Functional Structure: Advantages and Disadvantages

By Indeed Editorial Team

Updated September 30, 2022 | Published April 3, 2020

Updated September 30, 2022

Published April 3, 2020

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Three people sit at a table and compare different kinds of organizational structures for companies

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.

Key takeaways:

  • A functional organizational structure organizes a company into different departments based on areas of expertise.

  • A company that has a functional structure tends to have the following three characteristics: a top-down hierarchical structure, department heads who report to senior management and employees who specialize in certain tasks.

  • Other types of organizational structures include divisional, flat, flatarchy, hierarchical, matrix, network and team-based.

What is a functional organizational structure?

A functional organizational structure is a common type of business structure that organizes a company into different departments based on areas of expertise, grouping employees by specialty, skill or related roles. It’s 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.

The functional organizational structure typically 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.

Characteristics of a functional structure

A company that has a functional structure tends to have certain characteristics and features:

  • A functional organization is a vertical hierarchy.

  • The company is divided into different functional departments with employees who specialize in specific tasks.

  • Functional departments usually operate in silos because each group has its own independent vertical management structure.

  • Employees report to a manager who oversees their department.

  • Employees within each department typically only communicate with each other, rather than dealing with workers in other departments. 

  • Managers typically report to another functional leadership role.

  • Managers are responsible for coordinating with other managers of other departments.

Related: 4 Types of Organizational Structure: Definitions and Examples

Functional structure example

Here’s an example of a company that has a functional organizational structure:

Company ABC manufactures travel luggage and has nearly 500 employees. It has adopted a functional organizational structure and created various departments including:

  • Finance

  • Marketing 

  • Operations management

  • Human resources

  • Information technology

  • Engineering

  • Merchandising

  • Product development

  • Retail

Employees of each department report to their respective team manager, team managers report to their department manager and each department manager reports to the chief executive officer (CEO) of the company. For example, all product development employees who are responsible for developing new luggage designs report to the product development design manager, who reports to the product development head manager, who reports to the CEO.

11 Types of Organizational Structure and Design

4 advantages of a functional structure

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

  1. 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. Employees within this system of hierarchy who demonstrate high levels of productivity often receive promotions to other positions.

  2. Skill development: 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 and hard skills may develop over time as people work together to find unique solutions and overcome work-related challenges.

  3. 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. Plus, the hierarchical nature of the functional structure clarifies the specific roles and responsibilities of every person within a department.

  4. Minimized cost of operation: 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.

Related: How To Choose an Organizational Structure in 5 Steps

3 disadvantages of a functional structure

Some of the disadvantages of functional organizational structures include:

  1. Hindered decision-making: Formal organizational structures ]ypically 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.

  2. 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.

  3. 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. 

Related: Comparing Horizontal vs. Vertical Organizational Structures

7 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:

  • Divisional: Organizations are split into divisions based on specific products, services or geographies. For this reason, this structure is typically used by large companies that operate in wide geographic areas or own separate, smaller companies.

  • Flat or horizontal: Most levels of middle management are removed so there is little separating staff-level employees from upper management. Employees are given more responsibility and decision-making power without the usual hierarchical pressures or supervision and can often be more productive.

  • Flatarchy: Companies practice elements of both a hierarchy structure and a flat structure. As businesses develop new products and services, they typically seek guidance from different departments within the organization while maintaining a hierarchical structure.

  • Hierarchical: Employees are grouped and assigned a supervisor. This structure is often depicted as a pyramid because there are multiple levels or authority with the highest level of leadership at the top, their direct employees below them and so forth.

  • Matrix: This structure resembles a grid in which employees with similar skills are grouped together and report to more than one manager. The matrix structure is typically used by large, multinational organizations and promotes the sharing of skills and knowledge across departments to complete goals.

  • Network: Managers coordinate relationships with both internal and external entities to deliver their products or services. This structure focuses more on open communication and relationships than hierarchy.

  • Team-based: Employees are grouped into skills-based teams to work on specific tasks while all working toward a common goal. This is a flexible structure that often allows employees to move from team to team as they complete projects.

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