The functional organizational structure organizes the activities of a business around areas of specialization. This approach involves a considerable amount of process standardization within a business, with the real decision-making authority centered at the top of the organization. For example, there may be a marketing department that focuses solely on marketing activities, a sales department that only engages in sales activities, and an engineering department that only designs products and manufacturing facilities.
The functional organizational structure is the dominant mode of organization in larger companies, since these entities deal with such large sales and production volumes that no other form of organizational structure would be nearly as efficient. It is particularly effective in the following situations:
- Large volume of standardized product or service sales
- Reduced level of change within the industry
- Large fixed asset base
- Minimal amount of entirely new product line introductions
- Minimal changes due to fashion or other changes in taste or technology
- Competition is primarily based on cost
In other words, this system works well in a stable environment.
Example of the Functional Organization Structure
ABC International has just passed $10 million in sales, and its president believes that this is a good time to restructure the business to improve efficiencies through job specialization. Accordingly, he clusters employees into the following functional areas:
- Accounting department
- Corporate department
- Engineering department
- Facilities department
- Human resources department
- Investor relations department
- Legal department
- Production department
- Public relations department
- Purchasing department
- Sales and marketing department
Advantages of the Functional Organization Structure
Of the following advantages, the first one is the most important; the functional structure can introduce a great deal of efficiency into the operations of a business. The advantages are:
- Efficiencies. When employees are allowed to focus on one specific functional area to the exclusion of all else, they can achieve significant efficiencies in terms of process flow and management methods.
- Chain of command. There is a very clear chain of command in this structure, so everyone knows which decisions they are allowed to make, and which ones to hand off to their supervisors.
- Promotions. It is easier to set up career paths for employees and monitor their progress toward the goals outlined for their functional areas.
- Specialization. A company can use this approach to cultivate a group of extraordinary specialists who can strongly impact the functions of the company.
- Training. It is easier to monitor and update the training of employees when they are focused on narrow functional areas.
Disadvantages of the Functional Organization Structure
Despite the advantages of the functional organizational structure, it can also twist the fundamental process and decision flow within a business, with the following results:
- Fast growth. When a company is growing rapidly and is therefore continually modifying its operations to meet changing conditions, the functional structure can reduce the speed with which changes are made. This is because requests for decisions must move up the organizational structure to a decision maker, and then back down to the person requesting a decision; if there are multiple levels in the organizational structure, this can take a long time.
- Queue times. When processes cross the boundaries of multiple functional areas, the queue times added by each area can greatly increase the time required to complete an entire transaction.
- Responsibility. With so many specialists involved in a process, it is difficult to pin the blame for a specific product or service malfunction on any individual.
- Silos. There is a tendency toward poor communication across the various functional silos within a business, though this can be mitigated by using cross-functional teams.
- Small businesses. This approach is not needed in quite small businesses, where employees may be individually responsible for many functions.
- Specialist viewpoint. When everyone in the company is herded into clusters of functional silos, there are few people left who are capable of seeing the total strategic direction of the company, which can result in a very difficult decision-making process.