17 Types of Organizational Design and Structures
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?
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
- how the design structures came to be,
- what makes them successful, and
- what makes them subject to failure.
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.
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).
Today’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:
- having little or no departmentalization;
- a broad span of control;
- a central authority, usually a business owner; and
- little or no formalization in terms of established structure.
These organizations function very well until they grow to a larger number of employees and control becomes unmanageable.
At that point, most often become functional structures—the beginning of hierarchical design.
From 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.
The 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.
- Provides well-defined career and promotion paths.
- Encourages career specialization.
- Creates a sense of belonging.
- The structure clearly defines authority and responsibility.
- Defined organization structures are easily scalable.
- The hierarchy creates bureaucracy that slows down innovation and adaptation to change.
- Organizational silos can spawn rivalries and competition for resources between units.
- It encourages talent hoarding and discourages movement outside the career group.
Hierarchies 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.
As 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.
For 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 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.
Operating 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.
- Local autonomy promotes independence for a faster response to local changes or customer needs.
- It may be accepted more readily by local governments and businesses.
- Autonomy can lead to duplication of resources.
- Lack of communication can result in a company competing with itself.
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 design
One 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.
- Greater employee satisfaction because of more freedom and autonomy.
- High levels of cooperation between different functions.
- Emphasis on innovation helps maintain and grow market positions.
- Better communication and reporting.
- Lack of control of independent cross-functional teams.
- Management must “let go of the reins” and develop a peer-like relationship with subordinates.
An 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.
- Allows project managers to choose individuals by the needs of a project.
- Encourages employees to use their skills in various capacities aside from their original roles.
- It makes the organization more dynamic and malleable.
- Conflicting needs can create friction between department managers and project managers.
In 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.
- People working as a group can be much more creative than individuals.
- The collaborative working style and independence can be motivating.
- As team members build trust, their capability multiplies.
- Team structures can take a long time to implement. It takes time for people to adapt to the freedom and responsibility of independent decision-making.
- Intense training and facilitation are essential to establishing mission orientation and a collaborative way of working.
- Interpersonal conflict can derail the team or cause it to split into factions.
A 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.
- Organizations that are innovative and knowledgeable through learning create a significant advantage over their competitors.
- The organization must have knowledgeable employees willing to share their knowledge and apply it.
- It requires team design and excellent leadership.
A 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.
- Enables an organization to be more flexible to restructure as needed.
- The organization can respond quickly to market needs.
- The organization can fill its own needs with a modular unit operating interdependently within the whole. That could describe many shared services operations.
- Loose coupling can create intellectual property risks.
- Lack of connections can interfere with effective communication.
In 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.
- The only organizational overhead is the headquarters location and digital network.
- The company avoids the burdens of the employee/employer relationship, except in jurisdictions like California that have passed strict laws to outlaw the practice.
- Quality control can be a problem. Organizations control that with customer satisfaction ratings and service call metrics.
- Individuals may drop out of the arrangement at any time. Uber recently experienced severe service issues in certain areas because drivers were leaving.
One 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.
- It is a quick way to produce highly complex product systems.
- It facilitates planning, implementation, and control.
- Leads to strong teams that focus on project goals.
- Requires close attention to quality control through customer feedback.
- Requires detailed project tools and support.
A 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.
- Individual entities realize the benefits of a large organization without needing to manage one.
- Once entities establish a relationship, it can relieve them of some of their marketing burden.
- It can require redundancies to mitigate disruptions in the supply chain.
- Requires close attention to risks and liabilities.
Welcome to the organization of the future – Contemporary organizational design
It has arrived. Digital transformation and the rapid organizational change of the COVID-19 pandemic have shown us a new future.
“As digital transforms the business landscape, the successful organizations of the future will likely be those that can move faster, adapt more quickly, learn more rapidly, and embrace dynamic career demands.” — Deloitte
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:
- Specialization Principle: Boundaries should exist to encourage special skills without interference from the dominant culture.
- Coordination Principle. Activities should be coordinated in a unit to eliminate the need for cross-boundary coordination.
- Knowledge and The Competence Principle. Responsibilities should allocate to the person or team best fit to do them.
- Control and Commitment Principle. There should be control processes to manage the balance between effective control and maintaining engagement.
- Innovation and Adaptation Principle. Organizational structures should be sufficiently flexible to adapt to the changing world.
For more information on these principles, read our complete guide on organizational design.
The organization of the future includes these three concepts:
- The Holonic Enterprise Model: A collection of collaborative entities in which each member is a holon with autonomic and cooperative capabilities. It is flexible enough to adapt to any external or internal change.
- The McMillan Fractal Web: A framework in which an organization can grow organically using a fractal paradigm replicating successful adaptations.
- Ken Wilber’s AQAL Model: Drawing separate paradigms together into a network of enriching approaches called “The theory of everything.” It considers developmental psychology in the framework of the whole being. AQAL is an acronym for “all quadrants, all levels, all lines, all states, all types.” It is a design for building a sustainable future.
A final word
All 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.