When you start a business, you create a business plan. Your organizational structure is a key element of this plan.

Why is it so important? Well, the system that you choose will determine how your business functions on a day-to-day basis. In that sense, it could mean the difference between success and failure.

If you thought it was as simple as “boss directs workers,” then you may be surprised by how many organizational structures there are to choose from. Traditional top-down arrangements face challenges from more radical, relational systems.

Once you realize the range of structures that exist, you’ll understandably want to know which is the most effective. Unfortunately, there’s no straightforward answer to that question. It greatly depends on what your business wants to achieve.

Read on to learn more about some of the most notable organizational structures and find out how to choose the best one for you.

Traditional Organizational Structure

A traditional organizational structure looks like a pyramid. At the top, you have the CEO. The layer beneath consists of all who report to the CEO. Below them, you have the people who report to those managers.

Essentially, the most senior person is at the top of the pyramid, and each layer goes down a level of seniority until you have workers with no staff members reporting to them.

  • Functional or Divisional?

Traditional organizational structures can be functional or divisional. This determines how you divide the groups as you move down the pyramid.

In a functional system, employees are categorized based on their roles. A typical organization using a traditional functional structure might have a department for human resources, a department for research, and a department for marketing, for example. Every one of these departments would have their own teams within them, but they’d all ultimately report to their department manager.

A divisional organizational structure differs because it divides people based on specific projects or locations as opposed to departments. This system might be preferred by larger organizations.

Whether functional or divisional, the advantage of a traditional organizational structure is that there is an obvious chain of command. Employees know where to take their issues and who they are accountable too, as they have a clearly designated manager. Messages to and from the CEO are mediated by management, filtering the issues that reach leadership. This can be more efficient for the CEO, so long as they trust their management team to handle low stake problems.

A strong sense of teamwork can be fostered within departments. Employees work alongside colleagues in their own field, so it’s easy to share ideas and advice.

  • Matrix Systems

You could combine both functional and divisional structures to create a matrix system, one in which people are grouped into their functional departments before they’re separated again into divisional projects and products. The advantage of a matrix structure is that it provides more autonomy to each team while maintaining cooperation between managers.

Project-Based Organizational Structure

Just like in a traditional system, the CEO sits at the top of a project-based organizational structure. However, this type of structure is much more flexible. It was devised to be adaptable, suiting businesses undergoing processes of evolution that have constantly changing priorities.

Underneath the CEO, there is a layer of department managers, then a team of project managers. Employees are divided by the projects that they work on. The managers must distribute employees according to the expertise that each project requires.

The advantage of this system is that every team has a focus: the project that they’re currently working on. Leadership is easy-to-understand, since employees report to a project manager who in turn reports to their department head.

As the company’s needs shift, projects and their teams can be altered without restructuring the whole organization.

A disadvantage of this structure is that if projects are highly separated, the opportunity to share knowledge is missed. There’s also the risk that work is duplicated unless managers and department heads remain in close communication.

Flat Organizational Structure

A flat organization has either very few or no levels of middle management at all. That means you could potentially find junior employees directly below the executive level. Of course, this is a structure that makes more sense for startups or smaller organizations.

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The motivation for choosing this structure instead of something more traditional is that it removes the departmental boundaries between employees. This means they can work together towards the overall vision of the company. Skills and resources can also be easily shared.
If the CEO of an organization is happy to be very hands-on and approachable, this could be a suitable structure. Employees of all departments might speak directly with them at any time. The buffer layer of management is removed, so they have a firsthand understanding of their organization.

Within this structure, communication flows in all directions. These are organizations without boundaries, and they can promote creativity and collaboration. Their flexibility suits organizations that are subject to rapid change.

Factors to Consider When Choosing an Organizational Structure

Feeling stuck between the many options available? Here are some of the things you need to think about when you’re deciding how to structure your organization.

Strategy

Think about how your business will operate. Will it have multiple permanent departments? Or will the work that is being done change significantly over time? If you need your structure to respond flexibly as tasks change, then an open or project-based arrangement might be most effective.

Size

If you have a small business, a flat structure might be most appropriate. Why would you create unnecessary hierarchies when your team is small enough to communicate easily within itself? In that situation, a multi-layered system might cause more complications than clarity.

However, if you have a large organization, categorizing your employees is inevitable. There’s simply no way that they could all report directly to the CEO.

Technology

Technology will play a significant role in how your business functions, especially if you have team members working remotely. Bear in mind that they’ll need clear lines of communication: someone to report to and someone they can ask for help.

Environment

Is your organization a digital agency with a dynamic approach and a creative philosophy? A traditional structure may not be compatible with the culture that you’re trying to create.

On the other hand, most of us would agree that a traditional structure suits the banking world just fine. Having specific teams for mortgages, savings accounts and business loans helps them divide their workload efficiently and provide the necessary customer service to different demographics.

When determining the best model for your business, think about how you want your employees to communicate, cooperate and delegate. This will determine the right organizational structure for you.

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