Functional structure

The classic way to organize a company is by dividing it into departments that reflect the main functions of the business, each headed by a director or manager.

How it works

The chain of command is straightforward. The business typically consists of a chief executive officer (CEO) or president at the top, with the various specialist departments or divisions, such as marketing and finance, aligned below. Each department operates as an independent
unit, with its own budget, and reports directly to the CEO, who takes responsibility for the operation of all the departments. A functional structure is the most common type of organization.

Typical departmental hierarchy

The departments operate independently, with the managers reporting to the CEO or president, who has overall command. The sales and marketing department usually takes responsibility for managing product lines.

41% CEO
of UK companies say the structure of their organization is a barrier to improving customer experience

CEO

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Production/ operations manager

Research and development manager

Finance manager

Sales and marketing manager

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Deciding what to sell

The marketing department is closest to the market and is best able to analyze which product lines may do well. The sales and marketing manager can suggest what new products the company could make.

PRODUCT A

PRODUCT B

PRODUCT C

PRODUCT D

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Information technology manager

Human
resources manager

Customer services manager

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FUNCTIONAL: PROS AND CONS

Pros

• ❯ Allows for the development of specialization and expertise❯ Enables efficient use of resources and potential economies of scale
  ❯ Offers obvious career path for employees in each department
• ❯ Simple, efficient structure for manufacturers producing a limited range of goods for sale

Cons

❯ Formal lines of communication; stifles innovation and creativity
❯ Departments fail to coordinate efficiently with one another
❯ Response time on problems and queries between different departments slow
❯ Many decisions referred up to the top, creating a backlog

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WARNING

Dangers of silo mentality

Silo mentality describes a scenario in which each department has a different, closed view of its role within the overall scheme and information does not get shared.

1.Sales and marketing decides to launch a special online two-for-one offer.

2.Finance is not briefed and
processes the order for one item only

3.Operations is not briefed and sends customers one item instead of two.

4.Customer services is not briefed and is unprepared for calls from angry shoppers.

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NEED TO KNOW

❯ Line relationship Chain of command down the structure

❯ Reporting structure Who reports to whom

❯ Silo Pejorative term for a department that works in isolation: a vertical, closed structure like a grain silo