Is a Functional Organizational Structure the Best Fit for Your Company?

We all agree that an organization without organization can quickly become a dysfunctional workplace, right? A company’s structure — which includes how work is assigned, the chain of command, and communication flow — plays a huge role in how successful it is.

This is especially true given how much corporate structure influences company culture. In a world where 77% of job applicants consider company culture, companies can’t leave structure to chance — and functional organizational structure can be a powerful contributor to a positive work culture. Here’s how it works, and how it can work for you!

What Is a Functional Organizational Structure?

A functional organizational structure is a type of company hierarchy where employees are grouped based on their job functions or specialized roles. In this setup, each department is led by a functional manager who reports to top leadership. Common departments in a functional structure include HR, finance, marketing, operations, and IT.

Here's how it works:

• Employees with similar expertise work together. For example, all recruiters and HR generalists are in one department, reporting to the head of HR.
   
• Decision-making authority is centralized. Each function operates under the guidance of a department head who makes decisions for their area.
   
• Communication typically flows vertically — up and down the chain of command within each function.

Examples of a Functional Structure

Example 1: A Traditional Corporate Office

Company Type: Mid-size software company
Structure:

Why it works: Each team is laser-focused on their specialty. HR owns hiring. Marketing owns brand awareness. The CEO oversees each function's performance.

HR Insight: In this structure, it’s essential for HR to have strong cross-functional communication plans — especially when launching org-wide initiatives like wellness programs or DEI strategies.

Example 2: A Hospital

Company Type: Regional healthcare provider
Structure:

Why it works: Specialized departments allow healthcare workers to focus on care while HR and support functions manage operations behind the scenes.

HR Insight: In a functional hospital structure, wellbeing programs can vary widely between departments — frontline care workers often need different resources than billing staff. HR must segment offerings to meet diverse needs.

Example 3: A National Retail Chain

Company Type: Big box retailer
Structure:

Why it works: Consistency across hundreds of store locations requires centralization of each function — HR ensures every location follows the same policies.

HR Insight: A functional setup like this makes it easier to scale processes (like onboarding) nationwide — but it can create bottlenecks if HR is stretched thin trying to manage all store-level needs from HQ.

Advantages of a Functional Organizational Structure

What’s so great about functional organizational structure, anyway? Here are some of its benefits;

• Efficiency: Employees get really good at doing their job, becoming experts who can perform at the top of their field. This can help employees thrive, gain greater confidence in their abilities, and experience more fulfillment and satisfaction at work.
   
• Clear scope: Employees know what their responsibilities are, the range of their individual role, and the part their department plays in the larger picture. Having clear roles leads to strong teamwork, which makes for a positive work environment and a high-performing workforce.
   
• Clear communication structures: Employees know where to go to get answers to questions because they have a direct manager who guides them and their work. This helps employees devote more focus to their tasks as their managers handle the primary communication with other departments. 
   
• Positive training environment: Since roles are so specialized, training for new hires is straightforward and can be facilitated by peers who have a strong handle on the department’s responsibilities. Employees are 80% more likely to report emotional wellbeing when engaged in honest feedback, collaboration, and mutual respect within teams, so this kind of training and collaboration creates a healthy work environment, too.

Disadvantages of a Functional Organizational Structure

Functional organizational structure works really well for a lot of workplaces, but that doesn’t mean it comes without any drawbacks. Keep these disadvantages in mind as you determine what kind of structure might work best for your organization.

• Creating silos: Since work roles and responsibilities are well-defined and divided, employees may experience fewer innovative opportunities. Staffers may also not see the bigger picture or recognize how their contribution relates to the organization’s goals because of that tunnel vision.
   
• Communication difficulties: All communication between departments falls to management, which can cause bottlenecks when sharing information or slow processes down. Functional organizational structures can minimize unnecessary communication, but it’s easy to fall into the opposite pattern of poor communication, too.
   
• Competitive atmosphere: Departments may become competitive or frustrated with each other without ever communicating with them because they are so separate. Members might also be more motivated to work towards department goals rather than broader organizational goals. The limited interaction and connection employees have with those outside of their teams can complicate building positive communication and employee relations. 

Some of these disadvantages of functional organizational structure can be mitigated with other policies and guidelines within the company and how teams are designed. It all varies from organization to organization!

Other Types of Organizational Structures

If functional organization doesn’t seem to fit your workforce, there are plenty of other structures you can consider.

Flat Team Structure

A flat team structure, also known as a flat organizational structure, is characterized by minimal levels of hierarchy and a decentralized decision-making process. There are few or no middle managers in this structure, and employees have a wider span of control. This promotes open communication and a collaborative environment.

Advantages of the flat structure encourages employee autonomy and engagement, fostering innovation and faster response to changes. Communication flows more freely, enabling efficient sharing of ideas and information. Decision-making is decentralized, leading to quicker responses to challenges, and reduced managerial layers can lower overhead costs.

On the other hand, the lack of a clear hierarchy can make career advancement paths less defined and harder to aim for, which may cause confusion and frustration among the ranks. Limited managerial oversight might lead to coordination issues and conflicts. Certain roles, like team leadership, might be unclear, impacting accountability. In some cases, a lack of hierarchy can also result in decision-making bottlenecks due to over-reliance on a few key individuals.

Matrix Team Structure

A matrix organizational structure blends functional and project-based hierarchies, allowing employees to report to both functional managers and project managers. This encourages cross-functional collaboration and optimized resource allocation. Employees have dual responsibilities, contributing to both their functional teams and specific projects.

Versatility is one of the main benefits of a matrix structure. This setup promotes efficient resource utilization as individuals with specialized skills can be shared across projects. Cross-functional collaboration enhances creativity and problem-solving. Plus, its natural flexibility allows adaptation to changing project requirements. Team members in these settings develop a broader skill set due to exposure to different functions, which helps employees with their development and satisfaction.

There are some challenges to this structure to consider, too. Dual reporting can cause role ambiguity and potential conflicts for employees. Managers may feel that they must compete for employees' time and loyalty. A frustrating aspect for both leaders and employees is complex communication lines, which can lead to confusion and decision-making roadblocks. Despite how helpful a flexible structure can be, maintaining the balance between functional and project objectives requires careful coordination and can be time-consuming, so it’s important to find communication channels and methods that work for your teams.

Divisional Team Structure

A divisional organizational structure arranges an organization into semi-autonomous units based on specific products, services, geographic locations, or customer segments. Each division operates as a separate entity with its own functional areas like marketing, finance, and operations.

Some of the benefits of a divisional structure include streamlining operations and offering tailored support for every team. It allows for better focus on specific products or markets, promoting specialization and expertise. Each division operates somewhat independently, enabling quicker responses to local market needs. Decision-making is streamlined within divisions, which makes that unit far more agile and responsive to sudden challenges. It’s also possible for performance evaluations to be more accurate since each division's results are relatively isolated.

Divisional team structures also have pitfalls to guard against. Duplication of functions across divisions can lead to inefficiencies and increased costs, which takes a toll on profitability for the entire company. Coordination and communication between divisions might be challenging, potentially resulting in ineffective silos. If there are standard practices that the organization wants to implement, standardization across divisions might be difficult to achieve, impacting overall organizational coherence. Ultimately, it’s helpful to consider centralized decision-making when necessary for overarching strategic goals.

Drive Performance with Your Organizational Structure

Selecting the right organizational structure for your organization can increase your employee productivity. Strategically aligning the roles, responsibilities, and reporting relationships within your company creates an environment that fosters collaboration, communication, and efficiency.

Employee wellbeing is an essential part of optimizing your organization for impact. Workforce wellness programs boost employee productivity, a key reason 90% of companies with wellness programs see a positive ROI.

Wellhub's flexible wellness platform allows HR departments to foster engaging and successful workplaces for all their team members — no matter the shape or size of their organization.

Connect with a Wellbeing Specialist for help maximizing the efficiency through employee wellbeing.

References

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• Functional Structure: 3 Characteristics of Functional Structure. (December 17, 2021). MasterClass. Retrieved January 17, 2023 from https://www.masterclass.com/articles/functional-structure.
• Functional Organizational Structure: Everything You Need to Know. (August 10, 2020). Upcounsel. Retrieved January 17, 2023 from https://www.upcounsel.com/functional-organizational-structure#:~:text=A%20functional%20organizational%20structure%20is,to%20one%20product%20or%20service.
• Functional Structure: Advantages and Disadvantages. (April 3, 2020). Indeed. Retrieved January 17, 2023 from https://www.indeed.com/career-advice/career-development/functional-structure.
• International Foundation of Employee Benefit Plans. (2017). Well-being takes the lead over ROI in workplace wellness measurement. Retrieved from https://blog.ifebp.org/well-being-takes-the-lead-over-roi-in-workplace-wellness-measurement/
• Openness Predicts a Team’s Strength. Atlassian. Retrieved January 17, 2023 from https://www.atlassian.com/practices/open/research