The 9 Building Blocks of a Business’s Organizational Structure [With Diagrams]

I know that behind every great company, division, or team is a great organizational structure — a structure tailored to a company‘s, division’s, or team's goals and one that helps employees understand how they fit into the bigger picture. These are the fundamental building blocks of your business.

A couple of months ago, I drew my own organization chart for the first time, and I was pretty proud seeing my company structure outlined in front of me.

Aside from my fulfillment, the organizational structure helped the team understand their position within the company, the team they’re a part of (even though they’re not always working together), and the significant role each person plays.

Without the proper structure and building blocks in place, a business may fail to function efficiently or even collapse. However, new business owners or businesses experiencing rapid growth may not know which organizational structure is best for them and why.

So how do you decide which type of organizational structure is the best fit for your company, division, or team? Before we can answer that, we first need to understand how an organizational structure is built.

Let's explore nine key components of organizational structure using some visual examples.

1. Chain of Command

One of the most basic elements of an organizational structure, the chain of command, is exactly what it sounds like: an unbroken line of authority that extends from the top of the organization (e.g. a CEO) all the way down to the bottom. Chain of command clarifies who reports to whom within the organization.

2. Span of Control

Span of control refers to the number of subordinates a superior can effectively manage. The higher the ratio of subordinates to superiors, the wider the span of control.

3. Centralization and Decentralization

Who makes the decisions in an organization? If decision-making power is concentrated at a single point, the organizational structure is centralized. If decision-making power is spread out, the structure is decentralized.

While a decentralized structure promotes a more democratic decision-making process, it can also slow it down, making it more difficult for organizations to operate efficiently.

4. Specialization

Also known as division of labor, specialization is the degree to which activities or tasks in an organization are broken down and divided into individual jobs.

High specialization can be beneficial for an organization, as it allows employees to become “masters” in specific areas, increasing their productivity as a result.

However, low specialization allows for more flexibility, as employees can more easily tackle a broader array of tasks (as opposed to being specialized for a single task).

5. Formalization

Similar to specialization, formalization deals with how jobs are structured within an organization. The key differentiator here is that formalization also considers the degree to which rules, procedures, and other mechanisms govern an employee’s tasks and activities.

A formal organizational structure seeks to separate the individual from the role or position, as the role or position stays the same regardless of who’s holding it. An informal organization, on the other hand, places more value on the individual. It allows for the evolution of a role or position based on an individual’s preferences, skill set, etc., and places less importance on what team or department that individual is part of.

6. Departmentalization

Departmentalization refers to the process of grouping jobs together in order to coordinate common activities and tasks.

If an organization has rigid departmentalization, each department or team is highly autonomous, and there is little (or no) interaction between different teams. In contrast, loose departmentalization entails that teams have more freedom to interact and collaborate.

It’s worth noting that the way in which an organization departmentalizes is often used as a proxy for the overall type of organizational structure that organization has.

7. Functional Structure

A functional structure organizes a company into departments such as sales, marketing, finance, HR, etc.

A functional structure creates defined roles and specialists but can also lead to teams working in silos and create communication problems.

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8. Divisional Structure

A divisional structure organizes teams by products, markets, or geographic locations, enabling each division to operate independently and focus on specific needs.

This structure offers flexibility and fosters accountability by division, and divisions act like mini-businesses, usually with their own management and departments, as you can see in the infographic below.

The divisional structure can be resource-intensive and inefficient if roles are duplicated across divisions without proper coordination. It best suits large organizations such as global brands McDonalds, Pepsi, or Johnson & Johnson.

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9. Matrix Structure

A matrix structure combines functional and divisional structures.

Employees report to project managers, which promotes collaboration and flexibility and enables cross-functional teamwork.

However, it can become complex, create conflicting demands, and lead to confusion. It works best for organizations needing collaboration across departments or managing multiple projects simultaneously.

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The Right Organizational Structure for You

Currently, my business probably uses a centralized structure, which is fine since my operation is very small. However, all decisions funnel back to the central point (me), which I don't love!

Researching the types of organizational structures helps me see where I'd like to take my business and gives me something to aim for.

It‘s important to note that company size isn’t what determines the right structure for you. Before deciding on your company’s structure you'll want to think about a range of things like your company culture, product/service, the industry, projected growth, and so much more.

If you want to learn more about functional organizational structures, as well as other types of structures, download the full resource below.

Editor's note: This post was originally published in November 2014 and has been updated for comprehensiveness.