A hierarchical organizational structure contains a direct chain of command from the top of the organization to the bottom. Senior management makes all critical decisions, which are then passed down through subsidiary levels of management. If someone at the bottom of this organizational pyramid wants to make a decision, they pass the request up through the chain of command for approval, for which a decision will eventually be returned. A hierarchical structure operates well when there are few products that are sold in high volume, so that tight control can be maintained over the design, quality, production, and distribution of goods.
For example, Horton Corporation develops a wildly popular super widget that is in strong demand in many countries. This widget is the only product that Horton sells. The president decides to tightly control the quality of this super widget by producing it in a single, large-scale facility, and selling it through a chain of distributors. This calls for a hierarchical structure to control all aspects of production and distribution. The distributors are allowed to engage in their own marketing activities, so this portion of the business is essentially localized and not under the control of Horton.
Advantages of the Hierarchical Structure
A hierarchical system allows a few people to control all aspects of an organization, which has the following advantages:
- Control orientation. When there are just a few key products being sold, or there is a specific marketing message to be distributed, the hierarchical system works well. For example, a high-end women’s handbag manufacturer will likely need to employ a hierarchical system in order to closely monitor the design and production of handbags. Similarly, a high-volume consumer products company needs to maintain a consistent worldwide brand image, and so needs to control all aspects of production, distribution, and marketing.
- Career path. There is a clear career path through this type of organization, with employees gradually advancing through the various levels of management over a number of years. Those reaching senior positions tend to have built up massive experience with the company.
- Clear reporting. Since power is so centralized, it is easy to determine who is authorized to make a decision.
- Specialization. Employees are more likely to have niche positions that allow them to become in-depth specialists. If their expertise is used effectively, this means that a company can have a number of centers within the organization where best practices are employed.
Disadvantages of the Hierarchical Structure
Though the higher level of coordination associated with the hierarchical system is useful in some instances, there are also a number of problems with it relating to the flow of information, the speed of decision making, and added costs. Consider the following issues:
- Restricted information. Information tends to flow toward the top of the organizational structure, so that the management team has a complete set of information with which to run the business. However, the reverse is not the case. There is very little downward flow of information to the lower levels of the organization, which tends to cramp any initiatives that might otherwise originate in these areas.
- Slow decision making. The hierarchical system takes time for management decisions to percolate down through the various levels of management and be enacted. If a company operates in a swiftly-changing environment, this can mean that the business is slow to react to competitive and environmental pressures, and so can lose market share.
- Added costs. A hierarchical system requires a considerable amount of corporate overhead to support the senior management group, including extra layers of management, internal auditors, budgeting and control departments, and so forth. This can be an excessive burden on profits when the bureaucracy is especially bloated.
In general, there is a trend away from the hierarchical system and toward a decentralized organizational structure (see next). This trend is primarily driven by the speed with which decisions must be made, since many markets are now highly competitive and require lightning-fast decision making. This does not mean that the hierarchical system is entirely outmoded – on the contrary, there are a number of businesses that require tight control over limited product lines, and which therefore continue to operate well within this structure.