Is the functional organizational structure the right option for your company?

Whether you're thinking about starting your own company or simply want to improve your business acumen, it's important to develop an understanding of how businesses organize their operations. For example, how much do you know about the functional organizational structure in a business setting? Learning about this common way to organize a business can increase your business acumen and give you critical insight that can benefit you in any managerial or leadership role.

In this post, we examine the functional organizational structure and explain why business structure is so important for any company's success. We'll also explore the pros and cons of this type of organizational structure and look at several other examples of different structures that businesses can adopt.

Why business structure matters

A company's organizational structure lays the foundation for operational success. When a business develops its organizational plan, it's choosing everything from its hierarchy for decision-making and defined job roles to information flow, the distribution of authority and accountability, and how different departments and teams will collaborate to achieve the organization's goals.

Companies that fail to implement the right structure will almost always struggle to succeed. This is true for businesses that try to operate without any clear structure, and those that choose the wrong structure. Without the right structure, those companies will be confronted with a host of challenges, including:

  • Employee confusion about the chain of command, which can harm morale and motivation, reduce employee engagement, increase turnover, and destroy productivity

  • Breakdowns in communication that lead to inefficiency, poor customer service, and general disarray at operational level

  • Direct damage to the company's bottom line, as customers avoid the disarray by taking their business to more efficient and better organized competitor businesses

What is a functional organizational structure?

When companies adopt a functional organizational structure, they focus on organizing their employees based on specific skills and their roles within the company. Many large companies create separate departments to achieve this functional organization, with each department focused on different areas of expertise. This enables those individual departments, and their specialized teams, to maximize their collective talents while contributing to the company's overall success.

Companies that use this structure often employ multiple people with the same skill sets. For example, they may have several people with accounting skills, a group of marketing professionals, and multiple salespeople. By adopting a functional structure for those similarly skilled workers, a company could create three separate departments – accounting, sales, and marketing – to ensure that employees are grouped according to their expertise.

Of course, this structure primarily benefits large enterprises, since smaller firms may not always have sufficient employees to staff multiple departments. However, midsize companies may also benefit from adopting a functional team structure that groups employees according to skill or job role. Fortunately, that can often be accomplished without creating formal departments – as long as the chain of command is clear to everyone in the company.

What features are common in a functional structure?

A brief look at the common features of a functional organization structure helps to explain why this functional management structure is so effective. Below, we've outlined some common traits that you can use to identify companies that use this structure for their operations.

  • Top-down hierarchy, often with multiple levels of leadership and management

  • Individual, function-specific departments staffed by similarly-skilled workers

  • Separate management for each department

  • Self-contained departments, with employees reporting to their department supervisors

  • Department managers that report to their direct superiors and coordinate with other managers

Advantages of a functional structure

There are both advantages and disadvantages for companies that implement the functional organizational structure. Understanding these pros and cons is vital for ensuring that your company is using the right structure for its unique needs. Here are some of the potential advantages:

  • A distinct and understandable chain of command and a process for information flow can provide greater clarity. Roles and responsibilities are clearly outlined, ensuring that everyone understands their place within the broader organization.

  • By grouping people with similar skills and roles into separate departments, these employees can focus on their fields of expertise and assigned mission. This enhanced focus can increase productivity and efficiency in each department.

  • Grouping employees based on their specific skill sets and duties can provide managers with an increased opportunity to focus on their teams' skill development.

  • Separating employees into task-oriented departments can reduce costs, help to ensure that the right people are working on the right tasks, and minimize inefficiencies.

  • The hierarchical nature of a functional structure ensures that leadership can focus on big picture ideas while department managers attend to operational matters.

Disadvantages of a functional structure

It is important to recognize the potential disadvantages associated with this organizational structure, too. They can include:

  • Departmental rivalries that can sometimes lead to disruption in the company's overall cohesion

  • An inability for employees within one department to understand how their work relates to the efforts of other departments, or the company as a whole

  • Reduced employee engagement when staff are forced to go through a complex chain of command to bring new ideas to the attention of leadership

  • Productivity loss when departments are improperly managed

Other types of organizational structures you should know about

As we mentioned earlier, the functional organizational structure is not the only option available to companies. In fact, there's no one-size-fits-all organizational structure that works for every business. Here are just a few of the other options that a company can use to organize its structure and operations.


Also known as a flat organizational structure, the horizontal approach avoids the top-down, pyramid structure used in the hierarchical approach. Instead of multiple levels of management and leadership, the horizontal structure allows employees to report directly to leaders without going through a complex chain of command. Businesses that employ this structure tend to hire highly motivated employees who are able to work independently.


A hierarchical organizational structure uses the same top-down approach as the functional structure, but without separating employees into departments. The chain of command starts at the top with the owner or CEO and flows down through one or more managerial levels to the lower-level employees. The structure's main advantage is its clearly defined areas of authority and responsibility.


Companies that use the divisional structure are organized into separate divisions that operate with relative independence from other areas of the firm. These divisions may have their own operating budgets, sales team, information technology teams, and so on. For example, a multinational firm might use different divisions to focus on specific market segments, products, or customer types.


In a diverse economy, companies rely on an array of contractors, vendors, freelancers and satellite personnel to meet their customers' needs. As a result, the vertical organizational structure can sometimes be too limiting to manage all those locations, employees, independent contractors, and vendors. It gets even more complex when off-site or satellite locations are thrown into the mix.

By focusing on a network organizational structure, companies can more effectively manage workflows in an agile way. This form of organization can expedite communication, collaboration, and decision-making for managers and employees. Its main disadvantage is that it can easily become too complex, as a company grows and relies more on off-site independent operators to achieve its mission.


A team-based organizational structure is exactly what it sounds like – it groups employees into teams of professionals who use their diverse talents to accomplish specific tasks, solve problems, or promote innovation. Unlike hierarchical structures, the team-based approach focuses on allowing employees to self-manage their teams, collaborate in decision-making, and exercise greater agency in how they achieve their goals.


The matrix structure is one of the most fluid forms of organizational structure, since it focuses on creating cross-functional teams to address project needs. Employees working in this type of environment may see themselves moved from team to team on a regular basis, depending on where their skill-sets are needed at any given point in time. The main advantage of this structure is that managers have the flexibility to assign people to projects based on need. The disadvantage is that Project Managers may sometimes find themselves competing for the same employees.

Learn about organizational structures to expand your business acumen!

Regardless of your career goals, it's always good to know as much about business structure and operations as you can. That knowledge can help to ensure that you have the business acumen employers are looking for when they're trying to find top talent to fill their management and leadership roles. By taking the time to learn about the functional organizational structure and other organizational options, you can gain the business insight you need to deliver real value to any employer's company.

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