Organizational design refers to how an organization is structured to execute its strategic plan and achieve its goals. In practice, it’s not so simple because people work together to use information, materials, systems, processes, and each other to get human work done. What different types of organizational design are there? And what are each type’s advantages and disadvantages? Show
Our complete guide on organization design will give you an in-depth look at what organizational design is and how it works. If you are new to the world of OD, you might want to look at it and come back for the details. Rather than the broad field of organizational design, this article helps us understand the main types of organizational structures, including
Let’s explore! What types of organizational design are there?There is no one best method, and there are no right or wrong types of organizational design. Instead, each organization must determine what works best for them. As a result, you may find some elements of every design structure in a single organization. Organizational designs have changed rapidly over the past couple of decades, primarily because of the accelerating speed of change. Changes that once took a decade or more now happen in months or weeks. Last year, the retail industry managed a ten-year change in three months. As a result, only agile, forwarding-looking organizations have been able to capitalize on the opportunities they created.
Free HR Guide Stakeholder Management forHR LeadersA guide to increasing the effectiveness of your HR projects and making even more of an impact on your organization. We can divide structures into traditional and contemporary designs. We base conventional designs on the practices before the growth of organizational psychology, driven by theorists such as Douglas McGregor (The Human Side of Enterprise, 1960). Traditional organizationsSimple structureToday’s small businesses operate much as they have for millennia. An entrepreneur hires people to handle the tasks and supervises all of them. We characterize a simple structure as:
These organizations function very well until they grow to a larger number of employees and control becomes unmanageable.
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HR Leadership At that point, most often become functional structures—the beginning of hierarchical design. Self-contained hierarchiesFrom about 1870 to 1914, the second industrial revolution was when Europe and the United States surpassed Britain as world industrial powers. The change spawned a new upper class of industrialists who created large companies to manage their operations. They built them on the hierarchical nature of their social classes. By WWI, that hierarchical model had firmly entrenched itself as the best means to deliver efficient and effective industrial output. The self-contained design dominated until the late 1970s. There were clear boundaries between the company and its suppliers, customers, and competitors. Inputs arrived, went through a series of processes, and left as a complete product or service.
Try our need tool to determine the direction in which you want to progress based on your HR career goals and capabilities. Get StartedThe hierarchy or pyramid is still the most common type of organizational structure, simply because it is easiest to design and manage, and there is a clear chain of command. Hierarchies limit the span of control. Businesses seek to limit the number of people managers supervise to allow time for their other work. The ideal span of control varies according to the work, the supervisor’s ability and the expertise and ability of the people supervised, among other factors. In production-type work, first-level supervisors can have a wide span of control. The largest span we have seen is a customer services operation, with a span of 30 agents. The work is routine, tightly controlled, and monitored. Supervisors have a real-time dashboard display of performance metrics. Advantages
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Functional designHierarchies organized themselves primarily along functional areas such as Sales, Marketing, or Human Resources. In the beginning, they separated into management, clerical, and production groups. As organizations grew, they split into more specialized functions, with all the advantages and disadvantages of their hierarchies. Divisional designAs companies began making different products, acquiring other companies, or expanding into new geographical areas, they often split into divisions. Each division has its separate profit-and-loss statement (P&L) and a division president who reports to the CEO. The separation makes the performance of each division clear to everyone, including investors. It also means that it doesn’t affect other parts of the business if a division fails. A subsidiary is not a division. It is a separate entity. One way a division differs from a wholly-owned subsidiary is that employees in a subsidiary are not members of the parent organization. Divisional structures can take on many forms. Companies define them by market, product, or location, or they can be part of a matrix of functions and other business units. Note that the business entities may not be divisions with a separate P&L but a department or other business unit. These types of organizational design are not mutually exclusive. Organizations often have all three. As an illustration, see this organization chart for Stellantis. Market-oriented divisionsFor companies that have differentiated market segments and know them well, divisions by the market are ideal. For example, many automobile brands have a niche customer base. Those companies must adapt themselves to the tastes of their customer segment. Sales managers in businesses like auto dealerships can develop strong relationships with customers by providing a personalized touch. Customers respond with loyalty to the brand. An example is the organizational structure of Fiat Chrysler before it spun off Ferrari as a separate company. Each brand may have segments within it based on vehicle type that cater to different customer loyalties. For instance, Ferrari has a Brand Diversification Division and organizational elements that cater to motorsports and sporting activities. Product-oriented divisionsProduct divisions can work well by giving opportunities to people with good business ideas. The competitive environment can be healthy for innovation in each division. However, it can lead to rivalry if they must compete for resources and support. Product-oriented divisions can often be in the same general industry. For example, Honda Motor has separate divisions for motorcycles, automobiles, and aircraft. Geographical divisionsOperating geographical business units enables a company to adapt its products and services to the host location’s culture, needs, and tastes. It can be a challenge to manage coordination and control. Still, decision-makers who are a part of or very familiar with the culture and preferences of the population can overcome that. The advantage is that the company can expand its brand presence globally while catering to the customers and suppliers in the host country. Johnson & Johnson has been very successful in leveraging regional procurement centers to maintain quality while controlling costs. Advantages
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Subsidiary or division?Whether a company operates a foreign subsidiary or a geographical division depends a great deal on the regulatory and taxation environment of the target location. The company must also consider that the decisions of the parent company may not bind a subsidiary company. Whether a company wants to maintain a single global company culture is also a factor. It is much more difficult in a subsidiary. Horizontal types of organizational designOne way organizations overcome the communication and coordination challenges in traditional vertical organizations is to develop a horizontal overlay of linkages among the organization’s parts. From about 1980 to mid-late 1990, teams organized themselves around complete workflow processes rather than tasks, leading to flatter structures and cross-functional teams. The rise of the quality movement and Six Sigma drove the new team orientation and inspired new types of organizational design. The primary guiding principle of those movements was that the customer is the judge of quality, so we re-engineered processes with the customer in mind and with the customer’s input into the design. We also included suppliers in the plan for a “whole-process” approach. Over time, the horizontal structure has developed into sub-types of organizational design, including team-based, modular, and virtual forms. Advantages
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Matrix organizationAn organization may have one or more cross-functional teams that form for special projects. An individual may work for a department manager and on a project led by a project manager. When the project ends, the individual goes back to the department or takes on another project. Many types of companies, such as engineers and construction firms, operate almost entirely on this model of matrix structure. AdvantagesDisadvantages
Team-based organizationIn the second era of organizational design, most organizations had not yet become the “teams of teams” that General Stanley McChrystal envisioned in 2004. His experience in defeating Al Qaeda taught him that independently operating teams were far more effective than central planning. He carried the lessons taught in warfare into the business world, just as leaders had in the significant conflicts before them. Instead of having a manager who determines objectives and facilitates achieving them, teams work together to achieve their goals. Thus, for team leaders, supervisory skills are much less critical than collaboration and group problem-solving. Team selection is critical. For this reason, organizations must choose members based on their values and motivations to create a mix of creativeness, need for structure, and independence. Teams require regular reviews of their effectiveness and facilitation to root out and resolve conflicts that may hamper the mission. Advantages
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Learning organizationA particular type of team structure is the learning organization, which has developed to learn continuously, adapt, and change. Such an organization gives its people the freedom to adapt to customer needs as they arise. It requires a strong culture and commitment to common goals. Advantages
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Modular organizationA modular organization comprises independent bodies that can rearrange and work with different other departments as needed. Businesses divide into small strategic units that focus on specific elements of the organization’s mission. They are characterized by weak dependency and high flexibility. An example is the GNU Health Modular Design. Advantages
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Virtual organizationsIn 1990, a type of structure developed was not an organization but a digital network of cooperation. The headquarters might be the only established part of the business, as in Uber and Airbnb. Those businesses operate vast networks of independent operators. Other companies that use virtual teams are Amazon, Reebok, Nike, Puma, and Dell. Organizations are now using variations of virtual structure with outsourced tasks, positions, and even projects. Advantages
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Project-based organizationOne example of a virtual organization that is project-based has been with us since the beginning of the internet. It is the human capital technology industry. It is not unlike other ERP vendor groups. The work is seasonal, driven by the budget cycle. As a result, companies find themselves supporting implementation consultants who may be idle during times of low demand. To offload the burden, these companies outsource their implementations to independent partners and subcontractors. The partners themselves are virtual, project-based organizations. One creative way they deal with the slack time is to engage consultants in developing software products and services. Advantages
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Network organizationA network organization is a group of cooperating entities: individuals, teams, organizational units, or organizations who work together to achieve a common goal. They have no connection but the desire to work together for mutual gain. They govern their relationships through contractual agreements and work together through a collection of connecting and collaboration technologies, such as Microsoft Teams. By 2015, Deloitte’s Human Capital Trends reported that “the ‘on demand’ and ‘on tap’ talent markets were challenging companies’ ability to manage their total workforce.” Then, in 2021, CEOWORLD Magazine predicted that 80% of the total workforce could be freelancers by 2030. Advantages
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Welcome to the organization of the future – Contemporary organizational designIt has arrived. Digital transformation and the rapid organizational change of the COVID-19 pandemic have shown us a new future.
Organizations are transforming themselves into dynamic, empowered networks—purpose-driven, market-focused, and agile. However, the change is far from complete, and we don’t expect it to slow down soon. These organizations base themselves on five principles:
For more information on these principles, read our complete guide on organizational design. The organization of the future includes these three concepts:
A final wordAll types of organizational design have their merits and drawbacks. None of them are exclusive, and an organization must continually develop its structure to adapt to current and future challenges. Even the lowly hierarchical functional model has advantages in the right situation. This article aims to make you aware of the different ways to structure and grow an organization. As yours reinvents itself, you can better understand the potential benefits and challenges. We hope you enjoy the journey. |