All businesses, whether you realize it or not, have an organizational structure.
Yours might have formed and evolved organically, but it’s important to be deliberate and thoughtful about your organizational structure – particularly as headcounts increase and the company grows increasingly complex.
What is an organizational structure, and why is it important?
An organizational structure is:
- An explanation of workflow and responsibilities
- A day-to-day guide governing employee tasks, interactions and reporting
- A quick means for employees to understand where they need to go for help or answers for specific issues
A well-designed organizational structure of a company should be an integral part of your strategic planning. Done well, it can have significant impacts on company operations and the customer experience.
No matter where your business is in terms of size, growth or level of establishment, you should either:
- Create an organizational structure for the first time.
- Periodically rethink and optimize your existing organizational structure.
Where do you begin?
Main types of organizational structures
When it comes to structuring an organization, businesses have varying needs based on their goals, size, industry and the market they serve. These factors significantly impact the type of corporate organizational structure best suited for their operations. Below are some of the most common types of organizational structures that companies use to optimize workflow, improve efficiency and clarify responsibilities within their teams.
Functional structure
The functional structure is one of the most widely used organizational models, particularly in larger corporations. In this setup, employees are grouped based on their specific roles or specializations, such as marketing, finance, sales or human resources. Each department operates under a manager who oversees the function, ensuring that tasks are executed efficiently within that area.
Divisional structure
Divisional structures organize companies by product lines, geographic regions or customer markets. Each division operates semi-independently, which allows for a focused approach to specific markets. However, it can lead to resource duplication across divisions.
Matrix structure
A matrix structure blends functional and divisional models. Employees report to two managers—one for their functional role and another for the project or product they’re working on. While this structure promotes flexibility, it can also create confusion due to dual reporting lines.
Flat structure
Flat structures have few management levels, promoting decentralized decision-making and collaboration. This model is common in startups and smaller organizations, where quick decisions and adaptability are key. However, as companies grow, maintaining a flat structure can become difficult.
3 factors that influence organizational structure
1. What is the long-term vision for your business?
What’s the purpose of your business, and what do you hope to accomplish in the future? Your company’s employee structure is a blueprint for how you will realize the vision – day-by-day.
2. What have you promised your customers?
Who’s your customer, and what are you fundamentally promising them?
How do customers interact with your business, and what do they expect in those interactions?
Your customer is the ultimate decision-maker. Everything needs to be filtered through that lens.
How you decide to organize your business must support the delivery of your customer promise.
3. How do you need to be organized internally to be externally successful?
In other words, based on your marketplace presence (customer promise), what type of culture do you need to deliver on that promise better than your competition?
Consider how your company functions to achieve its goals.
To do so, ask yourself these questions:
- What type of company culture best serves your customers?
- How can your employees and teams best work together to achieve those goals?
- How are decisions made now, and is there a better way?
- What level of authority is needed to make decisions?
The process for designing an organizational structure
Once you’ve begun to understand how your business addresses the factors above, you’re ready to begin building (or reshaping) your organizational structure.
Here’s the general process:
1. Plan the future
Ask yourself: Where is your company headed? What do you want to do that you haven’t done yet?
Plan out as far into the future as you can. For newer organizations, this covers the next three to five years. For more established organizations, aim for 10 or more years.
2. Consider the past
In terms of how departments or teams work together, consider what has worked well and what hasn’t. For example, are certain departments at odds with each other? Do certain teams compete because your reporting structure encourages unhelpful rivalries?
Think of it this way: If you have a one-story house with a crack in the foundation, the problem will only escalate when you add more floors to your house.
3. Build your organizational structure
Piece together an organizational structure – without names.
At this stage, your focus should be on establishing:
- The optimal, most efficient workflow
- Achieving business goals
- Serving customers well
There are many ways by which you can organize your employees:
- By function (sales, marketing, accounting/finance, etc.)
- By region
- By product line
Your organization can be vertical, hierarchical, flat or matrixed.
Consider using organization planning software to:
- Build data-driven organization charts.
- Gain a more dynamic, interactive view of your company.
- See the effects of your changes in real-time.
- Make more informed decisions.
For each position or box, list five to six bullet points describing job responsibilities.
4. Fill in the people
If you’re an established organization with existing employees, now add their names.
It’s both necessary and difficult to objectively decide how an existing employee may or may not naturally be suited to the re-defined role. As an employee may not fit a role as precisely as they previously did you can identify new competencies needed.
A plan can be created and executed to develop those competencies. Alternatively, perhaps the employee is now better suited for another role in the company.
Determine whether each employee is a good fit going forward. Being a good fit means:
- The employee has the necessary skill level to perform well.
- The employee has the desire to take on the role.
If an employee’s skill level isn’t up to par, you’ll have to invest money and time for training.
Conversely, an employee may have the skill set but doesn’t enjoy the work, or the new role brings a level of pressure or attention that they don’t want.
The principle of weighing skill versus desire also applies to recruits and new hires.
5. Balance authority and responsibility
No matter where they fit within the organizational structure, give your employees equal measures of authority and responsibility.
Otherwise, they can feel hamstrung and become frustrated and disengaged.
6. Fill in employee data and metrics
Include key metrics on your organization chart to give you a comprehensive picture of the person identified in each role. This will also reveal a much larger story about your company.
These metrics can include tenure and performance ratings. Doing this will help you:
- Uncover risk factors so you can plan ahead. For example, do you have an employee whose title or salary doesn’t align with their tenure? This person could be at risk of leaving your company.
- Identify the kind of contribution each employee makes: loyal, hard-working, and supportive, “middle of the pack,” destined for increased levels of responsibility and authority, etc.
- Engage in succession planning to determine which employees may be good candidates to take over a role in the event of another employee’s promotion or departure.
7. Practice robust performance management of employees
Review employees continually throughout the year to reduce the frequency of updates to your structure.
This will also help to avoid the risk of organizational bloat, which indicates a tolerance for underperformers and complacency with status.
Bloated businesses can be fat and happy but are usually lacking in preparation for the future and in the establishment of strategic goals. Over the long run, bloat never serves a business well.
8. Review your organizational structure annually.
This helps ensure relevancy and to plan for the next 12 months.
Your structure should have an evolutionary life, not a static life:
- Does your structure still represent how you do business and what your workforce needs?
- Have any of your business goals changed, thus necessitating a change to your structure?
- Has the working relationship between any departments become dysfunctional?
- Do you need to add people? If so, where and why?
- Will this decision force you to adjust a department?
- Are you able to grow your organization without adding unnecessary layers?
Creating a company leadership structure
A company leadership structure refers to the hierarchy of executives responsible for making key decisions and guiding the organization’s strategy. Establishing a clear leadership structure ensures that the company has a strong foundation for achieving its goals.
Executive roles and responsibilities
- CEO (Chief Executive Officer): The CEO sets the company’s vision and overall strategy, ensuring the organization moves in the right direction. They are the public face of the company and hold ultimate responsibility for its success.
- CFO (Chief Financial Officer): The CFO oversees the company’s financial planning, budgeting and risk management. Their role is critical in maintaining financial health and guiding investment decisions.
- COO (Chief Operating Officer): The COO is in charge of daily operations, focusing on the efficiency and effectiveness of the company’s processes. They ensure that business operations align with the strategic goals set by the CEO.
- Board of Directors: The board provides governance and high-level decision-making, holds the executive team accountable and offers guidance on major strategic moves.
Leadership team collaboration
Cross-functional collaboration among the leadership team is essential for ensuring that different departments work cohesively toward shared goals. By working together, executives can make well-rounded decisions that benefit the entire organization.
The decision-making process
You and your senior leadership team should have ultimate decision-making authority when choosing how to structure a company. However, you should crowdsource ideas and perspectives from all levels of the organization.
Start with encouraging bottom-up ideas by soliciting suggestions from all employees. After all, they’re heavily involved in your company’s daily work, and they have an intimate knowledge of team dynamics and relationships. Don’t discount their perspective on what works and what could be better.
Use that feedback to assess your company holistically. Then consider your strategic vision for the future.
Senior leadership is uniquely positioned to take this view because they have a more expansive, bird’s-eye view of the entire organization. You and your team have information that lower-level personnel don’t.
For example:
- Impending market changes
- Shifts in strategies or priorities
- Financial issues
- Upcoming contracts and projects
- Potential mergers or acquisitions
Additionally, all teams impact each other directly and indirectly. Lower-level personnel might lack the visibility to understand these relationships and how certain changes could undermine harmonious workflow.
When business size impacts organizational structure
You may be surprised to learn that the overall process of creating an organizational structure in a business plan is the same regardless of employee headcount. And there is no definitive, black-and-white answer to the ideal organizational structure or the number of layers according to your business size.
Instead, the optimal structure is about what will help deliver your customer promise most effectively.
Smaller companies and startups
Your employees’ desire and enthusiasm to take on a role is likely more important than skill.
At smaller, leaner companies, and especially startups, the focus tends to be less on strictly divvying up responsibilities according to job descriptions and more on simply getting done what needs to get done.
It’s about survival.
This is the phase of a business where “bubble gum and Band-Aids solve problems.” People wear all sorts of hats.
In these scenarios, vet employees heavily for tolerance of ambiguity, stress and frustration. Ask the candidate whether they feel nervous stretching beyond their skill set and trying new tasks.
Larger companies
Employee skill plays a more important role.
At larger companies, people are needed to accomplish specific, niche tasks so quality isn’t diminished, and leadership is free to focus on moving the business forward.
Here, employees need to get their individual jobs done as easily and quickly as possible. Clearly defined roles, team formation and reporting structure aid in this endeavor.
Summing it all up
Having an organizational structure that meets the needs of your business goals and your customers is a crucial pillar of a successful company. However, it can be difficult to set time aside to build and think through an ideal structure.
Whether your business is brand new or well-established, a professional employer organization (PEO) and PEO HR services can help you build an effective organizational structure.
Still struggling to get started? Download your free organizational design template to start working through your organizational structure challenges.