Or­ga­ni­za­tion­al structure – in­dis­pens­able for companies

So, you have just started your own company. The concept is in place, the starting capital is there, and your employees are highly motivated. However, somehow the initial spark turns out to be smaller than you’d hoped, and the business isn’t taking off. What is missing? You may have forgotten to create an or­ga­ni­za­tion­al plan. Like any other type of or­ga­ni­za­tion, companies need a clear structure. This is the only way for all parties to know where they stand within the company, what they are re­spon­si­ble for, and who has what authority to issue di­rec­tives. What is the best structure for your company?

Companies need a clear structure in order to function smoothly and to grow at the same time. Without it, there is no clear focus, neither for the man­age­ment nor for the employees. No one knows exactly what falls within their area of re­spon­si­bil­i­ty and to whom they have to report. This causes confusion and stress – and conflicts over re­spon­si­bil­i­ties are almost in­evitable. The con­se­quence is lack of co­or­di­na­tion and slow decision-making processes that can have a long-term effect on the economic ef­fi­cien­cy of a company.

A well thought-out or­ga­ni­za­tion­al structure, which defines command chains, control spans, and com­mu­ni­ca­tion channels in a com­pre­hen­si­ble way, helps to align all energies with the corporate goals. This can be achieved, for example, by clar­i­fy­ing the chain value, providing an overview of the work areas, and even reducing or­ga­ni­za­tion­al costs. It also helps new employees to orient them­selves within the company, identify superiors and sub­or­di­nates, and un­der­stand the big picture and their career op­por­tu­ni­ties. A clear or­ga­ni­za­tion­al structure therefore con­tributes to job sat­is­fac­tion and the employee’s sense of security. For this reason, it is often com­mu­ni­cat­ed as an or­ga­ni­za­tion chart, e.g. in the re­cruit­ing area on the company’s homepage.

Designing the right or­ga­ni­za­tion­al structure and pre­sent­ing it in a clear or­ga­ni­za­tion chart is not that easy. The biggest dif­fi­cul­ty is to create a solid and reliable structure in spite of complex and dynamic en­vi­ron­ments. In order to do justice to this task, you first need to know what such an or­ga­ni­za­tion­al chart consists of:

• Structure elements: All the action units to which the previous tasks in the company are dis­trib­uted; these include the smallest unit (the job), the body (a body with authority to issue di­rec­tives), the de­part­ment (a com­bi­na­tion of several units under the direction of one body), sup­port­ing de­part­ments, as well as teams and com­mit­tees, which are usually deployed for a limited time to handle complex projects.
• Structure re­la­tion­ships: The network of re­la­tion­ships between all the above-mentioned or­ga­ni­za­tion­al elements.
• Piping systems: Graphic elements like boxes, lines, and arrows that visually il­lus­trate the order and pathways of in­struc­tions.

The or­ga­ni­za­tion­al plan design process is now divided into two steps:

1. During the task analysis you identify all goals of your company, translate them into the main company tasks, and break them down into subtasks. The clas­si­fi­ca­tion can be according to per­for­mance (e.g. physical/mental), object (e.g. a product), ear­mark­ing (primary or secondary tasks), phases in the man­age­ment process, or the rank in the hierarchy.
2. The synthesis of tasks rep­re­sents the actual or­ga­ni­za­tion­al activity for you as the founder of the company. Here, you take the subtasks de­ter­mined in task analysis and combine them into mean­ing­ful task complexes that are assigned to the cor­re­spond­ing jobs. The greatest challenge here is to make optimum use of existing resources and ensure smooth co­op­er­a­tion between all structure elements.

The following six com­po­nents are used to dif­fer­en­ti­ate between the usual forms of or­ga­ni­za­tion­al plan in an en­ter­prise:

• Chain of command (long or short): The basic component of the or­ga­ni­za­tion­al structure; a chain of command means an unbroken line of authority between the top man­age­ment and the employees at the lowest level. It specifies who is to report to whom (keyword: reporting).
• Control span (wide or narrow): The more sub­or­di­nates a su­per­vi­sor can or must ef­fec­tive­ly manage, the further the control span of an or­ga­ni­za­tion­al plan.
• Cen­tral­iza­tion (cen­tral­ized or de­cen­tral­ized): This component describes whether the decision-making in the company takes place at a central point (in the man­age­ment) or de­cen­tral­ized (in con­sul­ta­tion with the employees). The latter variant is con­sid­ered more de­mo­c­ra­t­ic, but can also slow down the decision-making process.
• Spe­cial­iza­tion (spe­cial­ized or dif­fer­en­ti­at­ed): Also referred to as division of labor; describes the degree to which tasks in a company are broken down into subtasks and divided into in­di­vid­ual jobs. With a high degree of spe­cial­iza­tion, employees can become experts in their field and work more pro­duc­tive­ly. A low level of spe­cial­iza­tion en­cour­ages the training of flexible, all-round talent.
• For­mal­iza­tion (formal or informal): In formal or­ga­ni­za­tion­al struc­tures, jobs and processes are strongly regulated and stan­dard­ized in­de­pen­dent­ly of the executing person. An informal or­ga­ni­za­tion­al structure, in turn, gives the in­di­vid­ual more freedom to shape their work based on their pref­er­ences, abilities, and per­for­mance. This enables employees to look beyond their prover­bial horizons and to orient and educate them­selves in other de­part­ments.
• De­part­ment formation (rigid or loose): In English, the term de­part­men­tal­iza­tion means the process of grouping jobs together to realize joint projects. Rigid de­part­ment formation therefore occurs when all de­part­ments are au­tonomous and hardly interact with each other, while a loose concept strongly promotes col­lab­o­ra­tion.

The in­di­vid­ual com­bi­na­tion of these com­po­nents results in different forms of or­ga­ni­za­tion­al struc­tures, which can basically be arranged on a spectrum between “mech­a­nis­tic” and “organic.”

• Mech­a­nis­tic: The term mech­a­nis­tic refers to the tra­di­tion­al ap­proach­es to or­ga­ni­za­tion­al structure, which include the func­tion­al and di­vi­sion­al or­ga­ni­za­tion­al structure as well as the matrix or­ga­ni­za­tion. These kinds of or­ga­ni­za­tion­al structure are char­ac­ter­ized by a tendency towards a fixed chain of command, narrow control spans, and a high degree of cen­tral­iza­tion. Jobs and de­part­ments are com­par­a­tive­ly highly spe­cial­ized, for­mal­ized, and rigidly sub­di­vid­ed.
• Organic: The organic part of the spectrum includes various in­no­v­a­tive and ex­per­i­men­tal or­ga­ni­za­tion­al struc­tures, which in summary are often referred to as “flat hi­er­ar­chies.” The chain of command is less strict, but control spans remain. In the com­po­nents cen­tral­iza­tion, spe­cial­iza­tion, for­mal­iza­tion, and de­part­men­tal­iza­tion, these concepts are also in contrast to the mech­a­nis­tic part of the spectrum. 

In or­ga­ni­za­tion­al theory there is a selection of struc­tur­al ar­che­types that are fre­quent­ly used. Bear in mind, however, that many companies tend to use hybrid models that combine the char­ac­ter­is­tics of different or­ga­ni­za­tion­al struc­tures.

The ad­van­tages of this easily scalable concept are that employees can spe­cial­ize in their re­spec­tive area and thus work more ef­fi­cient­ly. Clear areas of com­pe­tence and re­spon­si­bil­i­ty prevent ac­tiv­i­ties like ac­count­ing from du­pli­cat­ing in the various de­part­ments (this is referred to as “re­dun­dan­cies”). At the same time, the func­tion­al structure allows quick decision-making. This makes it par­tic­u­lar­ly suitable for smaller companies that produce a rather narrow range of stan­dard­ized goods in large numbers and at low cost.

Dis­ad­van­tages are the potential barriers that can arise between the various func­tion­al areas if such a rigid division is formed. The more a de­part­ment works for itself, the worse its ability to com­mu­ni­cate and its un­der­stand­ing of other de­part­ments is – sometimes also referred to as “de­part­men­tal self­ish­ness,” which can manifest itself in con­flict­ing interests, conflicts and, in the long term, also in inhibited pro­duc­tiv­i­ty. The lack of ori­en­ta­tion towards a specific market, target group, or product and the high degree of stan­dard­iza­tion and for­mal­iza­tion also limit any potential for in­no­va­tion.

In this highly adaptable structure, each de­part­ment can con­cen­trate on its re­spec­tive field of activity and thus work faster, more strate­gi­cal­ly, and in a more co­or­di­nat­ed fashion. The resulting autonomy leads to greater employee mo­ti­va­tion. At the same time, the more dif­fer­en­ti­at­ed al­lo­ca­tion makes it possible to make in­di­vid­ual business ac­tiv­i­ties more trans­par­ent and to measure and evaluate their per­for­mance precisely. For these reasons, di­vi­sion­al or­ga­ni­za­tion­al struc­tures can be found primarily in larger companies that offer a wide range of spe­cial­ized products and services for various sales markets. A sub­di­vi­sion according to regions is par­tic­u­lar­ly suitable for in­ter­na­tion­al­ly active companies. In these cases, decision-making is usually de­cen­tral­ized.

The fact that di­vi­sion­al struc­tures are more dif­fer­en­ti­at­ed and therefore require more spe­cial­ized managers is one of the reasons why im­ple­men­ta­tion is as­so­ci­at­ed with higher costs and greater co­or­di­na­tion effort. If the in­di­vid­ual de­part­ments work au­tonomous­ly or if they are far apart ge­o­graph­i­cal­ly, there is also the threat of di­vi­sion­al self­ish­ness and the du­pli­ca­tion of business ac­tiv­i­ties. In the worst case, this can lead to a dis­crep­an­cy between the goals of the divisions and the actual core goals of the company.

The strength of the matrix or­ga­ni­za­tion lies in the fact that it can be flexibly adapted to better cope with fluc­tu­a­tions in capacity uti­liza­tion in the company. The shorter com­mu­ni­ca­tion channels and the avail­abil­i­ty of spe­cial­ized contacts at all times give better dynamics to decision-making and trans­mit­ting in­for­ma­tion. Due to its com­plex­i­ty, however, the matrix or­ga­ni­za­tion is mainly used by large, in­ter­na­tion­al­ly active companies like Starbucks and in project-oriented in­dus­tries like con­struc­tion and vehicle de­vel­op­ment.

It is also this com­plex­i­ty that not only ensures high planning and im­ple­men­ta­tion costs, but can also cause confusion among employees. Potential points of con­tention here are dual man­age­ment: cross-fer­til­iza­tion of re­spon­si­bil­i­ty areas can lead to conflicts of com­pe­tence and make com­mu­ni­ca­tion, decision-making, and the as­sess­ment of per­for­mance more difficult. For this reason, many companies in practice appoint just a single au­tho­rized person (usually the function-related de­part­ment manager), who tem­porar­i­ly assigns tasks to sub­or­di­nates in the re­spec­tive product areas.

Although there is a hierarchy in this kind of or­ga­ni­za­tion chart, man­age­ment is not rep­re­sent­ed at the top, but instead in the middle of the or­ga­ni­za­tion. This implies the ideology that the CEO in­ter­venes less directly in the work of employees and instead com­mu­ni­cates their business visions from the inside out. There are only a few levels of middle man­age­ment, so in­di­vid­ual de­part­ment heads are re­spon­si­ble for more employees but the chains of command are cor­re­spond­ing­ly shorter.

Flat hi­er­ar­chies therefore in­creas­ing­ly rely on the ini­tia­tive and in­di­vid­ual re­spon­si­bil­i­ty of employees. At the same time, they make it possible to provide feedback directly to a relevant contact person instead of having to pass on their ideas through the tra­di­tion­al, lengthy bu­reau­crat­ic route to the top. While tra­di­tion­al concepts provide for a rel­a­tive­ly strong sep­a­ra­tion of semi­au­tonomous de­part­ments, the limits are less strict for flat hi­er­ar­chies.

This allows more flex­i­bil­i­ty in the work design and is intended to increase employee mo­ti­va­tion. Flat hi­er­ar­chies are par­tic­u­lar­ly popular in smaller, younger companies like start-ups. As a company grows out of this stage, however, the tendency is to counter the in­creas­ing com­plex­i­ty of business ac­tiv­i­ties with more de­part­ments and a longer chain of command. Ex­pe­ri­ence shows that just a few of these companies maintain their original or­ga­ni­za­tion­al struc­tures; examples include the video game developer Valve Cor­po­ra­tion and the web hosting service GitHub Inc.

The biggest dis­ad­van­tage of a lax hi­er­ar­chi­cal structure is that it is not equally appealing to all employees, since authority to issue di­rec­tives and re­spon­si­bil­i­ties are not always clear. Therefore, it can be difficult for a new employee to recognize their exact place in the company at the beginning. Most or­ga­ni­za­tion­al struc­tures of this kind have not been tried and tested for very long – so original concepts are prac­ti­cal­ly always a stab in the dark for you as a founder.

To be suc­cess­ful with your company, you must first determine an or­ga­ni­za­tion­al plan that best fits your goals. Which or­ga­ni­za­tion­al structure is the best – whether it’s a tra­di­tion­al/mech­a­nis­tic or modern/organic one – is still up for debate.

If you want to clear areas of re­spon­si­bil­i­ty and strin­gency, the func­tion­al model is probably best for you. However, if you have a wide range of spe­cial­ized goods and you are also active in the in­ter­na­tion­al market, you should consider a hybrid concept and combine a func­tion­al structure with a di­vi­sion­al one to form a matrix or­ga­ni­za­tion. But this isn’t the end of the story: Flat hi­er­ar­chies and equal team models are on the rise, because they allow closer com­mu­ni­ca­tion and co­op­er­a­tion between employees and promote mo­ti­va­tion.

At the end of the day, there is no perfect solution – every good or­ga­ni­za­tion­al structure always rep­re­sents a com­pro­mise between a fixed structure (in­te­gra­tion) and the deeply dynamic company en­vi­ron­ment (dif­fer­en­ti­a­tion).

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