taller.
Often, the number of managers in each level gives the organisation the resemblance of a pyramid. This structure gets wider as you move down - usually with one chief executive at the top, followed by senior management, middle managers and finally workers. Employees' roles are clearly defined within the organisation, as is the nature of their relationship with other employees.
What are the advantages of a hierarchical structure?
A hierarchical structure can provide beneficial to businesses. For example, it can help establish:
- clear lines of authority and reporting within the business
- clearer understanding of employee roles and responsibilities
- accountability for actions or decisions at different management levels
- clear career paths and development prospects which can motivate employees
- opportunities for employees to specialise and develop expertise in their field
- close supervision of employees through narrow span of managerial control
- a culture of loyalty towards teams, departments and organisation as a whole
What are the disadvantages of a hierarchical organisational structure?
Workplace hierarchies are not always effective. Common disadvantages of hierarchical structures include:
- complicated chains of command which can slow down decision-making
- inconsistencies in management at different levels which can impede work
- delays in communicating vertically through the levels and horizontally between teams
- less flexibility to adapt and react to environmental and market pressures
- disconnect of employees from top-level management
- lack of autonomy can cause strain on employee manager relationship
- difficulties collaborating outside of the team 'silo' or dealing with team rivalry
- considerable amount of corporate overhead to support the many management layers
Generally, tall organisations are very complex. Strategies should be in place to deal with the challenges that are likely to occur under this structure. This could include creating a decentralised organisational structure - one in which senior management assigns the authority for limited decision-making to lower levels in the organisation.
For some businesses, a tall organisational structure will not be appropriate at all. Find out more about the flat organisational structure.
If you decide to change your organisational structure, make sure that you manage the process correctly. See best practices in change management.
Organisational structure by product
Product organisational structure is a framework in which a business is organised in separate divisions, each focusing on a different product or service and functioning as an individual unit within the company.
What is a product based structure?
In a product-based structure (also known as a divisional structure), you assign employees into self-contained divisions according to:
- the particular line of products or services they produce
- the customers they deal with
- the geographical area they serve
The structure may have several layers of managers and employees. Each layer (ie division) can have its own marketing team, its own sales team, and so on. A manager typically reports to the head of the company by product type, eg sporting goods, housewares and general merchandise. Certain key functions (eg finance or human resources) may be provided centrally.
For example, a computer software business may divide its structure according to its two distinct customer groups - home users and business users. In such an arrangement, all employees working on the development, sales or promotion of business software would in one division, while everyone working on software for home users would be in another.
Product structure advantages and disadvantages
Product organisation may not suit everyone, but is likely to provide distinct advantages to those businesses that:
- have particular product lines that are substantially different
- require specialised expertise for production or distribution
- target a few major customers that make up most of your business
Product structure can also help your business:
- focus on specific market segments
- meet customer needs more effectively
- extend knowledge or expertise within specialised divisions
- respond to market changes more flexibly and quickly
- encourage positive competition between each department
- coordinate and measure the performance of each division directly
Product organisational structure does have certain disadvantages, including being difficult to scale and potentially:
- duplicating functions and resources, eg a different sales team for each division
- dispersing technical expertise across smaller units
- nurturing negative rivalries among divisions
- over-emphasising divisional, rather than organisational goals
- losing central control over each separate division
Product or divisional structure is mainly suitable for larger companies with two or more key product lines, strategic customers or markets.
Organisational structure by geographical area
Some businesses organise their activity according to geographical area or location. This is common in large multinational companies, but it may also suit medium-sized businesses. For example, a group of taxi firms, a small retail chain or a fast-food chain with several branches.
What is a geographical organisational structure?
Geographical organisational structure suits businesses that have offices or units in different regions or geographical areas. This form of structure enables businesses to:
- have a reporting and functional system across multiple locations
- operate separate sites according to local demand but still be directed by business policy
Depending on the size of the business, each geographic unit may report to an executive who oversees several locations. Alternatively, it may report directly to top management located at the business' headquarters. The reporting structure can adapt to the size and industry of the business.
The advantages of a geographical structure
A geographical structure can offer a number of operational and strategic advantages, including:
- close communication with local customers
- strong collaborative teams at each location
- the ability to better serve local needs and tailor their approach to the local market
- the ability to encourage positive competition between different departments
It makes sense to divide an organisation by region if different cultures, rules, languages and customer preferences exist in the area where the business operates. Logistics relating to shipping, resources and staff also sometimes make geographical structure a good choice.
The disadvantages of a geographical structure
The main downside of a geographical organisational structure is the potential conflict between local and central management, as individual divisions often take on a great deal of autonomy. Other disadvantages include:
- potential duplication of jobs, resources and functions
- some economies of scale may be lost
Geographic organisational structure suits mainly industries like retail and hospitality, transportation and other businesses that need to be near sources of supply and customers (eg for deliveries, production or on-site support).
There are other ways of structuring a multi-national business. For example, a suitable alternative can be a decentralised organisational structure or organisational structure by function. Both of these function as hierarchical organisational structures. For a simpler arrangement, see flat organisational structure.
Organisational structure by function
Functional structure is one of the most common types of organisational structure in business, especially in larger companies, where groups of employees are organised according to the function they perform.
What is a functional organisational structure?
In this type of organisational structure, businesses are organised according to their roles and skills into smaller groups or departments. This may include, for example:
Individuals, teams and line managers are grouped into a specialised department where they report to the head of the department, eg the sales director. The business' top management team typically consists of several functional heads, eg the chief financial officer, the marketing director or the head of operations.
Read more about the hierarchical organisational structure.
Advantages of a functional structure
Functional structure arguably achieves greater operational efficiencies, as employees with shared skills and knowledge work together and perform similar functions.
The advantages of this type of structure are:
- specialisation - departments focus on one area of work
- productivity - specialism means that staff are skilled in the tasks they do
- accountability - there are clear lines of management
- clarity - employees understand their own and others' roles
However, the nature of departmentalism within a functional structure can present certain risks.
Disadvantages of a functional structure
The vertical separation of divisions and teams can lead to the creation of 'organisational silos' - a mindset where one team hesitates to share information or knowledge with other teams within the same organisation.
This silo mentality can cause problems around:
- aligning priorities across the business
- the flow of information and communication
- co-ordination of decision-making
- embedding and managing change across departments
Functional structures are common in a wide range of businesses across many sectors. They work best within large companies, especially those that produce products or services on a continuous basis, such as in manufacturing.
Smaller companies may find functional structure too rigid, preventing them to adapt to changes quickly and easily. Project management organisational structure or flat organisational structure may be better options in this case.
Matrix organisational structure
A matrix organisational structure doesn't follow the traditional, hierarchical model. In the matrix structure, you share resources and staff across teams and projects, as well as within departments or functions.
What is a matrix organisational structure?
A matrix structure is a combination of two or more types of organisational structures. It is a way of arranging your business so that you set up reporting relationships as a grid, or a matrix, rather than in the traditional hierarchy.
In this structure, employees usually have dual reporting relationships - generally to their functional manager as well as the project manager. Typically, one reporting line will take priority over the other (eg staff may have to report to their functional manager before reporting to the project manager).
Examples of matrix structure
Different forms of matrix structure exist. These fall under three main categories, depending on the level of power of the project manager:
- Functional or weak matrix - the functional manager retains most of the power and is in charge of the people and resources. The project manager has a minimal role and tends to carry out administrative or coordinating tasks.
- Strong matrix - the project manager holds most of the power and authority, controls the project budget and manages staff. The role of the functional manager is limited.
- Balanced matrix - the functional managers and the project managers share the power and the authority over staff and budget.
In large organisations, it is possible to involve all these types of matrix structure at different levels within a business. This is sometimes referred to as a 'composite organisation'.
The advantages of a matrix organisational structure
The main advantage of the matrix structure is that it can:
- improve decision-making, since there are two chains of command
- help break down traditional 'silo' barriers
- improve communication across the business
- allow staff to apply their skills in different roles
- help share best practice and ideas across teams
- increase efficiencies due to sharing resources across departments
The matrix structure can also help businesses achieve quick market adaptation to changing customer needs, as it can decrease the lead time to produce a new product. This structure is most suitable for businesses operating in a dynamic environment.
The disadvantages of a matrix organisational structure
A matrix structure may not be well suited for businesses working in a more settled environment, with set customer requirements. Because of its complexity, and the need for employees to report to two bosses, it can lead to:
- confusion regarding roles, responsibilities and priorities
- divided loyalties between project teams
- blurred lines of accountability
- difficulties in coordinating tasks or functions
- power struggle between the project manager and the functional manager
- large overhead costs, on account of having multiple managers
Matrix organisational structure vs functional
A matrix organisational structure often exists alongside a traditional functional structure. It is common in large and multi-project organisations that relocate employees when and where they need them. For smaller businesses with limited resources, organisational structure by function may be more suited.
Decentralised organisational structure
Organisational structure in business is either centralised or decentralised. Centralised organisations rely on one individual to make decisions and provide direction for the whole business. A clear chain of command travels from the top down through the levels of their hierarchical organisational structure.
In contrast, decentralisation retains the hierarchy but relies on sharing of decision-making across various levels in an organisation.
How does decentralisation work?
Decentralised organisations assign decision-making to lower-level management and even individual teams, giving them the autonomy to take the necessary actions.
The top tier of the organisation retains a small span of control for making major, organisation-wide decisions. For example, they set the company's mission, vision, strategic plan, etc. The remaining decisions, as well as the authority and the responsibility to carry out daily operations, are delegated as much as possible down the ranks to the lower tier of management and sometimes even employees.
Examples of a decentralised organisation
In most businesses, there is a degree of both centralisation and decentralisation. For example, franchises often embody a combination - individual stores have control over hiring, but headquarters makes decisions about branding, marketing, etc.
Decentralisation may also be effective in businesses that:
- need individualised customer service, usually at the point of contact with customers
- have different locations, eg stores they need to monitor and make decisions for
- need to respond rapidly to market changes or competitor actions
- change their business model constantly, making centralised control impossible
A lot of small businesses start centralised and gradually decentralise as they grow - with expanding workloads and workforce putting pressure on one individual to manage it all. Decentralisation may offers several benefits to a growing business, although giving up control may be difficult for an owner used to making all the decisions.
What are the advantages of a decentralised organisation structure?
Delegating decision-making to the lower-levels of the organisation can help:
- allow top management to focus on long-term goals rather than day-to-day problems
- encourage accountability and taking ownership of the work
- enable talent development and leadership skills in the workforce
- improve the quality and speed of the decisions being made
- foster innovation and open exchange of ideas
- reduce the staff turnover and improve staff satisfaction
What are the disadvantages of a decentralised organisation structure?
Decentralisation can negatively impact processes and the flow of information within a business. It can also present challenges if:
- strong leadership is not established to give direction to the organisation
- administrative or service functions are duplicated across decentralised units
- 'silos' and unhealthy rivalry is emerging between units
- too much focus is placed on the needs of the unit, rather than the business as a whole
- uniform and consistent policies are required across the various units
Using a balanced approach between centralised and decentralised structures is the key to successfully managing most types of organisations.
You may also want to read about other common ways of structuring a business include: a matrix organisational structure, a project management organisational structure or organisational structure by product.
Project management organisational structure
Project management structure is becoming increasingly common. In a project organisational structure, you arrange your business around dedicated teams that work on a particular project.
What is a project based organisational structure?
The project structure involves taking a member of staff out of each functional department and placing them in a temporary project team. This team then works on one specific task.
This structure can be useful when developing a new product or entering a new market. A business that usually has a functional or customer-based structure can use project management to complete short-term objectives. In this structure, a project manager usually:
- has the decisive authority over the task
- leads a team of staff from different departments to complete a project
The individuals on the team work directly for the project managers.
The advantages of a project organisational structure
Some businesses may benefit from using a project management organisational structure all the time, especially if they need to be flexible and agile in their operations.
A clear benefit of a project structure is that you have more control over the team. However, there are many other advantages. For example, such a structure can:
- facilitate a multi-disciplinary or cross-functional way of working
- flatten a business' hierarchy
- create a strong team culture and sense of identity
- ensure a business is organised according to its core activities
- make better use of employees' skills
- make it easier to schedule work with dedicated resources
The disadvantages of a project organisational structure
While the project structure is probably the simplest structure of all, it's worth keeping in mind some possible downsides. For example, the project organisational structure can:
- blur organisational lines, since it effectively removes staff from their functional jobs
- suck up resources and staff to work on a single project, rather than wider objectives
- confuse lines of accountability as employees may report to several different managers
Project organisational structure can also prove expensive, as having a dedicated project team can often lead to high costs. This is likely to work best for big and short-term projects.
Reasons for changing your organisational structure
Typical reasons for organisational change vary. They range from disruptive technologies and changing market conditions to the need to improve quality, productivity or profit.
Many types of organisational change exist. Change can be:
- planned or unplanned
- transformational or incremental
- remedial or developmental
Different external or internal factors can cause or trigger organisational change.
What causes organisational change?
The main reason for restructuring a business is to execute a new strategy. A strategy sets out a plan that determines how a business will use its major resources to meet its strategic objectives.
When you change your strategy, you often have to adapt your business structure to ensure that the two elements continue to support each other. This may happen, for example, when you:
- transition from a start-up to a scale-up company
- take on a partner, or introduce change in management
- move into new product lines
- prepare your business for growth
- expand your business overseas
Find out more about strategic planning for business growth.
External factors affecting organisational change
External factors that might prompt a change in your business' structure include having to:
- address new markets
- react to changes in product or service demand
- keep up with new technologies or products from competitors
Other external events that can affect either your business or your rivals can also stimulate organisational change. These include, for example:
Internal factors affecting organisational change
Internal business needs can also prompt business change. For example, these may include the need:
- to raise capital, improve cash flow or profitability of your business
- to improve working practices and processes
- to eliminate excess job positions and duplicate management roles
- to reorganise internal functions, such as sales and marketing, for efficiencies
Prepare for organisational change
Being able to recognise the signs of oncoming organisational change can help you prepare for the change and implement policies that will ensure your business' growth.
If you wait until your business' position is threatened, it may result in defensive and ineffective management. Proactive business change is much more effective. This is when management foresees a change in the market or economy, which will affect the business and makes changes in order to improve its position. Read more about change management.
Analysing your strengths and weaknesses can help you identify potential changes. You can use SWOT, PESTLE and other models for strategic analysis.