A company that has departments for marketing, finance, personnel, and production is organized by:

Several factors determine the type of organizational structure that a company uses: revenues, number of employees, diversity of products, types of customers and geographical spread. Smaller companies have more informal cultures while larger corporations are more formal and bureaucratic.

Three forms of organizations describe the organizational structures that are used by most companies today: functional, departmental and matrix. Each of these forms has advantages and disadvantages that owners must consider before deciding which one to implement for their business.

The most common organizational structure is the functional or departmental form. In this structure, all of the employees of a specific function are brought together to form a department. Examples of these individual departments are sales, accounting, marketing, finance, research and production.

A functional structure has a firm hierarchy; each department has a separate management staff and upward reporting lines of authority. A department manager may report up one level to a vice-president who might be in charge of several departments, such as finance, marketing and IT. This vice-president could then report to the CEO of the company.

Functional organizations are effective for large corporations with homogeneous product lines. Smaller companies need structures that are more creative and can adapt more quickly to changes in the marketplace. Employees in small organizations may be responsible for several functions at the same time.

Advantages: A significant advantage of a functional structure is the focus and concentration of a group of specialists on their particular skills. Putting all of the company's marketing personnel together in one department allows them to more easily share ideas to improve their expertise and become more efficient. Training is more focused on the functional area.

The chain of command is clear in a functional structure. Each person knows the limits of his decision authority and when to pass the issue to a supervisor.

The opportunity for promotion is usually clearer in the departments. Junior positions can aspire to higher levels with more training and experience.

Disadvantages: A disadvantage of the departmental structure is the limitation to communication between employees in different departments. While the managers of each department may talk with each other, employees are more isolated from each other and don't have naturally open avenues of communication.

Another problem with a functional structure is the possibility that employees will only see the company's operations through the lens of their own occupations. They develop "tunnel vision," which prohibits them from seeing the strategic direction of the business and the viewpoints of people in other departments. Employees with this narrow focus have difficulty grasping the views and perspectives of other departments. This is also known as the "silo" effect.

Recent attempts have been made to solve this communication problem by creating teams with members from different departments.

A divisional structure organizes a company's activities into geographical, products, markets or service groups. As example, a company might have one division to handle sales in the United States and another for European sales. Or a division to manage blue widgets and another to handle green gizmos.

Each division would have a complete set of functional departments. Thus, the green gizmos division would have its own departments for sales, purchasing, accounting, finance, engineering and so forth. Companies with numerous products, markets or regions prefer to organize their businesses into divisions.

Advantages: Accountability is clear with divisional structures. Each one operates separately and is responsible for managing its activities. The results, good or bad, are easily identified.

A divisional structure works best when quick decisions are needed to react to rapidly changing market conditions. Local managers are in a better position to respond sooner to competitive threats rather than having to pass information up a chain of command and wait for a decision to come back down.

Employees in divisions develop their own unique cultures. For example, personnel in a division set up for retail customers become more closely attuned to the needs of their market demographics and can tailor their activities to those wants.

Disadvantages: Divisions cost more to set up and operate. When a corporation has numerous divisions, the total number of employees will likely be higher compared to an organization aligned into functional departments. The same functions when spread across several divisions will not be as productive and efficient as when they are concentrated in a single department.

Companies with separate divisions may lose the benefits of economies of scale. Take purchasing, for example. A corporation might get better discounts for office supplies when purchasing large quantities for all divisions together rather than placing smaller orders at the division level.

Inter-divisional rivalries can become a problem when division managers don't have incentives to work together. Managers may even work against other divisions to gain an advantage since they have clear accountability for the results of their own division and don't care about the performance of the corporation as a whole.

Companies that are creating and launching new products or initiating different marketing campaigns will form matrix structures to manage the projects.

A matrix organizational structure attempts to gain the benefits of functional organizations by combining specialized skills into a project grid. Matrix organizations are designed to foster cooperation between functional silos so that similar activities can be managed more efficiently to achieve a common goal.

Matrices have two chains of command: one for the project and another for the functional skills which are brought into the project. Project managers have authority horizontally across the departments. At the same time, employees still report to the department heads for their function.

Advantages: When a matrix organization is created, it has a clear objective. It may be to introduce a new product or design a new marketing campaign for another demographic. A matrix can be dissolved once its mission is complete.

A matrix project organization structure pulls together the employees with the particular skills and knowledge required for the project. This gives the employees the ability to work with co-workers from other disciplines as teams. Together, they communicate better and share more innovative concepts that are isolated by the silos of departmental and functional organizations.

Disadvantages: Matrix structures are more complex. Lines of authority run vertically and horizontally with employees working for two bosses. Employees can often receive conflicting directives from project and functional managers, creating stress and confusion when setting priorities.

Managers for matrix projects need special talents. Since they don't have singular authority, they must be able to compromise and negotiate. They need to have tolerance for conflict and be able to handle difficult situations.

Deciding on the best organizational structure for your company is critical to success. It requires thought and analysis about which structure will work at the moment and if it can be adapted to remain effective with growth. Making changes in organizational structure can be painful for management and employees, so it is important to get it right at the beginning. Describe how the firm is organized now and look to see which form would make the most sense.

The organization of different departments or business units in a company

Corporate structure refers to the organization of different departments or business units within a company. Depending on a company’s goals and the industry in which it operates, corporate structure can differ significantly between companies. Each of the departments usually performs a specialized function while constantly collaborating with each other to achieve corporate goals and values.

A company that has departments for marketing, finance, personnel, and production is organized by:

Departments in a company include Human Resources, IT, Accounting and Finance, Marketing, Research and Development (R&D), and Production. Some product-based or project-based companies may divide up business units by addressing a single product or project as a department.

Types of Organizational Structure

There are four general types of organizational structure that are widely used by businesses all around the world:

1. Functional Structure 

Under this structure, employees are grouped into the same departments based on similarity in their skill sets, tasks, and accountabilities. This allows for effective communications between people within a department and thus leads to an efficient decision-making process. Companies with departments such as IT and Accounting are good examples of a functional structure. 

2. Divisional Structure

This structure organizes business activities into specific market, product, service, or customer groups. The purpose of the divisional structure is to create work teams that can produce similar products matching the needs of individual groups. A common example of the divisional structure is geographical structure, where regional divisions are built to provide products or services to specific locations.

3. Matrix Structure

Matrix Structure is a combination of functional and divisional structures. This structure allows decentralized decision making, greater autonomy, more inter-departmental interactions, and thus greater productivity and innovation. Despite all the advantages, this structure incurs higher costs and may lead to conflicts between the vertical functions and horizontal product lines.

A company that has departments for marketing, finance, personnel, and production is organized by:

4. Hybrid Structure

Like the Matrix Structure, the Hybrid Structure combines both functional and divisional structure. Instead of grid organization, Hybrid Structure divides its activities into departments that can be either functional or divisional. This structure allows the utilization of resources and knowledge in each function, while maintaining product specialization in different divisions. Hybrid Structure is widely adopted by many large organizations.

A company that has departments for marketing, finance, personnel, and production is organized by:

Learning About a Company’s Corporate Structure

When an FP&A analyst performs various analyses and financial modeling, corporate structure is often one of the first things taken into consideration, because how the departments are defined directly influences the construction of any model.

1. Corporate structure is the basis for building any financial models

Depending on the kind of products/services a company provides or the industry it is in, its corporate structure can look very different from that of other businesses. Therefore, it is essential for the FP&A analyst to work closely with different business units in the company to understand their responsibilities and areas of expertise.

The FP&A analyst should organize regular meetings and communicate consistently with the different business units to keep up with the latest trends in the market, new and existing projects, short-term and long-term work plans, and expected opportunities in the project pipeline. That way, not only can the analyst familiarize themselves with the ongoing activities in each team, they are also able to respond quickly to changes in budgets and forecasts with the latest information.

2. Businesses with functional or divisional structures tend to use straightforward modeling

Out of the four organizational structures, functional and divisional structures are the easiest to build financial and forecasting models on, because of the simplicity of the companies’ departmental structure. An FP&A analyst can easily gather data, perform analysis and realize variances, identify data trends, and forecast future performance for each department.

Sometimes, an FP&A analyst may drill down to as deep as each employee when collecting information for detailed analysis. Because all employees are in a single reporting relationship in a functional or divisional structure, the analyst can easily track individual performance, working hours, and expenditures. This helps in performing precise analysis on departmental costs, earnings, and productivity, without simply making a lot of assumptions.

3. Matrix structure companies may incur more estimations on various factors

In a matrix structure, employees have dual reporting relationships, generally to both a functional manager and a division/product manager. This can lead to conflicts in resource utilization between a division and a function, making it more difficult to implement cost allocation because a single employee can be a member of two teams at the same time.

Moreover, it is more challenging for an FP&A analyst to develop a perfect forecasting model for matrix structure companies because there are many resources overlapping and ambiguous reporting lines. Measuring employee productivity rates and project expenses may require some estimations on individual working hours spent on various products or projects.

Other Resources

Thank you for reading CFI’s guide to Corporate Structure. The free CFI resources below will help broaden and deepen your understanding of how businesses actually operate.