Functional Organizational Structure: What Every Leader Should Know

Functional Organizational Structure: What Every Leader Should Know
Last Updated: May 29, 2023

Functional Organizational Structure: Definition

The most common organizational structure used by most businesses is a functional organizational structure, also known as a departmental structure. That is the most straightforward and affordable. Individuals are arranged in a functional organizational structure by their areas of specialization, competencies, or related roles. Layers of hierarchy covering these many departments are visible in a functional organizational structure. Companies frequently use functional structures because they combine people with similar knowledge and aid organizations in achieving their objectives when used in a team environment.

A functional organizational structure is distinguished by a strict hierarchy in which each department has its management team and reporting lines of authority. A department manager may report to a vice president, who may be in charge of several departments, such as finance, marketing, and information technology. This vice president could then report to the company's CEO.

A functional organizational structure works well for large corporations with similar product lines. Smaller businesses require more creative structures and can adapt to market changes more quickly. Employees in small organizations may be responsible for several functions simultaneously.


  • Vertical hierarchy is a feature of a functional organizational structure.
  • Task specialization
  • The entire work of an organization is divided into focus functions
  • Functional supervisors

Related: How to Develop a Requisite Organisational Structure

Functional Organizational Structure Example


The figure below shows a visualization of a functional organizational structure in an Organization with four functional departments reporting to the CEO.

Functional Structure of Organizations: Who uses this structure?

The organization is divided into departments based on their functions in a functional structure. An organisational chart categorizes employees based on their function, depicting the role hierarchy. A functional manager leads each department, and employees are assigned to roles. Functional managers typically have prior experience in the roles they supervise. A functional organizational structure works well in a stable environment with few changes or updates to business strategies.

Specialization and efficiency are the strengths of functional organizational structures. This structure is used by small businesses with a limited number of products to capitalize on their specialization strength. Because of the repetitive nature of their work, their employees are highly skilled, resulting in high efficiency and superior performance. They will work quickly, with less chance of error, and with high-quality output. Because of the specialization strength, the functional organizational structure is also ideal for businesses dealing with operations such as e-commerce and manufacturing, where skilled employees fill skilled roles.

Functional organizational structure is the most widely used basis for organizing business activities and is present in almost every enterprise. This functional organizational structure is especially effective when there is a high volume of standardized products or sales, a low level of change within the industry, a large fixed asset base, and a low number of entirely new product line introductions. A functional organizational structure is also effective when there are few changes due to fashion or other changes in taste or technology, and competition is primarily based on price. Indeed, a functional organizational structure is ideal when a company's activities are organized around areas of specialization. It entails a significant amount of process standardization within a business, with true decision-making authority centred at the organization's top.

Related: Organisational Structures and what every manager needs to know

Functional Structure of an Organisation: Advantages


The functional structure of an organization is founded on the concept of a manager who brings specialized knowledge to bear on decisions related to a specific function, as opposed to a general-purpose manager who lacks specialized knowledge. Specialization is one of the benefits of a functional organizational structure. Employees are grouped by specialization to ensure a consistent level of departmental competence. This is especially true in large organizations with multiple functional levels within a department. Employees can achieve significant efficiencies in process flow and management methods when they are allowed to focus solely on one functional area. As a primary benefit, having a department comprised of experts in a specific field such as accounting, appears logical.

Management creates efficient units by establishing specialist departments. Working with people with similar backgrounds and interests makes employees more efficient. This ensures that issues escalated to the follow-up group are handled by fully qualified personnel, increasing customer satisfaction and retention.

Skill Cultivation

Another advantage of the functional organizational structure related to and emanating from specialization is skill development. A functional structure allows new employees to be quickly trained and become experts by repeating the same line of tasks. They can pool their skills to complete the task. A functional organizational structure allows an organization to cultivate a crop of extraordinary specialists who can contribute significantly to the organization's well-being and growth.

Operational Speed

Another advantage of this type of organizational specialization is operational speed. Generally, a senior tech will handle a support issue faster than someone with less experience. Someone who has gained experience through repetition of work will most likely train new staff members more quickly. Efficiency comes with operational speed.

Operational Clarity

Separating the workforce by function clarifies organizational responsibility and task allocation. This reduces assignment duplication, wasted time and effort and makes it easier for management to direct work to appropriate employees. It is easier to set career paths and programs for employees and track their progress toward the goals outlined for their functional areas with functional structure. This structure has a clear chain of command, so everyone knows what decisions they can make, whom to report to, and how many employees report to a certain manager.

Related: How to carry out an Organisational Structure Design


Lack of Coordination

In an ideal functional organization, each functional group's tasks would require no input from other functional groups; however, this is not always the case. As communication becomes more prevalent in organizations, isolated groups may underperform or fail because they lack an institutionally recognized method of communicating needs and issues to other functional groups that could have assisted. Managers from other functional groups may sometimes not respond helpfully or promptly because "it's not our problem." The time when cooperation would have been most effective may have passed by the time the need for cooperation is established.

Increased Turnaround Time

First, the system is prone to bureaucratic bottlenecks due to the hierarchical nature of decision-making. Even for trivial and routine matters, files must usually pass through certain officers in the chain before making decisions, even if they add little or no value. This back and forth will inadvertently delay jobs. This lengthens the overall turnaround time for projects. Increased turnaround time may result in dissatisfied clients, harming the brand's image and client retention.

Internal Conflicts

Teams become siloed when departments are populated by employees who specialize in specific work areas. Employees in different teams do not have the opportunity to meet and share perspectives, which can be detrimental to the business's long-term success. Isolated employees may foster an environment of internal conflict due to the widespread belief that they are competing for resources with other functional areas. Another disadvantage of a functional organization is the possibility of territorial disputes, which is closely related to functional groups' failure to cooperate. These disagreements could be over goals, budgetary competition, or any other issues arising from a clash of egos that occurs when each department has its own separate functional structure.

Unclear Line of Responsibility and Accountability

It can be difficult to assign blame for an action to a specific employee when so many people must contribute before making a final decision. It is difficult when critical decisions must be made or when an error has occurred. Nobody will take the blame. With so many specialists involved in a process, it is difficult to blame any individual for a specific product or service malfunction.

Weakening of Common Bonds

A shared organizational purpose boosts employee morale and performance and is a key predictor of organizational success. When each group of specialists in a functional organization is relatively isolated, the common bond that emphasizes a single overarching organizational purpose is almost always weaker than in an organization where different types of employees interact regularly. This adds to the argument that efficiency is one of the most important benefits of a functional organizational structure. By structure, training is made easier because it is easier to delineate the training needs of employees, effect training, and monitor and update the training programs of workers.

Dilution of the overall strategic view of the company

Another challenge of the functional structure is the tendency of employees to take a specialist's perspective on organizational issues. When everyone in the company is herded into functional silos, only a few people can see the company's overall strategic direction, leading to a difficult decision-making process. As a result, functional areas may become distracted by their objectives and focus on them instead of the overall company objectives. For example, the IT department may want to implement a new, cutting-edge computer system, but the overall company objectives favour investment in new products. Because the department lacks a comprehensive view of the company, it may concentrate its efforts.

Related: Why It Is Time to Review Your Organisational Structure

What can be done about the disadvantages brought about by functional organizational structures?

Internal conflicts and a lack of coordination are two of the disadvantages of a functional organizational structure mentioned above. Cross-functional teams can help to mitigate issues caused by functional silos in the organization. These are teams that operate across traditional departmental boundaries. Managers could supplement the vertical functional structure with lateral cross-functional processes such as cross-functional job rotation and team-based rewards to break down silos formed by functional structures. Employees in production, for example, can speak directly with engineering under this teaming approach, which could result in an innovative and efficiently built product that becomes the company's standard.

A functional organizational structure can also lead to employee boredom if they perform the same tasks daily. This type of stalemate can cause them to lose motivation and disengage. Being rigidly organized by function may also lead to a lack of innovation. Employees and managers may not have a comprehensive picture of the company because they have limited flexibility to explore outside their departments. Functional organizations must focus on ensuring that their employees are motivated to excel at their jobs.

Companies that discover a functional structure that does not suit their needs should consider switching to a divisional or matrix structure. A specific geographic or product area acts as a mini-company in the divisional structure, with division staff for various functions such as accounting, marketing, and engineering. Each division is accountable for its financial results and generally reports to the company's CEO. Staffs have dual reporting relationships in the matrix structure, generally to both a functional manager and a product manager. A single functional area expert can now report to and support multiple products. It also provides employees with a functional area manager who understands their specialty, can review their work, and provide additional knowledge and direction.

Related: What you need to know about organisational structure review

Is a Functional Organizational Structure right for your business?

A functional organization is best suited for businesses that value the depth of knowledge in a specific area. Employees in functional departments typically lack in-depth knowledge of their organization's other departments. Because the functional structure is too limited for small businesses with only a few employees, it is ineffective. Employees in many small businesses must collaborate across functions. On the other hand, functional organizations can be difficult to manage in large companies with hundreds or thousands of employees, resulting in inefficiencies and redundancies.


A functional organizational structure comprises activities like coordination, supervision, and task allocation that are organized into departments based on their functions. The main benefits of a functional organizational structure are specialization and efficiency. Meanwhile, challenges abound, with one major example being departments forming silos and pursuing departmental goals at the expense of the organizational goal. Despite the drawbacks, implementing a coordinated effort and cross-functional teams is a critical remedy. Ad hoc or standing committees will help improve communication in functional organizations.

Cindy Baker
Tiffany Maruva
I am a Strategy and Performance Consultant at Industrial Psychology Consultants. I hold a Bachelor's Degree in Business and Computer Science. Key skills acquired include client management, Canva, HR Analytics, Article Writing, Proposal Writing, and Software Demonstrations. Proficient in using Zoom and Microsoft 365 (Word, Excel, PowerPoint, Outlook, and Teams). I have basic knowledge of Bill Quick and Trello. I aspire to become a project manager one day. I intend to further my education in this direction in order to realize my aspirations in the near future. After a hectic week of emails, I bake during the weekend or make a special meal. Socially, I am an extrovert with a dream to be a global citizen one day.

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