13. February 2023 10 minutes reading time

Organizational Structure: What’s that?

More Transparency, Flexibility, and Agility in Your Organization

Example of a team-based organizational structure

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Organizational Structure: What’s that?

The organizational structure of a company can be understood as a summary of all regulations and allocations of responsibilities, which in turn contribute to achieving the company’s goals. When implemented correctly, a good organizational structure increases transparency, supports better governance, and also enhances flexibility and agility within the company. In this guide, you will learn what an organizational structure is, what types of organizational structures exist, and how a successful organizational structure can be implemented in your company.

Definition: What Is an Organizational Structure?

An organizational structure provides the blueprint of, and for, a company – mapping out how tasks and responsibilities are divided both horizontally and vertically. As such, the system allows a business to effectively coordinate and manage both its operational and strategic objectives.

From the horizontal perspective, the organizational structure, at its core, determines how tasks are distributed throughout various levels of the business. This involves, among other things: marketing, sales, controlling, and production. Looking at the organizational structure from a vertical point of view, there is a strong emphasis on individual areas within the organization, which are determined by the distribution of competencies. There are a number of important considerations to take into account at this point, such as how reporting-channels are organized, and how tasks can be delegated between different levels of any given hierarchy. For example, how does the executive board delegate to the head of marketing, and from there how does the task make its way to the head of brand management, and finally to individual brand managers?

How a company selects an optimal organizational model, as well as the more refined aspects of its internal structure, depend on a wide range of factors such as the company’s size and industry, as well as any number of external conditions.

Why is it important to implement an organizational structure in a company?

Every organizational structure exists to help achieve predefined business goals in the best possible way. Ultimately, it’s about unlocking the full potential of employees and the way they collaborate. Only then can optimal company performance be ensured.

A common objective of a well-designed organizational structure is to enhance market and customer orientation. Since most companies operate in highly competitive industries and markets, it’s the role of the organizational structure to align the business precisely with customer needs. In addition, it’s often about using corporate resources efficiently. This includes not only material and financial resources but also the workforce.

By managing internal capacities more consciously, a company can strengthen its cost position and increase its profit margins. A well-thought-out organizational structure also contributes to the consolidation and further development of competencies within organizational units. This means, for example, that marketing professionals can continuously improve within marketing, while controllers do the same within finance.

Well-Designed Organizational Structures Provide More Flexibility

Today, many organizational structures are designed with the goal of greater flexibility. This is because increasingly complex tasks and the accelerating pace of change in the business world demand rapid adaptation to new conditions, otherwise, restructuring becomes necessary. In this context, flexibility becomes a competitive factor that can be influenced by the organizational structure. One important aspect is the qualification and engagement of employees: the more skills employees possess, the more flexibly they can be deployed. This also promotes entrepreneurial thinking and independent action.

Types of Organizational Structures

There are various types of organizational structures for companies. Below, we present some examples of organizational structures:

The Hierarchical Organizational Structure

The hierarchical organizational structure features a pyramid-shaped org chart and is the most common type of organizational structure. In this model, authority flows from the top – such as from executives – down to employees with lower levels of responsibility. Each employee reports to a supervisor. One of the main strengths of the hierarchical structure is its clearly defined levels of responsibility and authority, as well as well-established career paths and opportunities for advancement.

Example of a hierarchical organization chart — Example of a hierarchical organizational structure

The Horizontal Organizational Structure

A horizontal, or so-called flat organizational structure, is especially suitable for companies with only a few layers between top management and regular employees. Many startups adopt a horizontal structure until they grow large enough to form specialized departments. However, some companies choose to retain this structure, as it promotes self-organization and employee involvement. Horizontal structures also encourage more open communication and improve coordination and speed when implementing new ideas or concepts.

Example of a flat organizational chart — Example of a flat or horizontal organizational structure

The Matrix Organization

In a matrix organization, team members report to multiple managers. Regardless of whether they work remotely or in a physical office, employees in a matrix structure are typically assigned to both a project manager and a line manager. This organizational structure is particularly well-suited for situations where new products and services are being developed without the need to constantly reassemble teams.

The Functional Organizational Structure

The main focus of a functional organizational structure is to establish business units based on specific tasks and a high degree of specialization. In the org chart of such a structure, company leadership appears at the top level, followed by the various functional areas, such as procurement, sales, and production, on the next level. This type of structure is particularly common in small and medium-sized enterprises with a narrow product portfolio and a relatively low number of tasks and departments.

Example of a functional organizational structure

The Divisional Organizational Structure

The divisional organizational structure, also known as the business unit structure, divides a company into various business segments, called divisions. Each division operates independently and is responsible for a specific product, product line, geographic region, or customer sector. Each division has its own resources and functions, such as marketing, sales, or human resource management. In contrast to the functional organizational structure, where departments are organized by tasks (e.g., sales, production), the divisional structure focuses on overall responsibility within each division. This leads to increased flexibility and market orientation but can also result in resource duplication and higher costs. Unlike the matrix structure, the divisional structure does not have shared decision-making power, which creates clearer accountability within each division. The advantages of this structure include enhanced customer and market orientation and the ability to respond quickly to changes in specific markets. Therefore, the divisional organizational structure is particularly suitable for larger companies with a broad product range or international operations.

Example of a divisional organizational structure

The Agile Organizational Structure

The agile organizational structure is designed to be flexible and responsive to change. It is heavily based on principles from agile project management, such as those found in software development, like Scrum or Kanban. In an agile structure, cross-functional teams work autonomously on specific tasks in short cycles (sprints). There is a high degree of adaptability, and decisions are made quickly and in a decentralized manner. The focus is on continuous feedback and incremental improvements. The agile organizational structure aims to break down traditional hierarchies, emphasizing problem-solving in interdisciplinary teams. In this setup, experience and expertise outweigh seniority. The mindset is clearly geared towards innovation and the scalability of solution ideas.

The Most Important Steps for Implementing a Successful Organizational Structure in Your Company

Your Corporate Strategy Forms the Foundation
At the beginning, it’s crucial to define why the organizational structure is being established or adjusted in the first place. There is no point in implementing a structure without a clear understanding of where the company is headed. Likewise, making changes to an existing structure without identifying the core issues that need to be addressed is ill-advised. In this context, it is essential to define milestones for the transformation process and ensure that results can be clearly measured.

Uncover the Strengths and Weaknesses of Your Current Organizational Structure
In the second step, you need to identify where your current organizational structure supports your business goals and where it does not. To do this, you should create an org chart using a professional software solution like Ingentis org.manager. It provides a clear and comprehensive overview of your organization’s current structure. The triad of visualization, analysis, and optimization is an excellent approach to uncover hidden potential and unlock it effectively.

Review All Aspects of Your New Organizational Structure
Once you have identified all challenges within the current organizational structure, gathered initial feedback from employees and key stakeholders, and taken all role functions into account, you can begin developing the new organizational model.

Communicate Your New Organizational Structure
Once all possible options have been considered and the best course of action has been chosen, it’s time to announce and clearly explain the organizational structure adjustment to the entire company. This serves not only to provide guidance and prevent uncertainty among employees, but also plays a crucial role in addressing corporate governance and labor law considerations. These measures should therefore be carefully planned.

Launch Your New Organizational Structure and Adjust as Needed
Once all the groundwork has been completed, the new organizational structure can be implemented. However, it’s important to keep in mind that change is often challenging and can be met with resistance. Employees need time to adapt to the new structure and to better understand how the changes will affect their day-to-day work. In this phase, leadership plays a crucial role. They must manage the transition with sensitivity and, if necessary, with the support of organizational development professionals.

When communicating with employees, visualizing the new organizational structure using a professionally created org chart can be extremely helpful. It’s also important to always keep your corporate strategy as the guiding target in mind. Don’t hesitate to implement adjustments even if the new structure has not yet fully achieved the defined goals. Comparing target vs. actual states can provide valuable insights. Specialized software like Ingentis org.manager supports this process with dashboards and visual representations to help you monitor developments closely.

Example of an organization chart with profile pictures

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