What is Organizational Structure?
Organizational structure helps companies stay focussed on the organizational goals by directing the alignment of activities in the system. The activities revolve around protocols, responsibilities, and roles. The organizational structure determines the flow of information between various departments and employees of the company.
An organization is an establishment comprising of employees that work with each other to realize collective goals. Organizations are hugely affected by the internal and external environment they function in. Every organization has a unique management structure that dictates the terms of relationship with employees, the power structure, roles, and responsibilities needed to complete tasks. A well-structured organization is able to operate effectively and with coordination among individuals.
Understanding Organizational Structure
Any business is heavily dependent on organizational structure. Organizational structure spells out the hierarchy within the company and job responsibilities for each employee. Very simply, organizational structure specifies who does what in a company so that business goals can be achieved collectively. Organizational structuring presents a visual representation of the shape of the business and illustrates the best way forward. An organizational chart is like a pyramid with the most powerful people on top of the organization. The bottom rungs are occupied by people with less power. Without an organizational structure, employees will not understand their role and who to report to. This will increase the level of uncertainty in a company. Organizational structure helps raise the performance level of the team and also brings clarity regarding job responsibilities.
Centralized Vs. Decentralized Organizational Structure
Organizational structure can be centralized or decentralized. The centralized structure is usually found in traditional organizations. This structure is defined by central leadership and a strict chain of command. The decision-making authority lies with the higher management in this hierarchical structure with a wide span of control and many organizational tiers. For example, the military is known for following a centralized organizational structure with a hierarchy of seniors and subordinates.
A decentralized organizational structure is more adaptable with a narrow span of control. The decision-making authority is transferred to the lower rungs of the organizational hierarchy. Decentralized structure enjoys more autonomy as far as the lower ranks are concerned. For example, J&J follows a decentralized structure with over 200 different units operating autonomously. Many technology start-ups follow a decentralized organizational structure.
Types of Organizational Structures
The designing of an organizational structure is largely dependent on objectives and the strategy adopted by the company. An organizational chart is used to visually represent the vertical structure of the organization. The structure should clearly show the chain of command and reporting relationships. A defined flow of authority will encourage communication and result in coordinated efforts towards the strategic goals and an efficient work process flow. Some vital factors to be considered before deciding on the organizational structure are the size of the company, the nature of the business, the objectives & the strategy fixed to attain these goals, and the environment of the organization.
There are four major types of organizational structures. Each has its own advantages and disadvantages and might be relevant to the organization depending on the situation and particular points in the life cycle of the company.
Also called the bureaucratic organizational structure, this is the most commonly followed structure in the real world. This kind of structure divides the company into various departments like operations, sales, and marketing. This structure is visible in a lot of small to medium enterprises (SMEs). This structure is advantageous as employees are segregated as per their skills and functions. This enables them to collectively focus energies on their roles in the company towards the realization of the strategic goals. The disadvantage of such a structure is the lack of communication between departments.
Divisional or Multidivisional Structure
This kind of structure is popular with larger companies with multiple business units. This is a decentralized structure with projects, brands, or subsidiary-based leadership. These companies have many products and business lines, and each business unit operates as a company with its own leader. The divisional structure lends much more autonomy to the divisions within the company. This allows for structural flexibility as each division is a company in its own right. A downside to following a divisional structure is the lack of communication between individuals performing the same function but in different divisions.
This is a fairly new structure and is mainly followed by start-ups. As suggested by the name, this structure flattens the hierarchy and the chain of command, allowing a lot of autonomy to the employees. The biggest advantage of this structure is that it encourages innovative thinking by eradicating red tape in the company. The disadvantage to such a structure is confusion arising from employees not agreeing on how to organize the structure.
The Matrix structure is the final organizational structure. This structure is confusing, and hence the least used. This hybrid structure is a mix of projectized and functional organizational structures. As per the matrix structure, employees might have to function across departments and projects and report to more than one superior. The advantage of such a structure is the sharing of knowledge across a multitude of divisions. This helps the employees’ professional growth by expanding their skill-sets and knowledge. The matrix structure can be challenging as it is confusing to report to several bosses and not knowing one’s specific roles and responsibilities.
Benefits of Organizational Structures
It is essential to have an organizational structure in place for all companies. The structure defines the hierarchy of the company and also helps in assigning roles and pay structures for the employees. The organizational structure ensures effective and smooth operations by separating functions and employees into various departments. This helps the company conduct more than one function or operation at a time. The clarity in organizational structure instructs the employees in the best possible manner and results in effective functions across departments. In a centralized or hierarchical organization, employees have to follow the chain of command and decisions top-down. In a decentralized organization, employees are responsible for taking the initiative and bringing creative and innovative thinking to the table. An organizational structure ensures collective efforts to achieve the company goals and also encourages the employees to concentrate on their personal development and growth.
Summarizing Organizational Structure Quiz-let
Chain of Command – The chain of command is how work is delegated and approved. An organizational structure will have many levels of authority pertaining to its line of business. The chain of command spells out who delegates work and who is supposed to report to whom. The chain of command also deals with how issues, proposals, and requests are communicated and handled up and down the organizational levels.
Span of Control – Span of control can be either broad or narrow. It represents the number of subordinates assigned to a manager. The broader span of control means a bigger number of subordinates that the manager has to work with.
Cross-functional Team – Cross-functional teams consist of people from varied functional areas, like sales, marketing, product, and customer care. In this type of structure, employees belong to their own functional team but also operate across functions. Cross-functional teams encourage communication across teams to serve customers to the best of their abilities.
Mechanistic Structures –These are also known as bureaucratic structures and possess a narrow span of control. Mechanistic structures are highly centralized with rigid dictates of who does what and how the departments are designed.
Organic Structures – Also known as flat structures, these have a wider span of control. Organic structures are decentralized, and teams might take on projects based on capabilities rather than what the teams have been designed for.
Departmentalization – This means making different groups as per people and activities to possibly expand the organization.
Holacracy – Holacracy is a new-age way of structuring and handling an organization’s operations. This structure swaps the conventional hierarchical top-down management for one where power is disseminated through the organization, giving the employees freedom and a purpose to stay aligned to the organizational goals.
One of the most common mistakes made by students is not documenting the existing processes. It is important to know where the project started from to be able to make process-related improvements to it. Another mistake is to overcomplicate the processes while designing the organizational structure. Simple steps will avoid complications at a later date.
Context and Applications
This topic is significant in the professional exams for both undergraduate and graduate courses –
- Bachelor of Commerce
- Masters of Commerce
- Digital Operations Management
- Forecasting and Demand Planning
- Strategic Operations Management
- Advanced Operations Management
- Inventory Management
- Operational Accounting
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