Everything you need to know about the types and classification of organisation structure.

Organization structure is the pattern in which various organizational activities are divided and assigned among positions, groups, departments, and divisions and the coordinating mechanism among these activities to achieve organizational objectives.

An organisation structure shows the authority and responsibility relationships between the various positions in the organisation by showing who reports to whom.

It is a set of planned relationships between groups of related functions and between physical factors and personnel required for the achievement of organisational goals. Since these activities may be divided and assigned in different ways, there are many forms of organization structure.


Some of the types and classification of organisation structure are:-

1. Entrepreneurial Structure (Simple Structure) 2. Functional Structure 3. Divisional Structure 4. Strategic Business Unit (SBU) Structure 5. Matrix Structure 6. Team-Based Organisation 7. Virtual Organisation

8. Boundary Less Organisation  9. Product Based Structure 10. Geographical or Territory Based Structure 11. Customer Based Structure 12. Project Organisation  Structure 13. Virtual or Network Organisation 14. Mechanistic and Organic Structure.

Additionally, learn about the advantages, disadvantages, merits and demerits of few types of organisation structure.

Types and Classification of Organisation Structure (with Advantages and Disadvantages)

Types of Organisation Structure – With Merits and Demerits

There is no single organisation structure or design that is suitable for a given strategy. Thus, what is suitable for one business may not be suitable for a similar unit, but there are successful firms in a given industry tend to design structure in a similar way. For example, small firms tend to be functionally structured, big firms with multiple, products or services, use SBU structure or matrix structure. An organisations growth makes structure complex.


The different structures, usually followed are explained below:

Type # 1. Entrepreneurial Structure (Simple Structure):

Simple structure comprises owner (top level) and employees of lower level. It is the oldest and most common organisation structure. Almost all small scale industrial units or small organisations use simple structure. Generally, small scale units (SSUs) or small firms produce single or very narrow product line in which, owner makes almost all decisions. This type of structure is highly centralised. It is highly informal and the coordination of tasks is accomplished by direct supervision.



i. The design may often foster creativity and individualism.

ii. Helps to make quick decisions,

iii. Highly responsive to environmental changes,

iv. It helps in fast communication, since it is simple and informal, and


v. Helps to reward right person.


i. Informality may lead to problems,

ii. It may create and confusion conflict, due to improper understanding about employees responsibilities,


iii. May divert the owner from strategic decisions to day-to-day operating decisions,

iv. It does not allow employees participation in decision making,

v. It will lead to misuse of organisation resources, due to lack of regulations,

vi. Limit opportunities for upward mobility,


vii. Talent retention difficult, and

viii. There is no potential for future development.

Type # 2. Functional Structure:

Functional structure is generally found in organisations in which, single product/services is offered. When it is used, the organization is departmentalized on the basis of functions. Thus, one can see marketing, materials management, production, finance and accounting, personnel and maintenance departments in the functional design of a company engaged in manufacturing. The activities or functions of all these departments are coordinated by the chief executive of the organization.

A common theme of functional design proponents is the desirability of standardizing repetitive tasks and making them routine wherever possible. This approach helps reduce errors and lowers costs. Managers can concentrate on exceptions to eliminate any gaps or overlaps.



A functional design has advantages:

i. The design permits division of labour and encourages specialization.

ii. It is easily understood by the employees. It needs no specialized knowledge for them to understand that there are several departments, each performing a separate function, and all departments must work in unison to achieve an organization’s goals.

iii. Functional design eliminates duplication.

iv. The design enhances coordination and control within each of the functional area.


v. Career patterns and professional development in specialised area.


Functional design fosters a limited point of view that focuses on a narrow set of tasks.

i. Employees may lose sight of the organization as a whole.

ii. Horizontal integration across functional departments often becomes difficult as the organization increases the number of geographic areas served and the range of goods and services provided.

iii. There is no accountability of each function for total results. Each department functions as a stand-alone unit.


A functional design may be effective when an organization has a narrow product line, competes in a stable environment, pursues a low-cost or focused business strategy, and does not have to respond to the pressures of serving difficult types of customers. The addition of specialized staff departments to a functional design may enable an organization to lead effectively with same degree of environment uncertainty and dynamism.

Staff experts many provide line officers with expert advice, such as dealing with certain technologies. Functional design no doubt is the oldest and simplest form, but it is the most elementary type of design and often represents a base from which other types of design should evolve.

Type # 3. Divisional Structure:

Functional structure is helpful up to a certain limit of expansion and growth. When organisation grows into unrelated products and services for different markets then it is difficult to manage. The divisional structure is organised around products, projects, or markets. A divisional structure encompasses a set of relatively autonomous units governed by a Corporate Office.

The operating divisions are relatively independent and consist of products and services that are different from those of the other divisions. The divisional structure can be organised in one of four ways by geographic area, by product or service, by customer, or by process.


Divisional structure has some advantages:


i. Clear accountability,

ii. Separate strategic and operational control,

iii. Divisional managers can concentrate on responsible area and can improve performance,

iv. Enhances ability to respond quickly to changes in external environment,

v. Enhances development of general managerial talent,

vi. Leads to competitive spirit within the organisation,


vii. Allows new business and new products to be added easily.


The divisional structure is not without limitations.

i. It can be very expensive, due to requirement of functional specialists, duplication of staff services, facilities and personnel and better qualified divisional managers,

ii. Chance of differences in image and quality may occur across divisions,

iii. There is an urge to focus on short-term performance, because divisional performance is measured on ROI and revenue growth.

Type # 4. Strategic Business Unit (SBU) Structure:


Divisional structure may not be suitable when increase in number, size, and diversity of divisions in an organisation, and it becomes difficult for strategists to control and evaluate divisional operations. The span of control becomes too large at top levels. This may lead to decrease in profits even, when there is increase in sales. This structure is very much helpful in implementing strategy of a multidivisional business.

The SBU structure groups similar products, markets and/or technologies into homogeneous groups in order to achieve synergies. It facilitates strategy implementation by improving coordination between similar divisions and making accountability to different business units.


i. SBU structure makes the task of planning and control by the corporate office more manageable,

ii. Provides greater decentralisation of authority,

iii. Helps individual businesses respond to the changes in external environment,

iv. Sharply focuses on accountability for performance,

v. Retains functional specialisation in each SBU,

vi. Provides good training ground for strategic managers.


i. May become difficult to achieve synergies across SBUs,

ii. Corporate office may become unaware of key developments that could impact on the corporation,

iii. Require an additional layer of management,

iv. Role of the group Vice President is often ambiguous.

Types Organisation Structure – With Advantages and Disadvantages

Departmentation refers to the formal structure of the organisation composed of various departments and managerial positions and their relationships to each other.

There are different types of departmentation or organisational structure. The nature of the organisational structure depends on a number of factors like the size of the enterprise, objectives of the enterprise, nature of the business, marketing characteristics, social factors, etc. The organisational structure of an enterprise may undergo changes when there are changes in such factors as the size of the enterprise, nature of business, marketing characteristics, etc.

Some of the common types of organisational structure are given below:

1. Simple Organisational Structure:

The widely prevailing organisational structure found in respect of very small enterprises is a simple one. All the authority and decision-making is concentrated in the owner manager who often directly supervises all the activities.


The main advantages of the simple structure are the following:

i. The owner manager gets invested with a complete knowledge of his organisation and its business.

ii. Decision-making is very quick.

iii. Helps to maintain an intimate relationship with everybody in the organisation.


i. Taking everything on one’s head has its own risks and disadvantages.

ii. It does not encourage development of future managers.

iii. The simple structure becomes inadequate as the business grows.

2. Functional Structure:

Under the functional structure, the organisation is designed on the basis of the basic functions, namely, production, finance and accounting, marketing and personnel.

The functional structure is commonly found in small companies and also in large companies with single product line or narrow product ranges.


The major advantages of the functional type of organisation are the following:

i. It provides for a clear definition of functions and responsibilities.

ii. All major functions are under the direct control of the chief executive, making control easy and effective.

iii. It follows the principle of occupational specialisation and is a logical reflection of the basic functions.

iv. It helps to maintain the power and prestige of the major functions.

v. It simplifies training.


The major disadvantages of the functional structure are the following:

i. It tends to overburden the senior managers with routine matters.

ii. It could result in interdepartmental conflicts or lack of coordination between the functions.

iii. It is likely that the senior managers, confined mostly to their own functions, may neglect strategic issues.

iv. It is not suitable for enterprises with very diverse lines of businesses.

v. It tends to encourage overspecialisation, narrowing viewpoints of key personnel and limit the development of general managers.

3. Product Based Structure:

The departmentation by product places all the responsibility and authority under one manager to get the product (or service) produced and marketed. This is common with multi- product companies with diverse business lines.


The major advantages of the product organisation grouping are the following:

i. Each product line or product group gets concentrated attention.

ii. It places responsibility for profits at the divisional level.

iii. It facilitates measurement of unit performance.

iv. It encourages general management development.

v. Coordination of functional activities related to a product line is easy under this structure.


The important disadvantages of the departmentation by product are the following:

i. If there are too many divisions, coordination becomes complex and difficult.

ii. This structure presents increased problems of top management control.

iii. Divisions may grow too large impairing managerial efficiency.

iv. It may give rise to conflicts between divisions.

4. Territory Based Structure:

Departmentation by territory is commonly found among enterprises having business spread over a vast geographical area. For example – a large company having business throughout India may departmentalise its business by the major geographical regions (Example – Southern India, Northern India, Western India, Eastern India and Central India).


The major advantages of departmentation by territory are the following:

i. It enables the company to cater to the needs of the different regions more effectively.

ii. It has some of the advantages of decentralisation.

iii. It is very useful where proximity to the local market can result in cost reduction.

iv. It enables an organisation to quickly and effectively respond to changes in regional conditions.

v. The division can be made responsible for volume of business and profitability.

vi. It facilitates measurement of unit performance.

vii. It encourages general management development.


The main disadvantages of the territorial structure are the following:

i. It requires more persons with general management abilities.

ii. It may sometimes cause fragmentation and duplication of functions.

iii. It increases problems of central management control.

iv. Maintenance of economical central services is sometimes very difficult.

v. It may make coordination difficult.

vi. As the emphasis under this structure is generally on the total volume of business in the regions, some business lines may not get the required attention.

5. Matrix Structure:

The different organisational structures described above have their own advantages and disadvantages. None of them is effective in certain situations. The matrix structure, which is a combination of structures, has, therefore, become popular. It may take the form of combining product and geographical divisions or functional and divisional structures, operating in tandem.


The matrix structure has the following advantages:

i. Where there are conflicts of interests, the quality of decision-making is enhanced by matrix structure.

ii. Under this structure, direct contact replaces bureaucracy.

iii. It promotes development of managers through increased involvement in decision­-making.

iv. It combines the advantages of different alternative structures.


The important disadvantages of the matrix organisation are the following:

i. It may take more time to take a decision.

ii. Under this structure, there could be confusion regarding job and task responsibilities.

iii. Cost and profit responsibilities may not be very clear in the matrix organisation.

iv. There is scope for conflicts.

v. It may encourage bureaucratisation.

Types of Organization Structure – Entrepreneurial, Functional, Divisional, Matrix, Team Based, Virtual and Boundary Less Structure

Organization structure is the pattern in which various organizational activities are divided and assigned among positions, groups, departments, and divisions and the coordinating mechanism among these activities to achieve organizational objectives. Since these activities may be divided and assigned in different ways, there are many forms of organization structure. The basic forms of organization structure are simple or entrepreneurial, functional, divisional, and matrix.

These structures may be adopted on either/or basis or in hybrid form, that is, a part of the structure may be in one form while other part may be in another form which is quite common with large organizations. Further, in large organizations, the basic organization structure may be supported by other forms for performing various activities like team-based organization, virtual organization, and boundary less organization. A brief description of these forms is presented here.

Type # 1. Entrepreneurial Structure:

Entrepreneurial structure is quite simple in nature (that is why it is also called as simple structure) and is suitable for small organizations in which the entrepreneurs also work as chief executives. Such organizations operate in a single product/service or very closely related products/services. Number of employees in such organizations tends to be quite low.

Therefore, there is direct interaction between those who manage and those who are managed. Strategy formulation and its implementation functions are carried out almost by a single person as there is no scope for specialisation. However, such a structure is not suitable for large organizations.

Type # 2. Functional Structure:

Functional structure is, perhaps, most widely used in medium and large organizations with limited number of products. Functional structure is created by grouping the activities on the basis of functions required for implementing the strategy. For this purpose, all the functions required for strategy implementation are classified into basic, secondary, and supporting functions according to their nature and importance.

The basic or major functions are those which are essential for the strategy and their operations contribute to organizational efficiency. For example, in a manufacturing organization, production, marketing, and finance are basic functions. When the departments are created on the basis of basic functions and a manager feels that his span of management is too wide to manage effectively which invariably happens in large organizations, several departments are created on the basis of dividing a basic function into sub functions.

For example, marketing department may be classified and grouped into advertising sales, market research, and so on. Thus, the process of functional differentiation may continue through successive levels in the hierarchy. Apart from basic and secondary functions, departments are also created for supporting activities to take the advantages of specialisation and to support the basic and secondary activities.

Such departments may be personnel, industrial relations, accounting, research and development, general administration, and so on. These departments may be created on the basis of their requirement in the organization and can be placed according to their role in strategy implementation. For example, if an organization emphasises product innovation and development in its strategy, its research and development may be given very high status.

Functional structure is based on specialisation of functions. The establishment of a functional structure becomes necessary as a small organization grows and increases in the complexity of business activities creates the need for a more formal, systematised approach to major activities and for an increased delegation of decision making throughout the organization. However, top management will continue to control decisions that involve strategic and coordinative variables.

Because overall objectives are set and defined by top management, the functional units must also be organized in that perspective. In this way, advantages of specialisation can be taken as manager’s work in a functional area and they become quite efficient in dealing with the problems of that area.

The specialisation increases operational efficiency, economic flexibility, and greater motivation to the people having attached with their area of speciality. This structure is suitable to firms operating in a single or related business and if they continue to grow in that area, they can be successful by following this structure.

However, the functional structure does not work very efficiently once the firm takes up diversification as the new activity may be quite different from the old one and may require different perspective which may not be adequately provided by functional structure.

The problems emerge because of the following reasons:

i. No one in the organization is responsible for the project cost and profit. Functional department people are expected to discharge their responsibility within budget. As such, there is always a lack of proper coordination and control. This problem gets magnified when there is a tendency for the functional departments to become jealous of their prerogatives and fight to promote and preserve their specialisation rather than work towards unified project objectives.

ii. Complex and markedly different activities require faster decision making because time factor is of prime importance. Functional structure provides essentially slow decision­ making process because the problem requiring a decision has to pass to various departments as all of them have something to say on the matter. This process often delays important decisions or prevents them from being made.

iii. Functional structure lacks responsiveness necessary to cope with new and rapidly changing work requirements. If the firm decides to add some new business, the basic question is how to add it because it may mean adding additional functional structure to the firm as the new business cannot easily be absorbed by the old structure.

iv. Besides, functional structure suffers from usual line and staff conflicts, usual interdepartmental conflicts, and other weaknesses emerging from such structure. Though some degree of such conflicts is positive, they may often be heightened specially in the absence of coordinative force leading to destruction in the firm.

Type # 3. Divisional Structure:

The second basic structural form employed by organizations is the divisional structure. While growth through expansion of same line of business forces an organization to organize on functional basis, growth through geographic and product diversification necessitates the adoption of divisional structure. In India, many companies have diversified into unrelated businesses and have found functional structure quite unsuitable for them.

Divisional structure is built around business units. In this form, the organization is divided into several fairly autonomous units. Each unit is relatively self-contained in that it has the resources to operate independently of other divisions. For example, each division has its own manufacturing, engineering, marketing, etc. Each unit is headed by a manager who is responsible for the organization’s investment in facilities, capital, and people as well as for unit’s development and performance.

Divisional structure is similar to dividing an organization into several smaller organizations but it is not quite the same, since each smaller organization is not completely independent. Each unit is not a separate legal entity; it is still part of the organization. Each unit is directly accountable to the organization.

Basis of Divisionalisation:

There are different bases on which various divisions in an organization can be created. The two traditional bases are product and territory. Later, many organizations have moved from these bases to create divisions on the basis of strategic business units. In each of these bases, functions involved and, therefore, departments created are different.

i. Product Divisionalisation:

In this form, each major product or product line is organized as a separate unit. Each unit has its own functional structure for various activities necessary for the product. Multi-product organizations use this as basis for divisionalisation. This is appropriate specially when each product is relatively complex and large amount of capital is required for each product. The product requires different type of efforts as compared to others in terms of marketing and/or production.

For example, Century Textiles has separate divisions for textiles, cement, and shipping. Reliance Industries Limited has six product divisions-textiles, polyester, fibre, intermediates, polymers, chemical, and oil and gas. Each division caters to different customers and has different types of competition.

ii. Territorial Divisionalisation:

In this form, regional offices are established as separate units. Each regional office has its own set of functional departments and operates under the strategic policies and guidelines established by corporate management. This is useful for those organizations whose activities are geographically spread such as banking, transport, insurance, etc.

For example, Life Insurance Corporation of India runs its life insurance business on the basis of territorial divisionalisation in which the entire geographical area of the country has been divided into five zones—eastern, central, northern, southern, and western. Each zone has further been divided into appropriate number of divisions, for example, northern zone into four divisions located at Jalandhar, Chandigarh, New Delhi, and Ajmer. Each division has a number of branches at different places covered by the division concerned.

iii. Strategic Business Unit:

In multi-product or multi-geographical area companies, divisions are created in the form of various strategic business units (SBUs). SBU concept was evolved by General Electric Company (GEC) of USA to manage its multi-product business. The fundamental concept in SBU is to identify the independent product/market segments served by an organization, and creating SBUs accordingly.

For example, GEC was earlier having nine product groups and forty-eight divisions which were reorganised into forty- three strategic business units, many of which crossed group, division, and profit centre lines. For instance, three separate divisions in food preparation appliances were merged in a single SBU to serve house ware market. In India, many companies have organised their businesses on the concept of SBU.

In fact, most of the companies in information technology sector which are engaged in development of software for different purposes and for different customer segments have adopted this approach.

Divisional structure offers many advantages over functioned structure especially in terms of autonomy for efficient management, management development, increasing organizational size up to any limit, and taking into account of specific problems related with each product or territory contributing to the overall objectives of the firm.

At the same time, divisionalisation involves certain negative points in the form of being expensive, presenting control and coordination problems, lack of suitable personnel for heading divisions, and lack of specialisation of activities. However, advantages of divisional structure score over its disadvantages. Further, many disadvantages can be overcome if suitable steps are taken well in advance.

Many of these problems can be overcome through sharp focus on tasks and responsibilities of corporate and divisional management, measurement of performance of divisions, long-term policy for performance and incentives, creating more autonomy and decentralisation of authority, and finally the explicit strategies for both the firm as a whole and its various divisions.

Type # 4. Matrix Structure:

Matrix structure is essentially a violation of unity of command and, therefore, whole classical concepts related to the principle of unity of command are violated. Matrix structure is the realisation of two-dimensional structure which emanates directly from two dimensions of authority. Two complementary structures—pure project structure and functional structure—are merged together to create matrix structure.

Thus, matrix structure not only employs a multiple command but also related support mechanism and associated organizational culture and behaviour. It shows many organizational overlaps not only in terms of command system but also in terms of whole organizational processes and behaviour.

In matrix structure, a project manager is appointed to coordinate the activities of the project. Personnel are drawn from their respective functional departments. Upon completion of the project, these people may return to their original departments for further assignment. Thus, each functional staff has two bosses—his administrative head and his project manager.

During his assignment to a project, he works under the coordinative command of the project manager and he may be called upon by his permanent superior to perform certain services needed in the project. Thus, a subordinate in matrix structure may receive instructions from two bosses. Therefore, he must coordinate the instructions received from two or even more bosses. Similarly, matrix superior has to share the facilities with others. He reports in a direct line to the up, but does not have a complete line of command below.

Matrix structure has been evolved to overcome the limitations of traditional organization structures. This is being applied to various fields of activities because of pressure for dual focus, pressure for high information processing, and pressure for shared resources. Whenever these conditions exist, use of matrix structure is beneficial.

Type # 5. Team-Based Organization:

A team-based organization has self-managing teams and coordinating mechanism among these teams as against the traditional groups of people. The basic difference between a team and a group is in three contexts- job categories—group has many narrow job categories and team has one or two broad categories; authority—group is directly controlled by the immediate superior and team has its own control mechanism; and reward system—reward in group system depends on individual performance and seniority and reward in team system is based on team performance and individual breadth of skills.

Self-managing teams have the following characteristics:

a. They are empowered to share various management and leadership functions.

b. They plan, control, and improve their own work processes.

c. They set their own goals and inspect their own work.

d. They often create their own schedules and review their performance as a group.

e. They prepare their own budgets and coordinate their work with other departments.

f. They usually order materials, keep inventories, and deal with suppliers.

g. They are frequently responsible for acquiring any new training they might need.

h. They may hire their own replacement or assume responsibility for disciplining their own members.

i. They, and no others outside the team, take responsibility for the quality of their products or services.

A team-based organization is considered to be better than group-based organization as the former leads to enhanced performance, reduced costs, organizational enhancement, and better employee satisfaction. This is the reason why more and more organizations have put emphasis on creating self-managing teams. However, it is not free from shortcomings. First, team-based organization requires a work culture that is quite different from traditional hierarchy-based organization.

If such a culture is not established, team-based organization tends to perform poorer than hierarchy-based organization. Second, creating self-managing teams is a long-drawn process full of anxiety and tension. If teams are not created properly, there may be chaos in the organization.

Type # 6. Virtual Organization:

The concept of virtual organization/corporation, also known as networked organization or modular organization along with virtual team and office has entered management field very recently. The literal meaning of virtual is having the efficacy without the material part; unreal but capable of being considered as real for the purpose.

Based on this concept, virtual organization has been defined as follows – “Virtual Corporation is a temporary network of independent companies—supplies, customers, even erstwhile rivals—linked by information technology to share skills, costs, and access to one another’s markets. It has neither central office nor organization chart; it has no hierarchy, no vertical Integration.”

Thus, virtual organization is a temporary alliance between two or more organizations that band together to undertake a specified venture. Recently, in telecommunication sector in India, many virtual organizations have been created to provide different services.

The basic reason behind creating a virtual organization is to generate synergy through temporary alliances. Creating synergy is the process of putting two or more elements together to achieve a sum total greater than the sum total of individual elements separately. The synergistic effect is generated in virtual organization because of the complementarity of competences of different partners. Some companies can do something very well but struggle with most others.

Other companies can do very well in those areas in which the first group of companies feels handicapped. If both these types of companies put their efforts jointly to undertake any project, their combined strengths could lead to much better results than what individual companies could have achieved separately. However, management scholars have divided opinions over the effectiveness of virtual organizations because of the kind of trust that is required in creating such organizations.

Often, clash of interest generates much sooner than expected. For example, one of the virtual organizations created by Intel, USA and a Japanese company could not work properly because the Japanese company was not able to complete its part of the project, leaving Intel with a major product delivery problem. Intel was not happy about that venture and decided not to participate in any such venture.

Type # 7. Boundary Less Organization:

A boundary less organization, the term coined by Jack Welch, former chairman of GE (USA), seeks to eliminate vertical and horizontal boundaries in the organization as well as the boundaries between the organization and its customers and suppliers. It deemphasises chain of control, span of control, and rigid departmentation. Instead, it has limitless span of control without the existence of hierarchical control. Departments are replaced by self-managing teams.

It relies heavily on information technology. Therefore, some people tend to call it T-form (technology-based) organization. Boundary less organization has self-managing teams but it differs from a team-based organization. A team-based organization is comparatively more structured as compared to a boundary less organization. Further, a boundary less organization differs from a virtual organization in the sense that the former is a kind of structure that an organization may adopt while the latter is an alliance between two or more organizations to achieve certain specified objectives.

The major characteristics of a boundary less organization are as follows:

i. In the boundary less organization, vertical boundaries are removed through flattening of organizational hierarchy. Status and rank are minimised.

ii. Cross-hierarchical teams which include top executives, middle managers, supervisors, and operative employees adopt participative decision making. These teams collectively share the responsibility of decision outcomes as against individual responsibility in traditional organizations.

iii. In performance appraisal, 360-degree appraisal system is used. In this system, an individual’s performance is appraised by his superior, peers, subordinates, and outsiders interacting with him. Besides, the individual himself appraises his performance, known as self-appraisal, which is used along with 360-degree appraisal to arrive at the conclusion about the individual’s performance.

iv. In traditional organizations, functional departments create horizontal boundaries which stifle interaction between functions, product lines, and units. In boundary less organizations, functional departments are replaced by cross-functional teams and organising activities around processes. For example, for new product development, no functional department is created but a multidisciplinary team is created that works on a single process.

v. In order to develop multi skills among employees, emphasis is put on horizontal transfer, just as is the case with job rotation. Through this way, the horizontal boundaries are also minimised.

vi. When fully operational, the boundary less organization also breaks down barriers to external constituents such as customers, suppliers, regulators, and others with whom the organization deals, by linking them to the organization.

In the present era of globalisation, strategic alliances and organization-customer-supplier links have become significant sources for developing competitive advantage. Boundary less organizations are better equipped to manage these features. This is the reason why more and more organizations are moving towards becoming boundary less organizations. Low-cost but efficient information technology has also facilitated this process.

However, the boundary less organizations should not be treated as panacea for all structural ills because they have their own drawbacks which are follows:

i. The concept and practice of boundary less organizations is quite new. Therefore, organizational members do not find these very comfortable in comparison to traditional hierarchical systems. Even the earliest adopter of this concept, GE, has not yet achieved this boundary less status. However, this can be treated as an operational problem which can be overcome through experience over the period of time.

ii. Boundary less organizations use computer networks extensively. These networks may include Internet, extranet, and intranet. Through these networks, people of boundary ­less organizations communicate across intra-organizational and extra-organizational boundaries. These networks are not fully reliable at all times.

The most important problem is in the form of network security. Computer networks are susceptible to attack from network hackers, viruses, and other types of mischiefs either for making money or just for fun. Though some of these problems may be overcome by installing appropriate security devices, computer networks do not remain fully safe.

In spite of both these problems, boundary less organization is in practice and their popularity is increasing day-by-day.

Types of Organisation Structure – In Relation to the Attainment of the Organisational Objectives

An organisation structure shows the authority and responsibility relationships between the various positions in the organisation by showing who reports to whom. It is a set of planned relationships between groups of related functions and between physical factors and personnel required for the achievement of organisational goals.

Organisation involves establishing an appropriate structure for the goal-seeking activities. The structure of an organisation is generally shown on an organisation chart or a job-task pyramid. It shows the authority and responsibility relationships between various positions in the organisation.

It is significant to note that the organisation structure is directly related to the attainment of the organisational objectives.

For instance, if an undertaking is in production line, the dominant element in its organisation chart would be manufacturing and assembling. But if a company is providing services in different regions, it would follow geographical or territory based structure.

1. Functional Structure:

In a functional structure, activities are grouped and departments are created on the basis of specified functions to be performed. Activities related to a function are grouped in a single unit with a view to give a well-defined direction to the whole group. For instance, in an industrial enterprise, the major functions like production, finance, marketing and personnel may be grouped into different departments.

The functions will differ in non-industrial concerns or institutions. For example, in an insurance company, departmentation may be achieved on the basis of these functions, viz., underwriting agency, claims adjustment and administration. Functionalisation may also go a step further. For instance, the marketing department may be divided into four sections; namely, advertising, sales, customer service and marketing research.

Functional departmentation is the most widely used basis for organising activities. It is found in almost every enterprise at some level in the organisation structure as it leads to better planning and control of the key functions on which the survival and growth of the enterprise depends. It facilitates specialised performance of various functions.

Functional organisation is highly suitable for an enterprise engaged in production and distribution of a single product or a small number of products. It is very useful where it is desired to introduce specialisation in the performance of various functions like production, finance, marketing, etc. But where it is required to handle multiple products, functional organisation may prove to be insufficient.


The advantages of functional structure are as under:

(i) It is easier to organise departments based on functions and sub-functions.

(ii) It allows giving balanced weightage to the basic functions on which the survival of a firm depends.

(iii) It introduces specialisation leading to higher productivity and economical operations.

(iv) It ensures effective utilisation of personnel in different departments.

(v) It helps in training of specialist managers rather than generalist managers.

(vi) It facilitates better coordination of activities within each department.

(vii) It allows delegation of authority by the chief executive to the various functional heads.


The disadvantages of functional structure are as under:

(i) Each department concentrates on a narrow range of activities relating to its function only.

(ii) It may be difficult to achieve coordination between different departments because of their different orientations.

(iii) There may be lack of understanding between different departments. The atmosphere of mistrust may lead to inter-departmental conflicts.

(iv) Decisions are delayed where decision-making involves two or more departments.

(v) Excessive specialisation may destroy teamwork in the organisation.

(vi) Functional organisation may prove unsatisfactory in handling diversified product lines and specialized projects.

(vii) Functional specialisation restricts development of generalists or managers with all-round capabilities.

2. Divisional Structure:

Divisional structure is formed by creating a set of autonomous units or divisions which are coordinated by the central headquarters. For example, a company may have three divisions to manage textiles, cement and shipping. But to coordinate their functioning, certain essential services such as Corporate Planning, Finance, Legal and Research & Development are organised at the headquarters. This structure is popular with giant firms dealing in multiple products and operating in different geographical regions. The products are often unrelated and require different emphasis on different functions. And the territories served by the firm have their unique problems.

In a divisional structure, each division is semi-autonomous and has its own resources and facilities. Thus, there is duplication or triplication of activities, personnel and equipment. For instance, two divisions may have their separate marketing research wings or public relations departments. Let us assume that a typical company has two divisions for metal products and cement respectively. Each division may have further organisation based on functional departmentation.

In India, several companies like DCM, Gwalior Rayons, Century Mills and Voltas follow divisional structure to organise their operations. The divisional structure may be based on product or geographical territory.

3. Product Based Structure:

Product based structure is followed by giant organisations having multiple product lines. Under this, each major product or product line is organised as a separate division. It is employed where the unique characteristics of the product are of great significance and they require specialised machines and equipment and trained personnel. It is appropriate when each product is relatively complex and a great deal of capital is required for each product. For instance, Century Mills has separate divisions for textiles, cement and shipping.

Product is an important basis of departmentation because it creates product divisions each of which could be considered as a viable profit centre for accountability purposes. It places attention and efforts on product lines and fixes responsibility for profits at the division level. Since the product divisions are semi-autonomous, it permits growth and diversification of products and services.

Market-oriented long-range growth-oriented strategies can be planned and implemented. The top management can easily evaluate the performance of different product divisions and pay greater attention to the product line which is less profitable as compared to others. This type of departmentation is useful where it is essential to coordinate the activities relating to a particular product. Besides better coordination, it will also improve customer service.


The advantages of product based structure are as follows:

(i) Product departmentation can reduce the coordination problems which are created under functional departmentation. There is integration of activities relating to a particular line of product. It facilitates product expansion and diversification.

(ii) It focuses individual attention on each product line.

(iii) It leads to specialisation of physical facilities on the basis of products which results in economy.

(iv) It is easier to evaluate and compare the performance of various product divisions.

(v) It keeps problems of production isolated from those of others.

(vi) Since each product manager is required to supervise the diverse functions of production, sales and finance with respect to a particular product line, there is a wide scope for the training and development of all round executives.


The disadvantages of product based structure are as under:

(i) It results in the duplication of personnel and physical facilities. Each product division maintains its separate facilities and personnel. It may become uneconomical where full use cannot be made of the specialised skills and equipment of each department. High cost of operations and large investment make it unsuitable for small firms.

(ii) It may be difficult for an enterprise to adapt itself to changes in technology, demand, etc. though product lines can be added and dropped easily without dislocating the existing operations.

(iii) Product departmentation may sometimes lead to difficulties in coordination of certain specialised activities like marketing, financing and accounting.

Thus, departmentation by product generally leads to duplication of facilities. High cost of operation prevents the small companies from adopting this type of structure. As said above, product based structure is suitable only for fairly large organisations having multi-product lines and which can appoint top managerial personnel to handle semi-autonomous product divisions.

4. Geographical or Territory Based Structure:

Geographical structure is followed in case of service organisations which have offices in different regions or geographical areas. Each regional office has independent functional departments to realise its objectives. For instance, Life Insurance Corporation of India (LIC) has semi-autonomous divisions in different regions of the country. Each division regulates the LIC branches in its territory and each branch has separate departments for operations such as new policies, collection of premium, adjustment of claims and administration. Divisional structure based on territories served.

Departmentation by territories is more suitable for service industries such as transport, banks and insurance whose customers are spread throughout the country. It helps in concentrating on the special requirements of the customers of each region.


Territorial departmentation has the following advantages:

(i) It leads to the benefits of local operations. The local managers are more conversant with their needs and those of their customers. They can adapt and respond to the local situations with speed and accuracy.

(ii) The company can meet the demands of various regions more effectively.

(iii) Better attention can be paid to local customer groups thereby raising the image and goodwill of the company. It ensures quick delivery of products to customers in different areas, and intensive exploitation of local markets.

(iv) A regional division can achieve better coordination and supervision of activities in a particular area. It also helps in reducing transportation and distribution costs.

(v) The departments based on territories can function as autonomous units.

(vi) It facilitates the expansion of business in various regions.

(vii) It is also beneficial from the point of view of country’s economic development.


Territorial departmentation may suffer from the following difficulties:

(i) There is multiplication of physical facilities. It leads to uneconomical operations.

(ii) There may be problems of integration between various regional offices. They may compete with each other in certain areas.

(iii) There may be lack of talented personnel to take charge of regional departments.

(iv) There will also be problems in providing centralised services to various departments which are located in different regions.

(v) Attempts to enforce uniform marketing and personnel policies in all the regional units may be contrary to the local needs of some units.

5. Customer Based Structure:

Departmentation by customer may be followed in enterprises engaged in providing specialised services to different classes of customers. Under this, customers are the guide for grouping the activities. The management groups the activities on this basis to cater to the requirements of clearly defined customer groups.

For instance, a big automobile servicing enterprise may organise its departments as follows – heavy vehicle servicing division, car servicing division, and scooter servicing division. Many educational institutions usually follow this type of departmentation. They offer day courses, evening courses and correspondence courses to meet the requirements of different types of students. Similarly, a commercial organisation may be divided into wholesale, retail and export departments.


The benefits of structure based on customers are as follows:

(i) Customer departmentation can focus on the special needs of different kinds of customers.

(ii) It employ’s personnel with special abilities for meeting different customer requirements.

(iii) It leads to greater satisfaction of customers which enhances the reputation of the enterprise among the public.


Customer based structure is also not free from drawbacks. For instance, it creates the difficulty of co-ordination between the departments organised on this basis and those organised on other bases. Greater emphasis to the need of the customers may lead to less than optimum use of space, equipment and specialised personnel.

6. Project Organisation Structure:

A ‘project’ may defined as a complex set of activities which are diverse, specialised and technical to be performed within the given time frame and cost structure. The project structure is designed to handle such set of activities along with the already existing organisational structure.

It is a temporary structure designed under the following situations:

(i) The assignment presents a unique, infrequent and unfamiliar challenge to the business firm.

(ii) Successful completion of the project is critical for the firm.

(iii) The project must be completed within the prescribed time.

(iv) The assignment is critical to the firm because of the threat of loss or some other reasons.

The project structure consists of a team of specialists to work on and complete a particular project. The project staff is separate from and independent of the functional departments. It may be noted that generally project teams are created along with the existing functional organisation.

Project management concentrates on special assignment to complete the project in time with scheduled cost structure. Since the project manager is wholly responsible for project results, he places more emphasis on efficient control, better customer relations, and uses his initiative and dynamism for the successful completion of project. For building the project team, personnel are drawn both from the functional departments of organisation and from outside.

On the completion of project, the internal staff will be sent back to their respective parental departments or may be shifted to other projects. But in project structure high degree of uncertainty and insecurity is inevitable as the projects are for only specific period of time. For various projects, there may be several project managers or co-coordinators each getting required resources and personnel from organisation so as to complete the project in time.


The merits of project structure are as under:

(i) Project organisation concentrates on completion of a complex project or assignment. It can be tailored to meet the requirements of the particular project.

(ii) Project organisation provides greater flexibility in organisation; greater check over the project work, provision of determining exact responsibility and better co-ordination of organisational resources.

(iii) Project organisation requires specialists in various fields. Specialists get higher satisfaction while working on complex projects.

(iv) It facilitates the timely completion of a project without disturbing the normal activities of the organisation.

(v) It has been found to fit a number of widely-varying situations such as product development, installation of a new plant, etc.


The limitations of project organisation are as under:

(i) Uncertainty in project structure arises because the Project Manager has to deal with specialists from a number of diverse fields. The specialists often have different types of approaches and perspectives.

(ii) Lack of prescribed organisational processes, lack of clearly defined responsibility, lack of communication lines and measurement yardsticks make the job of a project manager often more challenging.

(iii) The project manager has to face a very unusual decision pressure that results from the severe penalties to be imposed because of the delay in completion of the project.

(iv) Motivation of specialists may pose another problem for the project manager. Moreover, there may be conflicts among the specialists quite often because of their different orientations.

7. Virtual or Network Organisation:

A virtual organisation is a temporary network between a number of companies that come together to accomplish a specific venture. It is also called network structure. It is created to exploit fast changing opportunities and share skills and even facilitate access to global markets. Each participating company contributes what it does best.

Network structure is created around a central organisation that relies on other organisations to perform manufacturing, distribution, financing and other crucial business functions on a contract basis. It allows different organisations engaged in research and development, consultancy, manufacturing, financing, transportation, security etc. to bring their resources and capabilities together.

The core of the network structure is the central organisation which coordinates relationships and activities with the other organisations in the network. The managers in the central organisation spend most of their time coordinating and controlling external relations. Sharing of information between the constituents of the network organisation is usually facilitated by electronic technology such as cell phone, computer, electronic mail, fax, etc. This avoids the expenses of renting new offices for the venture and costly travel time between companies.

Virtual organisations have been created by large companies such as IBM, Apple, Ford etc. though there is no bar on small companies to create such organisations. Network organisation in suitable for all endeavours which require high flexibility to respond quickly to changing environment. This form has been used by several U.S. multinational corporations whose manufacturing operations require low-cost labour that can best be utilized by contracting with foreign suppliers.

However, virtual organisations may suffer from two problems. Firstly, there may be lack of close control over manufacturing operations. Secondly, there may be doubt over the reliability of the partners. However, with advances in information technology, the network structure is gaining popularity. It may be the wave of the future for organisations to capitalize on certain types of ventures or projects.

8. Mechanistic and Organic Structure:

According to the contingent theorists, the structure of an organisation generally falls into one of two designs, namely:

(i) Mechanistic structure, and

(ii) Organic structure.

These are described below.

(i) Mechanistic Structure:

According to Bums and Stalker, “Mechanistic structure is one that is highly centralised and has the common elements of bureaucracy.” It lays emphasis on formal authority and communication patterns. In a mechanistic organisation structure, there are rigid authority responsibility relationships, formal chain of command and fixed patterns of communication. Thus, the members cannot communicate across all levels of the organisation to obtain information.

Mechanistic structure is characterised by a greater degree of horizontal differentiation, high formalization (i.e., formal relations and communication), mostly downward communication, and little participation by low-level members in decision-making. It represents traditional pyramid shaped organisation which is rigid in nature. For instance, line organisation is a kind of mechanistic structure.

(ii) Organic Structure:

According to Burns and Stalker, “Organic structure is one that is characterised by high degree of decentralisation and flexibility and under which individuals are more likely to work in a group setting rather than alone.” In an organic structure, the organisational members communicate across all levels of the organisation to obtain information.

Organic structure represents low horizontal differentiation, low formalization, free communication, and participation by low-level members in decision-making. This structure serves the needs of the situation faced and is flexible in nature. It utilises downward, upward and lateral communication networks for greater efficiency and quick decision-making. The examples of organic structures include project structure, matrix structure and network structure.

Comparative Features of Mechanistic:

Mechanistic Structure:

1. Rights and obligations of each position are precisely defined and assigned.

2. There are rigid hierarchical relationships in the organisation.

3. Vertical communication between superior and subordinate is the tendency in mechanistic structure. Thus, communication is highly formalized.

4. Decision-making is centralized.

5. Coordination and control processes tend to be tightly structured.

6. Loyalty to the concern and obedience to superiors is highly insisted upon.

7. There is a high degree of differentiation of functional tasks.

8. It is suitable where environment is certain and more or less stable.

Organic Structure:

1. Responsibility and obligation are loosely defined; problems cannot be passed up, down, or laterally.

2. The relationships are not rigid; they are collaborative and redefined through interaction.

3. In addition to vertical communication, lateral and horizontal communications are quite common. Informal communication plays a bigger role.

4. Decision-making is decentralized.

5. Coordination and control take place through reciprocal adjustments among the members.

6. Commitment to the organisational goals is more valued than loyalty and obedience.

7. Special knowledge and experience contribute to the common goals of the concern.

8. It is suitable where environment is uncertain and generally dynamic or unstable.