Topic #21: Organizational Structures

Talking Points

  • There are two main types of organizational structures: centralized and decentralized

  • These two main types divide into several hybrid types, depending on the organizations needs

  • The hybrid types include: team, matrix, functional and divisional

  • In practice, a manager will struggle to manage more than 7 +/- 2 direct reports

  • Reorganizations seem to always happen when another company gets acquired or new management gets put in place.


Debates rage about the best way to organize a company for success. Some say that the decentralized, push the power to the individual worker is the most efficient why while others stress the need for a broad strategic vision that can be acted upon. No matter which side you come down on, the way you organize your company will play a vital role it its success. The other thing to remember is an organizational structure needs to evolve as the business needs evolve. What worked as a five person startup does not work for a 10,000 person company. Many an organization has made the fatal mistake of not evolving when it made sense. The other extreme is the constant changing organization that struggles to find it’s way. That’s bad as well.

Types of Organizational Structures

There are several different types of organizational structures that spawn from the centralized/decentralized continuum. These structures all have pluses and minuses depending on the stage your company is in. In broad terms, organizations can be categories as follows:

  • Team: A small group of people that solely focus on one thing. Teams have leaders because someone has to reign in the chaos. Think of a sports team with a captain. The team performs when they work together and the captain keeps them motivated while contributing.

  • Functional: An organizational is functional when the common functions (e.g. Engineering, accounting, manufacturing) are all managed in the same group. Things get done by farming out the resources to who needs it.

  • Divisional: Aligns all the necessary resources to go after a particular market or set of markets. A divisional structure contains all of the necessary functional areas to stand on it’s own. It’s like a mini-business.

  • Matrix: is a hybrid between a functional and a divisional organization wherein some resources are functional (e.g. Engineering and sales) while others are divisional (e.g. Marketing and management). These organizations try to gain efficiencies by having the functional groups work for many different divisional entities.

  • Hierarchical/Bureaucratic: Can be either functional, divisional or matrix but share a common trait that decisions are typically made at the top and trickle down. These structures rely heavily on process and systems to ensure compliance with all the rules. The bigger an organization gets, the more hierarchical and bureaucratic it will become.

  • Flat: These organizations try and remove layers of management so that, ideally, everyone would report to the boss (or CEO). In practice, this is harder and harder to do as the company grows. The benefits of a flat organization is that everyone knows exactly what management wants since they all report to the highest level.

  • Entrepreneurial: Considers all opportunities like a mini business. Thrives on creating products and services not just selling the same old stuff. Formal structures are lacking and things tend to chaos quickly when scaled.

  • Virtual: No formal office or people in the same state or country. These types are the collaboration environments where people come together for specific projects and then fade away. Several consulting firms use this model since talent can be anywhere. and the Internet has made it easy to collaborate.

Stages of an Organization

Organizations go through many stages. These stages require different structures in order for the organization to be successful. There is really no magic formulas here but you do need to understand when you are moving between each stage and what stage you are at. These stages include:

  • Start-Up: This stage begins the organization. It’s the spark that ignited a small group of people to come together and figure out how to change the world. The official end of the start-up stage is somewhat nebulous. Some consider product launch, first sale or being profitable as the sign that the organization is moving to the next level.

  • Growth: At this stage, the organization has a product and it’s selling it into the marketplace at an accelerating rate. This rate is challenging to keep up with and it feels like things are happening so fast that no one knows what to do. At this point, companies hire like crazy. The official end of growth seems to be when your sales growth slows to your industry average or the organization starts to feel comfortable.

  • Expansion: Once growth ends, management will look to expand into additional markets to kick start growth again. This expansion phase will be riddled with mergers, new divisions or business units. It can be as chaotic as the growth stage because of managements overwhelming desire to restart growth by any means necessary. In some organizations, expansion never ends but when it does end, maturity sets in.

  • Maturity: At some point, a company will stop growing and expanding. At this stage, the company will look to make systems and processes that focus solely on reducing costs and improving efficiency. Maturity feels comfortable and the creative spark that might have existed has been extinguished.

  • Destruction: There are very few companies that stand the test of time. If you look at the Dow Jones of 100 years ago, there is only one company that is still on it. This means that all those other companies either merged with others or went out of business. This phase is pretty obvious when you are living it. Sales are slowing or sluggish, the company is losing money and employees are just waiting for the hammer to fall.

One complexity to this is that organizations can be at two stages at the same time. During these times, it’s always challenging to maintain a stable organizational structure since each stage tends to have conflicting requirements.

Signs You May Need to Change

The stages above are broad enough that it might not seem obvious which organizational structure is the best one to choose. In general, there are several signs that the organization you are presently in needs to change. Consider some of the more obvious situations like:

  • New businesses are fighting with old ones: There will always be a healthy tension between the people who make the money now and the ones working on making money later. If it gets too out of hand, it will create silos that will fight each other to the death at the expense of making the company successful.

  • Systems and procedures are constantly breaking down: One sure sign of growing pains is when the old systems (or lack of them) your organization had in place start to break down under the strain of growth. When this starts to happen, you need to take a look at your structure and see how it can change to overcome this.

  • Morale is low and people are leaving: Organizational change or lack of change can make your talented staff leave. This is a sure sign that whatever structure you are presently under needs to change.

  • No new products are being released: New products drive growth. Without them, a company will fad away. So if your innovation pipeline is drying up or you have not released something in a while, then you need to rethink your companies structure to support more new products.

  • Revenue or profit accelerating or decelerating: Revenue and profit will drive your organizational decisions either way they go. During highly accelerated revenue times, there will be a mad dash to grow and expand. During a deceleration, the organization will want to shed cost (read people) as fast as they can.

Focus on What Makes Sense

Organizations evolve over time. This is an inevitable fact of life. You need to be able to adjust your organizations to meet there needs but not adjust them so much that you loose the soul of your company. The desire to change will always be present no matter what stage you are in. This desire is rooted in managements need to build a better organization. Resist the urge of constant change because that will just create chaos. What you should focus on is what makes sense for your organization at the stage that it’s in.

Things To Ponder

  1. Determine the type of organization you are presently in. Write 2 paragraphs on how it’s organized.

  2. How would you reorganize your group or division to be more effective?

  3. Which organization do you like to work in? Write a paragraph on why you like the one you choose.

  4. Take a look at a recent merger. How did the two companies sort out their organizational structure? Write a paragraph or two on the challenges they faced and how they solved them.

  5. What stage is your organization in? How will you transition to the next level? Write a paragraph or two about your plan.

Exploring Further

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