Career Development

Your Guide To Functional Structure for Business: Advantages and Disadvantages

March 31, 2021

Operating a successful business typically involves some form of organizational structure. The functional structure is one type of organizational structure that helps companies manage employees and meet their business goals. In this article, we discuss the advantages and disadvantages of the functional organizational structure, plus learn about other organizational structures in business.

What is a functional organizational structure?

A functional organizational structure is a business structure that groups employees by specialty, skill or related roles. It is based on levels of hierarchy that include different departments, under the direction of designated leaders. Businesses commonly operate under functional structure because it groups people who have similar knowledge, and when used in a team environment, helps companies achieve their goals.

Related: Organizational Structure: Definition and Types

Advantages of using a functional organizational structure

There are many advantages to employing a functional structure in your business. They include:

  • Increased productivity
  • Skill development
  • Clarity
  • Minimized cost of operation

Increased productivity

People in a functional structure setting have specialized skills that allow them to work more quickly and efficiently than those who may be unfamiliar with specific subjects, which leads to greater productivity. Also, their confidence level enables them to complete tasks with minimal supervision. Employees within this system of hierarchy who demonstrate high levels of productivity often receive promotions to other positions.

Skill development

Companies following a functional organizational structure have multiple departments composed of small teams. Within each team, experienced managers have the chance to teach their team members the same skills they possess, resulting in an enhanced skill set for all involved. Both soft (interpersonal) and hard (technical) skills may develop over time as people work together to find unique solutions and overcome work-related challenges.

Clarity

When companies bring people of the same specialty together, it creates an environment of clarity. Any time someone within the company needs high-level information related to marketing, human resources, customer service or operations, they know where to go. This applies to people outside of the company as well, who may contact the company with a special request. Plus, the hierarchical nature of the functional structure clarifies the specific roles and responsibilities of every person within a department.

Minimized cost of operation

Organizational structures help businesses save money in many ways. By organizing employees according to business functions, departments can reduce the chance for multiple departments to complete similar work. Giving tasks to individuals with the right skills also saves money because work gets performed more efficiently.

The functional organizational structure works best for larger companies that employ multiple people with similar roles. When departments have employees organized by their skills and corresponding function in the company, business owners have more time to focus on their big-picture goals while departmental heads manage their team's goals. In smaller companies, there may not be enough employees with related skills to justify grouping them into separate departments.

Disadvantages of using a functional organizational structure

Some of the disadvantages of functional organizational structures include:

  • Hindered decision-making
  • Competition between departments
  • Narrow scope

Hindered decision-making

For companies that thrive on greater flexibility and creativity, the functional organizational structure may impact their ability to operate efficiently. Formal organizational structures like this typically require employees to seek approval from management and other authority figures before making decisions. When management is unavailable for feedback during time-sensitive projects, it may hinder the team's overall progress. Managers who understand this challenge may avoid work-related delays by communicating well with their team members.

Competition between departments

As employees within each department work together, they begin to operate as a team with a focus on achieving specific goals. This goal-oriented mindset, while typically positive, may prompt competition between departments. To maintain a harmonious work environment, managers must work to communicate effectively with other department leaders and respect the chief executive officer's priorities regarding the company's needs.

Narrow scope

Without extra guidance and information from managers, employees within departments may work with limited knowledge of how their roles relate to the company's objectives. They may also not understand how their work relates to other departments. Businesses that practice functional structure must take steps to ensure every department understands how the company is working together as a whole. This may be done through company-wide meetings and group emails.

Other types of organizational structures

Besides the functional organizational structure, there are other types of organizational structures that help businesses achieve their goals, such as:

  • Hierarchical
  • Matrix
  • Flat
  • Flatarchy
  • Divisional

Hierarchical

Hierarchical structures are similar to the functional organizational structure and look much like pyramids of an organization. The company's chain of command begins with the CEO or another executive-level position. From there, the structure may shift to an advisory board or staff director, who oversees various department directors. Department specialists and other employees report to these department directors. Management roles in the hierarchical structure are clearly defined, making it easy for employees to better understand whom they must report to.

Read more: Hierarchical Structure: Definition and Examples

Matrix

Under the matrix organizational structure, which mimics a grid, employees within a company commonly report to two managers instead of one. For example, an employee may report to both a functional manager and a product manager. The functional manager's role may be to help team members understand work priorities and review completed tasks. The product manager's role is to establish the company's direction regarding product offerings. Matrix structures create cross-functional teams for special projects.

Read more: Matrix Organizational Structure: Advantages and Disadvantages

Flat

A flat structure is the opposite of a hierarchy, as it is devoid of seniority, job titles and specific job descriptions. Employees in a flat structure freely contribute to the work as needed. It is common for start-ups and small businesses to operate under a flat structure, though companies often move to some form of hierarchy as they progress.

Flatarchy

Companies that operate under the hybrid flatarchy structure practice elements of both a hierarchy structure and a flat structure. While they have linear authority and specialized teams, they also allow for innovative idea-sharing. As businesses develop new products and services, they typically seek guidance from different departments within the organization while maintaining a hierarchical structure.

Divisional

Divisional structures work well with large companies that span a wide geographic area. Businesses divide employees into divisions related to specific products, markets or services. Within each division, there may exist a functional unit comprised of departments like marketing and operations. Chain stores and subsidiaries on a national and global level typically operate on a divisional structure.

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