A Guide To What A Business Hierarchy Is And How It Works
Updated 3 March 2023
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A hierarchy in an organisation is important for managing workflow, maintaining transparency and communicating effectively within the organisation. A company's hierarchical structure can vary based on size and business strategy, with small enterprises having a less complex one than larger organisations. Learning about a company's organisational structure can aid your understanding of how it manages information flow and operations. In this article, we define 'business hierarchy', explore how it works, discuss its various structural levels, analyse contrasting business structures and explain the advantages of hierarchical organisation.
What Is A Business Hierarchy?
A business hierarchy is a way companies organise different levels of authority within their organisation. A company's hierarchical structure allows it to classify employees to define who oversees specific duties. Professionals who work at higher levels have greater responsibility for ensuring the organisation achieves its strategic objectives. There are several hierarchical structures a business can adopt depending on its geographical distribution, number of employees, business strategy and corporate culture.
How Do Business Hierarchies Work?
A business establishes a hierarchical structure by organising its employees using a pyramid model determined by its employee's specific attributes. A typical hierarchy comprises the following employment groups: administrative, executive, supervisor and entry-level personnel. In a larger organisation, there are more levels in the structure.
Organisational hierarchies often have an advantage because of their streamlined training and communication abilities. Supervisors who thoroughly understand the company's processes can easily train entry-level employees, who can then ask for guidance or clarify questions. The hierarchy simplifies objectives and increases the efficiency of business processes.
Different Levels Of A Business Hierarchy
Here are a few common roles that comprise the levels in a company hierarchy:
Shareholders have a high level of influence over the direction of a company because they want to maximise the returns on their capital. They are rarely involved in the business's daily operations, but they influence crucial decisions. For instance, they may oversee appointments to the board of directors, choose executive officers, manage the distribution of dividends and the approval of mergers and acquisitions or approve the company's liquidation.
Board of directors
A company's board of directors comprises individuals who invested in the company or its representatives. These individuals attend regularly scheduled board meetings where they discuss corporate data, industry developments and other important matters. During these meetings, they may also make crucial decisions about the company's management, revenue streams and other corporate decisions.
Related: How To Become A Member On A Board Of Directors in 4 Steps
Chief executive officer (CEO)
As the highest-ranking member of the organisation, the CEO finalises mission and purpose statements and establishes operational standards. Many employees look to the CEO for direction and motivation. The CEO is responsible for making crucial company-wide executive decisions.
Related: How Much Does A CEO Make? (Plus Requirements And Tips)
Chief operating officer (COO)
The COO is the second-highest executive position within an organisation. They collaborate closely with the CEO to ensure the company's long-term objectives correspond with its current business operations. COOs analyse departmental reports to establish levels of productivity, technological requirements, hiring needs and business potential. They also monitor human resource (HR) data to improve corporate culture and employee satisfaction.
Related: Learn How To Become A Chief Operating Officer (COO)
The president makes crucial business decisions and devises strategies to enhance the company's current performance. They frequently represent the company in public. The president also contributes to developing customer relationships, strengthening its operational performance and helps achieve financial objectives.
The vice president assists the president in making business decisions. They offer a unique perspective on the company and its personnel. Other responsibilities include helping the organisation plan its mission, vision, values and strategic objectives.
Head of department (HOD)
A department head is an individual in charge of a department, such as HR, sales or marketing. They delegate responsibilities to managers and oversee performance. The head of a department is often a professional with several years of experience and in-depth knowledge in the relevant field.
Managers collaborate with the HR department to evaluate, interview and hire employees. To help ensure employees do their work, they also set company objectives and project deadlines. Managers provide employees important information from high-ranking company officials, such as the president.
Related: 10 Coaching Skills For Managers And Tips To Improve Them
Supervisors provide training and additional learning opportunities to develop employees' skills and make them more capable of carrying out their responsibilities. The supervisor clarifies any policy or goal that an employee finds confusing. They assess employee performance, offer feedback and write performance reviews for the management.
Related: 11 Important Supervisory Skills And Tips To Highlight Them
Employees perform most of the daily work. They often comprise the biggest group at a company. These professionals help produce the findings that management uses to determine how to run the business.
Related: Essential Areas Of Improvement For Employees (With Tips)
Independent contractors are professionals who serve as consultants for the company. They benefit a company by providing insight and knowledge that in-house staff may not know. They often work on a project-by-project basis with the business.
Related: What Does Freelance Mean? Definition, Tips And Popular Jobs
Types Of Business Structures
Some companies use unique structures based on their needs. Here are other business structures you may find:
In team-based organisations, each employee is a part of a group. These teams have a designated task. This organisational structure lacks any formal management or supervision. Instead, it is up to the teams to produce their content. Employees with a team structure can make most decisions without consulting management.
Related: Team Management Skills (Definition And Ways To Improve Them)
Flatter organisations have fewer levels than a typical hierarchy. This structure makes the company hierarchy simple while remaining organised. In such organisations, there is more interaction amongst colleagues.
Every employee in flat organisations is on the same level, so there is no hierarchy. Each employee establishes their role and manages their projects. The employees manage all aspects of a project, including planning and budgeting. They frequently develop unofficial hierarchies or informal groupings to help each other.
Flatarchy is a combination of hierarchies and flat organisations. Employees can choose their duties despite working in a hierarchical position. In addition, teams also operate without a hierarchy. Contrary to flatter hierarchies, a flatarchy may keep a few specific levels even as it expands the business model to include flat organisational structures.
In holacracy, there are no job titles or official responsibilities. An individual can hold multiple roles. This structure aims to distribute governance and decision-making. Since it lacks structure, it often resembles a flat organisation. Employees can work alone or in groups. Team members select what tasks they want to complete and follow a circle structure to divide the responsibilities. The self-governing holacratic organisation emphasises the unique talents of each individual. For instance, the business may consider each employee's area of expertise and encourage them to use it on projects.
Advantages Of Hierarchical Structures
Businesses with a well-planned hierarchical structure can experience several benefits. Here are some of the key advantages of these structures:
Businesses that offer goods or services to other businesses greatly benefit from a hierarchical structure. For example, if a company produces high-end apparel, it can use a hierarchical structure to ensure staff members design all garments to specific standards. Similarly, maintaining a consistent brand image across different regions is important if a business manufactures, distributes and advertises a high volume of goods. A well-organised hierarchy can help you communicate essential information from the top down as the business grows.
It is easy to understand who is in control as this structure clearly shows the flow of command. As each department has a decision-maker who centralises power and management processes, it is easy for staff members to understand to whom they report. Such a clear structure can assist employees in deciding whom to contact for resolving conflicts, offering business ideas, fixing HR issues or enquiring about internal promotions.
Related: 6 Report Writing Skills: Definition And Tips To Improve
Distinct career path
Employees can easily discover promotion opportunities, which helps them recognise their potential career paths. They can see how to rise to higher levels in the organisation. In a hierarchical framework, gaining experience and advancing through the ranks is clear.
Related: Learning Styles For Career Development
Opportunity for specialisation
Since the company has specified departmental divisions within its hierarchical structure, employees in each department have distinct responsibilities. This distinction allows individuals to specialise in particular occupations and improve their abilities. There may also be various internal areas where employees can specialise if they apply their knowledge correctly.
Each department's personnel work in specialised teams in a business with a hierarchical management structure. As a result, employees are more efficient and can reach their goals more quickly and effectively. This collaboration helps team members establish a feeling of loyalty and team spirit.
A strong hierarchy ensures clear leadership at all levels. This leadership enables the management to concentrate on broad goals and the company's vision while lower-level professionals monitor employee progress. It helps ensure the companies follow the actions that best help achieve business goals.
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