The Determinant of Organizational Structure

Whether you're still in the business-planning process or are looking to organize an existing small business, choosing the appropriate organizational structure is crucial for making it easy to communicate, carry out daily work tasks and monitor your staff for organizational effectiveness.

When making this decision, you'll look at key characteristics of your business such as how large it is, how long it's been in operation and what business strategy you've chosen. Other determinants of organizational structure include the use of technology and the external business environment.

The size of your small business will impact the organizational structure you choose in terms of how complex it should be. When assessing your business's size, you'll want to look at factors such as your number of workers, physical locations, handling of responsibility and the need for departments or divisions within the organization.

For example, if you run a bakery with a few bakers, cashiers and assistants who all report to you, you might find that your business is so simple that it doesn't even need a formal structure with separate departments. If, on the other hand, you have 200 employees with distinct departments and business units, you'll probably want to choose a formal structure grouped by function or division and led by individual managers.

Where your small business is in its life cycle, ranging from birth to maturity, is another one of the determinants of organizational structure. If you're just getting started, you might have few employees and not need a formal structure yet since you're able to manage day-to-day operations without much difficulty.

However, as your business gets older and demand grows for your product or service, you'll find that you need to share authority with departmental or divisional managers to lead the business efficiently. Eventually, you'll likely find that your structure becomes more complex with a detailed chain of command and that you have less control than in the earlier stages of the business life cycle.

Your business's use of technology will have an impact on how efficiently it operates and how communication is handled and will thus play a factor in determining your organizational structure.

Enterprise systems have made it easier for managers to collaborate with suppliers and even other businesses, while online communication through video chat, online presentations and email have made it easier than ever to collaborate with employees and business contacts regardless of physical location.

You'll want to design your organization keeping in mind the benefits of the technologies you employ so that you avoid having redundant positions that waste your time or money. For example, a small business employing supply chain management systems that handle the tracking and ordering of inventory might not need a separate logistics department or manager. If your company makes heavy use of online communication and employs a virtual workforce, however, you'll need to consider which organizational structure would best serve managing remote employees effectively.

Another one of the five determinants of organizational design deals with your business's strategy and the critical success factors you've chosen for meeting your goals.

If your small business manufactures basic clothing, your strategy may be to do so more cheaply and quickly than your neighborhood's competitor, so you'd choose an organizational structure focused on reducing waste and increasing productivity.

If your goal is to create innovative, high-tech products before any of your competitors, however, you'd design a structure that can handle the risks and pressures of a fast-changing environment and allows for the easy sharing of ideas.

While taking a look at the internal needs of your business is crucial for choosing an appropriate structure, the external environment – including your competitors, changes in the industry and economic conditions – can't be ignored. You'll want to especially consider whether the external environment is stable or dynamic for your business since this will determine whether a flexible organic structure or a more formal mechanistic structure works best.

For example, an established local bakery would likely be a more stable business than an electronics manufacturer since the former would probably see less need to change to meet customer demands and beat competitors than the latter. Therefore, the bakery would likely opt for a mechanistic structure that focuses on long-term efficiency and profitability, while the electronics manufacturer would want a design that facilitates innovation and makes it easy to scale the business and handle change quickly.