Guide

Business organisational structure

Organisational structure by function

Functional structure is one of the most common types of organisational structure in business, especially in larger companies, where groups of employees are organised according to the function they perform.

What is a functional organisational structure?

In this type of organisational structure, businesses are organised according to their roles and skills into smaller groups or departments. This may include, for example:

  • sales
  • marketing
  • production
  • IT
  • finance
  • operations

Individuals, teams and line managers are grouped into a specialised department where they report to the head of the department, eg the sales director. The business' top management team typically consists of several functional heads, eg the chief financial officer, the marketing director or the head of operations.

Read more about the hierarchical organisational structure.

Advantages of a functional structure

Functional structure arguably achieves greater operational efficiencies, as employees with shared skills and knowledge work together and perform similar functions.

The advantages of this type of structure are:

  • specialisation - departments focus on one area of work
  • productivity - specialism means that staff are skilled in the tasks they do
  • accountability - there are clear lines of management
  • clarity - employees understand their own and others' roles

However, the nature of departmentalism within a functional structure can present certain risks.

Disadvantages of a functional structure

The vertical separation of divisions and teams can lead to the creation of 'organisational silos' - a mindset where one team hesitates to share information or knowledge with other teams within the same organisation.

This silo mentality can cause problems around:

  • aligning priorities across the business
  • the flow of information and communication
  • collaboration
  • co-ordination of decision-making
  • embedding and managing change across departments

Functional structures are common in a wide range of businesses across many sectors. They work best within large companies, especially those that produce products or services on a continuous basis, such as in manufacturing.

Smaller companies may find functional structure too rigid, preventing them to adapt to changes quickly and easily. Project management organisational structure or flat organisational structure may be better options in this case.

Depending on your business needs, a matrix organisational structure or decentralised organisational structure may also be a suitable choice.