Several key factors influence the choice of organizational structures, influencing how teams, departments, and decision-making power are arranged within an organization.
Business managers need to remember that they need to adapt organizational structure to changing market conditions, the size of the business or the need to take decision ‘locally’ when the business is operating globally.
How to choose a suitable organizational structure?
Here are some examples of different organizational structures that are suitable for different types of business organizations:
- Organizational structure for a start-up. A very small business with a few employees will be using an entrepreneurial structure with the owner as the entrepreneur in the center of all business operations.
- Organizational structure for a growing business. A growing business will need to hire additional workers and managers as controlling the work of all the employees could become too time-consuming for one person. Typically, the responsibilities will be divided by function or type of operation.
- Organizational structure for a large business. A large-size business which have achieved successful expansion in another area or region may need to go through further structural changes such as decentralization or delayering. A decentralized organization structure is more customer-focused allowing for decisions to be made based on local market knowledge of customer tastes and preferences.
- Organizational structure for a multinational business. A global business with operation in many countries will most likely need to cut through traditional divisions and departments, if new projects were proposed. Project teams will be established using the matrix structure.
Factors that influence organizational structures
Here are some of the most important factors that could determine the internal structure of a business.
INTERNAL FACTORS
- Business size. An informal structure with casual links between staff might be adequate to allow smooth functioning of a small business, but is unlikely to work well in any business other than very small ones with a clear leader. When more employees are appointed, there is need for a formal structure indicating the positions of people and their level of authority. The organizational structure will change with the size of the business, but it should remain flexible enough to meet the changing needs of a business as it develops.
- Business objectives. Organizational structure of a business must reflect the objectives and needs of the firm. What are the organization’s goals and how does it plan to achieve them? A growth-oriented company might choose a flexible and decentralized structure, while a risk-averse one might prefer a more hierarchical and centralized approach. For example, if the objective is to expand into other countries, then the organizational structure must be adapted to allow for having different regional marketing departments.
- Management style. This refers to the culture of the business managers. If managers use the Theory X approach, then small spans of control would be adopted in a tall hierarchical structure. The Theory Y manager would adopt very few levels of hierarchy in a matrix team-based structure.
- Complexity. As an organization grows, its structure often becomes more complex to manage communication, coordination and decision-making. Larger organizations might adopt divisional structures or matrix structures to handle increased workload and specialization.
- Culture. An organization’s culture, including its values, norms, and beliefs, can shape its structure. A collaborative and innovative culture might favor flatter structures with less bureaucracy, while a traditional culture might prefer hierarchical structures with clear lines of authority.
- People. The skills, experience, and preferences of employees can influence the choice of structure. A skilled and empowered workforce might thrive in a decentralized structure, while a less experienced team might require more guidance and direction from a centralized structure.
- Technology. Advancements in technology can enable new ways of working and communication, leading to changes in organizational structure. For example, cloud-based tools can facilitate collaboration and decentralization, while automation can reduce the need for hierarchical layers.
EXTERNAL FACTORS
- Economic conditions. External business environment such as economic boom or economic recession will have impact on an organizational structure of the business. For example, delayering to reduce overhead costs during economic downturn will reduce levels of hierarchy flattening the organizational structure and shortening the chain of command.
- Uncertainty. A stable and predictable environment might allow for a more rigid and formal structure, while a turbulent environment might require a more flexible and adaptable structure.
- Competition. The nature of competition within an industry can influence the choice of structure. Organizations facing intense competition might need to be fast and agile, favoring flatter structures with quick decision-making.
- Regulations and laws. Government regulations and industry standards can also influence organizational structure. For example, regulations on safety or data privacy might necessitate specific procedures or reporting structures.
- Technology. Adopting new technologies can lead to reducing the need for certain types of employees, therefore reduce the size of the organizational structure. In addition, decentralization with making middle management layers less important can be made easier by the flow of information through IT systems.
It is important to note that there is no single ‘best’ organizational structure. The optimal structure for one organization might be completely unsuitable for another. The key is to choose a structure that aligns with the organization’s internal and external context and helps it achieve its goals effectively.
