Firms have organizational structures that show the relationship between the company’s employees and the responsibilities of said employees. Each firm’s organizational structure is different and depends on its specific needs. A large manufacturing firm with multiple factories is likely to have a different organizational structure than a financial services firm with only one office. However, there are some basic types of organizational structures, each with its own advantages and disadvantages.

Vertical Organizational Structure

A vertical organizational structure is based on the reporting chain from the head of the company down. It establishes the reporting relationships between people and their span of control. One disadvantage to this sort of structure is that it tends to be bureaucratic and does not foster communication between people at different levels. Decision making may be one-sided, too, as the views of the lower ranks may not to be taken into account. The advantages include faster decision-making and better coordination of the company’s activities.

Horizontal Organizational Structure

A horizontal structure is a flatter organizational structure that groups together people based on their skills or functions. The organizational structure could group those who work in a specific department together, or the grouping could be based on those who work in a functional area such as finance or marketing. One advantage of this sort of flatter hierarchy is that it is easier for employees to communicate with each other and it facilitates learning. Disadvantages are that as the company grows, there may be a lack of integration across the different functions or departments leading to inefficiencies.

Matrix Organizational Structure

Businesses working on a specific project could also have a matrix organizational structure that sets up the relationship among the people working on the project. The matrix type of project management system involves putting together people from different functional areas, such as marketing and systems, to work together for the project time frame. One advantage of the matrix organizational structure is that people across different functional areas have a better understanding of their coworkers in other areas. A disadvantage is that employees are responsible to their project team as well as to their functional areas. This can create some conflict.

Informal Organizational Structure

Whatever an organization’s formal organizational structure, there is an informal organizational structure that develops. This informal structure, also known as the "company grapevine," influences how information flows within the company. One advantage of such a grapevine is that employees who interact outside the confines of the formal organizational structure often cooperate better, benefiting the organization. A disadvantage is that rumors and gossip can spread through the grapevine.