What Are Organizational Systems?

An organizational system is, quite simply, how a company is set up. A good
organizational structure lays out both a hierarchy and the flow of communication in a
company. It is important for every business, no matter its size, to implement an
organizational system. There are many benefits to having a well-defined organizational
structure, including improved efficiency, productivity and decision-making. Each
structure has its strengths and weaknesses. Ultimately, these pros and cons depend on
the type of business you run, your industry, the size of your organization and other
factors. It is important to consider every kind of organizational system before deciding
which is right for your company.

What Are Organizational Systems?

An organizational system is the structure of how an organization is set up. That
structure defines how each division of a business is set up, the hierarchy of who reports
to whom and how communication flows throughout the organization. Broken down even
further, an organizational structure defines how each role in an organization function.
With a well-defined organizational structure in place, all employees know what is
expected of them and to whom they report. Business owners should think long and hard
about which system to choose, as each organization has unique needs. An
organizational structure that is right for one company will not be right for another.

Examples of Organizational Systems in Business

There are four main types of organizational structures: functional, divisional, matrix and
flat. Each system has unique features.

Functional organizational structure: A functional organizational structure is a traditional

hierarchy. Many companies, especially larger corporations, follow the functional
structure. This system features several specialized divisions such as marketing, finance,
sales, human resources and operations. Then a senior manager oversees all the
specialized divisions. The reporting flow is clear. Each employee reports to their senior,
including division heads, who report to the senior management. Senior management
oversees the entire structure. Because the company remains split up into specialized
divisions, employees tend to become specialized as well. This causes a clear path for
promotion and growth. However, the divisions can have trouble communicating with one
another. Because all departments report upwards, there is little horizontal
communication between them, leaving little space for holistic, whole-company thinking,
except at the top management level. This makes the functional organizational system
slow to adapt to change.

Divisional organizational structure: A divisional organizational structure divides the

business up into teams based on the projects the employees are working on. This
system includes many different types of teams, including legal, public relations,
research and business development. Further, teams are created around specific
projects. For example, a pharmaceutical company might have separate teams
dedicated to each medication they manufacture. Each project team has a director or
vice president and exercises a certain level of autonomy within the organization. The
divisional structure allows employees to become deeply familiar with their team’s work.
However, divisions are often unaware of what other teams are doing, and do not
communicate with each other. Employees may not be able to work effectively across
divisions when necessary. Ultimately, this system can be challenging to manage due to
its spread-out structure.

Matrix organizational structure: A matrix system is a cross between a functional

structure and a divisional structure. From a birds-eye perspective, the business is set up
in a functional structure, with a traditional hierarchy and specialized divisions. However,
when you look at those divisions up close, they are each set up in a divisional
organizational structure. This means they are split up into projects and smaller teams.
The matrix type of organizational structure is quite complex and requires a lot of
planning, not to mention strong systems of communication across the organization.
However, when the matrix structure works well, it eliminates a lot of the issues that pop
up with divisional or functional-only organizations. Communication can travel to the right
people, which increases productivity and holistic thinking. Further, employees are
exposed to other departments and projects, encouraging cross-collaboration. On the
downside, the matrix structure can quickly become confusing for employees when there
are too many managers, and it’s not clear who to report to.

Flat organizational structure: Flat organizational structure flattens much of the hierarchy
and allows employees more autonomy over their work. Often, flat organizations are split
up into temporary teams, although they usually do not have formal structures. There are
still some top-down dynamics in a flat system. Often, there is at least some senior
leadership steering the ship. However, this system is predicated on disrupting the
traditional hierarchical structures of businesses. Many startups and tech companies
tend towards a flat organization, as it encourages innovation and employee input. The
thinking is that when employees are not tamped down by red tape, they will think freely
and generate fresh, profitable ideas. This increases communication across teams and
eliminates some of the communication issues that can happen when messages travel
up a top-down structure. Unfortunately, a flat system is difficult to maintain as a
company grows, and the need for more structured communication systems comes into
play. Further, employees in a flat organization can become overwhelmed with doing too
many different tasks, and do not have a lot of room to grow or be promoted.

Why Businesses Need Organizational Systems

Organizational systems are important for businesses of every size. Having a solid, well-
defined structure in place erases confusion and lays out simple processes for
employees to follow. Each worker should know exactly who they report to. Without
some type of hierarchy or structure in place, a workplace can become chaotic.
Employees may not understand who is responsible for what, causing important things to
fall through the cracks. A solid organizational structure streamlines a company and
keeps everyone on the same page.
An organizational system puts every person in their correct place, able to contribute
their part to the company. Having a system improves overall efficiency, heightens
productivity and provides clarity to everyone in the organization. Every department can
work better when roles are clearly defined and objectives are shared. Further, the
proper organizational system can improve decision-making, as information flows
throughout the organization. Upper-level managers can collect information from all
divisions, giving them greater insight into the entirety of a company’s operations.

A solid organizational system eliminates many business problems, including the

duplication of work and conflicts between positions. If a business has been well-thought-
out, each employee has a distinct role, and roles do not overlap with one another. There
is no “runaround” where nobody is sure who is responsible for a particular task or
project. Because of this, cooperation is increased and employees feel a sense of pride
in their work. Workers avoid the frustration of having ever-shifting roles and goal posts.
They can focus on what they do best.

Choosing the proper organizational system can take your business to the next level. For
example, if your business is product-based, a matrix or divisional structure will likely be
ideal. These are project-based structures that focus on specialized teams. Small
startups, on the other hand, may consider a flat structure to allow all employees to
contribute their skills and expertise without the hierarchy interfering.

Examples of Businesses with Organizational Systems

Examples of the functional system: Functional organizational systems have historically

been used by the military, universities and government entities. Over the years,
functional hierarchies have become less popular, and many organizations have moved
away from them. However, they are still in use by certain businesses. One example of
how this type of organizational system might be used is in a traditional factory setting.
The factory manager oversees the different divisions of the factory, which are each
specialized. Each division has its own manager, all of which report directly to the
overseeing factory manager. Another example could be a retail store. A store manager
oversees the operations from the top of the pyramid. Below are different departments.
Perhaps there is one for inventory, one for customer service and one for marketing and
promotions. Each has its own supervisor, and all report to the general manager.

Examples of the divisional system: Divisional systems are popular with large,
multinational corporations. For example, Johnson & Johnson has a divisional structure.
Each of Johnson & Johnson’s brands operates as its own company, with its own
leadership and internal structure. All of those brands report to the parent company.
Another example of a divisional organizational structure is General Electric. The CEO
sits at the top, and beyond that, the company is split up into different groups. There are
some operational groups, such as those for finance, legal, public relations and global
research. Some teams are devoted to specific projects, including aviation, energy,
health care and more.
Examples of the matrix system: A matrix organizational system is complex, and
therefore mostly adopted by large, well-established companies. One famous example of
a matrix company is Starbucks. The world’s largest coffee company uses a functional
structure to split its business up into divisions, including HR, financing and marketing.
These departments are located at the brand’s corporate headquarters and report to the
upper levels of management. The HR department, for example, creates policies that
affect all Starbucks locations across the board. Next, Starbucks has separate divisions
for each geographic region. These regions include the Americas, China and Asia-
Pacific, Europe, Middle East, Russia and Africa. The Americas region, being the most
popular for the company, is further split into four smaller divisions. Starbucks also has
product-based divisions. For example, there is one division for merchandise like the
Starbucks mugs and another for baked goods. At the lower levels of the organization,
Starbucks has teams of employees, especially at the store level. This complex matrix
structure serves the coffee giant well, allowing the company to operate thousands of
stores across the country successfully.

Examples of the flat system: Flat systems are popular among startups and tech
companies. One famous example of the flat system is Zappos. In 2013, the massive
shoe company's CEO announced a new management structure called holacracy, a
setup to encourage collaboration by eliminating workplace hierarchy. The company
banned manager titles. It would no longer have job titles and there would be no bosses.
Every employee would be in charge of their own work. The company hoped to spark
innovation and creation by doing away with the red tape involved in hierarchy and
decision-making. However, Zappos struggles to keep operations truly flat.

This is a struggle of many large companies that implement a flat structure. Many
startups have spoken about the difficulty of maintaining a flat organizational structure
when experiencing exponential growth. Studies find that employees find hierarchical
structures comforting and practical. So, a flat organizational structure is perhaps a good
option for a business that is in its early stages, to spur innovation and growth. However,
most larger companies move away from a flat system as it can become cumbersome to
manage over time.

Organizational Structure Summary

In every business, somebody needs to be in charge, and those leaders lead others, who
might lead other management, who leads other employees and so on. Who the leaders
are and how they manage is, in part, determined by the structure of the organization?
The organization also dictates how information flows through the organization and how
tasks are delegated. A business’ structure is first regulated by law and then further
categorized depending on the functional needs of the company.
Legal Structures
Organizational legal structures include sole proprietorship, partnership, limited
partnership, limited liability partnership, limited liability company and corporation. Sole
proprietorship is the most common business structure, owned by just one person who is
personally responsible for all the company's debts and obligations. A partnership is the
same as a sole proprietorship, except all the owning partners split the business’
obligations. A limited partnership has some limited partners that are not as responsible
for obligations as other full partners. A limited liability partnership shields some partners
from debts and obligations incurred by other partners. Owners of limited liability
companies (LLC) are allowed to choose how debts and responsibilities are distributed.
Corporations are treated as individuals; the company is responsible for its own debt and
owners are people who hold shares in the corporation.

Centralized versus Decentralized

Centralized organizations have a few executive figureheads who bear almost all
management responsibility. In centralized companies, executives delegate to
supervisors, who delegate to managers who oversee employees. Management is clear
cut and there is little question of whom is in charge. Decentralized organizations have a
less formal management structure; temporary project teams may be responsible for
tasks and delegation is often shared.

Departmentalization
Many organizations are split in to departments. Departments can be categorized by
region, function, project or product. Department managers have control over all the
employees in the division, though they report to executives that oversee their division.
Benefits of departmentalization include straightforward delegation with no confusion of
who is responsible for what tasks. Risks of departmentalization include duplication of
activities (when one department does the same thing as another) and segmentation
resulting from departments functioning independent of the parent company.

Choosing a Structure
Deciding what types of organizational structures would be best for your company can be
daunting. You’ll want to consider several factors, such as how many people own (or will
own) the company and what you want your ideal functions of management. Finally,
consider how you want work to be divided up and the level of authority and
independence you’re willing to offer employees.

What Is the Purpose of Organizational Structure?

An organizational chart is the graphic used to visually depict the organizational structure
that conveys how communication and authority happen within companies. It is easy to
dismiss the organizational structure's importance and say that it is only relevant to large
companies, but failing to organize a business leads to frustrations down the road.
Organization makes the hierarchy clear, which obviously helps in day-to-day business,
and it is also critical should legal issues and liabilities ever arise.
The purpose of organizational structure involves various aspects of productivity,
accountability, communication and achieving results.

Some Types of Organizational Structure

To better illustrate the importance of organizational structures, it helps to understand the
types of structure and for whom they are best suited.

Functional: The most common organizational structure has a company head with
everyone underneath grouped via the function within the company — the sales division,
the R+D department and so on, with each running under a top-down management style.

Product Based: This divisional structure would happen in a company offering many
products, under which each product type is a division. Each reports directly to the CEO
and/or other company heads. For example, the company Kraft might have a barbecue
sauce division, a macaroni division and divisions for other product categories.

Geographical: These are large companies extending beyond one region, and each
region tends to have its own power division. For example, Sony is a worldwide brand,
but Sony America and Sony Japan would have different divisions. This form is also
common in smaller or even national brands that may have districts, regions and
territories.
Several other styles of structure exist, like matrix, process based, circular and market
based. Which is best for what company depends on several deciding factors.

Factors Behind Organization

When deciding what form an organization should take, it means voting on things like
whether the structure should be centralized or decentralized. If it is centralized, there is
a strong hierarchy and clarity over how power breaks down, much like in the U.S. Army
or with industrial giants like GE. Decentralized organization is more horizontal than
vertical, meaning power is shared by many and can be informal. This is an increasingly
popular structure in the casual, fast-moving world of Silicon Valley and tech startups.

Another factor is chain of command: who is the boss of whom, how decisions are made,
who carries out the orders and so on. There is also span of control, which is basically all
about whom a manager manages and what tasks belong to which departments.

Why It Matters
The objectives of organizational structure are to establish accountability, information
flow, authority and distribution of responsibilities. Without structure, everything might be
fine until it is not: If something goes awry, who is in charge?

A business without structure is likely to find itself in chaos when things go badly, and
how the firm proceeds will depend entirely on who asserts control during that phase.
However, a structured company will be "business as usual" when things go sideways —
it will be the same leaders who were in charge the day before, and it means employees
and even outside agents will know who has the answers during vexing times.

All the business planning in the world can not save a company if, over the long haul,
there is no one accountable for meeting client milestones or no one who definitively
calls the shots when there is a major manufacturing issue threatening to grind
production to a halt.

If you have ever tried to figure out the pizza order for a large party with no one taking
charge, you likely struggled to even get any pizza at all. That is exactly the type of
situation in which organizational structures help. By choosing someone to be the chief
pizza coordinator, there is a de facto method for collecting pizza opinions and tallying
the count before finally ordering the pies. Organizational structure is all about
productivity, accountability, communication and getting results.

What Is a Hierarchical Organizational Structure?

There are five types of organizational structures: the traditional hierarchy, flatter
organizations, flat organizations, flatarchies and holacratic organizations. A hierarchy is
set up so that there is a chain of command. Instead of having everyone report to one
boss, in other words, workers report to supervisors, who report to their supervisors and
on up the line. Although there are benefits to a hierarchical organizational structure, it
does have a few limitations, making it not the right fit for every type of business.

What Is a Hierarchical Organizational Structure?

Think of a hierarchical organization as a pyramid, with your CEO or director at the top, a
layer of managers under that person, an even bigger layer of workers under that group,
until finally, you arrive at the bottom layer of the pyramid. If a business has a flat
structure, a director might bring in every employee to discuss an upcoming project or
brainstorm an upcoming marketing campaign. In a hierarchy, that same director would
meet with his management team, who would then pass the information down to their
own employees. If those employees are also managers, they would continue the
information funnel by passing on what they’ve learned. If the director sought input, that
could be passed up the chain, as well.

The best thing about a hierarchical structure is that it distributes the workload more
evenly down the chain. A CEO or director doesn’t have to directly manage every
employee in his organization. Instead, he can trust his subordinates to handle that, and
those subordinates can delegate some of their duties, as well. Ideally, employees will
have a direct contact who guides them as they strive to do better in their jobs.
Unfortunately, it doesn’t always work this way. One small break in the chain can cause
communication to break down, employees to grow disgruntled and managers to feel
frustrated.
Although it’s easy to associate a hierarchical state with a large corporation, leaders
interested in this setup can start preparing from the beginning. This means as you add
employees, consider where they’ll fall on the hierarchy. You may need an app
developer before you need a manager, for instance, but that means you’ll need to start
thinking toward hiring a manager to oversee that developer, along with any others you
hire in the years to follow. You can then slowly expand your leadership team at the
same time you’re adding lower-tier employees.

You won’t just be able to outsource day-to-day instructions and big decision-making to
your leadership team. You can also entrust these professionals to take care of hiring,
firing and disciplining employees. If you hire a manager with an expertise in his subject
matter area, he’ll be the best to hire underlings in that specialty. You’ll not only get
better employees this way, but your managers will have an investment in the employees
they choose, making it more likely they’ll want to nurture their careers.

What Is a Hierarchical Organizational Chart?

If you ever want to determine whether your organization is hierarchical or another of the
five types, all you’ll need to do is take a look at your organizational chart. A flat, wide org
chart is a sign that you don’t have a hierarchical structure. For a hierarchy, you’ll want to
ensure a vertical structure, with fewer employees reporting to each manager.

There are two ways to create a hierarchical structure: top-down or bottom-up. If you
choose a top-down structure, you’ll put the bulk of the control in the hands of those at
the top of the chart, making those positions more responsible for high-level decisions. A
bottom-up structure means freeing up those who are at the bottom of the org chart to
make decisions without having to constantly look up the chart for guidance.

When it comes to top-down or bottom-up, the truth is that there is no “one size fits all”
as you’re trying to design an organizational structure. Top-down organizational charts
often work for businesses that have lower-tier employees doing repetitive, mundane
tasks. If, for instance, you run a manufacturing plant, you’ll likely need top-down control
so that those working the assembly line have guidance and oversight in the work they
do. The casual work culture so many businesses prize today often calls for more of a
bottom-up culture, since it gives employees the freedom they need to use their own
discretion in how they approach various tasks. It also is more likely to make them feel
engaged, especially if they’re encouraged to contribute to the decision-making process.

Although there are many templates available to help you achieve a hierarchical
structure in your business, you can use any org chart software to set up a hierarchical
chart. If you have shareholders, they’ll be at the top, with your board of directors slotted
in just beneath that. The director will be beneath the board of directors, and at that
point, the chart will begin to widen. All of your managers will go underneath the director,
including your marketing manager, applications development team manager, business
development manager, HR manager, COO, CTO and any other team leader. These will
act as the top of multiple silos that showcase the employees who will work under that
team leader. You could have entire teams reporting to one leader. Your CTO may
manage your entire app development, help desk, security and project management
team, for example.

What Are the Advantages of a Hierarchical Structure?

Time is the biggest benefit of a hierarchical structure. Since time is a rare commodity for
many business leaders, this can be a definite draw. When a business has a hierarchical
structure, information can be passed down, which means your director only needs to
meet with her own direct reports. Those direct reports can then pass the information on.
Generally speaking, that also means that if an employee has a question or concern, that
person will go to her own supervisor, who can then pass the concern up the chain if
necessary. Instead of a daily parade of employees in her office, the director can focus
on other duties, including growing the business.

Another great thing about these types of organizational structure is that they allow each
leader to focus on her own specialty area. Instead of having to be an expert in every
area, this means directors can bring together all of this expertise in regular management
meetings. A business that employees a team of engineers, for instance, can simply pull
in the head of that team to discuss big-picture issues, with the team entrusted to carry
on day-to-day operations in between those meetings.

In addition to being beneficial to the organization as a whole, a hierarchical structure

can be motivating to employees. They can clearly see the path to the top and strive for
that position. An entry-level accounts payable clerk will work under a team of HR
leaders who can guide her in her own specialty, helping her learn what she needs to
know to someday advance into HR management. If she chooses to stay with the same
company, her career path will be laid out in front of her. This also benefits the
organization as a whole, since employees may choose to stay and work their way up
the career ladder rather than leaving to work for a competitor.

An additional benefit of a hierarchical structure is that employees are more likely to

understand the role they play within the organization. Since everything is so heavily
defined, as is clearly visible in the business’s org chart, they know where they stand
within the organization and how that relates to all of the other employees. They also
benefit from a camaraderie that comes from working with others who share their own
specialization. Team leaders can act as mentors, in a sense, and can also foster that
camaraderie by encouraging everyone to collaborate and help each other.

Contrast this with a flatter organizational structure, which encourages much more
flexibility but can lead to confusion. Employees may not know exactly what to do if they
have a problem. Even if a director promises an “open-door policy,” not all employees
will feel comfortable going directly to the top person in charge with a seemingly small
complaint. As a result, workers may feel as though they don’t have the support they
need in their daily activities, which can lead to low morale.

What Are the Disadvantages of a Hierarchical Structure?

Not everything about a hierarchal setup is good, though. A management structure that
encourages a chain of command can feel too restrictive, especially if leaders aren’t
skilled at bringing in managers who are good at motivating and guiding employees. One
bad manager could cause serious issues for a business, leading to a costly turnover
and a reputation for having a toxic work environment. Since bad employee reviews can
haunt a business for years online, that can make future hiring efforts challenging.

Another disadvantage is that you can easily have a communication breakdown that
severely derails a project. Your director may meet with his managers and provide
crucial information designed to be passed on to each team. But if even one manager
neglects to share that information, everyone won’t be fully informed. Over time, those
miscommunications can add up, leading to repeat missed deadlines and
misunderstandings. The result is at least one or two employees who feel left out and
frustrated.

As many businesses find when it’s time for budget cutbacks, a hierarchical
organizational structure can create plenty of unnecessary positions that cost a business
money. If you have managers reporting to managers reporting to managers, you’ll find
that some positions exist merely to pass information from one group to another. Since
mid-level manager salaries aren’t cheap, you’ll probably find that you’re spending far
more money than necessary for the convenience of having more time to focus on other
things. This issue is exaggerated as a business grows and the organizational chart
grows wider and longer. Before setting up this structure, ask yourself if it’s necessary to
have a manager over every department. It’s possible you can get away with only a
couple of midlevel managers and put the rest of your payroll dollars into workers.

You may also find morale drops as your employees feel isolated from everyone else in
the organization. When you operate in silos, those in one silo tend to be disconnected
from the others. This comes at a cost, especially if you have teams that could benefit
from working together. Your sales and marketing teams, for instance, could help each
other by combining analytics and strategizing. But if you’ve encouraged them to work
independently by setting up separate departments under different managers, you won’t
have that collaboration. If you choose a hierarchical structure, it’s important to monitor
results on an ongoing basis and decide if it’s working the way you originally intended.

References

Resources

About the Author

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MANAGEMENT
Advantage & Disadvantage of Organizational Structures
By: Corr S. Pondent
Reviewed by: Jayne Thompson, LLB, LLM
Updated November 21, 2018
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Firms have organizational structures that show the relationship between the company’s
employees and the responsibilities of said employees. Each firm’s organizational
structure is different and depends on its specific needs. A large manufacturing firm with
multiple factories is likely to have a different organizational structure than a financial
services firm with only one office. However, there are some basic types of
organizational structures, each with its own advantages and disadvantages.

Vertical Organizational Structure

A vertical organizational structure is based on the reporting chain from the head of the
company down. It establishes the reporting relationships between people and their span
of control. One disadvantage to this sort of structure is that it tends to be bureaucratic
and does not foster communication between people at different levels. Decision making
may be one-sided, too, as the views of the lower ranks may not to be taken into
account. The advantages include faster decision-making and better coordination of the
company’s activities.

Horizontal Organizational Structure

A horizontal structure is a flatter organizational structure that groups together people
based on their skills or functions. The organizational structure could group those who
work in a specific department together, or the grouping could be based on those who
work in a functional area such as finance or marketing. One advantage of this sort of
flatter hierarchy is that it is easier for employees to communicate with each other and it
facilitates learning. Disadvantages are that as the company grows, there may be a lack
of integration across the different functions or departments leading to inefficiencies.

Matrix Organizational Structure

Businesses working on a specific project could also have a matrix organizational
structure that sets up the relationship among the people working on the project. The
matrix type of project management system involves putting together people from
different functional areas, such as marketing and systems, to work together for the
project time frame. One advantage of the matrix organizational structure is that people
across different functional areas have a better understanding of their coworkers in other
areas. A disadvantage is that employees are responsible to their project team as well as
to their functional areas. This can create some conflict.

Informal Organizational Structure

Whatever an organization’s formal organizational structure, there is an informal
organizational structure that develops. This informal structure, also known as the
"company grapevine," influences how information flows within the company. One
advantage of such a grapevine is that employees who interact outside the confines of
the formal organizational structure often cooperate better, benefiting the organization. A
disadvantage is that rumors and gossip can spread through the grapevine.

References
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Organizational design provides a critical framework that determines how people,
processes and operations move through a company. Good organizational design helps
support efficiency and achieve business goals. Having a clear plan from the beginning
as to how the company will operate helps different departments come together and
work toward a shared goal. Two common types of organizational structures are
functional and matrix.

What Is a Functional Organization?

Functional is the most common type of organizational design. In this type of structure,
the organization is grouped into departments where people with similar skills are kept
together in forms of groups, such as the sales department, marketing department and
finance department. This helps companies ensure that each group or department
performs at its peak.

There is usually a manager or a top-level executive managing a particular department,

handling all decisions related to budget, resources, decision-making and staffing. A
functional structure works best for those companies that operate in one location with a
single product category. It also works well for small teams and small projects because
resources can be more easily controlled and managed.

Are There Any Drawbacks?

Functional organizational design tends to be difficult to adopt by larger companies that
have many geographical locations because of expense and the difficulty of containing
resources. Work also takes place in a silo, which means that sometimes team members
don't have access to people outside of their division.

Some naysayers of functional organizational design say a big problem is incoherence.

Most functional teams are good at many things but great at nothing. These teams often
struggle to meet the needs and demands of their clients and managers, juggling an
endless, and sometimes conflicting list of demands from various departments. As a
result, they find it difficult to build the type of advantage or differentiation that is required
for long-term success.

How Do Matrix Organizations Work?

A combination of two or more types of organizational structures, the matrix organization
can help companies improve efficiency, readiness and market adaptation. This type of
structure works best for startups and other companies operating in a dynamic
environment since they often can respond faster to market or customer demand while
decreasing the lead time to create a new product.

The authority of a functional manager moves vertically downwards, and the authority of
the project manager moves sideways. Since these authorities flow downward and
sideways, this structure is called the matrix organization structure. A manager in a
matrix organization has two or more upward reporting lines to bosses who each
represent a different business dimension, such as product, region, customer, capability
or function. It’s often a response to corporate silos.

Skills are better utilized under a matrix structure, so companies can select the most
capable employees in order to deliver projects. In addition, matrix structures can serve
global customers by integrating business functions and responding to customer
demands quickly.

Potential Downsides of Matrix Structures

Managing a matrix structure can be complicated and challenging. A common complaint
about this business model is that it increases upward reporting and slows decision
making. The opposite should be true in a well-functioning matrix because it pushes
down operational decision-making in a controlled way.

Furthermore, the blurred authority that characterizes this organizational structure may
lead to conflicts and slow things down. Managers at opposite ends of the matrix may
find it difficult to reach an agreement, creating confusion among employees.
Additionally, the workload tends to be high and the resources scarce.

Another drawback is that work responsibilities are not always clear. The sales manager,
for example, is often responsible for various operations, such as customer relations and
digital marketing. He may or may not be specialized in each area. Wearing multiple hats
is common in small companies, but it can affect day-to-day operations and overall
performance in larger organizations.

References

About the Author

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MANAGEMENT
Nike's Flat Organizational Structure
By: Jorie Goins
Reviewed by: Michelle Seidel, B.Sc., LL.B., MBA
Updated December 04, 2018
boonchai wedmakawand/Moment/GettyImages
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Already known for its innovative footwear, swoosh logo and “just do it” slogan, Nike is
also making strides in the workforce management arena. Nike’s flat structure is unique
among legacy companies, making this brand an excellent study of the inner
machinations of a big business. The company uses this flat structure to maximize
transparency and agility among employees and sub-divisions while minimizing
bureaucracy and deployment time for new ideas.

What Is a Flat Structure?

A flat structure blends two different types of business hierarchies: those of traditional
hierarchies in which multiple people report to one leader, and product hierarchies in
which teams are divided based on specific products, customer base and geography –
and report to one overseeing body. In Nike’s flat setup, teams are divided based on
product and report to separate product managers while also remaining accountable to
more broad department managers. With the flat structure, employees typically report to
a minimum of two managers – one that handles more project-based assignments and
another who manages regulation and policy.

Nike’s flat structure, also known as a matrix structure, consists of several divisions
separated into subsidiaries: Converse, Hurley and others, which all report to Nike’s
global headquarters. The subdivision for EMEA, which Nike’s European headquarters
manages, replicates this structure, while the U.S., the Americas and Asia Pacific
locations are housed within the global headquarters’ oversight.

Nike’s many divisions operate pseudo-independently within the overall Nike brand
name. This controlled autonomy keeps Nike’s brand consistent and ensures a certain
standard of customer service and product delivery, while also affording separate
regional and product brands the flexibility to satisfy niche customer needs and
demands.

Benefits of a Flat Structure

One of the main benefits of this structure is that it makes room for decision-making to
happen without ideas getting trapped in a traditional, more bureaucratic, chain of
command. On average, it takes a project a year and a half to launch at Nike, from initial
design to the actual crafting of the product. This level of agility also gives Nike teams
the ability to keep their ear to the ground when it comes to trends and customer
preferences and make changes as they see fit.

Another plus of Nike’s flat structure is that it facilitates transparency and caters to all
markets. Managers are responsible for smaller teams and decisions happen faster and
with more collaboration among individual parties. Nike’s smaller regional teams typically
respond more to customer demand and distribution needs, while overall factory orders
remain within the authority of Nike’s headquarters.

Annually, Nike’s products undergo approximately 30,000 to 40,000 developments.

Cosmetic changes in things like color and regular features occur constantly. Nike
branches typically focus on apparel while footwear remains largely in the realm of global
headquarters. The independence of Nike’s subsidiaries and regional subsets and their
singular focus allows for these changes to happen on a continual basis without
interference from governing bodies or deviation from Nike’s overall brand.

Disadvantages of Nike's Matrix Structure

Despite its track record of success, Nike's matrix structure has its flaws. While this type
of organizational structure is based on clear roles and hierarchies, it can make it harder
for employees to climb up the career ladder. This can affect employee morale and
motivation as well as retention rates.

Another drawback is that communication often gets lost. A division may have several
different departments for the same function, which may create confusion and slow
things down. Furthermore, it increases the organization's costs.

Even though most departments operate efficiently and are able to make fast decisions,
managers may end up with a heavy workload and take on more responsibility. Those
who are new to the job or lack certain skills may find it difficult to keep up with the latest
changes and handle complex situations.

References

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DOCUMENTS FOR YOUR BUSINESS
Company Reporting Structure
writer bio picture
By: Anam Ahmed
Reviewed by: Michelle Seidel, B.Sc., LL.B., MBA
Updated March 24, 2019
Szepy/iStock/GettyImages
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The reporting structure of a business is designed to enable employees to hit company
targets most effectively. The way a company is structured depends on numerous
factors, such as company size, type of business, geographic locations, products and
services, current projects and individual expertise. For many businesses, the corporate
structure can change based on external elements such as the economy or internal
factors such as turnover.

The reporting structure is a key element of the organizational chart because it identifies
how and where company authority flows. Organizational charts clarify what functions
employees perform, the manager to whom they report and whether any employees
report to them. In some organizational structures, an employee can report to multiple
managers for different elements of their job description. In certain cases, employees
who are not direct managers can hold authority with regard to their functional expertise.

Traditional Vertical Reporting Structure

One of the most common reporting structures is a traditional vertical organization,
where the person at the top has the most authority. This person can be the CEO,
business owner or other executive. He guides the people underneath him, who further
manage the employees at the bottom of the organizational chart. Visually, this kind of
reporting structure looks like a pyramid, with the most powerful person at the top and
the least powerful people at the bottom.

The number of layers within the pyramid will depend on the size of the business. For
many small businesses, there may only be two layers: the business owner and all the
employees. There may not be any need for middle management if the business has few
employees because the business owner may be able to oversee them all. As the
business expands, the owner may wish to add a layer of management between herself
and the employees so she can focus on other elements of the business aside from
overseeing employees.

Functional Reporting Structure

A variation of the traditional vertical reporting structure is the functional reporting
relationship. In this kind of organizational model, people are grouped by the kind of job
they do. People who work on similar kinds of tasks are overseen by a manager who has
expertise in that particular function of the organization.

For example, all marketing employees are overseen by a marketing manager, and all
research and development employees are overseen by a research and development
manager.

The marketing manager may report to a marketing executive who may report to the
CEO. Like the traditional reporting structure, the functional reporting structure can have
as many or as few layers of management as needed. In a small business, for example,
there may be a customer service department of two people who are overseen by a
customer service manager who can also be the business owner.

Divisional or Product Reporting Structure

For larger organizations that have different products or sales channels, a divisional
reporting structure might work best. This is also a variation on the traditional vertical
reporting structure. However, in this case, the company is organized based on product
line or product division.

For example, the consumer packaged goods division may have its own vertical
hierarchy, and the clothing division may have its own completely separate vertical
hierarchy. The leaders of both groups would then report to an executive team that
manages the entire organization.

Business chain-of-command titles in this case may include Marketing Associate –

Consumer Packaged Goods, Marketing Manager – Consumer Packaged Goods and
Marketing Director – Consumer Packaged Goods. The clothing division would have
similar titles like Marketing Associate – Clothing and Accessories, Marketing Manager –
Clothing and Accessories and Marketing Director – Clothing and Accessories. The two
Marketing Directors might then report to the same Marketing VP who would hold
authority for all marketing in the company.

Line-and-Staff Reporting Structure

The line-and-staff reporting structure is a variation on the vertical hierarchy that also
includes horizontal authority. Line refers to positions within the business that are
involved in daily operations required to run the company, such as sales or
manufacturing. As a result, sales departments and manufacturing or production
departments are line positions with line personnel and line managers.

Staff refers to positions within the company that indirectly support the daily operations of
the business and those with line roles. Human resources departments, legal
departments and marketing departments are usually categorized as staff and are
composed of staff personnel and staff managers.
Staff roles can have indirect authority over line roles, as they provide functional
expertise that is required to run the business. For example, in a small business, there
may be one human resources professional. While he may not directly manage the sales
teams, he is there to provide support and expertise to that department. If the sales
manager wanted to hire another salesperson, she would likely have to clear it with the
human resources professional and get his approval.

Flat Reporting Relationship

A flat reporting structure is when decision making is spread throughout an organization.
This means that there are no managers or senior-level employees. Everyone in the
organization has equal authority. This kind of organizational model is easier to
implement in small- and medium-sized businesses rather than larger ones.

Flat organizations are sometimes called self-managed companies, which means that
each employee takes responsibility for ensuring she meets her company goals. In order
for a flat organization to succeed, a sense of equality needs to be rooted in the
company culture, mission and values. Sometimes, informal hierarchies can take place
based on employee expertise or seniority.

In a small business, a flat structure can be successful if each employee brings specific
functional expertise and experience. For example, if a bakery has a cake specialist and
a bread specialist plus a customer service specialist, a flat business model ensures they
all have equal reign over their respective areas and have to work together to meet the
goals of the bakery.

Matrix Organizational Structure

Matrix reporting structures combine at least two different kinds of organizational models
based on the current business needs. This kind of reporting structure is a dynamic one
that changes according to the company’s current projects and objectives. Most
commonly, matrix reporting structures combine the functional and divisional reporting
structures. Sometimes, matrix structures also include a geographical component.

Matrix structures, which are also called hybrid structures, are best suited for larger
businesses that have multiple products, divisions or campaigns. For example, if a
business is launching a new product line for pet snacks, they may create a matrix
reporting structure. The marketing manager may report to the pet snacks product
director for the duration of the product planning and launch period in addition to her own
marketing director. This way, when working on the launch, she can directly
communicate with both directors to ensure greater visibility and control.

Creating a Company Reporting Structure for Your Business

Regardless of which reporting structure you choose for your business, it’s important to
ensure it aligns with your current and future business goals. If you are planning on
growing the business, for example, be sure to use an organizational model that can
scale with you. It’s also important to provide stability and clarity for employees so they
always know what their job description is and how they fit into the company as a whole.
References

About the Author

Related Articles
Organizational Structure Summary
What Is the Purpose of Organizational Structure?
What Is a Hierarchical Organizational Structure?
Advantage & Disadvantage of Organizational Structures
Functional Vs. Matrix Organization Structure
Nike's Flat Organizational Structure
Company Reporting Structure
About Flat Organization Structure
Organizational Structure Summary
Vertical & Horizontal Organizational Structure
Elements of Organizational Structure
Traditional Vs. Contemporary Organizational Structure
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Tall vs. Flat Organizational Structures in Management

HUMAN RESOURCES
About Flat Organization Structure
writer bio picture
By: Fraser Sherman
Reviewed by: Michelle Seidel, B.Sc., LL.B., MBA
Updated January 26, 2019
shapecharge/E+/GettyImages
RELATED
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If you've had to deal with a bad manager, you can see the appeal of a flat organizational
structure. In a flat organizational structure, there is no middle management, just the
boss and the employees. Some companies find this liberating, but it leaves other
organizations floundering.

Flat Organizational Structure

The purpose of the flat management structure is to have as little hierarchy as possible.
In a completely flat company, employees make their own decisions. At the game-design
company Valve, for instance, employees choose the projects on which they want to
work or seek out funding for their own goals.

Other companies may not go that far. They're "flatter" companies rather than completely
flat. The flat hierarchy reduces or removes middle management so there are as few
bureaucratic layers between the boss and the frontline employees as possible.

Why Go Flat?
When a startup begins, running flat is often the logical approach. If a company has only
a dozen employees, the founder may be able to supervise them all personally. Having a
formal management structure beyond "I'm in charge" seems unnecessary. Startup staff
members who have come from larger corporations may relish going flat as an
alternative to bureaucracy.

While larger corporations may convert to a flat hierarchy, it's more likely to happen when
a company starts flat and stays that way as it grows. If everyone enjoys the freedom of
having no bureaucracy and the ability to take things to the boss, then switching to a
more formal, less-flat structure won't make anyone happy.

Flat Hierarchy: The Pros and Cons

The appeal of the flat organizational structure is that it avoids some of the problems that
bog conventional management hierarchies.

Things move faster because decisions move up and down a smaller chain of command.

Proposals and ideas that middle management might shoot down go straight to the boss.
The fewer the people who get to veto an idea, the better the chance of good ideas
becoming reality.

New products and services reach customers faster.

Overhead is lower because there are fewer managers drawing a paycheck.

Employees enjoy the freedom that comes with choosing their own projects and
managing their own work.

When there's a problem, the most qualified person can step up and tackle it without
worrying about formal authority.

With no hierarchy, there's no risk of working under a toxic, bullying boss.

If employees don't like their colleagues, they can rearrange their work to deal with
people they like better.
Like any management concept, however, flat hierarchy has its downside as well.
As the company grows, it becomes harder to stay flat. Employing 15 staffers without
supervisors is more practical than 1,500.

The executives the company does employ may feel overwhelmed.

If the company is introducing a flatter hierarchy, managers may resist out of fear for
their jobs and status.

It can be much harder to hold employees accountable.

The more employees each individual executive oversees, the slower their responses
become.

Some employees are more comfortable with supervisors giving their job structure and
direction.

When employees have problems, they have no idea to whom they should take them.

Converting an established company with a conventional hierarchy to a flat hierarchy is a

massive undertaking.

Middle managers perform valuable services, such as communicating strategy, helping

employees prioritize and developing employees' careers.
The Invisible Hierarchy
Another argument against the flat management structure is that organizations can't
function without a hierarchy. If a company doesn't have a formal hierarchy, it will
develop an informal power structure instead. Unofficial leaders develop, and other
employees turn to them as if they were managers. Executives may rely on the same
informal structure to get things done.

An informal power structure doesn't have to be a bad thing, but it often turns out that
way. A formal hierarchy, run properly, has discipline and penalties for managers who
abuse their authority. It's harder to hold unofficial leaders accountable.

Several ex-Valve employees have said that in practice, getting support for their projects
and careers depended on currying favor with the "barons" who ran the company's
invisible hierarchy. Without a baron, your career didn't advance. Employees said that
barons who supported them could easily and arbitrarily withdraw support. Employees
may form informal teams too. Employees who like working with each other may
eventually turn cliquish, offering no support to other employees and their projects.

Making a Flat Hierarchy Work

One way to use the flat organizational structure effectively is to shoot for flatter rather
than completely flat. Reducing the layers of management peels away bureaucratic
sludge. Hiring enough managers to direct employees keeps things efficient. Opening up
lines of communication rather than having employees report only to the person above
them improves the employee experience and makes it easier to collaborate.

To make a flat or flatter organization successful, a business needs several things:

It has to be willing to let go of the classic big-business hierarchy. If it doesn't want

employees exercising more independence, then flat's not the way to go.

It allows employees to question hierarchical practices, such as annual employee

reviews and rigid schedules.

It has good communication technology that lets employees talk to management and
collaborate freely with each other.

It has an understanding that management is there to help employees rather than

employees existing to help management.

Decision making has to be transparent. "Because your supervisor says so" doesn't
provide the motivation employees need in a flat system.

Employees down in the trenches need to think like entrepreneurs. It's one thing for an
employee to have a good idea, but it's another to figure out how to market and make
money off the idea.

Leaders have to be able to take it when employees challenge their ideas.

Employees must be able to access the resources they need.

Staying Flat
A company that starts small and flat doesn't have to adopt a classic over-managed
hierarchy as it grows. It takes a conscious effort to keep things as flat as possible,
however. One way is to scale up gradually, adding managers and levels of
management when it becomes necessary.

The business world has many rules of thumb for figuring out when to scale up. One best
practice, for example, is to have no more than 10 people reporting directly to one
individual. The further over that limit things go, the harder it is for managers to manage
effectively.

Advancement in Flat Organizations

Career advancement is often associated with climbing up the corporate hierarchy until –
if you're both good and lucky – you crack the C suite. Employees who want to advance
may find a flat management structure baffling. How do you climb when there's no
hierarchy to ascend?

Be very clear about what you want from your career. In a flat organization, you have the
freedom to move from project to project. That's liberating, but it may not take you any
further than you are now. Knowing where you want to be can help you decide which
projects will get you there.

Realize you can develop and grow at the company without ascending to a new job title.

Put your best effort forth at work. When you don't have job titles or rank to impress
anyone, it's even more important that your work speaks for you.

Look for opportunities. If you don't have someone over you who is willing to mentor you
or help your career development, then it's up to you to do it yourself.

Look for challenges you can take on.

Ask yourself what skills you have that you're not using on the job yet. Consider what
skills you need and where you can learn them.

Figure out the growth areas in the company. If you work on them, that could put you on
a winning team.

Build networks of supporters and allies who can help you get where you want to be.

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