What is functional design in organization and management?

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.

A functional structure is one of the most common organizational structures. Under this structure, the organization groups employees according to a specialized or similar set of roles or tasks. While functional structures operate well in stable environments where business strategies are less inclined to changes or dynamism, the level of bureaucracy makes it difficult for organizations to respond to changes in the market quickly.

When companies use a functional organizational structure, people with similar knowledge and skills are grouped together. This makes it possible for employees to become specialists in their field. It requires a performance management system that allows for the promotion, development and visibility of individual skills within their functional area. The specialization that functional structures hone helps to bring about in-depth knowledge and skill development among the employees, and this can help you achieve your company's functional goals.

Specialization leads to operational efficiencies and enhances productivity levels. Because of their expertise, workers with specialized skills can perform tasks quickly, efficiently and with more confidence, thus reducing the occurrence of work-related mistakes. In addition, the clear nature of the career path within the functional unit makes it possible for employees to be highly motivated to advance their careers as they move up within the hierarchy.

The main goal of functional structures in organizations is to bring the entire human and informational resources together to meet the organization’s goals. This can be an ideal structure for small businesses that focus on one product or service because you can maximize performance by encouraging peer cooperation among different units at various levels of management through supervision and coordination.

Communication in organizations with functional organizational structures can be rigid because of the standardized ways of operation and the high degree of formalization. This can further make the decision-making process slow and inflexible. Since it is more bureaucratic, functional units are often not accountable to each other, and poor horizontal coordination within the departments can occur.

Lack of innovation and restricted views of organizational goals, along with too much focus, can affect employees' motivation. As your company grow and you create more functional units, the level of autonomy within units might increase, making it difficult for you to coordinate all the units efficiently.

Even though functional units often perform with a high level of efficiency, their level of cooperation with each other is sometimes compromised. Such groups may have difficulty working well with each other as they may be territorial and unwilling to cooperate. The occurrence of infighting among units may cause delays, reduced commitment due to competing interests, and wasted time, making projects fall behind schedule. This ultimately can bring down production levels overall, and the company-wide employee commitment toward meeting organizational goals.

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.