Types of Business Organizational Structures

by on July 24, 2013

Large or small, every organization should operate with a defined organizational structure. A well thought out and strategic business configuration clarifies reporting relationships and supports good communication – resulting in efficient and effective work process flow.

The board and senior leadership should be the group who determines the type of organizational structure that would best support the internal operations, how work is carried out and the chain-of-command.

Determining the best structure is done by answering the questions:

  • What are the functional groupings of work processes?
  • Are there natural groupings of teams, work groups or units?

Senior leadership looks at all functions and determines how they would like work activities to be organized and carried out. This process also identifies natural reporting relationships and chain-of-command. Reporting relationships can be both vertical as well as horizontal.

5 Common Business Organizational Structures

1. Matrix Organizational Structure

A matrix structure provides for reporting levels both horizontally as well as vertically. Employees may be part of a functional group (i.e. engineer) but may serve on a team that supports new product development (i.e. new album). This kind of structure may have members of different groups working together to develop a new product line.

For example, a recording engineer who works for a music publisher, may have engineers who report to him but may also use his expertise and work with teams to develop new music albums. The advantage of a matrix organizational structure is that employees have responsibility not only for their department but for organizational projects. A challenge with this type of structure presents itself when employees are given direction from two different managers and they need to prioritize their work responsibilities.

2. Functional Organizational Structure

Functional organizational structures are the most common. A structure of this type groups individuals by specific functions performed. Common departments such as human resources, accounting and purchasing are organized by separating each of these areas and managing them independently of the others.

For example, managers of different functional areas all report up to one director or vice president who has responsibility for all of the operational areas.  The advantage of this type of structure is that functions are separated by expertise but the challenges comes in when different functional areas turn into silos that focus only on their area of responsibility and don’t support the function of other departments.

3. Product Organizational Structure

Another common structure is to be organized by a specific product type. Each product group falls within the reporting structure of an executive and that person oversees everything related to that particular product line.

For example an executive over Kraft products would be responsible for every product under that label – dressings, meats, sauces, etc.  The advantage of this type of structure is that it organizes products by category but can create completely separate processes from other product lines within the organization.

4. Customer Organizational Structure

Certain industries will organize by customer type. This is done in an effort to ensure specific customer expectations are met by a customized service approach.

An example of this would be in healthcare. A patient seen as an outpatient has very different needs than those of patients who spend time in the hospital as inpatients.  A customer centered structure creates customized care for those patients. The advantage of this type of structure is that it specializes in the needs of each customer group but can ignore the needs of different customer types.

5. Geographic Organizational Structure

For organizations that cover a span of geographic regions, it sometimes makes sense to organize by region. This is done to better support logistical demands and differences in geographic customer needs. Typically a structure that is organized by geographical regions reports up to a central oversight person. You see this type of structure in companies that go beyond a city or state limit and may have customers all across the country or in multiple states.

Deliberate time and thought should go into the design of an organization’s structure. This is important so employees have a visual of how the organization functions and understands the chain-of-command. Operating within a defined structure, with good communication processes and work-flows, help to ensure efficient management of resources – people, time and money.

photo by: Susan Renee

This article was originally posted February 2010 and updated July, 2013.

{ 23 comments… read them below or add one }

deepthi July 28, 2011 at 3:06 am

thx providing information

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chantel maseko September 29, 2011 at 2:31 am

sorry love to know where the LOCATION DEPARTMENTALISATION is because on my manual from the Independent Institue of Education on the Business Management 2 BUMAf221, the organisational designs are as follows Functional Departmentalisation, Product Departmentalisation, Location Departmentalisation, Customer Departmentalisation, and Muliple departmentalisation.

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Patricia October 1, 2011 at 4:08 pm

Hi Chantel. I’m not sure i understand the question. Could you please be a little more specific? Thanks for the comment.

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John Allen October 3, 2011 at 3:38 pm

Sorry to be pedantic, @ chantel, but would you not consider Geographic to cover location departmentalisation.

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Michael Maposa March 6, 2012 at 3:52 am

I am trying to figure out how an organisation can have a matrix structure with the HR department involved at all levels in the organisation. But on second thought after reading this article i think the HRM would be in the position of the the Music Publisher, and still have the Directors on top of them.

But what boggles my mind is what the Managing Directors still need the services of the HR department. Should the HRM be on the top level of the M.D’s or parallel to them?

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Patricia March 6, 2012 at 11:09 am

Hi Michael! I’m of the opinion that the HR function should touch every area of an organization. The “people” side of the business, whether it is communication, managing performance, rewarding employees, disciplining employees or writing goals is critical to achieving business results. I don’t’ see HR on the top of the structure – as in an oversight role but definitely in a supporting parallel role with managers. Too often people in management and supervisory positions neglect to use the expertise of an HR professional to help them solve their day-to-day employees issues! If they would, it could eliminate a lot of undue manager stress and often legal issues.

I hope this helps!

Thanks for the comment!

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Michael Maposa April 19, 2012 at 6:36 am

Thanks a lot Patricia. You made it very clear. The HR department is part and parcel of the whole organisational structure, every function cannot do without the HR function!

Thanks a lot.

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Patricia April 22, 2012 at 5:53 pm

Absolutely! The HR function is critical to every organization whether large or small! thanks for the comment!

Patricia

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Dennis Kullwa. July 18, 2012 at 12:06 am

The information is relevant but I think not complete. Other structures such as Network and Project structures are not represented.

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Patricia July 18, 2012 at 9:00 am

Thanks for pointing that out. I’ll try to do some research to add those! Thanks for the comment!

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Donald September 26, 2012 at 2:35 pm

Hi there,

There is mentioned of line organizacional structure, i would like some input.

Thank you,

Donald

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Patricia September 26, 2012 at 3:13 pm

Hi Donald, I’m not sure what the question is but I’d love to help you!

Patricia

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Brian October 28, 2012 at 6:08 am

Please.. what kind of organizational structure/chart is best or suitable for a virtual IT project management company? I need this for my school project. thank you.

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Patricia October 29, 2012 at 8:06 am

Hi! I’d love to help you think through this for your school project but I need a little more information about this company. How many employees, job types, product lines, organization’s mission/vision, client reach?

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David November 21, 2012 at 6:14 am

My experiences with HR has led to viewing them as the executive muscle of the softly spoken agenda of top management. Who does one speak to when HR rubberstamps the fast track allegations of wrongdoing by a department manager when everything is “confidential” including the party making allegations? Who holds HR accountable within an organization? Surely an internal investigation by the head of HR is no solution. Structurally, who does one address to move outside the fishbowl of HR investigating itself? My experience has been to move to legal counsel where the rules of discovery expose the phantom witnesses to alleged events and the veil of “confidentiality” speaks to the softly spoken agenda of management massaging an employee out the door. This is how one comes to be known as a “whistleblower”. Sometimes, the interface of HR touching every part of an organization provides the conduit for very unprofessional behavior known as gossip or defamation or providing favors that turns into business as usual that becomes the “wink/wink” that every employee understands when facing unjust treatment by a very “compliant” and reputable (cough) HR department. Don’t even mention exit interviews and the confidential nature of that process.

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Patricia November 21, 2012 at 10:42 am

Yes unfortunately there are organizations that don’t operate with the best ethical approach in practice or decision making which is why corporate culture is so important to employees. A strong, ethical culture does not tolerate those things you describe.

Thanks for the comment!

Patricia

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genive ompod October 17, 2013 at 11:16 am

the apptropriateness of an independent oragnisational structure for the business and whats is the impact on the empowerment of eemployees ? thnk u

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Melonie Mcfarlane November 3, 2013 at 10:30 am

I would like to know what kind of departmental structure a business has if the organizational chart is in the form:Manager—>supervisor–>technician–>sales representatives

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Inez Nunez November 17, 2013 at 6:38 pm

Hi I wanted to find out if you knew what kind of structure would a college fall under? like an institute such as TCI college in NYC.

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Patricia Lotich November 18, 2013 at 8:31 am

Hi Inez. I looked at the college website and based on the programs they offer, I might lean toward a product organization structure. The reason for this is each program is created to meet the needs of a particular student population. So if you think of each program as a product, it would fit well. Thanks for the inquiry and please let me know if there is anything else I can try to answer for you. Patricia

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Hood February 6, 2014 at 1:22 am

i’m doing an assignment.. the organisational structure of the business had departments like, Construction materials, Medicals services, Fuel and Lubricants,Finance, Human Resource, Information Communication Technology, etc.
what type of departmenmtalisation do they have???
please reply soon as my assignment is due on 8th February

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Hood February 6, 2014 at 1:33 am

in my view it is a matrix. if i am right can you please note out some points that i can use to justify that the business had an matrix departmentalization
please reply soon as my assignment is due on 8th February

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Patricia Lotich February 8, 2014 at 8:57 am

I would need more information to be able to say for sure, but based on the departments you have listed, this sounds like a functional org structure because each department has a specific specialized function. I hope this helps and good luck on your assignment!

Reply

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