Many small-business owners don't have a traditional hierarchical reporting structure for their company. In these cases, the organizational chart often looks like a hub and spoke system—all the decision making is centralized, and every important conversation is one on one with the owner. There's also no standardization of tasks.
As your business grows, a more bureaucratic structure will usually develop, with a stricter hierarchy since you can’t be everywhere at once. Clear definitions of the responsibilities for each functional job are documented. There's a respect for merit, but politics and personal relationships may play an influential role here. This is where a company culture may start to take shape independent from you.
In this type of org chart, there are strict management and individual contributor levels. The management layer works directly with you. As your business grows, there can be many layers of top-down decision making.
This may work well for organizations that require quick command and control decisions, but it creates few leaders and more followers. All strategic decision-making is done at the top. Unfortunately, over time, this strict structure may stifle innovation and creativity in rapidly changing markets. The key to creating a strong hierarchical organization is often to task each manager with setting departmental goals within the company’s overall mission. They may work with you on what needs to be accomplished, but they're responsible for how it will be achieved. As a result, they're given their own budget and hiring authority for their team.
For hierarchical organizations to be effective, each person on the chart may need to be evaluated quarterly as far as their impact on achieving these specific goals and how they contribute to the overall company. Weak team members may bring down a department or an entire company. In effective businesses, people who don't perform have no place to hide and are ushered out. Team members should be cross-trained to fill in for employees who leave. Systematic approaches should be implemented and followed.
Choosing the Right Structure
One size does not fit all. It's critical to align your company’s strategy and market environment with an organizational structure that will allow it to optimally operate. If your business is producing low-cost and high-volume products, the traditional hierarchical organization can be very successful. If your company depends on constant innovation in a volatile marketplace, this structure may not be effective. For a small organization, too many specialized silos could be paralyzing. If your company grows to greater than 15 people, there are economies of scale by maintaining specialized departments with more decentralized decision making. You need to organize with strict controls if your company is working in a highly regulated industry such as health care, insurance or finance.
Shifts Based on Your Culture
Organizations also make shifts based on their culture, including:
Matrix management. This is where team members across different functions (research/development, production, sales and finance) work on a given project or product all reporting to a single manager. This differs from a traditional hierarchical organization where all the employees performing a similar job get pooled and report through a single management layer.
Why make this shift: This structure breaks organizational silos and can promote communication across many functional areas so team members might better understand the challenges of other groups. It may also help grow the skills of all its team members. Unfortunately, it may also result in confusion for people who have multiple bosses and competing priorities.
Profit center management. The structure revolves around the competency of the entire team to reach their goal. At one national grocery chain, for example, each location operates as an autonomous profit center composed of about 10 self-managed teams. These team leaders also act as their own team across the entire company.
Why make this shift: This often works well for franchised or autonomous geographic locations. Each unit can be evaluated for how much they contribute to the bottom line and that successful location’s practices can be replicated across other units.
Network management. This tends to be effective when employees work with a lot of external resources. Each person manages a set of outside relationships. This format provides a form of vertical integration for one national retailer that owns no factories and outsources the manufacturing of its clothing to its 800 suppliers.
Why make this shift: This might work for small-business owners who work with a lot of outside suppliers that handle key parts of their business, including development, manufacturing, sales or service.
Virtual management. This is popular with small businesses where there are a lot of freelancers or temporary bonds to accomplish a particular goal. While not strictly a formal organization, it exists with a network of electronic Internet connected alliances. This allows the core business to be very small, but operate in a bigger market.
Why make this shift: This is generally used by small businesses that maintain a small staff and hire outside resources to deliver on a given customer project. When the project is over, the alliances dissolve.
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This article was originally published on February 19, 2015.