What is organizational design?

Organizational design is the creation or change of an organization’s structure. If you have a job, belong to a club, or participate in sports, then you belong to a type of organization. Imagine if your group had no structure — no organization. Things would get messed up pretty fast.

The organizational design of a company reflects its efforts to respond to changes, integrate new elements, ensure collaboration, and allow flexibility.

Managers must make choices about how to group people together to perform their work. Five common approaches help managers determine departmental groupings (grouping of positions into departments).

The five structures are basic organizational structures, which are then adapted to an organization's needs:

  • Functional structure groups positions into work units based on similar activities, skills, expertise, and resources. Production, marketing, finance, and human resources are common groupings within a functional structure.
  • Divisional structure groups departments according to organizational outputs — by product type, customer, or geography.
  • Matrix structure combines functional specialization with the focus of divisional structure. This structure uses permanent cross-functional teams to integrate functional expertise with a divisional focus. Employees in a matrix structure belong to at least two formal groups at the same time — a functional group and a product, program, or project team.
  • Team structure organizes separate functions into a group based on one overall objective The intent is to break down functional barriers among departments and create a more effective relationship for solving ongoing problems.
  • Network structure relies on other organizations to perform critical functions on a contractual basis. That is, managers can contract out specific work to specialists.