The functional organizational structure groups employees according to broad business activities, resulting in departments such as finance, marketing and production. These departments might be further divided, depending on a company's size and needs. Departmental managers supervise a wide base of employees below them. These managers are in turn supervised by more-powerful managers, who answer to one powerful boss, perhaps a CEO, owner or president. The resulting hierarchy has a vertical thrust, is shaped like a triangle and features clear authority lines and departmental boundaries. This affords companies both benefits and disadvantages.


One main benefit of the functional organizational structure derives from grouping like jobs together. Equipment and personnel aren't repeated across different departments, which saves a business money. The scope of activities within a department is larger than it would be if it were spread across a company, allowing for greater expertise and specialization. This, in turn, leads to "economies of scale," which refers to efficiency and productivity increases as operational scope increases.


Functional organization makes for clear lines -- lines of communication, lines between departments and jobs, and the line that is the chain of command. The advantage of these clear-cut delineations lies smoother management. People understand boundaries, who answers to whom and who takes the blame or credit for results. Decision-making is centralized, both for departments and for the organization as a whole. This unity of command structure fosters a sense of direction and coordination, especially within functional areas.


Though the functional organizational structure gives employees a sense of belonging within each departmental area, the structure creates space between departments. Communication between them suffers, and with it goes easy coordination and cooperation. Functional division also makes it difficult for departments to understand larger company concerns. If managers become myopic, they may put department before company and resent other departments.


Functional organizational structures are not nimble, flexible or easily adaptable. Indeed, this type of structure is the most rigid of all possible structures. The hierarchy creates bureaucracy, an impediment to change. When shifts in the market environment occur, decisions on how to react come slowly as proposed changes are forced to travel through various chains of command. This same situation also stifles innovation. The rigidity of the functional organizational structure makes it a poor fit for dynamic environments.