Types of Organizational Structures

Key takeaways

Selecting the best type of organizational structure for your needs from some of the most commonly used options can help your business succeed. Here are some important things to know:

• Effective communication, a backbone of an organizational structure, can increase productivity and employee satisfaction by 55 percent and 58 percent, respectively [1].

• An organizational structure typically defines roles, communication channels, reporting lines, and decision-making processes tied to leadership, departmental priorities, and company-wide goals. 

• You can develop a deeper understanding of organizational behavior to help you better meet the needs of your company and its employees.

Discover the various types of organizational structures and learn how to select the most suitable option for your organization. Then, if you're ready to learn how organizational strategy can enhance your leadership abilities, consider enrolling in the Leading: Human Resource Management and Leadership Specialization from Macquarie University. 

What is organizational structure?

Organizational structure is the framework your business uses to outline its internal organization and operational processes. It typically defines roles, communication channels, reporting lines, and decision-making processes tied to leadership, departmental priorities, and company-wide goals. 

Effective communication is the backbone of organizational structure. While one in five business leaders reports losses due to poor communication, effective communication can increase productivity and employee satisfaction by 55 percent and 58 percent, respectively [1], making a carefully crafted organizational structure an excellent tool for enhancing your organization.

Learn more: What Is Organizational Development?

Key elements of an organizational structure

Regardless of your company's needs and priorities, its organizational structure will likely define the extent to which it addresses the following four elements: formalization, organizational hierarchy, centralization versus decentralization, and departmentalization. Consider the role each of these elements plays in an effective organizational structure:

• Formalization: You can gauge your organization’s formality by how comprehensive and clearly defined its rules and procedures are. 

• Organizational hierarchy: Your organizational hierarchy outlines the number of management levels between top executives and lower-level employees (chain of command) and the number of employees that report to each manager (span of control). 

• Centralization vs. decentralization: Who holds the power and delegates authority in your organization? Are most decisions made by upper management (centralized) or do all employees share in decision-making (decentralized)?

• Departmentalization: This aspect of organizational structure addresses how jobs are grouped. This may be by function, product, geography, process, or customer.

What are the four types of organizational styles?

Four common organizational management styles include authoritative, democratic, laissez-faire, and transformational. In reviewing the characteristics of each style, you can likely infer the type of organizational structure each style might lead to.

• Authoritative: This style is highly centralized, with decision-making coming from the top and an expectation that junior-level employees complete work tasks precisely as they are told.

• Laissez-faire: This “hands-off,” decentralized approach prioritizes employee empowerment, with management delegating decision-making and allowing employees to determine how they will accomplish their work.

• Democratic: A hybrid option in which higher-level management seeks input from all employees (decentralized) before making the final decision (centralized). Management provides guidelines for work completion, but allows employees to decide how they complete the work.

• Transformational: This style promotes collaboration and open communication. Although the vision comes from the top (centralized), employees generally share a passion for the cause and are eager to accomplish the goals set forth.  

7 different types of organizational structures

Companies use a variety of organizational structures, each designed to meet specific needs. Examples include functional, divisional, matrix, hierarchical, flat, network, and circular structures, which illustrate the range of possibilities. Refer to the following chart for an overview of popular structures as you further explore each one in detail.

1. Functional organization structure

A functional structure features clear reporting lines, defined career paths, and improved efficiency from specialized teams. Conversely, this specialized departmentalization may limit cross-functional communication and collaboration, foster slow decision-making processes, and bring fewer career path options.

• Organizational hierarchy: Hierarchical, with a clear chain of command and multiple levels of authority, including top (executives), middle (functional heads), and lower-level (specialists) employees

• Centralization vs. decentralization: Moderately centralized, with key decisions made by higher management but many established lines of communication for sharing information across departments

• Departmentalization: Work division by function, with similarly skilled employees grouped into highly specialized roles, such as marketing, sales, and research and development, with clearly defined goals

• Good for: Companies with a stable environment, established processes, and focused product lines, such as grocery stores

2. Divisional organization structure

A divisional structure builds on the functional structure by adding management layers to support a company’s growth. It promotes flexibility, innovation, transparency, specialized focus, improved customer service, and quick decision-making. However, this structure can result in limited collaboration, resource duplication, a compromised company culture, and alignment challenges. 

• Organizational hierarchy: Hierarchical, with divisional managers facilitating quick decision-making, without having to move up the chain of command

• Centralization vs. decentralization: Hybrid, with each division operating with a high degree of autonomy in its own market, product, or geographical area (decentralization) and a centralized structure within each division 

• Departmentalization: Work division into semi-autonomous departments based on products, services, location, or market, comprised of employees with specific expertise

• Good for: Companies that provide a targeted focus on a specific market segment or large, rapidly growing companies with diverse product lines 

3. Matrix structure

A matrix structure combines elements of functional and divisional designs, forming cross-functional teams that work on various projects. This approach fosters flexibility, encourages collaboration, and promotes communication across departments, while also offering low-risk opportunities for developing new managers. 

• Organizational hierarchy: Dual-reporting where employees answer to multiple managers, often a department manager and a project, product, client, or geographical manager

• Centralization vs. decentralization: Hybrid, characterized by shared decision-making, with functional managers providing guidance on corporate-level expectations (centralization), while project or product managers have autonomy (decentralization) in setting daily priorities

• Departmentalization: Work on projects completed by specialized staff for a set timeframe, after which they return to their regular duties or move to another project

• Good for: Ideal for companies, such as engineering, construction, or information technology firms, that handle numerous temporary projects

4. Hierarchical structure

A hierarchical structure is a commonly used option characterized by the pyramid shape you likely envision when thinking about company organization. This structure is easy to understand, more streamlined, and offers well-defined career paths and job security. However, it may limit innovation, process implementation, and cross-departmental collaboration.

• Organizational hierarchy: Hierarchical, with many levels of authority, ranging from top executives to frontline employees

• Centralization vs. decentralization: Centralized, with decision-making concentrated at the upper levels to promote consistency and a unified strategy

• Departmentalization: Work division by level and function, where senior leaders often set the vision and policy, middle managers translate those into departmental goals, and operational staff execute detailed tasks

• Good for: Large organizations, such as the military, churches, or government, where clarity and stability are paramount 

5. Flat structure

You can expect a company with a flat organizational structure to be highly responsive to change, primarily due to its efficient decision-making and information flow. That said, limited role clarity and oversight can affect quality control and increase the risk of friction.

• Organizational hierarchy: Minimal, with very few levels of authority and a limited number of managers overseeing many employees 

• Centralization vs. decentralization: Decentralized, relying on shared decision-making, which reduces bureaucracy and empowers employees

• Departmentalization: Broadly defined job roles, with employees working under general job descriptions and taking on a range of responsibilities

• Good for: Small companies, such as start-ups or creative agencies, with straightforward organizational needs

6. Network structure

A network organizational structure connects independent teams or businesses that collaborate toward shared goals, emphasizing flexibility, adaptability, and innovation. By tapping into your network structure, you can gain efficiency, stronger customer ties, and smarter resource use. Conversely, a network structure can pose challenges, such as a lack of unified control, dependency on your networks, limited accountability, and a risk of misalignment.

• Organizational hierarchy: Minimal levels of authority, with networks of teams making up the structure

• Centralization vs. decentralization: Decentralized decision-making, reducing bureaucracy, and empowering employees

• Departmentalization: Work division by specialization or project, often involving freelancers, contractors, or third-party vendors

• Good for: Organizations that need flexibility and scalability, such as technology firms, virtual organizations, or global service providers

7. Circular structure

A circular organizational structure promotes open communication, accessibility to leadership, and the free flow of information, fostering inclusivity, collaboration, and creativity compared to a more rigid chain of command. However, lacking a clear chain of command can slow decisions and blur reporting lines.

• Organizational hierarchy: Hierarchical, with leadership forming the inner circles of the structure, while operational and support roles occupy the outer circles, which reduces hierarchy

• Centralization vs. decentralization: Decentralized, with inner circles influencing vision, alignment, and strategic oversight, outer circles providing feedback inward, and decision-making shared across circles

• Departmentalization: Work division is typically by operational teams, but roles are flexible, with employees taking on responsibilities based on their skills, interests, and a shared sense of purpose

• Good for: Purpose-driven organizations like nonprofits or social enterprises that rely on innovation and collaboration to realize leadership’s vision

Choosing between different types of organizational structures

Select an organizational model that best aligns with your industry and your company’s size, goals, culture, and environment. Start by identifying your main priorities, such as speed, flexibility, and control. Then, compare your options (e.g., functional, division, matrix, etc.) based on how well they support factors like teamwork, decision-making, and growth, as well as your other priorities. Weigh the trade-offs, and choose the structure that fits both your internal strengths and outside pressures. 

Organizational structure example: Nike

Nike operates with a matrix organizational structure that combines both geographic and product-based divisions. Product managers determine how to launch a product, while regional managers refine the launch strategy based on their specific region. Although Nike’s structure is more complex, this simple representation clearly illustrates the hallmark of a matrix structure, the “two-boss matrix.”

Getting started with organizational design

With just over 90 percent of organizational development consultants holding either a bachelor’s or a master’s degree [2], you will likely have an easier time entering the field if you, too, earn a degree, especially in an area such as business or psychology. If you’re experienced in the human resources field, you can also consider earning a certification such as the Senior Professional in Human Resources (PSHRA-SCP) from the Public Sector HR Association. 

For a more minimal commitment option, consider beginner-friendly courses like Organizational Design: Know Your Organization and Designing the Organization, which provide you with the opportunity to learn more about the field of organizational design in as little as one to two weeks.

Explore ideas for meaningful career growth with our free resources

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• Watch on YouTube: Organizational Analysis with Daniel McFarland

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