Organizational design provides a critical framework that determines how people, function, reporting and workflow move through a company. Good organizational design helps support efficiency and achieve business goals. Having a clear directive from the beginning as to how the company will operate helps different departments come together and work toward a shared goal. Two common types of organizational structures are functional and matrix.
Functional is the most common type of organizational design. In this type of structure, the organization is grouped into departments where people with similar skills are kept together in forms of groups; such as the sales department, marketing department and finance department. This helps organizations enhance the efficiencies of each functional group.
There is usually a manager or a top-level executive managing a particular department, handling all decisions related to budget, resources, decision-making and staffing. Functional structure works best for those companies that operate in one location with a single product category. It works well for small teams and small projects because resources can be controlled and managed. Functional organizational design tends to be difficult to adopt for larger companies that have many geographical locations because of expense and the difficulty of containing resources. Work also takes place in a silo, which means sometimes team members don't have access to people outside of their division.
Some naysayers of functional organizational design say a big problem is incoherence. Most functional teams are good at many things, but great at nothing. These teams often struggle to meet the needs and demands of their clients and managers, juggling an endless, and sometimes conflicting, list of demands from various departments, never managing to build the type of advantage or differentiation that is required for long-term success.
A combination of two or more types of organizational structures, the matrix organization can help companies improve efficiency, readiness and market adaptation. This type of structure works best for startups and other companies operating in a dynamic environment since they often can respond faster to market or customer demand while decreasing the lead time to produce a new product.
The authority of a functional manager moves vertically downwards, and the authority of the project manager moves sideways. Since these authorities flow downward and sideways, this structure is called the matrix organization structure. A manager in a matrix organization has two or more upward reporting lines to bosses who each represent a different business dimension, such as product, region, customer, capability or function. It’s often a response to corporate silos.
Skills are better utilized under a matrix structure, so companies can select the most capable employees in order to deliver projects. In addition, matrix structures can serve global customers by integrating business functions and responding to customer demands quickly. However, managing a matrix structure can be complicated and challenging. A common complaint about a matrix structure is that it increases upward reporting and slows decision making. The opposite should be true in a well-functioning matrix because it pushes down operational decision-making in a controlled way.