Every company is organised in a specific way. It has a specific structure that is followed in order to maximise its efficiency. As a result, there are different types of organisational structures that companies employ. What are these structures and how do companies decide which one to use? Let's take a look.
Organisation Structure Meaning
The organisational structure is a system that outlines how activities are managed in order to achieve the objectives of a business. These activities can include rules, roles, and responsibilities.
The organisational structure determines:
Organisation Breakdown Structure
Organisation breakdown structure (OBS) describes an organizational framework for:
- project planning,
- resource management,
- time and expense tracking,
- cost allocation,
- revenue/profit reporting,
- work management.
It is mostly used to manage workflow schedules, resource breakdown and organise people who will be working on a particular project. It also outlines a hierarchy and reporting structure. Organisation breakdown structure is typically in the form of a chart or a graph that outlines a model of organisational framework.
How to create an organisation breakdown structure?
Make a hierarchy of the entire firm
Recognize all departments and teams within the firm
Specify functional groups
Figure 1. Organisation breakdown structure, StudySmarter
Types of Organisational Structures
Let's now take a look at the different types of organisational structures.
Centralised and Decentralised Organisation Structures
A centralised organisation structure is where decisions are made at the top of an enterprise or in a head office and then passed on to the rest of the employees.
Companies using this type of organisational structure characterise consistency and clear direction. Moreover, their activities are carefully controlled and managed. However, their employees tend to be demotivated which results in lower productivity.
At Apple, much of the decision-making responsibility lies with the Chief Executive Officer (CEO) Tim Cook (previously Steve Jobs).
The decentralised organisation structure is when lower levels in a business have the decision power.
It is usually where the business has many locations and therefore the head office is reasonably unable to control or make decisions for all the locations. Employees in companies using this type of organizational structure are typically more motivated since they have a sense of responsibility. Additionally, managers are able to make decisions suitable to their local area and customers. On the other hand, however, enterprises using the structure tend to struggle with achieving consistency which may negatively impact sales and overall business performance.
McDonald's has numerous restaurants all around the world. The company's managers are assigned to specific areas.
Flat and Tall Organisation Structures
A flat organisation structure (in other words horizontal organisational structure) is when there are few or no levels of management between management and staff level employees.
Managers have a wide span of control with more subordinates and there is usually a short chain of command. Communication between employees is typically more effective and the employees themselves have more responsibilities which lead to their increased motivation and efficiency. Unfortunately, managers in firms using horizontal structure have higher workloads and the firms have limited progression opportunities. Figure 2 shows an example of a flat organisational structure.
Figure 2. Flat organisation structure, StudySmarter
A tall organisation structure (in other words hierarchical structure) is when there are many leaders and layers of management.
Here managers have a narrow span of control and there is typically a long chain of command. Unlike by flat structure, here enterprises have great progression opportunities and it is easier for managers to perform their work. However, the employees are less motivated as they do not have that many responsibilities and any changes are implemented very slowly due to the long chain of command. Figure 3 shows an example of a tall organisational structure.
Figure 3. Tall organisation structure, StudySmarter
Functional, Product-Based and Matrix Sructures
Functional organisation structure is when employees are grouped based on their specific skills and knowledge.
Figure 4 shows how employees are divided into departments such as marketing, finance, IT, R&D etc. All of the groups are able to separately focus on and have control over their parts. However, it might slow activities down as there is no ‘whole project’ optimisation.
Figure 4. Functional organisation structure, StudySmarter
Product-based organisation structure is when employees are grouped based on:
- A particular product they work on,
- Customers they deal with,
- The geographical area they serve.
Here all of the activities are under the overall control and therefore, everything is coordinated better and runs more smoothly. It is easier to focus on a specific segment and fulfil the customers’ needs. Unfortunately, since people are not directly involved in activities they are the best at, they tend to lack the skills necessary for what they work on. Figure 5 below shows an example of a product-based organisational structure.
Figure 5. Product-based organisation structure, StudySmarter
Matrix organisation structure is when employees report to more than one manager.
There is no one leader overseeing the entire organisation. Instead, there are several supervisors cooperating with each other. There are three types of matrix organisational structure:
Weak matrix,
Balanced matrix,
Strong matrix.
In a weak matrix, a functional manager supervises all the activities and has most of the decision power. In a balanced matrix, the main manager is given more authority, although there are still functional managers involved. In the strong matrix, the main manager has equal or even more power than the functional managers. Figure 6 below shows an example of a matrix organisational structure.
Figure 6. Matrix organisation structure, StudySmarter
Organisation Structures - Key Takeaways
- Organisation structure is a system that outlines how activities are managed in order to achieve the objectives of a business.
- Organization breakdown structure (OBS) describes an organization framework for project planning, resource management, time and expense tracking, cost allocation, revenue/profit reporting and work management.
- There are two types of organization structures regarding the decision power in a firm: centralized and decentralised.
- There are two types of organization structures regarding leaders and layers of a company: flat and tall.
- Other types of organisation structures include functional, product-based and matrix structures.
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