The Functional Org Chart

If the organizational structures could take the form of office workers, it might appear as if the functional structure would be the one who still goes to work wearing a shirt and tie, carrying a carefully-arranged briefcase.

Not for this one the wilder experiments carried out by its skateboard-riding, reverse-baseball cap wearing “flat-structure” colleagues – the sort who abolish all management tiers and then boast about it in the business press.

Functional organizational structures would seem to be inherently conservative. Even the name seems to benefit from the weight of convention. At a glance it seems a functional organizational structure is the only possible safe choice. What kind of lunatic, you might ask, would want to adopt a dysfunctional organizational structure?

What do we mean by "functional"?

The real picture, of course, is more nuanced than that. And the name, of course, does not refer to functionality in the sense of “something that works”, but rather to an organization which is divided on functional lines.

And, as we can see, the decision over whether to orient a well-established business around its functions or around its products is one of the most important that management can face.

So how does a functional organizational structure work? Businesses adopting a functional organizational structure separate their organization into departments based on their function.

Each of these departments has a functional manager. Specialities, role and, often, skillsets dictate where employees will fit in this structure. Specific departments in the structure may well vary depending on the company.

Who uses a functional org chart?

Manufacturing industries often utilise a functional organisation structure.

The functional organization structure is suitable for a business dealing with operations, like manufacturing industries.

In such a structure employees are likely to be highly skilled due to repetitive work which means high efficiency and performance.

One could argue that functional departments allow greater operational efficiency and specialization because it facilitates the grouping of employees with shared skills and knowledge.

Different groups of specialists are able to operate independently with management enabling cross-functional communication.

In this kind of structure project managers, if they exist, are likely to exist below a functional manager in the overall hierarchy. The approval of a functional manager is likely to be necessary for any projects which require spend.

And functional organizational structures are generally considered to be a good fit for manufacturing companies or those that specialise in producing a relatively homogenous area of products.

From past companies to modern giants

Early railway companies pioneered the functional org chart.

A good example would be the 19th century railway companies which brought this kind of structure to prominence. It would be illogical however, for a company which only made cardboard boxes, for example, to separate its production of different kinds of cardboard boxes into divisions.

Smaller companies, by the same token, may feel the structure does not offer them the agility, creativity and informal communication they require.

But to consider that functional structures are only adopted by the most conventional and old-school of companies would be to fail to appreciate the flexibility the structure can offer when combined with other structural innovations.

When asking what companies use functional org structures, consider for example, that Apple’s visionary leader Steve Jobs was a champion of the structure.

Steve Jobs’ functional Apple revolution

Steve Jobs made some fundamental structural changes at Apple on his return in 1997. Photo - CNBC.

The departure and return of Jobs to Apple has been immortalised in the annals of business history.

After initially being fired from the company on September 16, 1985 he made his return 12 years later to the day in 1997 and had soon recaptured the CEO’s position after a boardroom coup.

Apple was languishing. It had just seen its worst-ever quarterly results. Jobs’ response was to fire an entire tier of general management in a single day.

The reasoning behind the move was linked to Jobs’ conviction that general managers – ones without deep expertise in the core businesses of the company or other specialist functional knowledge – are nothing more than dead weight.

He wanted his managers to be experts who made product decisions without being unnecessarily influenced by short-term financial pressures.

At a stroke Jobs transformed Apple from a product-led structure to one orientated around functions.

“Whereas the fundamental principle of a conventional business unit structure is to align accountability and control, the fundamental principle of a functional organization is to align expertise and decision rights,” wrote the HBR in 2020.

And it is a structure Apple has maintained to this day – flouting the conventional wisdom that as companies become larger they must inevitably move from a functional to a product-based organizational structure.

Functional versus divisional – an unresolved debate

Post-World War II larger companies began growing out of a functional structure.

This road was frequently travelled by many 20th century conglomerates. DuPont and General Motors were among the first to make a transformation to a multidivisional structure and were followed by the vast majority of large corporations in the second half of the century.

Post-World War II large corporations increasingly found themselves too unwieldy to maintain a functional structure. They began to divide their activities as they added new divisions, often through acquisitions.

By bucking this particular trend, Apple demonstrated that functional structures could work for companies in sectors facing rapid technological change.

Bear in mind however that rather than adhering to conventional wisdom, Apple’s initial switch to a functional structure was based on the belief that only employees with the most expertise and experience in a particular area should have decision rights in that area.

And this too was based on the fact that the company operated in an area of rapid disruption.

This meant it was forced to rely on the judgment of people with deep knowledge of the technologies at hand rather than waiting for feedback from a senior management that may come too late to make a difference.

Outside of fast-moving spheres like the tech sector the long-running debate over functional structures versus divisional structures continues.

A new(ish) contender – the matrix

And another kind of organizational chart has become increasingly popular as an apparent trade off between the advantages of a functional and product-oriented structure.

This is the matrix structure -- which aims to organize employees into functional departments based on skill sets while also ensuring project managers oversee all employees involved with a particular product line.

Matrix structures also have potential disadvantages in that they can easily lead to employees reporting to separate supervisors and receive contradictory instructions.

No, not THIS matrix.

Nevertheless 84% of businesses responding to a recent Gallup survey were at least slightly matrixed, according to a McKinsey report on the structure.

Starbucks, for example, is often cited as a company which broadly maintains a functional structure with elements of a matrix structure overlaid upon it.

In this case divisions are product-based and intersect with functional groups and geographic divisions. These in turn intersect with other parts of the organization.

Of course functional organizational structures do contain certain inherent disadvantages. They often lead to the dreaded “silos” – groupings of employees within companies who have little communication with other functions.

These agglomerations are not named so much after missile silos – though in truly dysfunctional businesses one grouping may well wish it could nuke the other – as after the agricultural kind of silo.

When silos occur, the system has become vertical and disconnected and departments communicate only with senior management rather than each other.

In such cases it becomes difficult for one part of the business to know what others are doing. And indeed this difficulty is particularly likely to emerge when functions of an essentially different character – the more process-driven departments for example -- have to work with creative functions.

Silos can potentially decrease flexibility and innovation and can lead to functional structures becoming blinkered, as each function perceives the organization only from its own point of view.

The famous Starbucks logo. Starbucks are often cited as having elements of a matrix org structure.

How to build your functional organizational chart

In order to create an organogram or organizational chart for this kind of structure one must decide whether to include only the function itself— Marketing, Supply Chain etc -- or also the name and title of the person responsible for each function.

Once this has been decided the next step is to collect names, titles, hire dates, and full-time equivalent (FTE) status of all employees in the company as well as reporting relationships.

After using Functionly to create the chart, send a draft version for approval by senior management inputting any changes or edits before circulating it to staff.

Consider whether to include vacant positions, positions soon to become available and employees on maternity or other types of leave. 

It can also be useful to summarize total numbers of employees on leave as well as total headcount numbers, broken down into temporary and full-time status and those of contractors or consultants.

Of course while software like Functionly makes this part easy, the hard part is figuring out whether a functional structure is right for your business in the first place.

Just remember that while on the surface functional structures may appear safe and conservative underneath you can easily customize them. With functional structures the pin stripe option may in fact be wearing jazzy socks, a loud tie and colorful braces.