5 types of organizational structures for entrepreneurs

Organizational structures, and the way those structures are visually represented in charts and diagrams, are important because they help sort out three key aspects of business operations: specific job duties, reporting relationships, and decision-making authority.

That’s why it’s important to understand the different types of organizational structures and how management differs in each of them. For example, larger companies face opportunities and obstacles different from those of smaller organizations.

Before we examine some common organizational structures, let’s look at another way to think about these structures in terms of their complexity and general “shape”: the hierarchical versus the flat.

Hierarchical vs flat structures 

You can sort most types of organizational structures for businesses into one of two general types: hierarchical (sometimes called “mechanistic”) and flat.

Hierarchical structures are the most common and have been around the longest. This structure is somewhat flexible. It can be further classified according to specific corporate needs and a specific organizing factor.

The hierarchical structure creates a traditional bureaucracy. It can lead to a degree of inflexibility and red-tape delay. Many startup founders and CEOs say this approach stifles innovation and responsiveness.

The flat organizational structure seeks to address those issues. Startups and small businesses in the early stages of development often use this structure. It tends to be more suited to small, lean, and flexible companies, while large organizations usually find a flat structure unwieldy and unworkable.

One of the key characteristics of a flat structure is the relative absence of many layers of middle management. There are employees and team leaders or supervisors, but the chain of command in flat structures is quite direct and short.

Within these two larger categories, there’s a lot of room for variation.

1. Functional structure

A company with a functional organizational structure is divided into various departments or teams. These are often built around specific corporate functions, such as sales, marketing, IT, finance, and human resources.

A functional organizational structure can increase efficiency and productivity. This is because all of your corporate resources — people, knowledge and skills, budget, equipment, etc. — are organized around a specific function.

A disadvantage of the functional structure is that it adds layers of bureaucracy. It can slow down innovation, as many levels in the chain of command must individually approve new ideas or decisions.

2. Divisional structures

The divisional structure groups teams or departments into broader divisions. This is often done on either a geographic or product-line basis.

In the product-based structure, leaders create company divisions for specific product or service lines, each with its own manager. For example, a clothing company might create separate product-based divisions for women, men, and children. Separate marketing, sales, design, and customer service teams would serve each of the three lines. In many cases, this is better for product development.

The approach can result in decreased efficiency, though. With separate design teams in each division, for example, it may become more expensive to source numerous fabrics and trims. A more unified structure might save money because you could negotiate for larger quantities of materials.

3. Geographic structures

With geographically based structures, companies create divisions based on the specific regions or countries they serve. For instance, a company may find it more economical to be located near a specific material source. This means that a geographic structure makes more practical and financial sense.

A downside is that geographic divisions tend to decentralize large companies. Each separate location starts to operate independently of the others. That can lead to muddied thinking and strategy. A more united brand front might better serve the company’s needs and goals.

4. Matrix structure

The matrix structure organizes reporting relationships between employees and supervisors in a grid-like model. This differs from the direct lines of the more traditional hierarchical structure.

For example, workers who share skill sets may be assigned to separate divisions or departments but work together for a specific project. The result of this arrangement is that employees may report to more than one supervisor.

In visual representations of this kind of structure, these different reporting relationships are represented by solid lines (for primary supervisors) and dotted lines (for project-based, temporary supervisory roles).

This approach can become confusing and complicated. Multiple points of command can increase the possibility of conflict. Stability might create drudgery over time, but too little of it can provoke anxiety and frustration.

5. Network structure

The network organizational structure is most commonly associated with companies that either partner with other businesses or that outsource large segments of business operations to contractors and freelancers. It describes the relationship between various locations and those outside or third-party entities.

Visually, it might look a lot like a functional structure. But divisions represent each independent participant in the network instead of intracompany departments.

This type of approach works best when your company relies on outsourcing or joint venture partners. The structure more accurately reflects actual workflows and processes, both on- and offsite. It’s not generally the best choice when your company uses a minimal number of freelancers or contractors, or when it completes production almost wholly in house.

Combining different structures

Whether your company is in the early stages or employs thousands of people, it can be challenging to figure out your organizational chart.

Early on, founders should lean toward a structure that helps the organization run smoothly. Some leaders combine elements of a flat organization and a more traditional hierarchy to meet the demands of startup life. Even if you already use a more functional structure, for example, you can integrate elements of the matrix structure regarding how teams report to supervisors.

Whatever structure or structures you choose, get to know the options well and think of efficiency as well as the needs of your team members.