Defining the Organizational Structure of Your Business

When a small business gets started, structure isn't an issue. There's you, possibly your brother and your best friend...a work space...and that pretty much covers it.  

But even within that very small business, a structure begins to emerge. Because while you may be terrific at developing your product—high fashion purses, or garden implements, or an innovative kind of corkscrew—your brother may be a genius at raising seed money and finding markets for your product. And your best friend may be terrific at designing packaging and marketing materials. Without giving it much thought, the three of you have become the basic building blocks of a divisional structure in which you are the head of R&D, your brother is manager for finance and sales, and your buddy is Creative Director.

If you decided to grow your business by hiring additional staff, you'd probably—without much thought—add new people to each division. Perhaps an accountant to work with your brother, or a graphic designer to work with your buddy...or a CAD specialist to work with you. If your business started to thrive, you'd find yourself at the top of a typical hierarchical structure based on function.

But did you really want to run a business with a hierarchical, divisional structure? While that might be a good choice as your business grows, there are other options that could be even better.

What Are My Structural Options?

Business structures, in an ideal world, are developed for a reason—and not by accident. They reflect the function and culture of the business, and make it easier, pleasanter, and more lucrative for everyone involved to get their work done. Multiple types of structures can be combined together, depending upon the needs and preferences of the business and its managers.

Business structures can be vertical (hierarchical) or horizontal (flat, with shared authority). They can be organized as a single whole, into functional units, or into business units. They can be centralized or networked —or even "virtual." Different groups can work together or independently.

Let's look at some examples.

Vertical (Hierarchical) Structure

Vertical (hierarchical) structure is the traditional top-down approach. This can work well in a small business, or in a business that is streamlined in its products and processes. It's also, in many cases, an efficient way to do business. 

In a vertical business, the top managers are in charge, which means they have both the authority and the responsibility to manage the business to meet their goals. No, employees may not be asked to do a lot of innovating—but on the other hand they have clear goals and a transparent management model, along with (in many cases) an old fashioned but reliable understanding of what it takes to rise through the ranks.

Horizontal (Flat) Organizational Structure

A horizontal (flat) organizational structure has become very popular in recent years. It supports the idea that employees need and thrive with lots of responsibility and authority, and suggests that no one individual should take charge of an entire organization. It supports teamwork and innovation, but may be inefficient when it comes to decision making and hitting goals and deadlines.

Centralized Company

A centralized company is an organization with all of its functions managed by a single set of people who work together. In general, employees come into the office, work in their function, and share resources.

Networked (or Virtual) Company

A networked or virtual company has a small, dedicated staff in one location, and a network of consultants, freelancers, part timers and even full time employees in other locations around the country or even around the world. This type of organization is ideal for a company that works on large projects which come and go, or which relies on very specific expertise, skills, or knowledge.

Business Units or Functional Units

Business Units or Functional Units are groups or teams that focus on specific aspects of a business. They may represent different parts of a whole (e.g., R&D, Production, Sales) or they may represent sub-businesses (e.g., newly acquired businesses that are now part of a large multi-national). 

While each team has an important role to play in the whole organization, each team may also have access to independent resources (accounting, design, etc.) for its own, unique needs.

Are Flat Structures Always Better Than Vertical Structures?

Today, there is a bias toward flatter structures in which management and employees are on an equal or at least semi-equal standing. Zappos, which is well-known for its unusual management style, went from a vertical to a horizontal structure; according to an article in Inc. Magazine: "Instead of having managers and subordinates, Zappos will be made up of 400 'circles,' or teams of people who work together and take on various roles within those circles." This new approach was expected to result in stronger personal and professional connections among employees. 

But, as Inc. goes on to say, this approach "is not without its risks." Yes, some employees may find this new structure empowering and exciting. But others may find it disorienting or confusing. 

Yes, some people may take the ball and run with it, developing their own skills while also improving the company's resources. But others will spend a great deal of time attempting to hang onto or take authority in an apparent vacuum. The Wall Street Journal, citing a research study, even says that, in some cases, hierarchy can improve productivity.

On the other hand, flatter or more collaborative structures can be extremely liberating for creative endeavors. When there is no "boss" to report to, and no hierarchy to keep you from advancing your ideas, you're much more likely to say what you think and suggest innovations. If you're wrong, you're less likely to be pushed down the ladder.

Some companies have found ways to combine the best of vertical and flat structures by incorporating flat units into hierarchical structure. In fact, many businesses that are, at heart, vertically structured, have created smaller entities which encourage creativity through a variety of "flattening" approaches. The iconic Bell Labs was a subsidiary of AT&T where the entire focus was on innovation and invention. Bell Labs is the model on which entities such as the uber-creative Google X were built.

Which Business Structure Is Best for Your Company?

As you've probably guessed, there is no single "best" structure for businesses in general, though there is usually a single best structure for any individual business. The choice of business structure depends upon several concerns, including but not limited to:

• Type of business. Obviously, a local hair salon is not going to function well with virtual employees located in other cities. By the same token, an international financial corporation would collapse if all its employees were required to show up in the same building at the same time.
• Size of business. Not every entrepreneur wants to grow their business indefinitely. Many aim for a smaller or moderate size company, or prefer a local or regional presence. It may not be feasible for a company with 40 employees to develop fully functional business units—but a large multinational may find it almost impossible to centralize many of its functions.
• Business culture. There is probably no more efficient structure than a dictatorship. One person is in charge, and everyone else does what they're told.  But efficiency isn't everything. And some business owners create working teams, business units, and flat structures NOT because they expect a great boost to the bottom line but because they prefer to work collaboratively. Some businesses offer opportunities for individual innovation because the industry expects it. Some types of tech firms fit that model.
• Business needs. Some industries require specialists who can be available for short periods of time to complete discrete projects. Others require daily, ongoing attention to tasks that recur over and over again. Many require both. 

In order to determine which type of structure is likely to be best for your business, it's worthwhile to ask yourself a series of questions. While the answers may not immediately define your structure, they will certainly help you along the way. Specifically:

1. Is my business going to be local? Regional? National? International?  An international business may require specialists located far from HQ—and those specialists may need some autonomy to do their work without direct supervision.
2. Is my business going to be small, medium-sized, or large? The larger the company, the more likely it is that you will need to establish business units to work on larger products or projects. The smaller your company, the more likely it is that you will need to reach outside for specific skills or specialties.
3. Is my business going to produce or offer multiple, discrete products or services? If you're building the Model A Ford, you don't need a separate business unit to build pickup trucks. But once you diversify, you may find that product development, marketing, and sales are different enough that they warrant a whole separate business unit.
4. What kind of culture do I want in my business? Do I prefer to run my company from the top down, or do I want a collaborative group working as a team? Am I interested in working with networked or virtual employees, or do I want everyone right here in the office? These types of questions will have a significant impact on your choice of business structure.

Whether you build your business tall, wide, or broad—or you combine multiple ideas to create a unique structure—the key is to meet your own goals.

Editorial Note: This content was originally published in 2014. We're sharing it again because our editors have determined that this information is still accurate and relevant.