Factors That Influence Organizational Structure

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For some businesses, organizational structure isn't an issue. A sole proprietorship with no employees doesn't have to worry about departmental coordination or the chain of command. Other businesses find the right structure as vital to success as the right leadership.

Size and Time

Size is one of the major factors influencing organizational structure. In a partnership, or a business with three or four employees, everyone may know their role. Employees with specific skills may handle those jobs, or employees may switch around, tackling whatever needs doing.

The bigger the organization grows, the less practical this kind of improvisation becomes. A hundred employees will probably find it hard to operate without an organizational structure. For a thousand or 10,000, it becomes impossible.

Many businesses start small and become more complex as time passes, adding departments, employees and product lines. Entrepreneurs need to keep track of their company's growth and change the original structure if it no longer works.

Legal Factors Affecting Organizational Design

State and federal laws influence organizational structure. If you want to incorporate, for example, you have to meet your state's legal requirements: a formal charter, a board of directors and bylaws.

Or consider partnerships. In a general partnership, the partners share responsibility and authority equally. In a limited partnership, one partner puts up money but has little control over managing the business. Whichever approach you choose for your business, your structure then has to comply with the relevant laws

Once you choose a legal form, it becomes a factor affecting organizational behavior. A C corporation has to have annual stockholder meetings, for instance. If you put up money as a limited partner, the structure shuts you out of controlling business operations.

Leaders and Followers

The factors influencing organizational structure include the leaders' vision for how they want to run the company and direct their followers. Two extreme and opposite approaches are the hierarchical structure and the flat structure.

The hierarchical structure is one most of us have encountered: leader at the top with several layers of management under them, employees at the bottom. In the flat structure, the hierarchy goes away, with no layers between top leaders and front-line staff. Both structures have pros and cons.

  • A flat organization gives employees greater responsibility and greater independence.
  • Flat organizations allow quick communication between top and bottom levels.
  • Flat organizations can work well with small groups, but they become cumbersome as the number of employees grows.
  • Hierarchies are orderly and management can exercise tight control of the lower ranks.
  • Hierarchies are very stable, and effective at preserving the status quo.
  • Hierarchies make decisions and take action slowly, as communication inches up and down the layers of management. 

Formal and Informal Structures

The formal structure you establish for your business probably isn't the only structure in play. Whenever people gather together, informal structures crop up based on the needs of the group, rather than just the will of the leader.

  • Friends may gravitate to working on each other's projects.
  • The office grapevine may spread information, or misinformation.
  • Workers who have no official management position may become informal leaders because of their experience and knowledge.
  • Employees form cliques whose members work together well but shut out non-members.
  • Employees learn who to trust for honest information when management's being close-mouthed.

Informal structure can be a positive factor affecting organizational behavior because it builds camaraderie and teamwork. The downside is that informal leaders may have won their influence through bullying and backstabbing other employees, which hurts the organization's interests.

Business Environment

Organizations don't exist in a vacuum. The environment around the company is another of the factors influencing organizational structure.

Some companies operate in stable, settled markets, selling products such as copier paper or household cleaners that don't change much over time. A hierarchical, tightly structured organization can work well in this situation, as the company doesn't have to adapt to much change.

Tech companies, on the other hand, operate in an industry that's constantly changing. To succeed they need an organizational structure that allows them to adapt and change fast.

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About the Author

Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com

Photo Credits

  • business colleagues preparing for business meeting image by Vladimir Melnik from Fotolia.com