Organizational structure is the set of rules used to delineate how tasks are controlled within an organization. These rules state the reporting relationships between positions, as well as how work is delegated and controlled. The type of structure adopted by an organization can be stated graphically in an organization chart. The two general classifications of organizational structure are:
- Centralized. Decision-making is concentrated at the top of the organization, with lower levels of the organization being told how to implement those decisions. This approach is more common in large organizations operating in industries that do not experience much change.
- Decentralized. Decision-making is diffused throughout the organization, which results in fewer levels within the organizational structure. This approach works best when the organization needs to be more agile in its decision-making.
More specifically, a business might adopt one of the following organizational structures that is tailored to operate best within its specific business environment:
- Functional. This approach breaks up a company into departments, so that each area of specialization is under the control of a different manager. For example, there may be separate departments for accounting, engineering, purchasing, production, and distribution. This is the most common organizational structure.
- Organic. This approach has an extremely flat reporting structure, where the span of control of the typical manager encompasses a large number of employees. Interactions among employees tend to be horizontally across the organization, rather than vertically between layers of managers and their direct reports.
- Divisional. This approach creates separate organizational structures to service different geographic regions or product lines. It is used in larger organizations. There can be functional or organic structures within a division.
- Matrix. This approach allows employees to have multiple responsibilities across multiple functional areas. When implemented correctly, it can result in an effective organization. However, it is confusing for employees and so is rarely used.