Functional Structure: 3 Characteristics of Functional Structure

A functional structure is a type of business structure that organizes a company into different departments based on areas of expertise. These departments serve as functional units and are overseen by functional managers or department heads. In each department, team members report up the chain of command to department heads, who in turn report to the company's top management, apprising them on the status of their functional areas.

Examples of departments in a functional organization structure include a sales department, a production department, a human resources department, an information technology department, a marketing department, and a legal department. In some large corporations, these departments are stratified into different geographical areas. In smaller companies, they may simply occupy different areas of the same office building.

Companies with a functional organizational structure tend to share the following characteristics.

1. 1. There’s a top-down hierarchical structure. Most functionally structured companies have a senior management team that oversees the company at large, but nearly all other employees are part of a specific, siloed department.
2. 2. Department heads report to senior management. Each department within a company—whether it’s sales, product, or IT—has a department head who is either part of top management or directly reports to them.
3. 3. Employees specialize in certain tasks. Employees in functionally structured companies are hired for their expertise in a particular skill. They rarely stray outside of their role to help with the work of another department.

Companies that operate under a functional structure may enjoy three clear advantages.

1. 1. Stable work environment: A functional organizational structure offers a stable environment where employees can clearly understand the scope of their job and what is expected of them.
2. 2. Built for organizational efficiency: Large companies often favor functional structures because each department can hum along independently, which leads to greater efficiency. A conflict in one department will not necessarily lead to a bottleneck throughout the company.
3. 3. Taps into people's strengths: A functional structure places employees where they are needed most and does not burden them with tasks that push the limits of their skillset. Employees who work on projects that fall within their expertise often work more efficiently.

Along with the upsides, employing a functional organizational structure can have several disadvantages.

1. 1. Potential for silos: When employees work exclusively in one department or focus on one task, they can lose the context of the company's broader goals. Employees may feel less invested in an overall business if they do not interact with members of other departments and understand how their work fuses together.
2. 2. Competition between departments: When departments are clearly defined and tasked with specific goals, there can be a risk of competition getting in the way of inter-department collaboration.
3. 3. Missed chances for innovation: Sometimes the best way to generate ideas for new products, marketing campaigns, or supply-chain models is to venture outside of a department's hive mind. When employees get siloed into specialized departments, they can miss the chance to glean wisdom from colleagues in a different sector of the company.

Functional structure is just one of the common organizational structures used by modern corporations. Consider functional structure in the context of other common organizational templates.

1. 1. Functional structure: This type of business structure organizes a company into different departments based on areas of expertise. For example, lawyers work in the legal department and marketers work in the marketing department.
2. 2. Divisional structure: In the hierarchical model of a division structure, a parent company owns various divisions or subsidiaries that function with a large degree of autonomy. The heads of these divisions sit atop their own brand's organizational chart, but they sit below senior management on the broader corporation’s org chart.
3. 3. Matrix structure: In a matrix organizational structure, project initiatives can be the purview of multiple teams. For instance, if a food company is launching a new brand of cereal, both the product team and the marketing team work together to get the cereal into the hands of customers. This type of structure often works well for small businesses, from whom "departments" might include just one or two people. It also works well for larger companies, provided that they have clear lines of communication so that competing divisions do not impede one another's work.
4. 4. Team-based structure: A team-based organizational structure has elements of both a functional structure and a matrix structure. In team-based structures, employees work on teams that serve specific organizational goals. Some teams focus on one task, such as product development. Others are cross-functional teams that work in many sectors of the overall business. Unlike the functional and matrix models, which tend to have a hierarchical structure with department heads and managers, team-based structures may feature employees with more equal status. While these teams may be guided by a project manager, ideas often flow more freely without status as a hinderance. This model fits the type of organization that values teamwork over nearly all other virtues, which makes it popular among start-ups.
5. 5. Modular structure: In a modular organizational structure, employees get divided into strategic business units (SBUs) with precise areas of expertise. Most SBUs are relatively small and nimble, which lets them easily bounce to different areas of need. Modular structures are popular in hospitals, where a surgeon, an anesthesiologist, and a nurse may effectively function as their own SBU, hopping from patient to patient as necessary. This can improve operational efficiency, but it is less practical for steering an entire organization toward new shared goals.
6. 6. Network structure: A network organizational structure combines specialized departments, external divisions, and outsourcing. It deemphasizes organizational hierarchy and prioritizes getting a job done, no matter who is involved. The aforementioned cereal company might have its own internal development division, an outside manufacturer that it shares with other food brands, a marketing department it shares with a parent company, and a box-making factory it hires on a contract basis. Network-based companies can work with great agility, but they may have less organizational unity and less emotional investment from employees.

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