Functional vs. Divisional Organizational Structure

Westend61/Westend61/GettyImages

The temptation to perform every task yourself and run the company on your own beckons, but the outcome of that choice speaks for itself. Try standing with each foot in a separate chariot while controlling 16 horses, and assuredly you will crash. Although the business may survive the aftermath, starting over takes immense amounts of heart and soul and devours your precious time.

The preferred choice requires dropping the reins and choosing between functional or divisional organizational design, so ponder the strengths and weaknesses of the various types before you make your selection permanent. Examine the benefits and drawbacks of function vs. department to help decide who should perform which roles in the business, who will report to whom and how to group staff members for maximum effectiveness.

What Are the Four Types of Organizational Structures?

Organizational structures provide the formal description of how communication and decision making should take place in your company. An organizational chart depicts who reports to whom and who has the final say on any workplace issues that might arise. New employees can refer to the organizational chart to ask the right person what decisions and actions have prior approval and which ones require permission every time, such as whether or not to order durable office equipment or refund consumer payments for custom goods and services. Unfortunately, making decisions in hierarchical or pyramid-shaped organizational structures often leads to never-ending discussions of responsibility without team members ever taking any decisive action, so explore the benefits and drawbacks of each structure before settling on the one that works best for your venture.

Flat Organizational Structure

The flat organizational structure eliminates several layers of staff between the decision makers and the employees at the bottom level of the chart. Instead of having a team leader who reports to a floor manager who then reports to a director and so on all the way to the CEO, teams of as many as 15 people report to a single manager, who in turn reports directly to the CEO. In the flat management model, team members all communicate with their manager first. The managers sometimes confer with one another before speaking with the CEO, after which they return to the work floor to share information with their respective teams. No less than once a year and as often as once per quarter, the CEO might speak to the entire workforce in a state of the company address.

A flat organizational chart often resembles a rectangle or trapezoid, with at most two to four layers between workers and the owner or CEO, compared to other organizational maps which might have six or more levels of authority. Team members have a little bit of decision-making power, such as when to take breaks, but which shifts to cover, how many hours each employee works and whether or not anyone may act without continual affirmative permission still comes from the CEO to the managers and from there to team members. Most lean startup companies begin with an autocratic but otherwise flat structure that eventually evolves into a hierarchical, function-based chart unless the various teams purposefully avoid becoming bureaucratic.

Matrix Reporting

In a company that serves more than one geographical region, offers multiple products, performs distinct functions or serves more than one group of clients, each employee reports to more than one department or division. The matrix organizational chart resembles a diamond: employees at the bottom level, managers from one or more departments at the next level and the head of the company at the top. This management structure works well with a service industry, such as meeting the housing and employment needs of people with disabilities, for example.

Functional Organizations

Have you ever heard "that's not my department" when you need information or have to take an action? You may have joined a company that has organized its workforce by their functions. Car dealerships often use this management model. Typical dealerships have a sales group and finance department working together on every deal, an administrative services department that handles human resource and customer service issues, a service team and an advertising section. Communication sometimes fails due to having to pass messages through so many layers of authority, but everyone knows what responsibilities they hold, so little to no decision making takes place until the various teams gather together to create strategies for achieving their daily, weekly and monthly quotas for sales and service.

Divisional Structure Definition

In companies with national, continental or global reach, breaking into divisions by brand or region can reduce the duplication of labor and resources that occurs when a function-oriented management system grows too large. Rather than continuing operations as a single, unwieldy entity, the company using a divisional organizational design would clone itself first and then trim its workforce. Middle management takes the initial hit, followed by the least competent or efficient workers until only the top producers and enough managers to keep things running efficiently remain. At this point, the highest-paid workers receive offers – often including generous incentives – to leave the company. Both the new and old company rename themselves to reflect the changes, sometimes reorganizing as (Company Name) (Region Name or Number) Division. The two divisions then continue as before until they grow large enough to split again.

Holacracy

The recent development of the fifth type of organizational structure, known as "holacracy," distributes decision-making power through roles and responsibilities. Staff members select which roles they wish to fill and take responsibility for performing the myriad tasks needed to achieve company objectives. The system, created by Brian J. Robertson, topples the feudal, top-down pyramid of power practiced by older, larger organizations and transfers decision making and freedom of action to every individual employee in the company. Amazingly, nearly 140 companies and counting have chosen holacracy as their organizational structure as of 2018, including Zappos and Mercedes-Benz. This structure resembles a group of overlapping word balloons.

What Is a Functional Chart?

Visualize your company as a drawing, with the owner or CEO in the top position. That drawing begins your chart. The president and two or more vice presidents lie below the CEO. Under each vice president, you find two or more department managers: finance, customer service, the production team and the research and development team. The chart illustrates a clear and direct chain of command. Information travels downward from the owner and CEO, and only rarely does anything travel upward past the floor managers to the department heads. When that does happen, it can take months or years before any given worker sees any of his ideas implemented.

What Is a Divisional Organizational Structure?

As stated earlier, companies organize a division when the company grows to an unmanageable size. Divisions serve a geographic region or represent a company's entire market. Each storefront carries just one brand or line of products unless the company has completed a growth cycle.

Some divisional companies exist to market the byproducts of other industries. This approach reduces garbage production while wringing maximum profits from each product line. As an example, the Procter and Gamble company makes soap, many of whose ingredients come from the byproducts of meat production. Their Cincinnati location allows Procter and Gamble to take advantage of the competition between the various meat producers in Ohio, thus keeping prices low. That same Cincinnati region also produces grain alcohol, so the grain that made a cask of bourbon also fed one herd of cattle. The manure and urine produced by the cattle and hogs in the area become the chemicals used in making soap after digestion and elimination take place. The animals also produce fertilizer for the next field of grain and fuel for the farm in the form of ammonia and methane.

What Is a Matrixed Work Environment?

A company using the matrix structure for management and communication might serve children, families and adults, offering respite services, personal care and early-intervention training to the children and families, along with providing employment readiness assistance for the adults. As such, this company would have a quality assurance department, housing assistance, job training and a family services department. The program managers might report to three of the four departments, with the quality-assurance department independently auditing all three, or each department might report to its own supervisor and the QA specialist. While the matrix structure increases communication between the departments, many employees still lack the power to make a spontaneous decision. The various programs also have to compete for budget dollars

Decide How to Set up Your Business Structure

No matter whether you choose a functional or a divisional organizational structure, use a matrix or just allow your company to operate as a holacracy, make sure every staff member knows to whom they report and what duties they should expect to perform. If you decide to experiment with newer structures, bring in a trainer who excels in that particular management style rather than blundering through an unfamiliar process on your own. Seek advice from your health insurers about which organizational structures contribute to workplace stress and injuries and ask your business insurers about any increased probability of the legal vulnerabilities of each type of organization.

Because some management structures work best in specific industries, tour a few similar businesses and feel free to copy their style if that company seems to be thriving. Spend as much time observing how their company functions as they will allow. Ask every question, even if it might seem disrespectful or nosy.

Once you allow a function-based hierarchy to develop, give every person in the company time to settle into his position. Take note of any bottlenecks or power struggles. Is the problem the position or the person? Don't be afraid to move people from one position to another until everything runs smoothly and you begin making the profit margins expected in your industry. If the position created the problem, brainstorm what changes need to occur before you eliminate it from your company chart.

If you find yourself moving the same person around the company without seeing any improvement in her production or an increase in her competence, encourage her to find a new position elsewhere. You may also have to save yourself a headache and fire her outright. It is better to be open and honest from the beginning rather than fighting an entrenched, popular employee who does not fit into her current role. The more entrenched and popular a bad employee becomes, the greater her effect on morale.

Keep the situation as positive as possible by assisting employees whom you need to fire with finding their next job. Provide them with severance pay, for example, or put them into training programs as part of your company-separation process. Above all, if you have the time and resources, give employees whom you have to fire or lay off a list of local resources to cushion the economic losses and help them navigate the path to their next position in an entirely different industry.

References

About the Author

After earning a B.S. Ed. from Kent State University in 1995, Smith provided educational support in multiple Ohio school districts. Smith has managed nine employees and 86 independent adult care providers at a time. In addition, Smith has assisted two charities with successful 501 (C) 3 applications, serving on the board of one for three years. Currently, Smith serves as an independent Avon representative at Avon Beauty by Laura. Her writing chops include one published novel and close to 1500 articles in various online and offline publications.