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What is a Functional Organization Structure?

what is a functional budget

By Fahad Usmani 28 Comments

Your working style depends on the type of organization you’re working in; your role, responsibilities, working culture and everything depend on it. In a functional organization you may have a static role, while in other types of organization structures you may have dynamic and constantly changing roles.

In a functional organization structure, you will report to the functional manager, while in other types of structures, you will report either to the project manager or multiple bosses. For example in a projectized organization structure. you report to the project manager, and in a matrix organization structure. it depends on the type of matrix. Your working style, career growth path and reporting system all depend on it.

This is a one of the most sought after topics for the PMP exam. You will see a few questions on this topic in your exam, and I don’t want you to miss any of these.

Therefore, I’m writing this blog post to explain to you the functional organization structure, which is the most commonly used form of organization structure. Since this is the oldest type of organization structure, you can also say that this is a traditional type of organization structure.

Okay, let’s get started.

Functional Organization Structure

A functional organization structure is a hierarchical type of organization structure wherein people are grouped as per their area of specialization. These people are supervised by a functional manager who has expertise in the same field, which helps him to effectively utilize the skills of employees, which ultimately helps him in achieving the organization’s business objectives.

In this kind of organization structure, people are classified according to the function they perform in the organization. The organization chart for a functional organization structure shows you the president, vice president, finance department, sales department, customer service department, administration department, etc.

Each department will have its own department head, and he will be responsible for the performance of his section. This helps the organization control the quality and uniformity of performance.

These different departments are sometimes referred to as “silos”. This means the system is vertical and disconnected. The communication flows through the department heads to the top management.

Here all authority (i.e. budget allocation, resource allocation, decision making, etc.) stays with the functional manager. Usually the position of the project manager does not exist in this type of organization structure. Even if this position exists, the role of the project manager will be very limited and he will need permission from the functional manager to fulfill his requirements. The project manager may have the title of a coordinator or an expediter.

The functional organization structure is suitable for an organization which has ongoing operations and produces some standard products or goods, such as manufacturing and production industries.

Advantages of the Functional Organization Structure

The following are a few benefits of the functional organization structure:

  • Employees are grouped as per their knowledge and skills, which helps achieve the highest degree of performance.
  • Employees are very skilled and efficient because they are experienced in the same work and hence they perform very well.
  • Their role and responsibility is fixed, which facilitates easy accountability for the work.
  • The hierarchy is very clear, and employees don’t have to report to multiple bosses. Each employee reports to his functional manager, which reduces the communication channels.
  • There is no duplication of work because each department and each employee has a fixed job responsibility.
  • Employees feel secure, and therefore they perform well without any fear.
  • Since there is a sense of job security, employees tend to be loyal to the organization.
  • Employees have a clear career growth path.
  • Within the department, cooperation and communication is excellent.

Disadvantages of the Functional Organization Structure

The following are a few disadvantages of the functional organization structure:

  • Employees may feel bored due to the monotonous, repeated type of work and may become lazy.
  • If the performance appraisal system is not managed properly, conflicts may arise. For example, an employee may feel demoralized when a lower performing employee is promoted.
  • The cost of high skilled employee is higher.
  • The departments have a self-centered mentality. The functional manager pays more attention to only his department; he usually doesn’t care about other departments.
  • Communication is not good among the departments, which causes poor inter-department coordination. This decreases flexibility and innovation. Moreover, there is a lack of teamwork among different departments.
  • Employees may have little concerns and knowledge about anything happening outside their department. This causes obstacles in communication and cooperation.
  • The functional structure is rigid, and therefore is slow to adapt to changes.
  • Due to bureaucratic hierarchy, delays happen in decision making.
  • Generally the functional manager makes decisions autocratically without consulting the team members, hence it may not always work in favor of the organization.
  • When the organization becomes larger, functional areas can become difficult to manage due to their size. Each department will start behaving like a small company with its own facilities, culture and management style.
  • Functional departments may be distracted by their own goals, and focus on them rather than the organization’s goal.


The functional organization structure helps organizations run their business and earn profit. This type of structure suits organizations intended to produce some product or service on a continuous basis. Here, employees feel secure, perform well and tend to be highly skilled. The project manager doesn’t have any role in functional organization, and even if he exists, his role will very limited and he will be known as either the expediter or coordinator.

Here is where this post on functional organization structure ends. If you have something to add, you can do so through the comments section.

Category: Bank

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