Organizational structure is the means by which a business or corporation defines roles, responsibilities and levels of authority within the company. The structure shows how information flows from top to bottom and vice versa. Most importantly, the organizational structure identifies who supervises who, and which employees report to which supervisor.

What Are Traditional Structures?

Traditional forms of organizational structure are known as functional, divisional and matrix. These structures are hierarchical and, in most cases, centralized. This allows for clear lines of authority and efficient dissemination of information and directives. It is, however, inherently slow to respond to changes in the business environment, and slow to incorporate innovative ideas or new product directions. Each of the three forms has its advantages and disadvantages.

Functional Organizational Structures

Perhaps the most familiar, functional structures divide the organization vertically into functional groups, with employees of similar specialties working together to support the entire organization. A mid-sized manufacturing company, for example, could be divided into functional areas that include administration, marketing and sales, and production. These functional areas could be further divided. For example, administration would include departments for human resource management and accounting. Production might be subdivided into development, production, and fulfillment and shipping.

Employees within these sections typically work with peers who have similar backgrounds and job descriptions. This provides for useful cohesion within the work unit, but it also tends to isolate the departments so that the employees lose sight of how their work impacts the company as a whole.

Divisional Organizational Structures

Divisional structures also divide the organization vertically, but the divisions are based on related subjects, such as product line, project or geography. For example, a distributor of office supplies could organize its divisions by stationery and desk supplies, office furniture and electronics. A national hotel chain could have a division for each region where it has facilities.

In these structures, employees of many different specialties work together, along with administrative specialists, who support the line employees. When large corporations adopt this model, each division operates as its own company. This type of structure offers flexibility, and the multidisciplinary groupings of employees can stimulate innovation. However, it can also set up unhealthy competition among divisions.

Matrix Organizational Structures

The matrix structure is an effort to combine the best of both worlds. In addition to the typical functional structure, in which employees work in groups of related specialties, various employees may be assigned to additional bosses for project work, often on an ad hoc basis.

For example, a software company aiming to develop a new application for use by school children might pull together a team that includes engineers and programmers from one functional area, along with artists and market specialists from other departments. As long as the project lasts, these employees would report to both the team leader on project business and their normal supervisors for day-to-day work.

This organizational structure is highly flexible and the cross-disciplinary teams support innovation, but problems can arise from the unusual reporting system. In particular, employees may feel overworked and burdened by having two jobs to do, with two sets of responsibilities for their work time.

Flat and Flatter Future Structures

With the continuing need for innovation and rapid response to changing conditions, some businesses are adopting structures that reduce the vertical or hierarchical chain of command in favor of organizational modes that enhance communication between levels and employees. The matrix structure could be seen as a bridge to the concept of flat organizations. Other forms have been coined flat, flatter, flatarchy and holocracy.

The flat structure forms one end of the spectrum, with all employees operating on the same level, without job titles, managers or lines of authority. Flatter and flatarchy structures insert a reduced hierarchical structure into the melting pot, but they still allow for ad-hoc teams and other circles of work that are based on project needs.

The holocracy structure maintains levels but places working circles at each level, rather than having the top levels occupied by a single individual. The aim in all of these structures is to increase information sharing, support innovation and create a nimble structure that responds quickly to external conditions. Most of the companies adopting these non-traditional structures are small to mid-sized, and evidence shows that they are achieving these goals to some degree.