Organizational structure is crucial for the smooth running of any business. The best organizational structure provides clarity and engagement for its workers while also maximizing profits for the corporation. The need to meet the demands of others has pushed humans to develop more efficient and effective ways of manufacturing products. This desire led us from small family-run businesses to the industrial age, then the bureaucratic structure.
Today, companies are favoring a more employee-centered organizational structure. Promoting this structure doesn’t mean organizations don’t use other designs. It only means the business’s values, goals, and culture contribute to the organizational structure that suits it best.
This article will highlight the different organizational structures, why identifying the right one is essential, and the elements of it. We would also discuss the best one in this era.
What is an Organisational Structure?
Minterberg defined organizational structure as the “framework of the relations on jobs, systems, operating processes, people, and groups making efforts to achieve the goals.” An organizational structure defines the reporting structure of a company. We must have all experienced this kind of structure when working in any organization. For example, when one is asked to report to a specific manager or if you are a manager and asked to supervise a team and have them report back to you. It’s also the case when starting a new job; the company gives you a job description and a list of activities your role covers. These activities highlight the presence of an organizational structure within a company.
What are the Elements of an Organisational Structure?
Every organizational structure possesses elements that make them work. When setting up your organizational structure, you look at these elements. Taking these elements into consideration helps establish a network that supports the company values, culture, and goals. There are six elements, and they are:
Formalization is how flexible a job description is. For example, a factory employee on an assembly line. The person has little to no room for creativity, reinventing, or improving it, making it a monotonous job. Many companies today are more flexible and give some room for creativity. Although, some organizations need the repetitive approach – think Amazon packaging warehouses.
Chain of Command
The chain of command defines and clarifies the line of authority and whom each employee ought to report to within the organization. The two ideas behind this element are that the superior should be obeyed, and the employee should only report to one manager to avoid confusion. Today, this element isn’t as rigid as in the past. Later in the article, we will look at some organizational structures with a loser chain of command compared to others.
Work specialization is the idea of being good at a particular activity. Henry Ford was one of the early adopters of specialization in the 1920s, and this idea served him well on the assembling line. Having a worker concentrate on the front tires, another the back, and another on the brake pedals improved productivity because each man specialized in their skill. Today, specialization introduced division of labor, which created the idea of having specific job titles and functions within a functional unit.
An example is a sales department. It can have separate people working on cold emailing and receiving orders from customers. To avoid boredom, disengagement, and absenteeism of employees, they can be rotated or given more responsibility to keep engagement high.
Departmentalization is bringing specialized jobs or activities together to coordinate a common task. We can group them in the following ways:
- Function: Grouping by function is the most popular method in big cooperations today. Examples of these functions are having a finance function, a supply chain function, or a human resource function.
- Geography: Some companies can group their activities based on geographical location. This method is popular with companies with branches and customers scattered across a country or the world.
- Product: It isn’t unheard of to find companies grouped according to their products. This method is popular in the manufacturing sector – where a single raw material can produce various end products. An example is a tree. It can make different end products like paper, clothing, tissue, hard hats, etc. A company can produce all or some of these items, deciding to create its department based on the different products.
- Process: Companies can choose to use similar processes to group a department. An example is a petroleum company. They ordinarily carry out the following activities; exploration, extraction, refining, and transportation. They can form a department based on each process.
- Customer: A business can group itself into departments based on the services rendered to its customers. An example is offering different packages to organizations, households, and individuals.
A large organization can use some or all of this departmentalization in its structure.
Centralization and Decentralization
Centralization means the decision-making process lies at a single point, typically with a few people in top management. A decentralized system means that the decision-making process is at different points. It allows the distribution of authority throughout the organization, unlike a centralized system where all the decision-making power lies with a few. In modern times, companies favor a decentralized system because of fast decision-making and engagement of workers at different levels.
Span of Control
The span of control commonly speaks about the number of employees a manager has control over. The rule of thumb is to have a manager take control of more people. This is because it supports less hierarchical layers for workers to report to and receive information. Fewer layers also mean fewer managers and less money to pay them.
Today, this element has gone through some changes. One of them is companies prefer to work in smaller, more effective teams. They are also more fluid in receiving and giving information.
Why is Having the Right Organisational Structure Important?
We cannot stress on the importance of an ideal organizational structure enough. The idea of not knowing who to report to, what your job entails, or what project you are working on, can lead to confusion and inefficiency. This section highlights some of the importance of having an efficient organizational structure.
Facilitates meeting objectives through proper coordination
An efficient organizational structure allows the company to plan clearly and coordinate when executing them. Each department and individual has set goals, and having an ideal structure allows the organization to hold the departments responsible for achieving those goals. An efficient organizational system supports the company in coordinating and monitoring the progress of each individual and department.
Removes Overlapping and Duplicate Jobs
One thing a company doesn’t want is to waste resources replicating the same jobs. If a company doesn’t have a structure to help define the roles and duties of employees, there will be cases of their work overlapping or, worse, duplicating their jobs. A proper system ensures this doesn’t become a norm in the company.
Provides a Clear Communication Channel
Communication is an integral part of any organization. Without proper communication channels, a company will be ineffective in its operations. A good structure clearly defines the communication flow, so the employees know who they report to.
It Improves Productivity
Having the ideal structure ensures employees know their roles are and are engaged in those duties. Having a clear and defined description of jobs can help improve their productivity.
Identifying the Right Organisational Structure for Your Business in This Era
Before identifying which organizational structure is suitable for your company, let’s first look at the various organizational structures.
The hierarchical structure is the oldest and most familiar structure used by companies. It is a centralized structure with all the decision-making power in the hands of the board and senior management. Workers are to report to the senior management and cannot make business decisions. If we use the elements to describe this structure, we would say they are;
- Very formalized
- Rigid and define a chain of command
- Little specialization
- Narrow span of control
Most organizations in the 1900s until the early 1940s used this structure. Even today, some industries that require a lot of regulation and strict rules still use this model.
The functional structure is like the hierarchical structure but with more division of labor involved. The hierarchical structure has a top-to-bottom chain of command, with everyone reporting to top management. It was an early answer to employees crying out about the hierarchical structure in America in the 1950s and 1960s.
Functional, on the other hand, allows for departments and departmental managers. This structure means different employees report to specific managers. An example is an accounting department focusing on accounting-related activities. This system came to be to make hierarchical management more efficient.
A flat structure is the opposite of the hierarchical, and entails little or no middle management. This type of structure is popular with startups, where there are a handful of staff and a single person in the top management position. This structure allows creativity, proactiveness, and some degree of decision-making power. As the company grows, there should be a clear reporting structure to avoid confusion in the long run.
Divisional structure is when a company or organization breaks down the company according to a product, market, or service rendered to customers. Under the type of departmentalization under elements, the divisional structure allows a large company to allocate its resources based on other divisions to improve productivity. It is a decentralized system that gives decision-making power to branch managers. Only highly strategic decisions go through the headquarters.
A real-life example of this is Coca-Cola. It has divisions for its products based on various regions. The leaders there have a certain level of autonomy based on the demand of their customers and government.
The matrix structure sees employees report to two managers. A typical example is if an employee reports to a functional manager and a product manager. Another example is if a software engineer from the engineering department is also on a team working on a new product for the company. The software engineer reports to both their line and product manager.
This is an ideal structure for organizations that often take on projects.
Philips, the Dutch multinational company, set up a matrix structure in the 1970s.
Companies that outsource several functions easily fall into this category. They usually have a core team and then lots of subcontractors and contractors. It’s a decentralized system that’s flexible and allows the company to concentrate on its primary core processes. It can also be a cheaper option since the subcontractor specializes in that activity.
Examples of companies are Nike and H&M (Hennes & Mauritz) that outsource their manufacturing procedures to subcontractors.
A team-based structure entails bringing a group of employees together to accomplish organizational goals (long term) or work on a project (short term). A team-based structure is fluid, less defined like hierarchical structures, and decentralized. We should note that team-based structures have a management team that assigns their targets and goals but allows them to choose how they will meet that goal. A good example here would be Google.
It is good to note that large companies can adopt more than one organizational structure for a different aspect of their business. For example, Nike also has a geographical divisional structure for its products.
Now that we have described the organizational structures available, we go back to the question; What is the best organizational structure in this era?
We have already mentioned the internal factors that affect strategic decisions. They include the values, culture, and goals of the company. But that’s not all that affects an organization’s structure – external factors affect as much as its internal factors and sometimes more.
Since no company is an island and operates in an industry, the trending factors will also shape and change the organizational structure. A study by Deloitte in 2016 found that 92% of participants believe redesigning their current structure was important or very important. The same research noticed that organizations are moving to be more decentralized and are more product and customer-centered. So what external factors have brought about this change?
The first is technology. Technology has allowed information to travel faster, creating a fast-paced environment. This tech has made the functional and hierarchical structures obsolete when passing instructions. Engagement software has improved the flow and speed of communication, allowing us to do so in real-time.
More companies combine functional structures with team-based designs like Apple and Cleveland Clinic. This ensures that there is still a form of the hierarchic system but has quick responsive teams.
The second is the empowerment of the labor force and the benefits of engaging this force. In recent times, industries leaders and management have witnessed the gains of having an engaged workforce. Millennials and Generation Z want to be more involved in their workplace. Because of this, companies have had to rethink their strategies.
The best organizational structure for this era seems to be decentralized, employee or customer-empowered, and flexible to adapt to changes. Most companies are happy to have top management set the goals and targets and leave it to the team assigned the job to be creative with how they are to achieve the goals.
Uber, the famous car transport service, usually appoints a general manager, city manager, and driver operations manager when it arrives in a city. They give the team the freedom to adopt a strategy unique to that city, which will involve developing a practical organizational structure in the city.
In conclusion, the fast pace of the market, changing views on employees, and the need to surpass competition have made the modern-day organizational designs decentralized, compact, engaging, and information hubs. Although some large firms have still kept their functional organizational structure, it’s only a matter of time before most companies adopt traits to stay relevant in the market.
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