Understanding the Basics of Organizational Structure and Design

Small business owners face a number of important decisions when developing and managing their companies. Early on, the most critical include developing a strategic plan, determining best practices for recruitment and selection, and how to form a positive company culture.

While important, such decisions are just the beginning. In addition, you’ll also need to decide how to direct and arrange work activities in ways that are most effective at realizing the strategies and recruitment you have put in place and align with the culture you are trying to create. This is where the topic of organizational structure comes in.

What is organizational structure?

When you hear the term structure, you might be thinking of something physical, such as the layout of an office space or the design of a corporate headquarters. While structuring your organization might require you to modify some of these more visible aspects of your organization, the topic of organizational structure also requires an understanding of how to modify the social and task environment in ways that maximize productivity.

While structuring your organization might require you to modify some of these more visible aspects of your organization, the topic of organizational structure also requires an understanding of how to modify the social and task environment in ways that maximize productivity.

Organizations are constantly experimenting with new ways to modify how to work in order to increase employee motivation, heighten creativity, and remain competitive and relevant. Some notable examples of organizational restructuring in action include Zappos’ elimination of workplace hierarchy or Amazon’s “two pizza rule” which mandates that meetings should not exceed a size so large that two pizzas can’t feed the entire group.

These are but a few examples. The possibilities for how to develop or alter your organization’s structure are limitless. A good place to start is to understand some of the basics for how to structure, or restructure, the physical, social, and task-related aspects of your organization. Here are a few basic structural elements to consider.

Work specialization

When structuring your work environment, one question you’ll invariably need to ask yourself is how to divide work activities among your employees. On the one hand, you might decide that it would be best for your workforce to be highly specialized. In the extreme, this might look something like an assembly line, where each activity is broken down into separate tasks and assigned to individual employees. Conversely, you might decide it’s better for your employees to be generalists, where each is involved in different and potentially interrelated tasks.

Like all elements of organizational structure, decisions regarding work specialization vary along a continuum and what you choose should always be driven by the needs of your company. For example, if you believe it’s important to maximize efficiency and ensure quality control, higher levels of work specialization might be best. On the other hand, if you want to maximize creativity or need boost employee motivation, less specialization might be more appropriate.

Span of control

Another structural decision you may need to make, especially as you begin expanding the size of your workforce, relates to span of control. Span of control deals with determining how many employees each manager in the organization can realistically and effectively supervise. In other words, it involves determining how many layers of management you need. Typically, the more layers of management that are present, the fewer number of employees each manager will supervise. Conversely, fewer layers of management means that managers are responsible for a larger number of employees.

You can think of span of control as a trade-off. On the one hand, as your workforce grows and you continue to add more employees, you will invariably begin to lose control, because at a certain point, you cannot possibly monitor and control the behavior of every employee. To regain some control, you may find it necessary to begin adding several layers of management to your organizational hierarchy.

On the other hand, adding more managers can be costly and can end up making your organization more bureaucratic and less efficient as decisions and communication may take longer to flow through the chain of command. Beyond efficiency and control, there are a number of other trade-offs when determining whether to institute a narrow or wide span of control, such as how it might impact employee innovation and motivation.

Once again, the extent to which you should implement a wide or narrow span of control depends on the needs and characteristics of your organization. For example, the more training and experience employees have, the less direct supervision they typically need and the wider the span of control can be. Conversely, work units in which tasks are highly complex or that lack sophisticated management information systems might benefit from a narrower span of control.

Departmentalize 

It might make sense to start grouping employees and the tasks they are doing in ways that can help streamline your operations and achieve economies of scale.

As your organization grows larger and you start adding more employees and layers of management, not only might you need to revisit how to divide work activities among your employees, but you probably will need to start thinking about how you will group these activities together. That is, it might make sense to start grouping employees and the tasks they are doing in ways that can help streamline your operations and achieve economies of scale. There are several ways to group employees, but one of the most common is to group them according to the function they serve, such as procurement, manufacturing, quality control, or marketing. Beyond functional departmentalization there are other ways to group tasks. For example, companies that provide multiple products or services might find it beneficial to departmentalize based on product offering, customer type, or location served.

(De)Centralized decision-making

Structuring your organization also involves determining the extent to which decision-making should be centralized or decentralized. Highly centralized organizations are very hierarchical in terms of decision-making. In such situations, upper management sets most major decisions with little to no input from those lower in the organizational hierarchy. Conversely, in decentralized organizations, decision-making tends to be a collective effort, with those lower in the organizational hierarchy having the opportunity to offer their opinions and suggestions. Obviously, organizations can never be fully centralized or decentralized. There will always be situations where lower-level employees will need to make decisions, however small, without consulting upper management — and upper management cannot always rely on the input of subordinates when making major decisions about the organization.

As with the other elements, you’ll need to decide which is the right amount of centralization for your specific circumstances. Some common factors that can help you determine the extent of centralization to incorporate include the degree to which your organizational environment is fairly stable or dynamic, whether the development of products and services require consistency or allow for flexibility, and, perhaps most importantly, whether lower-level managers and employees have the knowledge and ability to meaningfully contribute to decision-making.

Formalization of employee roles

Formalization refers to how standardized jobs are in an organization — it relates to decisions regarding how much you want your employees’ behavior to be guided by rules and procedures and whether you would strictly enforce such behavior. Jobs that are highly formalized tend to have clear and explicit job descriptions and numerous rules governing what is done and how it is to be done. You might be wondering why all managers wouldn’t want the roles they assign to employees to have clear rules and procedures for them to follow. But in reality, some jobs might be better off less formalized than others.

For example, for employees working on an assembly line, it likely makes sense that there are clear procedures to follow because it is critical that the product is uniform and consistent as it moves down the line to the next employee. Conversely, an employee working in creative fields, such as computer programming, would likely benefit from having a comparatively less formalized job because thinking and working more flexibly is conducive to creative outcomes.

Determining what degree of formalization is right for your situation likely depends on whether you have a strong culture present that can substitute for explicit rules and regulations, how experienced your workforce is, and the overall goals your organization is striving toward (e.g., consistency versus innovation).