Business organisational structure

Flat organisational structure is an organisational model with relatively few or no levels of middle management between the executives and the frontline employees. Its goal is to have as little hierarchy as possible.

How does a flat organisational structure work?

In a small business with only a few employees, a flat or horizontal structure often makes sense. Staff usually report directly to the business owner, and there is often no formal management structure.

If there is a management layer, the chain of command is usually short. Each manager is responsible for a wide area or group. Employees report to one or a small number of managers and are encouraged to take part in decision-making. Managers can often make decisions without much involvement from senior leaders.

What are the advantages of a flat organisational structure?

While it will not suit all types of organisations, the benefits of a flat structure are:

• better communication and relationships between different roles
• better team spirit as there is less hierarchy
• simple, faster decision-making as the chain of command is shorter
• better ability for the business to change and adapt
• greater job satisfaction when employees are given more autonomy
• more self-direction can lead to more innovation and efficiencies
• ability to lower operational costs

A flat structure can work well for small and medium-sized organisations. It can also suit businesses that start small and keep this approach as they grow.
For larger organisations with hundreds or thousands of employees, a flat structure is usually less practical. These organisations often use a hierarchical organisational structure.

What are the disadvantages of a flat organisational structure?

Like any other organisational model, flat hierarchies have their downsides. The common disadvantages of a flat organisational structure are:

• risk of generalisation and confusion if it's not clear who to report to
• lower sense of accountability as employees may have more than one boss
• risk of power struggles arising in absence of a formal system
• lack of employee specialism and specific job functions
• lack of long-term growth or opportunity for promotion
• difficulties in scaling up and growing the company

If they want to flatten their organisational structure, hierarchical organisations will need to invest significant time, resources and investment to achieve this.

What does flattening an organisation mean?

Flattening an organisation, or changing a hierarchical structure to a flatter one, is called delayering. This usually involves:

• opening up lines of communication and collaboration
• removing one or more management layers 

Often, it is the middle management layer that is removed. Delayering does not always mean job cuts or lower costs, but it usually increases the number of people senior managers oversee.

Although it can be difficult and time-consuming, flattening can help improve efficiency, reduce wage costs and cut red tape. If you decide to change your organisational structure, it is important to manage the process well. See best practices in change management.

Organisational structures define a hierarchy within an organisation. The two most common arrangements include:

• a flat organisational structure
• a hierarchical organisational structure

Each structure has its advantages and disadvantages. The most appropriate arrangement will depend on the size and the type of your business, and the number of management levels that you need. See reasons for changing your organisational structure.

How does a hierarchical organisational structure work?

A hierarchical structure is common in larger businesses and organisations. It has several levels of authority, linked by a clear chain of command.

Decision-making is usually formal and moves from the top down. This creates a tall structure, with clear responsibilities and control at each management level. As the organisation grows, more levels are often added.

This structure often looks like a pyramid, widening as you move down. At the top is the chief executive, followed by senior managers, middle managers and workers. Each employee has a clearly defined role and place in the organisation.

What are the advantages of a hierarchical structure?

A hierarchical structure can provide benefits to businesses. For example, it can help establish:

• clear lines of authority and reporting within the business
• a clearer understanding of employee roles and responsibilities
• accountability for actions or decisions at different management levels
• clear career paths and development prospects which can motivate employees
• opportunities for employees to specialise and develop expertise in their field
• close supervision of employees through a narrow span of managerial control
• a culture of loyalty towards teams, departments and organisation as a whole

What are the disadvantages of a hierarchical organisational structure?

Workplace hierarchies are not always effective. Common disadvantages of hierarchical structures include:

• complicated chains of command which can slow down decision-making
• inconsistencies in management at different levels which can impede work
• delays in communicating vertically through the levels and horizontally between teams
• less flexibility to adapt and react to environmental and market pressures
• disconnect of employees from top-level management
• a strain on the employee-manager relationship due to lack of autonomy
• difficulties collaborating outside of the team 'silo' or dealing with team rivalry
• considerable amount of corporate overhead to support the many management layers

Tall organisations can be complex. To deal with this, businesses may need strategies such as a decentralised organisational structure, where senior managers give some decision-making power to lower levels. 

A tall structure will not suit every business. Some may find that a flat organisational structure works better.

If you decide to change your organisational structure, it is important to manage the process well. See best practices in change management.

A product organisational structure is a framework that divides a business into separate parts. Each part focuses on a specific product or service and works as its own unit within the company.

What is a product-based structure?

In a product-based structure (also known as a divisional structure), you assign employees into self-contained divisions according to:

• the particular line of products or services they produce
• the customers they deal with
• the geographical area they serve

A product-based structure can have several levels of managers and staff. Each division may have its own marketing and sales teams. Managers usually report to the head of the company for that product area. Some functions, such as finance or human resources, may still be managed centrally.

For example, a software company might organise itself around two customer groups: home users and business users. Staff who develop, sell or promote business software would work in one division, while those working on software for home users would be in another.

Product structure advantages and disadvantages

Product organisation may not suit everyone, but is likely to provide distinct advantages to those businesses that:

• have particular product lines that are substantially different
• require specialised expertise for production or distribution
• target a few major customers that make up most of your business

Product structure can also help your business:

• focus on specific market segments
• meet customer needs more effectively
• extend knowledge or expertise within specialised divisions
• respond to market changes more flexibly and quickly
• encourage positive competition between each department
• coordinate and measure the performance of each division directly

Product organisational structure does have certain disadvantages, including being difficult to scale and potentially:

• duplicating functions and resources, eg a different sales team for each division
• dispersing technical expertise across smaller units
• nurturing negative rivalries among divisions
• over-emphasising divisional, rather than organisational goals
• losing central control over each separate division

Product or divisional structure is mainly suitable for larger companies with two or more key product lines, strategic customers or markets.

For businesses operating in different markets or requiring distinct units, see also organisational structure by geographical area and decentralised organisational structure.

Some businesses organise their work by geographical area or location. This is common in large multinational companies, but it can also suit medium-sized businesses. For example, it may work well for a group of taxi firms, a small retail chain or a fast-food chain with several branches.

What is a geographical organisational structure?

A geographical organisational structure suits businesses with offices or units in different regions or geographical areas. This type of structure helps businesses:

• manage reporting and business functions across several locations
• operate separate sites according to local demand but still be directed by business policy

Depending on the size of the business, each location may report to an executive who oversees several sites. In some cases, it may report directly to senior management at the company headquarters. The reporting structure can vary depending on the size and type of business.

The advantages of a geographical structure

A geographical structure can offer several operational and strategic advantages, including:

• close communication with local customers
• strong collaborative teams at each location
• the ability to better serve local needs and tailor their approach to the local market
• the ability to encourage positive competition between different departments

A geographical structure can work well if a business operates in areas with different cultures, laws, languages or customer needs. It can also be useful where shipping, staffing or access to resources varies by location.

The disadvantages of a geographical structure

The main downside of a geographical organisational structure is the potential conflict between local and central management, as individual divisions often take on a great deal of autonomy. Other disadvantages include:

• potential duplication of jobs, resources and functions
• some economies of scale may be lost

A geographical structure is often most suitable for sectors such as retail, hospitality and transport, as well as businesses that need to be close to suppliers or customers for deliveries, production or on-site support.

There are other ways to structure a multi-national business. For example, you could use a decentralised structure or a functional structure. Both are types of hierarchical structures. For a simpler arrangement, see flat organisational structure.

A functional structure is one of the most common ways to organise a business. It is often used in larger companies, where employees are grouped by the type of work they do.

What is a functional organisational structure?

In this type of structure, employees are grouped into smaller teams or departments based on their roles and skills. These may include, for example:

• sales
• marketing
• production
• IT
• finance
• operations

Employees, teams and line managers are placed in specialist departments and report to the head of that department, such as the sales director. The senior management team usually includes the heads of the main functions, such as finance, marketing and operations.

Read more about the hierarchical organisational structure.

Advantages of a functional structure

A functional structure can improve efficiency because people with similar skills and knowledge work together and carry out similar tasks. The advantages of this type of structure are:

• specialisation - departments focus on one area of work
• productivity - specialism means that staff are skilled in the tasks they do
• accountability - there are clear lines of management
• clarity - employees understand their own and others' roles

However, the nature of departmentalism within a functional structure can present certain risks.

Disadvantages of a functional structure

Separating divisions and teams can create organisational silos. This is when one team is reluctant to share information or knowledge with other teams in the same organisation.

This silo mentality can cause problems around:

• aligning priorities across the business
• the flow of information and communication
• collaboration
• co-ordination of decision-making
• embedding and managing change across departments

Functional structures are common in many types of business. They work best in larger companies, especially those that provide products or services on an ongoing basis, such as manufacturers.

Smaller businesses may find this structure too rigid and less able to respond quickly to change. In that case, a project-based structure or flat organisational structure may work better. Depending on your business needs, a matrix structure or a decentralised structure may also be suitable.

A matrix organisational structure does not follow the traditional hierarchical model. In a matrix structure, staff and resources are shared across teams, projects and departments.

What is a matrix organisational structure?

A matrix structure combines two or more types of organisational structure. It organises reporting lines in a grid (or a matrix), rather than in a traditional hierarchy.

Employees usually report to two managers - a functional manager and a project manager. One reporting line will often take priority over the other. For example, staff may report first to their functional manager and then to the project manager.

Examples of matrix structure

There are different types of matrix structure. These are usually grouped into three main types, based on how much authority the project manager has:

• Weak or functional matrix - the functional manager keeps most of the authority and controls people and resources. The project manager has a limited role and mainly handles administration or coordination.
• Strong matrix - the project manager has most of the authority, controls the project budget and manages staff. The functional manager has a smaller role.
• Balanced matrix - the functional manager and the project manager share authority over staff and budget.

In large organisations, different types of matrix structure may be used at different levels. This is sometimes called a 'composite organisation'.

The advantages of a matrix organisational structure

The main advantage of the matrix structure is that it can:

• improve decision-making, since there are two chains of command
• help break down traditional 'silo' barriers
• improve communication across the business
• allow staff to apply their skills in different roles
• help share best practice and ideas across teams
• increase efficiencies due to sharing resources across departments

A matrix structure can help businesses respond more quickly to changing customer needs and speed up the development of new products. It is often most suitable for businesses operating in a fast-changing environment.

The disadvantages of a matrix organisational structure

A matrix structure may not suit businesses in more stable environments with fixed customer needs. Because it is complex and employees report to two managers, it can lead to:

• confusion about roles, responsibilities and priorities
• divided loyalties between project teams
• unclear accountability
• difficulties coordinating tasks or functions
• power struggles between managers
• higher overhead costs because there are multiple managers

Matrix organisational structure vs functional

A matrix structure often sits alongside a traditional functional structure. It is common in large organisations running several projects, where staff are moved to where they are needed. For smaller businesses with fewer resources, a functional structure may be more suitable.

Business structures can be centralised or decentralised. In a centralised structure, one person makes the main decisions and sets the direction for the business. Decisions flow from the top down through a clear chain of command in a hierarchical structure.

In a decentralised structure, the hierarchy remains, but decision-making is shared across different levels of the organisation.

How does decentralisation work?

In a decentralised organisation, lower-level managers and teams are given the authority to make decisions and take action. Senior leaders still make the biggest decisions for the whole organisation, such as setting the mission, vision and strategy. Other decisions, along with responsibility for day-to-day work, are passed down as far as possible to lower-level managers and sometimes to employees.

Examples of a decentralised organisation

Most businesses use a mix of centralised and decentralised decision-making. For example, in a franchise, individual outlets may decide who to hire, while the head office controls branding and marketing.

Decentralisation can work well for businesses that:

• need to offer personalised customer service
• operate in different locations, such as shops or branches
• need to respond quickly to market changes or competitors
• change their business model often, making central control less practical

Many small businesses start with a centralised structure and become more decentralised as they grow. As workloads and staff numbers increase, it can become too much for one person to manage everything. Decentralisation can bring benefits to a growing business, although some owners may find it hard to give up control.

What are the advantages of a decentralised organisation structure?

Giving decision-making power to lower levels of the organisation can help:

• senior leaders focus on long-term goals instead of day-to-day issues
• encourage accountability and ownership 
• develop skills and future leaders
• improve the quality and speed of decisions 
• support innovation and the sharing of ideas
• reduce staff turnover and improve job satisfaction

What are the disadvantages of a decentralised organisation structure?

Decentralisation can make processes and communication harder to manage. It can also cause problems if:

• there is no strong leadership to guide the organisation
• support or admin work is duplicated across different units
• 'silos' and unhealthy rivalry develop between units
• teams focus too much on their own needs instead of the wider business
• uniform and consistent policies are required across the various units

Most organisations work best with a balance of centralised and decentralised decision-making.

Find out about other common ways to structure a business, including a matrix structure, a project-based structure or a product-based structure.

Project-based management structures are becoming more common. In this type of structure, a business is organised around teams set up to work on a specific project.

What is a project-based organisational structure?

A project-based structure usually takes staff from different departments and places them in a temporary project team. The team then works on one specific task.

This structure can be useful when developing a new product or entering a new market. A business that usually uses a functional or customer-based structure can use project management to deliver short-term goals. In this structure, a project manager usually:

• has overall authority for the project
• leads a team made up of staff from different departments

Team members work directly for the project manager.

The advantages of a project organisational structure

A project-based structure can work well for businesses that need to stay flexible and respond quickly to change. 

One advantage is greater control over the team. Other benefits include the ability to:

• support cross-functional working
• flatten a business' hierarchy
• create a strong team culture and  identity
• organise the business around its core activities
• make better use of employees' skills
• schedule work more easily with dedicated resources

The disadvantages of a project organisational structure

A project-based structure may seem simple, but it also has some disadvantages. For example, it can:

• blur reporting lines by moving staff away from their usual roles
• use up staff and resources on one project instead of wider business goals
• make accountability less clear if employees report to several managers

A project-based structure can also be expensive because dedicated project teams often cost more. It usually works best for large, short-term projects.

Other common ways to structure a business include hierarchical structure, a matrix structure and a product-based structure.

Businesses change for different reasons. These can include new technologies, changing market conditions, or the need to improve quality, productivity or profit.

Businesses also change in different ways. Change can be:

• planned or unplanned
• transformational or incremental
• remedial or developmental

Different external or internal factors can cause or trigger organisational change.

What causes organisational change?

Businesses often restructure to support a new strategy. A strategy is a plan for how a business will use its main resources to meet its goals. When a strategy changes, the business structure often needs to change too, so both continue to work well together. This may happen when a business:

• transitions from a start-up to a scale-up company
• takes on a partner, or changes management
• adds new product lines
• prepares for growth
• expands overseas

Find out more about strategic planning for business growth.

External factors affecting organisational change

External factors can also lead to changes in a business structure. These may include the need to:

• enter new markets
• respond to changes in demand for products or services
• keep up with new technologies or competing products 

Other outside events can also trigger a change in your business or in competitors. These may include:

• mergers and acquisitions
• joint ventures and business partnerships
• preparing to sell your business

Internal factors affecting organisational change

Internal business needs can also lead to change. These may include the need to:

• raise capital or improve cash flow or profitability
• improve working practices and processes
• eliminate unnecessary job positions and duplicate management roles
• reorganise internal functions, such as sales and marketing, to improve efficiency

Prepare for organisational change

Spotting the signs of organisational change early can help you prepare and put the right policies in place to support growth. If you wait until your business is under pressure, management may become defensive and less effective. It is usually better to act early. This means anticipating changes in the market or economy and responding before they affect the business too much. Read more about change management.

Looking at your strengths and weaknesses can also help you identify possible changes. Tools such as SWOT, PESTLE and other strategic analysis models can support this.