A Guide to the Organizational Structure Types for Businesses

We often think of organizations as static entities, but in reality they're constantly growing and evolving. And just like a toddler who is now too big for that pair of pants, your growing company may need major organizational change to accommodate its promising future.

If you've been watching your company's performance metrics and the results have been declining, it may not be the fault of bad management or poor employee performance. It could be that you just have the wrong structure for your business.

If you're not sure what structures are available to you, this breakdown of the four most basic company management structure types should help you get some ideas on where you should be headed as a company.

4 organizational structure types to consider for your small business:

• Geography-based
• Product-based
• Market-based
• Role-based

Overview: What is organizational structure?

Organizational structure is simply the framework within which tasks are coordinated and allocated. An organizational structure is the very foundation of a company, defining operational procedures and dictating who is responsible for what.

This structure aligns all the parts of an organization so they work together efficiently and with maximum effect. By understanding how to create a structure for your organization, you will be able to improve the overall efficiency and productivity, and therefore the bottom line.

What to consider when choosing organizational structure types

The different types of organizational structures are not one-size-fits-all. Your company has specific needs, and most likely there is only one type of company structure that is best suited for your organization. There are three considerations in particular that should come into play.

1. What is your goal?

These different organizational structures are heavily based on what an organization is trying to accomplish. You should think about what you want your structure to help you do before you settle on one. If your focus is on improving production efficiency, for example, you may need a different structure than if you’re looking to grow and expand your organization.

2. What is best for your employees?

Your organization’s structure matters because it impacts workforce planning and determines how well your employees are able to do their jobs as well as what room they have for advancement within your company. You should always choose a structure that will keep them happy, motivated, and able to operate with maximum efficiency.

3. How important is collaboration?

Putting a new organizational structure in place can have a huge impact on the collaboration in your company. You may accidentally introduce “stovepipes” and separate key players who need to work together, which can have a disastrous effect on your company. It is wise to consult with the key stakeholders in each of your current departments before making the change.

How to choose the right organizational structure type for your company

There are a host of different organizational structures you can choose from to help with your human resource planning, but these four are generally the most common and many other structures are based in some way on them, so it’s important to understand these four types first and modify them as needed for your company.

Type 1: Geography-based

If your company is spread out, a geography-based organizational structure might make the most sense for you. In this case, you'd typically have the company split into various geographic divisions, like a Southwest division and a Northeast division. You will often see many larger companies take this approach, because these different divisions -- because of their geographical location -- have vastly different purposes. For example, your Southwest division might be focused on producing and shipping parts because that's where your factory is based, while your Northeast division might be more focused on marketing and government relations.

Pros for a geography-based organizational structure

This structure has a couple of key advantages, depending on your organization’s situation:

• Makes it easier to run a spread out organization
• Combines expertise from many different employees that normally would be split apart under a different structure

Cons for a geography-based organizational structure

The disadvantages can be significant, however:

• Doesn’t usually make sense for small or even mid-size companies
• Some divisions may act too independently without strong centralized control
• Possible duplication of effort, as divisions may have the same types of employees doing the same work

When to choose organizational structure

Is a geography-based organizational structure the best one for your company? Here are a couple of questions you can ask to figure that out:

• How are you currently functioning? Do you find you are frequently having to make geographic-based decisions? Perhaps this structure is right for you.
• Would it help your workforce? If you have workers who need to be near their supply sources or their customers, and you're paying a lot of money in transportation to achieve that, perhaps it's time to explore this structure.

Type 2: Product-based

When your organization is product-based, it means you've split it up according to the various products you've created. This is an especially good structure for companies that produce a wide range of products, but it may not work as well for companies that fill a narrow niche.

For example, if your company produces electronics for many different types of products, you might have an "appliances" division, an "automobile" division, and a "consumer electronics" division.

Pros for a product-based organizational structure

Organizing your company around products can help you crank out products much faster than usual and has a couple of important advantages:

• Helps manage diverse range of products that often differ widely
• Best for maximizing efficiency of individual product lines

Cons for a product-based organizational structure

But going with this structure does come with its downsides:

• Generally not ideal for businesses that serve more niche markets
• Risk of duplication of effort as people develop products in stovepipes
• Less collaboration company-wide

When to choose a product-based organizational structure

The key to determining whether this structure is right for you comes down to what you see as the main challenge to your business, so you should ask yourself a couple questions first:

• Does your range of products justify this structure? You may not think of yourself as needing to build your organization around individual products, but you should examine your current offerings just in case. Do you need different resources to produce each one? Perhaps you need to streamline by dividing up your product lines.
• Are they being delivered to market as quickly as you would like? If you feel your products could be moving from production to the market more quickly, maybe that’s an indication you need to focus on streamlining individual production lines by employing this structure.

Type 3: Market-based

Many companies out there only serve commercial customers through B2B sales, or perhaps they only do contracts with the government, or maybe they sell directly to the consumer. However, some companies serve a variety of different markets that have very different needs.

For example, consider a hypothetical company that produces toilet paper for both commercial customers and for individual consumers. The commercial customers would want the lowest cost material possible, and the product would be delivered with minimal packaging on pallets.

However, grocery stores who sell the consumer version might prefer to stock a higher quality grade of toilet paper in attractive packaging. As a result, you would want to have two divisions that deal with the very different logistics associated with each product.

Pros for a market-based organizational structure

This structure has the following advantages:

• Works great when your products are vastly different depending on what kind of market you're serving
• May encourage competition between divisions
• Much more efficiency in producing their products than if both divisions combined

Cons for a market-based organizational structure

However, there are a couple of disadvantages that you should be on the watch for:

• Lack of collaboration between divisions can make it seem like you are managing two totally divorced companies
• Divisions sometimes focused more on their goals instead of the overall goals of the company

When to choose a market-based organizational structure

Before you make the shift to a structure that focuses on the markets you serve, there are a couple of questions you need to ask to avoid making a major mistake:

• Are your products truly different depending on the market? Just because you serve different markets doesn't mean you need to adopt this structure. If the products you provide to the different markets are largely the same with just minor adjustments, this structure may not be necessary. But if you have to make significant adjustments and have to deal with entirely different logistical channels, it might be time to make the switch.
• Is collaboration important? When you have two divisions serving two different markets, they may eventually evolve into entirely different companies with their own processes and procedures. You may have difficulty getting them to collaborate down the road if you take this route.

Type 4: Role-based

This might be the most classic type of organizational structure. Essentially, it divides your company based on the various roles your employees may serve: a marketing department, a sales department, a customer support department, a product development department, a human resources department, and so on. This is probably the most straightforward structure you can choose, so it makes sense for a lot of smaller and mid-size businesses who aren't big enough to start chopping up their business into markets or geographic locations. As the company grows, however, leadership may find that they need to evolve beyond this model.

Pros for a role-based organizational structure

The pros for this type of structure are easy to understand:

• Simple and straightforward model easy for owners to organize around
• Focuses on managing the most important assets of any company: the employees
• Can be scaled to handle organizational growth
• Ideal if you’re focused on talent management and full cycle recruiting

Cons for a role-based organizational structure

However, companies should be aware of some hidden downsides:

• Inefficiency may start to creep in when the company grows to a certain size, at which point company leadership may want to switch to one of the above structures. You may also want to track performance measures and HR metrics so you can spot changes over time
• May reduce collaboration, as individuals who have to work together are separated into different departments

When to choose a role-based organizational structure

This structure is the default for most companies, but that doesn’t mean you should automatically choose it. Here’s a couple questions you can ask yourself first:

• Do other structures make sense? Take a second look through the structures above. If none of them really make sense for your organization, then perhaps this is the right one by default.
• Are you small and focused on growth? This setup will give you the flexibility to efficiently manage your team while providing room for you to expand. You can always change structures down the road if you outgrow this model.

Do some experimenting with organizational structures

You can certainly find more nuanced organizational structures out there. For example, a matrix organizational structure involves individuals who have more than one supervisor, which introduces complexities but may help with collaboration between departments in role-based organizational structures.

One you settle on one of the structures above, begin exploring some of the other types of organizational structure options out there and draft a company organizational chart that you think might work.

Then, workshop it with other individuals in the organization -- such as department heads or your HR business partner -- to get input on what tweaks might need to be made.

If you're stuck, give some HR software a try, which often includes strategic human resource management tools and workforce analytics that can help you test out different types of organizational structures and determine which works best for you.