Before we discuss the differences in organizational structure, we need understand the meaning and purpose of organizational structure. Organizational structure formally determines the hierarchy within an organization. In other words, who reports to whom? Some companies refer to this as the organizational chart. Types of organizational structure include: functional structure, divisional structure, and matrix structure. Divisional structure is further broken down into three sub-types: product structure, market structure, and geographic structure.
The functional structure groups employees together based upon the functions of specific jobs within the organization. I used to work for a division of an internet service provider (ISP). The organizational structure at that division was functional. The organizational chart was as follows:
– Sales Department (sales function)
– Customer Service Department (customer service function)
– Engineering Department (engineering function)
– Accounting Department (accounting function)
– Administration Department (administration function)
The divisional structure is broken down into three areas: product, market, and geographic.
Product structure groups employees together based upon specific products produced by the company. An example of this would be a company that produces three distinct products, “product a”, “product b”, and “product c”. This company would have a separate division for each product.
Market structure groups employees together based upon specific markets in which the company sells. When I worked at the ISP, we also used a form of market structure. We sold internet access to individual consumers and business customers. So the sales and customer service departments were organized using market structure. Consumer sales and consumer customer service worked together, and corporate sales and corporate customer service worked together.
Geographic structure groups employees together based upon specific geographic location. This is often used by large companies that operate in many areas throughout the United States or in both the U.S. and overseas.
Matrix structure groups employees by both function and product. This structure can combine the best of both separate structures. An example would be a company that produces two products, “product a” and “product b”. Using the matrix structure, this company would organize functions within the company as follows: “product a” sales department, “product a” customer service department, “product a” accounting, “product b” sales department, “product b” customer service department, “product b” accounting department. Matrix structure is the most complex of the different organizational structures.
Finding the organizational structure that works best for a particular company is very important. Using the wrong structure can result in poor communication, poor product development, poor customer service, and a myriad of other business problems. Any of these things can be detrimental to a company and could result in lost revenue or even complete failure of the company.