What Is the Purpose of Organizational Structure?

An organizational chart is the graphic used to visually depict the organizational structure that conveys how communication and authority happen within companies. It is easy to dismiss the organizational structure's importance and say that it is only relevant to large companies, but failing to organize a business leads to frustrations down the road. Organization makes the hierarchy clear, which obviously helps in day-to-day business, and it is also critical should legal issues and liabilities ever arise.

TL;DR (Too Long; Didn't Read)

The purpose of organizational structure involves various aspects of productivity, accountability, communication and achieving results.

Some Types of Organizational Structure

To better illustrate the importance of organizational structures, it helps to understand the types of structure and for whom they are best suited.

  • Functional: The most common organizational structure has a company head with everyone underneath grouped via the function within the company — the sales division, the R+D department and so on, with each running under a top-down management style.

  • Product Based: This divisional structure would happen in a company offering many products, under which each product type is a division. Each reports directly to the CEO and/or other company heads. For example, the company Kraft might have a barbecue sauce division, a macaroni division and divisions for other product categories.

  • Geographical: These are large companies extending beyond one region, and each region tends to have its own power division. For example, Sony is a worldwide brand, but Sony America and Sony Japan would have different divisions. This form is also common in smaller or even national brands that may have districts, regions and territories.

Several other styles of structure exist, like matrix, process based, circular and market based. Which is best for what company depends on several deciding factors.

Factors Behind Organization

When deciding what form an organization should take, it means voting on things like whether the structure should be centralized or decentralized. If it is centralized, there is a strong hierarchy and clarity over how power breaks down, much like in the U.S. Army or with industrial giants like GE. Decentralized organization is more horizontal than vertical, meaning power is shared by many and can be informal. This is an increasingly popular structure in the casual, fast-moving world of Silicon Valley and tech startups.

Another factor is chain of command: who is the boss of whom, how decisions are made, who carries out the orders and so on. There is also span of control, which is basically all about whom a manager manages and what tasks belong to which departments.

Why It Matters

The objectives of organizational structure are to establish accountability, information flow, authority and distribution of responsibilities. Without structure, everything might be fine until it is not: If something goes awry, who is in charge?

A business without structure is likely to find itself in chaos when things go badly, and how the firm proceeds will depend entirely on who asserts control during that phase. However, a structured company will be "business as usual" when things go sideways — it will be the same leaders who were in charge the day before, and it means employees and even outside agents will know who has the answers during vexing times.

All the business planning in the world can not save a company if, over the long haul, there is no one accountable for meeting client milestones or no one who definitively calls the shots when there is a major manufacturing issue threatening to grind production to a halt.

If you have ever tried to figure out the pizza order for a large party with no one taking charge, you likely struggled to even get any pizza at all. That is exactly the type of situation in which organizational structures help. By choosing someone to be the chief pizza coordinator, there is a de facto method for collecting pizza opinions and tallying the count before finally ordering the pies. Organizational structure is all about productivity, accountability, communication and getting results.