Whenever the production of goods or services involves more than one person, some kind or organizational structure comes into play. Even in the most ad hoc and informal work groups, people divide up and coordinate tasks and communicate regularly with each other. The larger the scale and complexity of the production and distribution, the more structured and hierarchical this structure grows.
A company organizes itself around the technologies it uses and the type and number of goods and services it produces. Small-batch custom-manufacturers redesign their work-flows with each new product. Collaboration and knowledge-sharing are thus a must. Mass manufacturing entails automated assembly lines and a large number of unskilled and semi-skilled workers. Control is paramount. Continuous-process production relies heavily on machinery monitored by far fewer workers. Upper echelons here collectively plan and coordinate work-flows; lower echelons follow standard operating procedures.
Small firms are usually run by their founders or a few principals, each having a wide span of control. There is little if any hierarchy, a shared knowledge base and centralized decision-making. Decision-making in very large firms is also centralized. But here the division of labor is compartmentalized by functional specialty. Coordinating such a diverse set of operation requires multiple layers of supervision. Structurally, the organization resembles a pyramid-shaped hierarchy where individual managers have a narrower span of control.
Organizational structures tend to be either mechanistic or organic. Hierarchical, compartmentalized bureaucracies lauded by early organizational theorists work with machine-like precision. Everything -- job-tasks, production sequencing, logistics, etc -- is routinized to maximize efficiency. Difficulties arise, though, when producing goods or services does not naturally lend itself to systemization. Rigidly formal structures thwart creativity and collaborative thinking. Impromptu, cross-functional work-groups free to experiment and innovate are better at solving complex problems. In key respects, their adaptive process-orientation resembles a living organism's.
In a functional organization, a chief operating officer (COO) oversees one department tasked with marketing, another with production, a third with research and development, etc. In a product or geographic area, each profit center or region has its own set of functional departments overseen by a general manager who reports to the COO. Or a company can retain its functional structure by assigning a manager to coordinate each functional department’s work on a given product and become a matrix organization.
Many start-up businesses with a good product and growing sales nonetheless fail eventually because they lack organizational structure. Established businesses hamstrung with an organization structure ill-suited to its competitive environment likewise fail. Hierarchical ones respond slowly to changing market condition. Product or geographical ones sacrifice economies-of-scale. When product and functional manager have different agendas, matrix ones fall prey to internal gridlock. Finding the optimal organizational ‘fit’ given the size, technologies employed and markets served by a business is thus crucial.