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The Relationship Between Organizational Structure and Establishing the Hierarchy of a Company

The organizational structure of a company can determine its success or failure. The hierarchy of a company is closely integrated with company culture and how it’s perceived internally and externally. Learn more about what goes into determining an organization’s structure and the different options you have for creating the kind of company hierarchy chart that’s best for your business.

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Basic elements of an organizational structure

Before considering the hierarchy of a business, consider the shape your organizational structure will take. Having the right structure ensures optimal business success on all levels. Along with establishing the business hierarchy, it’s important to take a look at each of these basic elements: 


1. Departmentalization

This is how the company’s functions are grouped based on what kinds of tasks certain workers will perform. Depending on the industry, there may also be the need to create departments based on criteria other than tasks, such as brand lines or customer needs.


2. Centralization or decentralization

This is an important structural consideration because it will affect not only the office hierarchy but also the flow of ideas and overall culture. In a centralized structure, C-level managers make all of the decisions. This leaves middle managers with little to no say in setting the company’s goals, although they still help implement them. Decentralized structures, however, allow all levels of management to have input on the company’s goals and objectives. This is a good option for start-ups and some larger organizations and is contingent upon having the right executive leadership.


3. Span of control

Span of control specifies the number of direct reports a manager has. The ideal number depends on certain factors, including industry, job descriptions, manager style and company strategy.


4. Work specializations

The needs of the company’s workforce must be met, and paying attention to the employees’ work specializations, job descriptions, required education, skill sets and prior work experience means managing expectations so that employees don’t perform beneath their capacity. 


5. Rule formalization

Formalization of rules, policies and procedures dictate the relationships within the organization and determine aspects of its culture. Standards of dress, equipment usage and break durations are just some of the guidelines that management must adopt. 


Related: 10 Recruiting Strategies for Hiring Great Employees


How small businesses can create their organizational structure 

When it comes to small businesses, the company hierarchy chart can be fuzzy, which can lead to important tasks going undone. To start structuring your organization, consider working these three steps:


Create departments: Most companies need at least these three departments in order to survive:


  • Sales handles generating profits and can include lead generation and PR. 
  • Operations is all about having a product or service to sell and fulfilling customer orders. This may include production, fulfillment and customer service.
  • Finance is for tracking expenses and revenues.

Assign staff to roles: Once you have departments, assign people who will take ownership of the various roles within the department. Be specific about what they’ll do, knowing that titles and responsibilities may change with the organization’s growth.


Figure out leadership structure: When it comes to leadership, remember that you need someone with the energy and innovative streak to create the vision for the company and someone who follows through and can implement those ideas. Those characteristics may not reside within the same person. This could mean having a CEO (chief executive officer) role partnered with a COO (chief operating officer), which strikes a healthy balance between creative vision and practical application.


What is a company hierarchy chart?

A company hierarchy chart shows the organizational structure of the company with clearly defined titles and roles. Each manager and employee can locate their position in the chart and know who they report to and how their job fits in the company structure. Job titles identify employees and promote equity among coworkers of the same title and position of authority. They also help employees define their work experience for future employment opportunities. 


Common types of business hierarchy

There are many types of hierarchies in business and numerous models that can be customized to fit your business type and structure. Here are five examples and explanations of how they might function for your business:


  • Traditional
  • Flattened
  • Matrix 
  • Divisional
  • Team-based 

Traditional hierarchy of a company

In this model, authority is structured top-down. This is the most common structure, especially in large corporations, governments and religious organizations. Higher positions on the chart typically have the most decision-making power. From there, authority is delegated down according to the company’s divisions by region or department.


Flattened structure

A flattened structure removes some of the supervisory layers of the top-down hierarchy, allowing for more frequent communication, input and feedback. This can increase productivity and give employees greater personal ownership of their work. A flattened structure may work well for a start-up or a small business where work is transparent and more traditional oversight may not be required. 


Matrix or dual-manager hierarchy

The reason why the matrix structure is sometimes called a dual-manager hierarchy is that employees report to two authority figures. One authority is on the functional line and the other is on the project or product line. In theory, both managers have equal authority, and the matrix structure attempts to solve the problem of limited perspectives within departments.


Divisional structure

In a divisional hierarchy, a company is divided along product, geographic or market lines. Each group in the chart functions independently with its own set of support and accounting staff. This structure can be useful for allowing a division in two continents, for example, to have individual decision-making for marketing and advertising without waiting for approval from another manager higher up on the chart. It can promote efficiency and autonomy, with decisions based on local knowledge and practices.


Team-based hierarchy

In a team-based hierarchy of a company, employees with clearly defined roles are organized into teams that make collective decisions. Ideally, the team manages specific areas, such as customer service and project management. This can work well for a company with employees who work from home or in scattered geographic locations. Each member of the team takes responsibility for the project’s completion and can cross over into other roles to make that happen. 


Tips about business titles

Having well-defined titles makes job descriptions and responsibilities clearer for employees. Job titles often fall into three categories, with each category describing something about the job:


  • Responsibility or hierarchy level: Titles such as executive, manager, operations manager, director or supervisor are commonly management-level positions that have decision-making power and other employees who report to that position.
  • Daily job duties: These titles describe what the employee does. Examples include titles such as chef, janitor, mechanic, assistant, server, programmer and event planner.
  • Hierarchy level: In some cases, job titles will include an additional descriptor to indicate seniority and possibly managerial responsibilities. Examples of descriptors include junior, senior, head, chief, assistant and associate. 

Related: How to Reduce Employee Turnover


Final thoughts about structure and hierarchy in business

When establishing your company’s hierarchy structure, you can choose to adopt traditional titles and a top-down approach, or you can decide on a less-traditional model and titles that signal a flattened management style. 


Company hierarchy FAQs

Here are some frequently asked questions about company hierarchies:


How do I structure the hierarchy of a business?

Consider how your company functions every day to determine the best way to employ a hierarchy. Ask yourself questions like these: Do your employees come to one centralized office? Do you want one top decision-maker or do you want to delegate high-level decisions down the line? Do your employees mostly work from home with little supervision? Then choose the structure that fits best.


How do I create a business hierarchy chart?

Use employee photos, names or titles in boxes that you connect with solid or dotted lines to show the reporting relationship between each position or person.


What is the purpose of creating a company hierarchy?

A hierarchy makes roles and duties clear no matter who is occupying the position. It is a way to make sure that transitions from one employee to the next are seamless and help the company function well even as employees move on and new hires come on board. The chart makes it clear who reports to whom and how to best accomplish decision-making.


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