Why functional organizational structure is the best?

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 noted below.

Increased 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.

Clear 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.

Clear Career Paths

It is easier to set up career paths for employees and monitor their progress toward the goals outlined for their functional areas.

Enhanced Specialization

A company can use this approach to cultivate a group of extraordinary specialists who can strongly impact the functions of the company.

Better 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:

Slower 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.

Longer 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.

Unclear 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.

Functional 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.

Unnecessary in Smaller Businesses

This approach is not needed in small businesses, where employees may be individually responsible for many functions.

Narrow 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.

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Functional structure is one of the most common types of organisational structure in business, especially in larger companies, where groups of employees are organised according to the function they perform.

What is a functional organisational structure?

In this type of organisational structure, businesses are organised according to their roles and skills into smaller groups or departments. This may include, for example:

• sales
• marketing
• production
• IT
• finance
• operations

Individuals, teams and line managers are grouped into a specialised department where they report to the head of the department, eg the sales director. The business' top management team typically consists of several functional heads, eg the chief financial officer, the marketing director or the head of operations.

Read more about the hierarchical organisational structure.

Advantages of a functional structure

Functional structure arguably achieves greater operational efficiencies, as employees with shared skills and knowledge work together and perform similar functions.

The advantages of this type of structure are:

• specialisation - departments focus on one area of work
• productivity - specialism means that staff are skilled in the tasks they do
• accountability - there are clear lines of management
• clarity - employees understand their own and others' roles

However, the nature of departmentalism within a functional structure can present certain risks.

Disadvantages of a functional structure

The vertical separation of divisions and teams can lead to the creation of 'organisational silos' - a mindset where one team hesitates to share information or knowledge with other teams within the same organisation.

This silo mentality can cause problems around:

• aligning priorities across the business
• the flow of information and communication
• collaboration
• co-ordination of decision-making
• embedding and managing change across departments

Functional structures are common in a wide range of businesses across many sectors. They work best within large companies, especially those that produce products or services continuously, such as in manufacturing.

Smaller companies may find functional structures too rigid, preventing them to adapt to changes quickly and easily. Project management organisational structure or flat organisational structure may be better options in this case.

Depending on your business needs, a matrix organisational structure or decentralised organisational structure may also be a suitable choice.

Companies that produce the same goods consistently and have routine operations use a functional organizational structure because its rigid structure provides predictable stability.

An organization can adapt to any structure it requires. If the business mainly handles projects, it will choose a projectized structure. While an organization dealing with operations will stick with a functional structure.

Your working style accommodates your organizational structure, defining your role and responsibilities and shaping the work culture. This culture includes the work environment, reporting system, hierarchy, etc.

Every organizational structure has a different system.

In a projectized organizational structure, team members report to the project manager. Likewise, employees report to a functional manager in a functional organizational structure. In a matrix organizational structure, it varies.

I have covered the matrix and projectized structures in other blog posts. For now, let’s focus on the functional organizational structure.

Functional Organizational Structure

The PMBOK Guide defines functional organizational structure as “An organizational structure in which staff is grouped by areas of specialization, and the project manager has limited authority to assign work and apply resources.”

A functional structure divides the organization into departments based on their functions. Each is headed by a functional manager, and employees are grouped according to their roles. Functional managers typically have experience in the roles they supervise, ensuring that employees are using their skills effectively. A functional structure that maximizes department expertise helps companies achieve their business objectives.

Under a functional organizational structure, employees are classified according to their function in an organizational chart. This chart shows the role hierarchy (e.g., president, vice president, finance, sales, customer service, administration, etc.).

Each department has a head responsible for it, helping the organization control the consistency and quality of its performance. These department heads are skilled, experienced in the same work, and perform at a high level; accordingly, productivity is exceptional in a functional structure.

Functional departments are sometimes referred to as “silos.” This means each department is vertical and disconnected from the others, and communication flows straight up through the department heads to top management.

Here, all authority remains with the functional manager. Usually, a project manager has a minimal or even non-existent role in functional organizations. Project managers will need the functional manager’s approval to use resources and may operate as a coordinator or an expediter.

The functional organization structure works well in businesses dealing with operations, like manufacturing industries.

The strengths of functional organizational structures are specialization and efficiency.

Small companies with a limited number of products use this structure. Their employees are highly skilled due to repetitive work, which means they feature high efficiency and superior performance. 

Since employees are grouped according to their skills and experience, they gain more knowledge and expertise and become specialists, making them highly efficient and productive. They will perform quickly, with less chance of error, and their output will be high quality.

The key weakness of functional structure is insufficient cooperation among different departments and management problems.

Although each department is efficient and productive, the lack of coordination among functional units or departments slows productivity. They often inadvertently compete with each other, putting their department’s interests above the organization’s.

This causes low employee morale, affecting the productivity level, which can fall behind the target.  

Communication in functional organizations is formal and mostly from top to bottom. The top management makes decisions and informs the lower-level employees. They often change procedures and modify the work environment without taking input from employees on the ground.

This negatively affects the morale of the employees and lowers efficiency, ultimately setting back innovation.

Advantages of the Functional Organizational Structure

The following are several benefits of the functional organizational structure:

• Employees are grouped by their knowledge and skills, allowing them to achieve high performance.
• Their roles and responsibilities are fixed, facilitating easy accountability for the work.
• The hierarchy is clear and transparent. This reduces the number of communication channels.
• Communication is frictionless within the department.
• Work is not duplicated, as all departments have defined responsibilities.
• Employees feel secure; they perform well without fear or uncertainty.
• Because of job security, employees tend to be loyal to the organization.
• Employees have a clear career growth path.
• Cooperation is excellent within the department.

Disadvantages of the Functional Organizational Structure

The following are a few disadvantages of the functional organizational structure:

• Employees may feel bored because of repetitive work. This monotony causes a loss of enthusiasm.
• Conflicts may arise if the performance appraisal system is not properly managed. 
• A highly skilled employee costs more.
• Departments develop an insular, self-interested mentality. Functional managers pay more attention to their own departments and ignore others’ interests.
• Communication is weak among the departments. This causes poor inter-department coordination, affecting flexibility and innovation. 
• A lack of teamwork among different departments slows innovation.
• Employees may have little concern or curiosity about events outside their group.
• The rigid functional structure makes adapting to changes difficult and slow.
• Decision-making is sluggish due to the bureaucratic hierarchy.
• Functional managers can make decisions without consulting team members. This is not good for company morale.
• Personal bias may affect employee morale. For example, an employee may feel demoralized when a low-performing employee is promoted over them.
• As the organization grows larger, managing functional areas becomes challenging. Each department may start behaving like a small company, i.e., the “silo” effect.
• Functional departments may be more committed to departmental goals rather than organizational goals.
• Employees do not learn new skills, and their roles don’t often change, causing stagnation.

Examples of Functional Organizational Structure

Small organizations dealing with production can be similar to a functional structure.

However, as they grow, they will need elements of a projectized structure.

For example:

• Research-based projects to launch a new product
• Projects to improve their product or operations
• Projects to construct new production facilities 

Summary

The functional organizational structure helps organizations run their businesses, especially those involved with ongoing operations. Employees feel secure, perform well, and are highly skilled here. Project managers typically do not have any role in a functional organization. They will have a very limited role and no authority if they do exist. In a functional organization, employees’ roles are static, and they report to the functional manager.

Does your organization use a functional organizational structure? If yes, please share your experience in the comments section.

This is an important topic for the PMP exam. You will see quite a few questions on this topic in your exam.