The term organizational structure refers to how the people in an organization are grouped and to whom they report. One traditional way of organizing people is by function. Some common functions within an organization include production, marketing, human resources and accounting.
Functional organization has roots in early 20th century. As the Industrial Age emerged, efficiency was the primary concern for management. Organizations were structured with few managers at the top and most people at the bottom, organized by the tasks they performed. Job classifications were well defined and authority was top-down. Control was maintained by setting rules and establishing standard procedures.
Organizations may be complex or simple in the way they are structured. Functional organizations tend to be complex and formal.
Some advantages of a functional organization are that the lines of command are clear. Individuals specialize and departments tend to develop common knowledge across the group. There may be an advantage to individuals in that career paths can be fairly easily defined.
Disadvantages of the functional organization include poor communication across groups and slow response to changes in the environment. Too much work may be referred upward due to the lack of decision making authority, and serious problems can ensue when groups develop a narrow perspective.
Functional organizations work best in stable environments that do not require rapid change of strategy or in relatively small organizations that provide few services or products.