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Types of Business Organizational Structures

Types of Business Organizational Structures

Large or small, every organization should operate with a defined organizational structure. A well thought out and strategic business configuration clarifies reporting relationships and supports good communication – resulting in efficient and effective work process flow.

The board and senior leadership should be the group who determines the type of organizational structure that would best support the internal operations, how work is carried out and the chain-of-command.

Determining the best structure is done by answering the questions:

Senior leadership looks at all functions and determines how they would like work activities to be organized and carried out. This process also identifies natural reporting relationships and chain-of-command. Reporting relationships can be both vertical as well as horizontal.

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6 Common Business Organizational Structures

1. Hierarchical Organizational Structure

Organizations that use a traditional hierarchical structure rely on a vertical chain of command as the prime method of organizing employees and their responsibilities. Military, government, and other very large organizations use a hierarchy to determine the level of control employees have over their work as well as their rank relative to others.

Hierarchical structures typically feature multiple layers of management and are therefore prone to bureaucracy and the creation of silos that prevent cross-team collaboration.

An interactive example of a hierarchical organizational structure:

2. Matrix Organizational Structure

A matrix structure provides for reporting levels both horizontally as well as vertically. Employees may be part of a functional group (i.e. engineer) but may serve on a team that supports new product development (i.e. new album). This kind of structure may have members of different groups working together to develop a new product line.

For example, a recording engineer who works for a music publisher, may have engineers who report to him but may also use his expertise and work with teams to develop new music albums.

The advantage of a matrix organizational structure is that employees have responsibility not only for their department but for organizational projects. A challenge with this type of structure presents itself when employees are given direction from two different managers and they need to prioritize their work responsibilities.

3. Functional Organizational Structure

Functional organizational structures are the most common. A structure of this type groups individuals by specific functions performed. Common departments such as human resources, accounting and purchasing are organized by separating each of these areas and managing them independently of the others.

For example, managers of different functional areas all report up to one director or vice president who has responsibility for all of the operational areas.

The advantage of this type of structure is that functions are separated by expertise but the challenges comes in when different functional areas turn into silos that focus only on their area of responsibility and don’t support the function of other departments.

Related: Looking to revamp your outdated org chart and get your team actually excited about using it? Download this free guide to learn everything you need to know.

An interactive example of a functional organizational structure:

4. Product Organizational Structure

Another common structure is to be organized by a specific product type. Each product group falls within the reporting structure of an executive and that person oversees everything related to that particular product line.

For example an executive over Kraft products would be responsible for every product under that label – dressings, meats, sauces, etc.

The advantage of this type of structure is that it organizes products by category but can create completely separate processes from other product lines within the organization.

Learn more in this related guide: 4 Ways to Find Out If Modern Org Chart Software Makes Sense.

An interactive example of a product organizational structure:

5. Customer Organizational Structure

Certain industries will organize by customer type. This is done in an effort to ensure specific customer expectations are met by a customized service approach.

An example of this would be in healthcare. A patient seen as an outpatient has very different needs than those of patients who spend time in the hospital as inpatients.  A customer centered structure creates customized care for those patients.

The advantage of this type of structure is that it specializes in the needs of each customer group but can ignore the needs of different customer types.

An interactive example of a customer organizational structure:

6. Geographic Organizational Structure

For organizations that cover a span of geographic regions, it sometimes makes sense to organize by region. This is done to better support logistical demands and differences in geographic customer needs.

Typically a structure that is organized by geographical regions reports up to a central oversight person. You see this type of structure in companies that go beyond a city or state limit and may have customers all across the country or in multiple states.

An interactive example of a geographic organizational structure:

Wrapping Up

Deliberate time and thought should go into the design of an organization’s structure. This is important so employees have a visual of how the organization functions and understands the chain-of-command. Operating within a defined structure, with good communication processes and work-flows, help to ensure efficient management of resources – people, time and money.

Related Reading

Next up: Looking to revamp your org chart? Download The Definitive Guide to Org Charts

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Patricia Lotich
by Patricia Lotich
Founder of The Thriving Small Business. Patricia is an MBA and Certified Manager of Quality and Organizational Excellence through the American Society for Quality. You can find her on Twitter @PatriciaLotich.