Functional Organization Structure: Pros and Cons

By Indeed Editorial Team

Updated September 4, 2022

Published September 29, 2021

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.

Successful businesses have a stable organizational structure. Companies that manufacture the same goods frequently and follow routine processes use a functional organizational structure because its fixed system brings predictable stability. Understanding how this organizational structure works can help you decide whether it's right for a company. In this article, we discuss what a functional organization structure is, its merits and demerits, and other common organizational structures in business.

What is a functional organization structure?

A functional organization structure classifies employees by skill, speciality, or related roles. It relies on a ranking system that includes several departments under the guidance of designated leadership. Most businesses operate under the functional structure because it groups workers who possess similar knowledge, and when used in a team environment, it can help companies achieve their goals.

The functional structure works vertically, with senior managers for each department at the top, leading mid-level managers who lead entry-level staff. Employees have fixed roles in a functional organization, and they are accountable to the functional manager. People in these departments work closely together, communicate regularly and work towards their department's unique goals. Typically, the head of the department or senior-level management communicates with other departments and distributes key information to the rest of their team.

Read more: A Guide to Promoting Effective Workplace Communications

Advantages of functional structure

Companies that use functional organization structures can gain several advantages in their business. These include:

High productivity levels

Most employees in a functional organization structure have unique skills that allow them to work more efficiently, which can lead to increased productivity across the company. Their high confidence levels enable them to accomplish tasks accurately, with little supervision. Employees under this system who showcase greater productivity often receive promotions to higher positions in the company's hierarchy.

Skill growth

Companies using a functional organizational structure have several departments made up of small teams. In each group, experienced managers have the opportunity to extend knowledge of the skills they possess to their team members. The result of this is an enhanced skill set for all the members involved. Their hard skills and soft skills may improve over time as teams work together to find unique solutions and overcome work-related challenges.

Read more: A Guide to Soft Skills

Clarity

When companies bring people with the same skill set or specialty together, it establishes clarity. When a person within the company requires high-level information regarding human resources, marketing, customer service or operations, it's clear who they can contact to get the right information. The same applies to external stakeholders, clients, or customers who may contact the company with a special request. Additionally, the hierarchical nature of the functional structure clarifies the specific tasks and obligations of every member of a particular department.

Decreased cost of operation

Functional organizational structures help companies save money in multiple ways. By organizing or classifying staff according to the area of specialization, departments have their own unique tasks that all contribute towards the greater company goals. Assigning tasks to employees who possess the right skills can also save money because the work gets done more efficiently.

The functional structure is best suited to large companies that recruit many people with similar roles. In companies where they organize employees, expertise, and skills into groups, departmental heads have more time to concentrate on their bigger goals, while mid-level managers can focus on overseeing their team's goals. The functional organizational structure may not work in smaller companies because there are fewer staff members with similar skills to justify grouping them into various departments.

Read more: What Are Cost Efficiencies? (With Definition and Benefits)

Disadvantages of functional structure

Some demerits of functional organizational structures include:

Slow decision-making

These organizational structures may affect operational efficiency for companies that flourish due to creativity and flexibility. Functional organizational structures usually require people to meet department heads or coworkers in a position of authority before making important decisions. If your management is unavailable for feedback during time-dependent tasks, it may delay the team's overall progress. Managers who are aware of this challenge may avoid delays by communicating well with their department members.

Competition between departments

The more employees work together, the more they operate as a team while concentrating on reaching specific goals. This goal-oriented mindset is usually positive, but may give rise to competition between teams. To retain a harmonious work environment, managers need to relate effectively with department heads and comply with the Chief Executive Officer's priorities regarding the company's needs.

Narrow scope

Without experienced guidance and extra information from managers, employees in departments may possess little knowledge of how their roles relate to the firm's objectives. They may also have a limited understanding of how their work affects the other departments. Any company employing a functional structure must ensure they take steps to communicate to all departments and teams about how the company is working together as a whole. Group emails and company-wide meetings are effective ways to achieve this.

Other types of organizational structures

Apart from the functional organizational structure, there are various types of organizational structures that help companies reach their goals, such as:

Hierarchical structure

Hierarchical structures are identical to functional structures. The organization's chain of command starts with the Chief Executive Officer or anyone in an executive-level position. Next, we have the Staff Director, who supervises the various department directors. Department specialists and other employees report directly to these department directors. Management responsibilities in the hierarchical structure are clear, making it simple for employees to understand who to communicate with.

Matrix structure

The matrix organizational structure mimics a grid and creates a system where employees commonly report to two managers instead of one. For example, an employee may report to both a product and a functional manager. The product manager's responsibility is to set up the company's direction regarding product offerings. The functional manager's duty may be to help team members understand work priorities and review finished assignments. Matrix structures set up cross-functional teams for special projects or tasks.

Read more: Understanding a Matrix Organizational Structure

Flat structure

The flat structure is the opposite of a hierarchical structure. This is because it lacks clear seniority, job titles, and specific job descriptions. Employees in a flat structure willingly send in their contributions to projects when needed. This structure is usually helpful for smaller businesses and startups, although companies often shift to some form of hierarchy as they advance.

Related: What Is a Flat Organizational Structure?

Flatarchy structure

Any company that operates under the hybrid flatarchy structure combines a flat structure and a hierarchical structure. While they have linear authority and specialized teams, they also allow for innovative contributions to team projects. As companies develop and render products and services, they usually seek advice from the various departments while trying to maintain a hierarchical structure.

Divisional structure

Divisional structures are best suited to large companies that spread over a wide geographic area. Companies divide employees into divisions related to specific markets, services, and products. In each division, there is usually a functional unit made up of departments like operations and marketing. Chain stores and subsidiaries on a national and global level typically run on a divisional structure.

Team structure

Team organizational structures arrange each function into an objective-based group. Employees from each department come together to deal with issues and create opportunities. Employees can join a diversity task force or product development team. The team organizational structure can assist companies in removing barriers between departments and bolstering solid problem-solving techniques. It can also inspire people and lead to quick, confident decision-making.

Read more: The Purpose of a Team in the Workplace (With Tips)

Network structure

In a network structure, the company would depend on other companies to perform specific roles. For instance, you may hire a website administrator, security personnel, or accountant on a contractual basis. You minimize your organization's overall costs because you don't need to employ many people. There is a possibility that you may lack control of the result because you depend on contractual workers to complete crucial tasks.

Project organization structure

This is a temporary setup created for a particular project. In this functional organizational structure, a project manager is the head of the structure. Once you complete the project, you may decide to change the setup or move it to create a new project. If you choose to form a new project, the project manager may need to reorganize their staff to fit the new goal. Project managers may use the resources available to them until they complete the project.

Related: Definition of an Organization Type (With a List of Benefits)

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