Types of Organizational Structures and How They Work

In a symphony orchestra, each musician has a part to play. Achieving this seamless collaboration requires practice, organization, and clear leadership. Each section of an orchestra has a leader, known as the first chair. First-chair musicians follow the direction of the first violin, also known as the concertmaster. The concertmaster reports only to the conductor. As the ultimate source of authority, the conductor provides the overarching direction that brings the entire group together.

Dividing the orchestra into teams with individual leaders provides each player with a clear point of contact for questions, relieving the conductor of managing every individual. This is an example of a centralized organizational structure. Businesses, regardless of their size, can benefit from employing similar systems.

What is an organizational structure?

Organizational structure refers to a company’s internal definition of roles, including their responsibilities and how they’re interrelated. A clear organizational structure helps employees understand the chain of command and the flow of information within a company. Thus, an organizational structure outlines job functions and reporting channels.

There are many different types of organizational structures. Businesses may choose one style over another based on their product or service, size, or corporate culture, among other considerations. Companies may adopt one organizational structure or combine elements of multiple systems to create a unique hybrid structure.

Centralized vs. decentralized organizational structures

In general, organizations tend to break down into a couple of broad categories. Centralized organizational structures are characterized by a small leadership team at the top of the organization. In this structure, top-level executives make major decisions and set the tone for the company. In a decentralized structure, more power is given to individual teams. Leaders have the power to set the direction for their team. While a centralized company structure can lead to more consistency, the streamlined approval process in a decentralized organizational structure can execute more quickly.

Types of organizational structures

• Functional structure
• Hierarchical structure
• Line structure
• Process-based structure
• Divisional structure
• Matrix structure
• Team structure
• Network structure
• Circular structure
• Organic structure
• Geographical structure

These are examples of common organizational structure types and their benefits and challenges. 

Functional structure

Functional organizational structures divide employees into teams or departments based on the types of work that they do. Common departments include marketing, design, sales, and engineering. This is a centralized system with a clear reporting path. Dividing employees into specialized teams allows them to focus on what they do best. However, a functional organizational structure can also lead to communication breakdowns. Sharing information between departments takes effort—otherwise, teams can become siloed. 

Hierarchical structure

Hierarchical organizational structures are centralized systems with a clear reporting chain. These structures place a centralized leadership team at the top and create tiers of managers and employees beneath them. This system has the benefit of being easy to understand. However, the need to run decisions by upper management can create barriers that slow the decision-making process.

Line structure 

Line structures are centralized systems. This model is similar to a simpler, pared-down version of a hierarchical structure. In line structures, the organization chart resembles a straight line to the top. Each employee reports to a manager and a top executive controls major company decisions. This system is clear and easy to implement, but may be too simplistic for larger companies. 

Process-based structure

Process-based organizational structures use business operations as a guiding principle. In this model, teams and reporting structures are arranged according to where they fall in the business process. Process-based structures can be centralized or decentralized. This system encourages cross-departmental collaboration and can lead to greater efficiency. However, this structure requires a mental shift away from traditional departmental structures, which can make it difficult to implement. 

Divisional structure 

Divisional organizational structures create separate divisions within a business. Each division essentially functions as its own company with a separate centralized structure. This structure is well-suited to large companies with a wide range of products or services.

Divisions can be product-based or market-based structures, depending on the needs of the company. A market-based structure creates separate offices based on the needs of the customer market. Product-based systems create divisions based on the products that the company offers. These separate units can have their dedicated teams to handle day-to-day operations.

For example, a large electronics company might adopt a product-based structure and create separate divisions for microwave and refrigerator production, each with its own marketingteam. This structure allows specialization and focus but may lead to some redundancies if divisional teams don’t share resources.

Matrix structure 

Matrix organizational structures incorporate elements of both centralization and decentralization, emphasizing shared resource use among teams. Employees typically report to multiple managers who oversee different functions. For example, a graphic designer might report to managers of the design team and the marketing team. This model allows collaboration between departments, but it can lead to confusion. Managing employees in a matrix organizational structure may be challenging as they can have difficulty understanding priorities and knowing whom to ask for help.

Team structure

Team-based organizational structures group employees into separate business units to focus on specific projects or tasks. In this system, each smaller team will include a project manager and employees from different departments.

For example, a team working on a product launch might include a representative from the marketing team, a social media manager, a customer support manager, and members of the product team.

Team structures can incorporate elements of centralization and decentralization. Leaders may have the authority to steer their teams, but they follow the guidance of higher-level management. This system enables seamless cross-departmental collaboration, but since each individual bears increased responsibility, team conflicts or one weak team member can reduce productivity. 

Network structure

Network organizational structures are well-suited to large businesses and companies that rely on outsourcing for some functions. This system bears a strong resemblance to a divisional org structure, but in this case, third-party contractors take the place of some divisions.

Commonly outsourced divisions include shipping and logistics and customer service. Network structures are considered decentralized because third-party partners with dedicated leadership teams manage their own employees. Network structures are flexible and efficient, but they can be difficult to oversee. 

Circular structure

Circular organizational structures are centralized structures with a hierarchical reporting system. Lower-level employees report to managers, who report to directors, all the way up to senior leadership.

This chain of command resembles hierarchical structures, but it is represented differently in the company’s organizational structure chart. Instead of depicting a pyramid with executives at the top and tiers of employees beneath them, the chart consists of a number of concentric circles. Senior management falls in the center of the circle and each outer circle represents a lower tier of the organization. Instead of directions coming from the top down, this system views decisions as flowing from the center to the outer rings.

This structure can contribute to a positive company culture, as executives refrain from positioning themselves above other people.

Organic structure

Organic operational structures are decentralized systems with loosely defined departments. While the organizational chart for a functional or hierarchical system may resemble a pyramid, the chart for an organic structure can look like a maze.

This less formal structure allows for maximum flexibility. Employees may be able to work on multiple types of projects, giving them a chance to develop new skills. Organic structures promote communication between employees but they can lead to unclear reporting systems. 

Geographical structure

In this model, an organization’s structure is based on the geographic regions in which it operates. This structure is well suited to national chains, such as grocery stores and restaurants, or companies with international operations. Each region or location will have a complete team with a clear reporting system.

Market customization is an essential element of this strategy. Having a team present in the service area makes it easier for employees to understand the needs of local customers and provide high-quality customer service. However, this system may make it more difficult to create a cohesive brand.