Five Basic Options for Organizational Structure

This blog post relates to a number of other recent posts on organizational design frameworks (e.g. Star Framework; People Management Pyramid; Purpose, People, Process). The five basic options for organizational structure is one of those things where most people will say “of course, I knew this.” But I would bet that even experienced strategists may leave out one or two options. And a thorough review of what the options are, as well as a good understanding of their advantages and disadvantages, is always helpful if you embark on a project related to organizational design.

Functional Structure:

• Advantages: Strong transfer of ideas and knowledge between employees of a certain background. Allows for greater scale and specialization.
• Disadvantages: May create barrier between functions, “silos.” Can be overwhelming if there is a large number of products, channels or customers.
• Well suited for the following strategic situations: Small firm, single product line, undifferentiated market, long product development cycle, etc.

Product Structure:

• Advantages: Can be helpful to speed up the product development cycle and make product development very responsive to market needs.
• Disadvantages: Risk of “reinventing the wheel” and duplicating resources. Loss of economies of scale. Can create confusion if customers buy from more than one division.
• Well suited for the following strategic situations: A company sells multiple different product lines to distinct customers or customer segments. Short product development cycles.

Market or Customer Segment Structure:

• Advantages: Intimate knowledge and understanding of a market segment can lead to competitive advantage. Can be particularly appropriate in service businesses.
• Disadvantages: Same tendency to reinvent the wheel and duplicate resources. May be difficult to share common products or services.
• Well suited for the following strategic situations: Products and services are unique to specific market/customer segments. Strong buyers, Customer knowledge provides a comnpetitive advantage.

Geographical Structure:

• Advantages: Minimize costs of travel and distribution. Helpful if an organization needs to be located near a source of supply.
• Disadvantages: Local “fiefdoms” may develop.
• Well suited for the following strategic situations: Low value-to-transport cost ratio. Service delivery or support has to be on site. Perception of the organization as a local player provides a competitive advantage.

Process Structure:

• Advantages: Allows for efficient definition and optimization of end-to-end processes (and accordingly tracking of clear metrics). Scale advantages, reduced working capital.
• Disadvantages: Can create barriers and hand-offs between various process groups.
• Well suited for the following strategic situations: Ability to fundamentally re-invent and optimize processes can provide a competitive advantage.