Want a simple way to organize your small business? Try a functional organizational structure. A functional organizational structure is the most straightforward and common organizational structure for small- to medium-sized businesses. It works best for companies that have one or just a few product lines.

Tip

Grouping employees by function or specialization is a simple organizational method to use when starting a business.

Functional Structure Definition

A functional organizational structure groups employees together based on their functions or roles and areas of specialization. Typical departments are marketing, human resources, finance, engineering, sales and customer service.

Departments in a functional structure are often called "silos" because they work independently from each other. The employees communicate exclusively with others in their group and report to a department head. Department heads communicate with their peers in other departments. Managers of departments report directly to top management or the CEO.

This type of organizational structure works best in a stable environment with few changes where job tasks are standardized and continuous. Consider the functional organizational structure advantages and disadvantages.

Advantages of a Functional Structure

  • Specialization and efficiency: Employees achieve a high level of specialization. Grouping employees with similar skills increases efficiency and results in higher-quality work output. By executing standardized tasksrepeatedly, workers become more skilled and productive.

  • Training and promotions: The path for growth is clear with well-defined objectives for receiving promotions. Since the tasks are usually standardized, training new employees is easier and quicker.

  • Accountability: Employees have a clear chain of accountability by reporting to a single department head, not multiple supervisors from other divisions. :

Disadvantages of a Functional Structure

  • Silo effect on decision making: The silo effect leads to poor communication across functions since employees don't communicate and aren't accountable to each other. The structural bureaucracy slows down decision making. Everything must go up the chain to top management and then back down to the employees taking action on the decisions.

  • Lack of cooperation: Because each department operates separately, employees can become territorial, excessively loyal to their own department and unwilling to cooperate with other departments.

  • Growth: Functional models have difficulty adapting to the increased diversification that results from growth. Top management must assume the responsibility of coordinating and integrating the work of the various functional departments. :

Example of a Functional Structure

  • Sales: Eight salespeople are divided by geographically defined regions.

  • Marketing: The marketing department has seven employees who are constantly monitoring consumer buying habits and competitors' promotional campaigns.

  • Accounting and finance: Seven employees are in charge of sending invoices to customers and making payments for overhead expenses and supplies. One employee handles bank account reconciliations.

  • Office: The administrative staff has 11 employees with an office manager, a receptionist, a customer service person and several people in charge of correspondence and filing.

  • Production: Manufacturing uses 36 employees to handle the purchases of raw materials, production operations, warehousing and delivery of the products to customers.

  • Research: The research staff has six employees working on improvements for Swifty Feet.

  • Human resources: With 82 employees, the company needs seven employees in the human resources department to handle employment issues such as:
  • recruiting
  • hiring
  • performance reviews
  • benefits
  • payroll
  • insurance matters

Span of Control

The organizational structure for Hasty Hare is considered "flat" because the seven department heads report directly to the president. This reporting chain of command will change as the company grows and adds more specialized departments.

However, the president can only handle a certain number of people reporting to him without getting overloaded. At some point, the president will have to start relinquishing authority and delegating responsibility to other managers. When that happens, the organizational chart will become taller, with fewer department heads reporting to the president and other top management officers.

A functional organizational structure is a logical starting point for most small businesses. It is simple to implement and easy to manage. Its limitations are the difficulty in adapting to growth and additions of new territories or product lines. A functional organizational chart will define the span of control and expose any limitations.