Factors That Determine Organizational Structure

Organizational structure is a map of the way your business functions in terms of decision-making hierarchy, supervisory authority and the placement of employees with similar functional responsibilities. Each organizational design has its own unique advantages and disadvantages, and gaining knowledge of the factors that determine organizational structure can help you to choose the structure that best fits with your business type, industry and operational philosophies.

The degree to which your front line employees must interact with customers is a large determinant when choosing the decision-making hierarchy of your company. If your low-level employees only perform routine functions for customers, such as running cash registers and restocking retail floors, then a taller organizational structure with centralized decision-making may suit your needs. If, however, your low-level workers must constantly make quick decisions to negotiate with buyers, appease upset customers, engage in individually tailored services or offer personalized merchandise return options, then they will likely need a greater degree of autonomy and decision-making control. In this case, a flatter, more decentralized organizational structure may be preferred.

The sensitivity of data used in your operations, and the legal environment surrounding the use and storage of the data, can be an important factor in organizational design. Businesses such as financial consulting firms, which utilize a large amount of personal financial data in performing services, may be better suited for an organizational structure in which front-line employees act nearly autonomously when dealing with clients that are assigned only to them. A largely decentralized structure can ensure that sensitive data is seen only by those who require it, and that client information is not shared between company agents.

A company that deals with non-sensitive or public information, on the other hand, can afford to maintain a taller, more centralized organizational structure where information from the top can flow down through all levels of the company without creating excessive security risks.

Businesses in which innovation is a key determinant of sustained competitiveness will likely function more successfully with a flat organizational structure. Ensuring that all employees have the ability and responsibility for innovation initiatives, and providing them with a non-threatening environment in which to introduce new ideas, will allow an innovative company, such as a software development firm, to speed innovation by eliminating layers of approval and political gate-keeping from the idea-generation process.

If your business serves distinct markets segmented by geography, demographics or other clearly distinguishable factors, a divisional structure can allow your company to be more responsive to the unique needs of your target consumer groups. The advertising function, for example, is likely to be largely ineffective if a single advertising campaign is rolled out in three different countries. Having a small marketing team attached to each distinct country in this example would allow you to produce three separate advertising initiatives, each aimed at the preferences and buying patterns of the targeted culture.

According to dept.lamar.edu, a functional structure may suit your needs more effectively if your business markets undifferentiated products for which demand patterns are similar among all of your consumer groups. Oil producers, for example, are not likely to make large changes when marketing to different geographical groups.