Organizational Structure - The Strategic CFO® (2024)

Organizational Structure

Organizational Structure Definition

Organizational structure is the way responsibility, authority, and lines of communication are arranged. It is also how all processes occur in a company. Additionally, this term is commonly referred to as organizational culture.
The most common organizational structure include hierarchy with employees comprising vertical layers of rank where each layer is superior to the layers below and subordinate to the layers above. In addition, most large organizations divide their employees up into subunits called divisions, departments, segments, business units, work units, or groups. The objective is to get employees at all levels and across all subunits working towards the goals of the organization.

Organizational Structure: Models

Models exist on many levels. To simplify the matter, however, they generally fall into two categories: centralized or decentralized. This main theory is studied across the world.

Centralization vs. Decentralization

Organizational structure in businessis either centralized or decentralized. Thus, centralization and decentralization are two ends of a spectrum. You can find organizations somewhere along that spectrum. Companies with centralized structure concentrate their authority in upper levels of management. For example, the military has a centralized organization structure. This is because the higher ups order those below them and everybody must follow those orders.

Unlike centralized companies, decentralized companies have less concentrated authority. In a decentralized organization, lower levels in the organizational hierarchy can make decisions. An example of a decentralized organization is a fast-food franchise chain. Each franchised restaurant in the chain is responsible for its own operation. Broadly speaking, companies start out as centralized organizations and then progress towards decentralization as they mature. This structure, horizontal when decentralized, places power in the decision maker on the ground floor.
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