The word “organization” was derived from the root word, “organize”, a verb that means “to arrange into order or into a structured whole”. This implies that, in order for any organization or collective to be arranged into any semblance of order, a basis or a framework is required. This is where organizational structures come in.

A Complete Guide to Organizational Structures

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In this post, we start with 1) the introduction to organizational structures; 2) evolution and 3) types of organizational structure; and finish with the 4) future trends of organizational structures.

AN INTRODUCTION TO ORGANIZATIONAL STRUCTURES

An organizational structure is the framework around which an organization’s operations are based on. In most cases, it is referred to as the “manual of operations” of an organization or a company, showing how it is formed and how it works or functions. This encompasses various processes including, but not limited to, recruitment, settlement of disputes, and other decision-making actions. It details how work is performed, who does what, and who is accountable for what, while keeping in view the organizational goals.

Importance of an Organizational Structure

An organization cannot exist or even come about without any structure or order. It requires a framework, regardless of the type of the organization or the purpose of its existence. Its development could be on the onset of the organization, when it is still in the process of being formed, or during the life of the organization, when it is already in operation. In most cases, development of a structure within an organization is a continuous or ongoing process, with changes implemented to adapt to various circumstances directly (or even indirectly) affecting the members, or the organization, as a whole.

Why is it important to have an organizational structure? Here’s why:

  • An organizational structure lends “organizational” identity to the members. Members will instinctively feel that they are part of something solid or of a cohesive unit. It displays the working relationships that are in effect in the flow of work within the organization, so they will know exactly where they are supposed to be or what their roles are. In effect, this also clears up issues regarding responsibilities and accountabilities.
  • An organizational structure provides clear guidelines. Essentially, it sets out the scope of acceptable behavior of members within an organization. Members refer to the structure to get an idea how things work, or what rules should prevail in certain situations. This ensures an improvement of the operational efficiency of the members and the company or organization.
  • An organizational structure aids in decision-making. After all, it is considered as an operations manual of guidebook. Decisions can be made more easily if they have something solid – the structure – to base on.
  • An organizational structure facilitates growth of the organization. For the precise reason that it serves as the guide for the company, it provides direction on how certain matters or issues must be resolved.

Elements of an Organizational Structure

With more than one or two types of organizational structures currently prevailing, there are bound to be several elements that comprise them. The basic ones, however, are enumerated below:

  1. Leadership or governance. The persons or individuals who have the power to make decisions or steer the organization towards its common goal are clearly identified.
  2. Implementing rules. These are the rules – both the explicitly stated rules and those that are implicit by nature – that must be followed in the organization’s normal operations or functioning.
  3. Division of labor. Within the organization, the division and subsequent distribution of work among the members must also be laid out, with their roles and responsibilities clearly defined.

Taking into account the significance of an organizational structure in the grand scheme of things, it follows that an organization should have a proper structure in place: one that is most suitable for the type of organization, its operations, its scale (or size), as well as its ultimate goal.

EVOLUTION OF ORGANIZATIONAL STRUCTURES

Ever since man started getting into trade or business, setting up enterprises of different sizes, they have unconsciously set up structures, even if they weren’t aware of it yet. In fact, even during the ancient times, when hunters went out in groups, there was a certain order to how they carried out their hunting tasks. There is, unbeknownst to them, already an “organizational structure” in place.

It was during the 1900s, when the concept of mass production started to take root, that thinkers and industry leaders at the time looked into ways to increase productivity while maintaining efficiency throughout the production process. Henri Fayol of France likened the process to resemble that of a machine – well-oiled, it will operate smoothly and yield better results. The oil, in this case, would be a structure that will keep operations going smoothly.

Fayol introduced the concepts of having a chain of command, specialization of tasks, and separation of jobs, power and authority. This lent support to the idea of another thinker, Max Weber, who introduced the application of the concept of bureaucracy. This time around, it is the positions or roles that are assigned with specific powers or authority, regardless of the identity of the person or individual in those positions.

From Centralized to Bureaucratic Structure

Prior to the application of bureaucracy to organizational structures, task specialization and standardization was not practiced, which means everything was centralized. This type of structure does not work as well anymore when applied to mid-sized to large organizations. Delegation of tasks becomes imperative as the workforce – and the operations – grows.

This bureaucratic take on organizational structures is said to be the classical or traditional view. It is in this type of structure that standardization has been introduced.

Main Features of the Traditional Bureaucratic Structures

  • Presence of a certain degree of standardization.
  • Multiple levels of management and decision-making stages. In the spirit of delegation, many levels of management are created. For example, in a large retail chain setting:

Store or branch managers – management of specific stores or branches

Area managers – management of all stores in one city

Regional managers – management of all stores in one state or region

Senior executive managers – top management level

  • Presence of defined policies and procedures.
  • Authority lies with top management.

Advantages (+) and Disadvantages (-) of Traditional Bureaucratic Structures

+     Well-defined roles and responsibilities. Everyone is clear on who makes the decisions or who has the final say, and they are also fully aware of their responsibilities.

+     Systematic decision-making process. The clear line of responsibilities results in a more organized manner of making management and other business decisions. Since the authority lies with the top management, making decisions is also faster.

+     More control for top management. Top level managers have all the power to decide on all matters regarding the organization, so they have full command and control of everything that goes on.

–     Restrictive environment. Rules, procedures and policies in this form of structure tend to be too limiting and strict. All movements should adhere to the rules, leaving no room for innovation and hampering members of the organization to display their creativity.

–     Resistance to change. What rules were in effect at the beginning tend to prevail for a long time. They tend to stick to what they have “already started with”. This inflexibility is likely to cause problems when the organization is faced with unusual setbacks.

Basis of Grouping for Organizational Structures

If you notice the bureaucratic structures, as represented in most hierarchical organizational charts, there are specific groupings or, in some cases, departments. This is to simplify the process of creating a solid structure for the organization.

The grouping or departmentalization will depend on several factors, mainly on the type of the organization and its size or scale. Currently, this process is done through several bases.

Departmentalization by Functions

Departmentalization under this category is done depending on the specific functions performed by members or employees within an organization.

Example: A company engaged in the manufacture of electronics will have departments based on functions, such as Research and Development, Sales and Marketing, Manufacturing, Accounting and Finance, and Logistics.

Pros:

  • It promotes efficiency, such as in utilization of resources.
  • It promotes sharing of knowledge and expertise within the department.
  • It encourages personal and professional growth and development of members within one department.

Cons:

  • It prohibits members from interacting and coordinating with other departments, as they tend to focus inwards, only to their own respective departments.

Departmentalization by Products

Often applicable to companies engaged in diversified businesses or activities, this basis provides that all activities that contribute to the development, production and marketing of a specific product are classified as belonging to one group or department. The more products or group of similar products there are, the more departments or groupings there will be. This concept also applies to product lines.

Example: A company has several products or product lines, such as men’s footwear, women’s footwear, men’s sportswear, women’s sportswear, and sports accessories. All activities related to each of the product line, from development all the way to sales and distribution, will fall under its own department.

Pros:

  • It aids in personnel development, increasing their expertise and specialization with respect to the products or product lines they are assigned to.
  • Product quality is monitored since all the focus of the members or personnel will be devoted to the products falling under the department.

Cons:

  • Redundancy of some functions, particularly support functions. Some of the functions, such as accounting, marketing, and production, to name a few, will be duplicated, since all the departments will also have each of them.

Departmentalization by Location

Grouping is made with respect to geographical location. This is applicable to organizations that span wide areas, or operate in many locations.

Example: A worldwide chain of hotels will be grouped in accordance with their geographical profiles, such as those located in Asia, Europe, North America, and South America, respectively.

Pros:

  • It promotes efficiency, such as in utilization of resources.
  • It serves as a good training ground for members aiming for higher management positions in the future.

Cons:

  • Distances cause greater difficulty in coordination among geographical units.
  • Diversity of locations brings about differences that require unique responses. A Southeast Asian department cannot be expected to have exactly the same operations or circumstances as the department in North America.
  • Departmentalization by Customer or Market

This requires answering the questions “who is your customer?” and “who are in your target market?” The grouping will be based on the type of customers or market served by the organization.

Example: A company engaged in providing office supplies will come up with separate departments that cater to wholesale customers, retail customers, and another that deals with government contracts.

Pros:

  • It improves relationship between the organization and its customers or market.
  • Personnel improve in handling matters affecting the customers or market they are specifically dealing with.

Cons:

  • Personnel will only be familiar with the needs of one set or group of customers while remaining oblivious, to a certain extent, to that of other customers or markets.

TYPES OF ORGANIZATIONAL STRUCTURES

Organizations have evolved and decided to move past the traditional structures, in order to address issues these conventional views could not resolve. Currently, there are three major structures.

Functional Organizational Structure

This is the most commonly seen organizational structure in use by small organizations with specialized divisions or divisions assigned to perform functions or tasks unique to their respective groupings.

For example, an IT company has several departments, and they include the accounting division and the engineering division. The personnel in the engineering division are all software engineers; the accounting department, on the other hand, is staffed with people involved in accounting and finance.

Advantage: Increased efficiency of operations within the division.

Disadvantage: Lack of interaction and communication of one division with other divisions of the organization.

Divisional Organizational Structure

In this structure, departmentalization was done based on the product/product line, the process or project performed, or the geographical location. In this case, it is possible for one division to have several departments under it, which is why it is ideal for organizations with complex nature of operations and products or product lines.

Advantage: Increased operational efficiency and improved capability and expertise of the members of the division.

Disadvantage: Too much diversification tends to make the organization lose focus, and could also lead to duplication of tasks in the different divisions.

Matrix Organizational Structure

Unfortunately, sticking to any one of the aforementioned organizational structures could be limiting, considering the varying nature of organizations. Not all organizations are the same or operate the same way, so it would be wrong to conclude that a structure that works for one will also work for the rest, even if they belong to the same industry.

A certain degree of flexibility is called for, and this is when the Matrix Organizational Structure was developed.

This type of organizational structure basically combines two or more structures. In fact, it has been said that it combines the best things about the functional and divisional organizational structures. The departments could be divided based on their functions, but then are subsequently grouped according to the products they are associated with. An example would be drawing expert personnel from the different functional departments together in order to achieve predetermined goals or results.

It is usual to see functional managers as well as product managers or area managers in this type of organization. In a manufacturing setting, you will find managers in charge of the functions of the production, quality control, and logistics. But you will also find people who are tasked to manage a specific product line that results from the production process.

Advantages: Decentralization of decision-making results in better performance monitoring and adaptability of the organization. This also increases operational efficiency as the utilization of resources is done in a more flexible manner, and results are achieved more quickly, thanks to the faster flow of information in a horizontal, rather than a vertical, direction.

Disadvantages: Increased possibilities of conflicts brought about by confusion on authority, responsibility and accountability. Conflicts are not limited to managers alone, since the personnel or employees may also be affected, largely due to the large manager-to-employee/worker ratio. Operational efficiency may be improved, but administration cost is likely to be high.

EMERGING AND FUTURE TRENDS IN ORGANIZATIONAL STRUCTURES

The constantly evolving or changing landscape of business on a global scale calls for a more proactive attitude from organizations. They simply cannot sit still, doing nothing or making no attempts to adapt to these changes. Fortunately, more and more organizations are taking active steps to do so.

‘Flattening’ the Organization

By “flattening”, it is a move of organizations to adopt a “flat” structure, where the horizontal relationships are more emphasized than the vertical relationships.

The characteristic move performed by organizations to achieve a flatter structure is to eliminate middle management. Instead of having multiple levels of management, they will be left with only a few levels. As a result, the organization becomes more streamlined, and decision-making becomes faster while communication within the entire organization becomes more free-flowing.

Another way to improve the communication within the organization is to take advantage of technology. Internet has played an active role in recent years in business and has even reshaped the way organizations go about their operations.

Industry Consolidation

Today, we see conglomerates and global companies entering alliances, merging with other companies, and entering into joint ventures and various other cooperation agreements. This results in an overlapping and consolidation of industries. Naturally, this would mean the organization would be more complex, and there would be a seemingly constant need for a more well-defined and suitable structure to accommodate these changes.

Do not be surprised when, in the future, more organizational structures will crop up, in order to meet the ever-increasing complexity and demands of organizations.

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There is a need to relook at Organisation Structure around the Customer Experience Journey and how efficiently we can move the customer through the various stages of his journey. The current problem with most organisations is that they are designed for internal efficiencies (functional, Location based structure etc)
Moving towards Customer Experience involves training front line staff to handle multi functional aspects (Functional structure are internal to the company), as is required to guide the customer through his various micro journeys.
The future Organisation structure has to be multi functional and customer experience journey oriented at grass root level, functional / product oriented etc at middle and once again with an overall perspective at the Top.