What is a functional organizational structure?

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Understanding a functional organiational structure

A functional organizational structure is one where the organization is organized around functional groupings. Heads of each functional area – such as manufacturing and finance – report to the CEO. Individuals with the same functional background thus work together – the organizational hierarchy is grounded based on similar functions. 

Different functions firms areas often grouped into

Some common functional areas that companies can be grouped into include:

  • Manufacturing
  • Product design and development
  • Sales
  • Marketing and advertising
  • Logistics
  • HR and other administrative areas

Situations where a functional organizational structure can make sense

Functional organizations are a common organizational form, making particular sense in single industry settings, or where companies want to achieve economies of scope by sharing resources across different somewhat related product lines. 

Single product firms

For companies operating only in one industry or with only one product line, functional organizational structures can make the most sense. The specific tasks that the firm needs to perform group naturally by functional activity, and since there is only one product line, there is no opportunity to group firms into product-level decisions. 

Comapnies looking to share functions across different product lines

A functional organizational structure may also make sense when the company is looking to obtain high economies of scale by grouping together related activities from different product lines. A danger of a divisional structure is that activities get replicated across product lines, avoiding economies that may come from sharing the resources across areas. Organizing the firm around functions can help ensure that economies of scope are obtained.