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Functional Structure of an Organization: Advantages, Disadvantages & Example

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Taught by

Carol Woods

Carol has taught college Finance, Accounting, Management and Business courses and has a MBA in Finance.

A functional organizational structure is one of several reporting structures a company could implement. Read on to learn why a company might implement a functional structure and the advantages and disadvantages for both company and staff.

What is an Organizational Structure?

An organizational structure defines the reporting relationships in a company; in other words, who works for who. Companies choose an organizational structure based on many factors, including their size, their geographic dispersion, and the number of different products and services they offer.

What is a Functional Organizational Structure?

organizational chart

In a functional organizational structure , an organization's reporting relationships are grouped based on specialty, or functional area. For example, there might be separate departments for marketing, accounting, and engineering. Generally, all the functional heads will report directly to the company president or CEO.

Advantages

There are some definite advantages to grouping all staff by function:

  • Staff is managed by a person with experience in their same specialty who can adequately understand and review their work.
  • Staffers have the opportunity to move up within their functional areas, which gives a reason for them to stay long term. The company gets the advantage of their expertise and company knowledge over time.
  • Staffers work with others in their field, which allows for knowledge sharing and lateral job moves to learn new skills.

Disadvantages

The functional structure also has some disadvantages, including:

  • Functional areas may have difficulties working with other functional areas. There is often a perception that they are competing with other functional areas for resources and a lack of understanding of what other areas do for the company. So, the accounting department may be upset that its request for an additional headcount is denied, but the company financial results point to a need for additional sales people rather than accountants.
  • As the company grows larger, the functional areas can become difficult to manage due to their size. They can become almost like small companies on their own, with their own cultures, facilities, and management methods.
  • Functional areas may become distracted by their own goals and focus on them, rather than on overall company objectives. For instance, there may be a desire by the I.T. department to implement a new, state of the art computer system, but the overall company objectives support investment in new products instead. Since the unit doesn't have an overview of the entire company, it may focus attention on goals that it believes are important but which are not priorities for top management.

Alternatives

Companies who find the functional structure doesn't work well with their business will generally look to two other options: divisional structure and matrix structure.

In the divisional structure, a specific geographic or product area acts as a mini-company, with division staff for various functions, such as accounting, marketing and engineering. Each division is responsible for its financial results and generally reports into the company CEO.

In the matrix structure, staffers have dual reporting relationships, generally to both a functional manager and a product manager. This allows a single functional area expert to report to and support multiple products. It also gives the staffer a functional area manager, who understands their specialty and can review their work and give additional knowledge and direction.

Summary

An organizational structure defines the reporting relationships in a company. In a functional organizational structure, staffers with the same specialty, or function, are grouped together. The leaders of those functions generally report in to the company president or CEO.

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