An organizational structure defines the scope of acceptable behavior within an organization, its lines of authority and accountability, and to some extent the organization's relationship with its external environment. More specifically, it shows the pattern or arrangement of jobs and groups of jobs within an organization and yet it is more than an organizational chart. The organizational structure pertains to both reporting and operational relationships, provided they have some degree of permanence. The individual elements of an organizational structure typically include a variety of components that one may usefully see as building blocks: 1) departments or divisions; 2) management hierarchy; 3) rules, procedures, and goals; and 4) more temporary building blocks such as task forces or committees.

Ideally, organizational structures should be shaped and implemented for the primary purpose of facilitating the achievement of organizational goals in an efficient manner. Indeed, having a suitable organizational structure in place—one that recognizes and addresses the various human and business realities of the company in question—is a prerequisite for long-term success. Nonetheless, all too often organizational structures do not contribute positively to a company's performance. This is usually because the structure was allowed to grow somewhat organically and was not redesigned as the company grew so as to more efficiently guide the behavior of individuals and groups so that they would be maximally productive, efficient, flexible, and motivated. Small business owners seeking to establish a beneficial organizational structure need to recognize that the process may be complex since this task is often left until a start-up organization has already been established. By then, a de facto structure exists and changing it will need to be done carefully so as not to alienating or frustrating key players.

Even large corporations that attempt to restructure or reorganize and implement a new or changed organizational structure may discover that simply announcing a new structure does not immediately translate into actual change. Hierarchy is an important element of any organizational structure. The more levels of management are present in an organization, the more hierarchical it is. During the late 1990s and early 2000s it became fashionable to reduce the hierarchy in large corporations and the trend was dubbed flattening the corporate structure. But, as Eileen Shapiro, a management consultant and author told Patrick J. Kiger in his article "Hidden Hierarchies," things aren't always what they seem. "I've been inside a lot of companies that espouse flat organizational structures and self-management. But when you really start looking at how things actually work, you find that there is in fact a hierarchy—one that is not explicit." She explains that most firms, regardless of style, do actually have a hierarchy, whether explicit or not, and that trying to reflect the true, functional hierarchy in the organizational structure will help prevent the hidden hierarchy phenomenon. It also prevents the misunderstandings that can arise when the explicit organizational structure does not match the actual, functional structure.


All sorts of different organizational structures have been proven effective in contributing to business success. Some firms choose highly centralized, rigidly maintained structures, while others—perhaps even in the same industrial sector—develop decentralized, loose arrangements. Both of these organizational types can survive and even thrive. There is no one best way to design an organization or type of structure. Each depends upon the company involved, its needs and goals, and even the personalities of the individuals involved in the case of small businesses. The type of business in which an organization is involved is also a factor in designing an effective organizational structure. Organizations operate in different environments with different products, strategies, constraints, and opportunities, each of which may influence the design of an ideal organizational structure.

But despite the wide variety of organizational structures that can be found in the business world, the successful ones tend to share certain characteristics. Indeed, business experts cite a number of characteristics that separate effective organizational structures from ineffective designs. Recognition of these factors is especially important for entrepreneurs and established small business owners, since these individuals play such a pivotal role in determining the final layout of their enterprises.

As small business owners weigh their various options in this realm, they should make sure that the following factors are taken into consideration:

  • Relative strengths and weaknesses of various organizational forms.
  • Legal advantages and disadvantages of organizational structure options.
  • Advantages and drawbacks of departmentalization options.
  • Likely growth patterns of the company.
  • Reporting relationships that are currently in place.
  • Reporting and authority relationships that you hope will be implemented in the future.
  • Optimum ratios of supervisors/managers to subordinates.
  • Suitable level of autonomy/empowerment to be granted to employees at various levels of the organization (while still recognizing individual capacities for independent work).
  • Structures that will produce greatest worker satisfaction.
  • Structures that will produce optimum operational efficiency.

Once all these factors have been objectively examined and blended into an effective organizational structure, the small business owner will then be in a position to pursue his/her business goals with a far greater likelihood of success.


Day, George. "Aligning Organizational Structure to the Market." Business Strategy Review. Autumn 1999.

Kiger, Patrick J. "Hidden Hierarchies." Workforce Management. 27 February 2006.

Nickelson, Jack A., and Todd R. Zenger. "Being Efficiently Fickle: A dynamic theory of organizational choice." Organizational Science. September-October 2002.

"Thinking for a Living." The Economist. 21 January 2006.

Wagner-Tsukamoto, Sigmund. Human Nature and Organization Theory. Edward Elgar Publishing, 2003.