CharacteristicsUnder a functional structure, business units that are responsible for revenue must ask for things from functional teams such as human resources and information technology. This creates a strange division between departments that only generate costs and departments that generate revenue.
A lack of internal competition. For example, an information technology department that "owns" technology.
Allows for a high degree of labor specialization.
Functional departments have autonomy over business units.
Functions such as technology can be standardized across organization.
Organization divided into cost centers and revenue functions.
AdvantagesA functional structure allows for a high degree of professionalism. For example, when technology people work with other technology people in a large department there is potential for challenging assumptions, peer review and standardization. The following are common advantages of a functional structure.
Ability to standardize functions across organization.
Avoiding repetition of investment and effort.
Encourages professional competence.
Functions at scale.
Prevents business units from doing their own thing in an area that needs to be aligned across an organization.
Specialization of labor.
DisadvantagesA functional structure takes much control from those who are delivering revenue and creates a strange separation between revenue and cost.
Bureaucratic structures that are separated from market realities.
Business functions such as human resources or technology may become entitled and overly powerful whereby business units are essentially at their mercy.
Business units that have little control over cost.
Functional units that only generate cost.
Functional units that resist business requests such that little gets done.
Fundamentally inefficient as several large departments are typically involved in each project.
Lack of internal competition.
Separation of revenue and cost.
Functional Structure vs Divisional StructureThe primary alternative to functional structure is a divisional structure where an organization is structured into business units that are responsible for profit and cost. In this case, each division would perform its own business functions such as human resources and technology with no standardization or scale across the organization.
Business Function (what teams do)
Product (what teams sell)
Functions can be implemented at the scale of the organization.
Functions implemented at the scale of business units.
Revenue & Cost
Division of organization into revenue centers and cost centers.
All departments are responsible for both revenue and cost.
Professionalism & Standardization
Opportunity for highly standardized processes and a culture of professionalism.
Smaller / disconnected functional teams with less opportunity for mature processes and specialized company culture.
|Overview: Functional Structure|
A hierarchical organization with departments organized by business function.