Any business employing more than a few people needs to organize itself into a structure that defines how information travels within the company, and how workers in different roles and at different levels of responsibility relate to each other. Organizational structures increase efficiency by ensuring that all employees know to whom they report and from whom they take direction regarding their work activities. The two most common types of organizational structure are known as functional and divisional.

Structure Definitions

A functional organizational structure organizes the chain of authority by occupational function. For example, the administrative functions may be grouped together, delineating them from other functions such as sales and production. These broad areas may be further subdivided, as when administration is divided into human resources and accounting units. Employees within each functional unit may have similar titles, backgrounds and job descriptions, although they may assume different levels of responsibility and supervision within their units.

Divisional organizational structures divide the corporation into units based on factors such as geography or product line. For example, a car manufacturer may have a separate division for each class of vehicle it produces. A national retail chain might have a division for each state or region where it has sales outlets. Each division behaves like its own company, with its own top-level management and its own subdivided units.

Applications in Business

Functional structure is the most common type of organizational structure, especially among small to medium-sized companies. This structure is centralized and hierarchical, so information and lines of responsibility flow from top management down through the heads of the various specialized departments and to the employees who carry out the work of each functional unit. It is especially useful and efficient for companies that focus on one product type or one line of related products.

Divisional structures are most frequently seen among large corporations that operate with multiple product lines and objectives. One example is General Electric, which has numerous divisions – including energy, residential and commercial products, aviation, healthcare and transportation – as well as top-level divisions for administration, research and development. The product divisions operate autonomously while still reporting to the company CEO and coordinating with the top-level development divisions.

Pros and Cons

The lines of authority seen in functional structures provide for clear channels of communication and clear expectations about who reports to whom. This increases efficiency by eliminating guesswork and duplication of effort. Within each functional unit, employees of related specialties work together, providing for ease of information sharing. The hierarchical structure makes it easy to identify promotional paths for employees, providing an additional motivating factor for the workers. The major disadvantages of functional structures are the built-in barriers to interdepartmental communications and the tendency for specialists within a unit to develop “tunnel vision,” which can stifle innovation. A company with this structure is efficient as long as it stays within its founding purpose, but it may respond ineffectively if outer circumstances change or the organization seeks new areas of operation.

In a divisional organization, personnel from multiple specialties work together on projects. This stimulates innovation and reduces problems involved with interdepartmental communication. Because the major divisions operate on the same level with each other, the projects have a better chance of getting the resources and funding they need. A major disadvantage to this structure is the tendency to set up competition between divisions, which can yield such negative results as rushing a product to market before it's ready, or one division trying to undermine the others in terms of prestige or resource allocation. Also, if the divisions are very large, they might tend to organize themselves functionally, thus experiencing the same disadvantages that are typical of functional structures.