Running a small business often means the buck starts and stops with you. But if you want to attract and keep qualified employees to help spread out responsibilities, you need an organizational hierarchy that promotes communication, defines the chain of command and shows employees how to advance their careers up the ladder.
Traditional organizational structures come in four general types – functional, divisional, matrix and flat – but with the rise of the digital marketplace, decentralized, team-based org structures are disrupting old business models. Before you establish an innovative way to manage your enterprise, take some time to understand the old mold – then blaze a trail.
Under a functional organization structure, people who do similar tasks are grouped together based on specialty. So all the accountants are placed in the finance department and so on for the marketing, operations, senior management and human resources departments.
The advantages of this kind of structure include quick decision making, because the group members can easily communicate. They can also learn from each other, since they already possess similar skill sets and interests.
In a divisional structure, your company groups workers into teams based on the products or projects that meet the needs of a certain type of customer. For example, a bakery with a catering operation might structure the workforce based on key clientele, such as a wedding department and a wholesale-retail department. The division of labor in this kind of structure ensures workers making similar products can achieve greater efficiency and higher output.
A matrix structure combines elements of the functional and divisional models, so it’s more complex. It groups people into functional departments of specialization, then further separates them into divisional projects and products.
In a matrix structure the team members are given more autonomy and expected to take on more responsibility for their work. This increases the productivity of the team, fosters greater innovation and creativity, and allows managers to cooperatively solve decision-making problems through group interaction. This type of organizational structure takes lots of planning and effort, making it appropriate for large companies that have the resources to devote to managing a complex business framework.
A flat organizational structure attempts to disrupt the traditional top-down management system of most companies. Management is decentralized so there is no everyday “boss.” Each employee is the boss of themselves, eliminating bureaucracy and red tape and improving direct communication.
For example, an employee who has an idea doesn’t have to wade through three levels of upper managers to get the idea to the key person making the decision. The employee simply communicates directly with the target on a peer-based level.
A company adopting this type of structure for everyday purposes typically establishes a special top-down management system for temporary projects or events.
The organization of different departments or business units in a company
Corporate structure refers to the organization of different departments or business units within a company. Depending on a company’s goals and the industry in which it operates, corporate structure can differ significantly between companies. Each of the departments usually performs a specialized function while constantly collaborating with each other to achieve corporate goals and values.
Departments in a company include Human Resources, IT, Accounting and Finance, Marketing, Research and Development (R&D), and Production. Some product-based or project-based companies may divide up business units by addressing a single product or project as a department.
Types of Organizational Structure
There are four general types of organizational structure that are widely used by businesses all around the world:
1. Functional Structure
Under this structure, employees are grouped into the same departments based on similarity in their skill sets, tasks, and accountabilities. This allows for effective communications between people within a department and thus leads to an efficient decision-making process. Companies with departments such as IT and Accounting are good examples of a functional structure.
2. Divisional Structure
This structure organizes business activities into specific market, product, service, or customer groups. The purpose of the divisional structure is to create work teams that can produce similar products matching the needs of individual groups. A common example of the divisional structure is geographical structure, where regional divisions are built to provide products or services to specific locations.
3. Matrix Structure
Matrix Structure is a combination of functional and divisional structures. This structure allows decentralized decision making, greater autonomy, more inter-departmental interactions, and thus greater productivity and innovation. Despite all the advantages, this structure incurs higher costs and may lead to conflicts between the vertical functions and horizontal product lines.
4. Hybrid Structure
Like the Matrix Structure, the Hybrid Structure combines both functional and divisional structure. Instead of grid organization, Hybrid Structure divides its activities into departments that can be either functional or divisional. This structure allows the utilization of resources and knowledge in each function, while maintaining product specialization in different divisions. Hybrid Structure is widely adopted by many large organizations.
Learning About a Company’s Corporate Structure
When an FP&A analyst performs various analyses and financial modeling, corporate structure is often one of the first things taken into consideration, because how the departments are defined directly influences the construction of any model.
1. Corporate structure is the basis for building any financial models
Depending on the kind of products/services a company provides or the industry it is in, its corporate structure can look very different from that of other businesses. Therefore, it is essential for the FP&A analyst to work closely with different business units in the company to understand their responsibilities and areas of expertise.
The FP&A analyst should organize regular meetings and communicate consistently with the different business units to keep up with the latest trends in the market, new and existing projects, short-term and long-term work plans, and expected opportunities in the project pipeline. That way, not only can the analyst familiarize themselves with the ongoing activities in each team, they are also able to respond quickly to changes in budgets and forecasts with the latest information.
2. Businesses with functional or divisional structures tend to use straightforward modeling
Out of the four organizational structures, functional and divisional structures are the easiest to build financial and forecasting models on, because of the simplicity of the companies’ departmental structure. An FP&A analyst can easily gather data, perform analysis and realize variances, identify data trends, and forecast future performance for each department.
Sometimes, an FP&A analyst may drill down to as deep as each employee when collecting information for detailed analysis. Because all employees are in a single reporting relationship in a functional or divisional structure, the analyst can easily track individual performance, working hours, and expenditures. This helps in performing precise analysis on departmental costs, earnings, and productivity, without simply making a lot of assumptions.
3. Matrix structure companies may incur more estimations on various factors
In a matrix structure, employees have dual reporting relationships, generally to both a functional manager and a division/product manager. This can lead to conflicts in resource utilization between a division and a function, making it more difficult to implement cost allocation because a single employee can be a member of two teams at the same time.
Moreover, it is more challenging for an FP&A analyst to develop a perfect forecasting model for matrix structure companies because there are many resources overlapping and ambiguous reporting lines. Measuring employee productivity rates and project expenses may require some estimations on individual working hours spent on various products or projects.
Other Resources
Thank you for reading CFI’s guide to Corporate Structure. The free CFI resources below will help broaden and deepen your understanding of how businesses actually operate.