Organizational Structure

The organizational structure is important for companies because it defines the formal “reporting lines”. For employees, the organizational chart shows where they are located in the organization.

The organizational structure also indicates which issues and which functions are important for companies. Companies in the same industry are sometimes organized quite differently.

But don’t overestimate the importance of organizational structure in terms of how your company operates. The organizational structure should always support the processes. The processes show how work is done, who works with whom, and how information and materials are exchanged at interfaces. Processes are the important levers in organizations.

If you derive the organizational structure resulting from the processes, it can be an asset to your company. However, if you try to create a clear organizational structure first and only then turn to the processes or define the organization “around people”, conflict is pre-programmed.

Which form of organizational structure is suitable for your company? Each form has its own advantages and disadvantages. The organizational structure must fit your company, i.e. your processes, your locations and your markets.

For organizations that work in environments of low complexity and maintain only one location, a line organization is generally well suited if the focus is predominantly on efficient implementation of predefined work steps. A line organization is clear and straightforward. A matrix organization can be useful for enterprise groups with several locations.

In addition to the line and matrix organization, there is the possibility of a process-oriented organization.

In complex environments, organizational forms that promote self-regulation are more likely to meet the requirements. This is because they naturally ensure that the interests of all involved stakeholders are taken into account in a balanced manner directly at the grassroots level, because this is where they come together out of their own motivation to achieve something together. The contribution principle applies, which is borne out of the incentive to expect more benefit from the later distribution of the value of the jointly created output than contributions have to be made for it beforehand.

Both the project organization and the fractal organization derive their particular value creation strength from the opportunities arising from diversity, from the high level of self-motivation of the participants, from the high level of decision-making authority on the ground, and from the flexibility in the composition of the teams and in decision making – with comparatively low transaction costs, because controls and reporting paths are largely eliminated. The high development and adaptability beats a hierarchically structured and centrally controlled organization.

In practice, combinations of different “purebred” organizational concepts are often recommended. For example, a line organization can certainly be combined with a project organization.

Example: A plant engineering company operates a classic project business. Customer orders are projects. Projects are also handled in product development. On the other hand, all operational functions are available at their site, which can be performed in a line organization. In such cases, a line organization is generally a good idea, supplemented by organized project teams.

However, avoid placing additional heavy demands on capable line employees in projects and vice versa. Many committed and motivated employees are overburdened by such constructs and may even drop out.

Many of the organizations that exist today, especially in small and medium-sized enterprises, still come from the era of owner-managed small businesses; on the other hand, there are former group companies that have uncritically retained the learned group structure, even though it is not suitable either because of the task at hand or because of the size of the company or the earnings situation.

Example 1: An owner-managed, medium-sized metalworking company has more than 50 employees and is still organized as follows: The owner is in personal union the managing director, the sales manager, and the sales representative for key accounts: The production manager has the materials management and inventory under him, supervises shipping and deliveries, performs necessary maintenance on machines and equipment, and is also one of the most important know-how carriers in the company. There is one employee in the office and an external accountant; the rest of the employees make parts according to instructions and drawings.

Example 2: A former production subsidiary spun off from a traditional German corporation had a total of 300 employees, a managing director and assistant, five directors each with an assistant, and each of these up to eight main department heads, who usually had at least two department heads under them, who then had first foremen and shift supervisors with the corresponding deputies.

In the course of a reorganization carried out under a new group management, it happened that some employees took over the tasks of up to 10 former colleagues.

Are you sure that – apart from the extremes outlined above – you have built up an organization that really fits your company, its tasks and the competitive and market situation? In addition to a classic line organization, you have a matrix organization, a process-oriented organization, a project organization, a fractal organization and mixed forms available to you as organizational forms.

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