The Functional Organization

Suppose you manage a team or even a larger organizational unit. Perhaps this is already a reality today, maybe it is hypothetical at the moment.

In that case, you will probably be confronted with a functional organizational structure and experience its advantages and disadvantages first-hand.

It was the same when I took on a leadership role for the first time.

As a manager in a functional organization, I was immediately confronted with the challenge of making collaboration smoother, keeping everyone focused, and ensuring that expertise didn’t get lost in the hustle and bustle of day-to-day operations. It was overwhelming to figure out how to utilize the team’s strengths while managing the demands of the day-to-day business.

These challenges have accompanied me my entire professional life since then.

It was not easy to recognize the strengths of this form of organization and use them to meet the demands of day-to-day business.

That’s why I want to share some helpful insights with you in this article.

As a company grows, the question naturally arises:

How can employees be organized to ensure efficient and goal-oriented collaboration?

This is ultimately a question of finding the right organizational structure.

There are different approaches, all of which have their own advantages and challenges. I will look at the most important ones here on my website.

Once the choice is made, you should focus on exploiting the advantages of the chosen organizational form and mitigating the disadvantages. It helps if you know the organization and have prepared strategies for action.

In this article, I’ll focus on functional organization, a structure most of us are familiar with. It’s likely the most common way businesses organize their teams.

I blend established theoretical approaches, which you may recognize from other sources, with my insights and lessons learned over the years in the industry.

I’ll share my observations on organizational structures, responsibilities, and control systems, examining the dynamics I’ve encountered—what works well, what doesn’t, and the key insights I’ve drawn from these experiences.

As I have spent my professional life in vehicle development, my experience naturally focuses on product development, which is also reflected in this article. However, this does not diminish the general validity of the problem presented.

Take the opportunity to reflect on your company’s situation and find suggestions and inspiration. I would be delighted if my thought-provoking ideas could help you further develop your organization and enhance your success in your role.

In a functional organization, the organizational units are oriented towards the tasks required to achieve a company’s business objectives. These areas of responsibility are called specialized functions.

Organizational Structure of a functional organization

At first glance, the logic is task-oriented.

The sales department sells.
The production department produces.
The development department develops.
The purchasing department buys.
etc.

The major tasks are divided into subtasks, resulting in a pyramid-shaped line organization.

The name “functional organization” comes from these specialist functions, which are bundled together in organizational units and led by a responsible manager.

As a rule, there is only one organizational unit for each task and every unit is dedicated to one specific task, which makes navigation easy.

At second glance, it becomes clear that this focus on tasks automatically leads to a focus on competence.

All people who know about sales and marketing are in the sales area.
All the people who know anything about production are in the production area.
All people who know anything about product development are in the development area.
All people who are familiar with the supplier landscape work in purchasing.

This organizational structure therefore bundles employees with the same or similar qualification profiles into organizational units.

By grouping people based on specialized know-how, the functional organization streamlines expertise.

In the typical pyramid structure, areas of expertise become increasingly specialized at deeper organizational levels. Managers at the higher levels therefore need to be experts in their specific fields but must also function as generalists within those fields.

The head of the company must be the greatest generalist, as all specialist functions converge at that level.

He or she must also be an integrator, as the task of integrating the subordinate organizational units always lies with the head of the respective organizational unit.

Specialization within each area is highly specific, offering limited potential for synergy across different fields.

As a result, a complex network of collaboration forms among employees, as nearly every organizational unit must work with others to achieve the company’s objectives.

The Purpose of Organizational Structures

To evaluate the strengths and weaknesses of an organizational form, we need to be clear about its purpose.

The purpose of an organization is to enable the responsible entrepreneur or manager to fulfil his or her obligations by delegating tasks and responsibilities to mid level managers and employees.

These responsibilities are:

Ensure the correct execution of activities within the company to comply with contractual and legal obligations.
Realize the economic result of the company.
Keep the product competitive and attractive for the customer.

Considering the first line item, bundling groups of people and assigning them responsibility for specific obligations is clearly the best approach. That is the reason the functional organization principle is so popular.

The second line item calls for an organizational structure that fosters collaboration. As I will discuss in more detail, this is not a natural strength of a functional organization and requires specific additional organizational measures.

The same applies to the third item. I recall that, a long time ago, product development was conducted solely by a functional organization. Today, however, that approach is no longer feasible.

Ensuring an attractive and competitive product requires a comprehensive chain of activities, which I explain in a dedicated article on product development.

While some steps in this process fall within the responsibilities of individual functional units, others require close collaboration and coordinated management of tasks and to-dos, typically organized through product project structures.

The Responsibilities in a Functional Organization

In a functional organization, responsibilities are assigned clearly and intuitively to the respective functional areas and their managers.

Responsibilities come in various forms. A manager in a functional organization must address all of them.

Let’s examine each one individually.

Responsibility for Fulfillment

The managers of the functional units are primarily expected to ensure that their teams deliver the results with which this specialist function contributes to the company’s success.

Here we are talking about professional performance.

A manager dedicates their time and attention to important tasks and the resulting outcomes, thus ensuring the smooth functioning of the company.

If your top priority is exceptional functional performance, you should decide favorably for a functional organization.

However, don’t be convinced that it resolves all issues; such a view is oversimplified.

Achieving performance targets in the functional areas is a necessary but not a sufficient condition for business success.

However, at least the necessary condition must be guaranteed from the outset.

Competence Responsibility

Since the functional organization bundles the competencies in functional areas, it makes sense to hold the respective manager responsible for ensuring and developing the professional competence of the staff.

Unfortunately, this is not as self-evident in reality as it appears here at first glance.

Perhaps it is so challenging precisely because it appears so self-evident that it is no longer openly discussed. This is a mistake.

Since professional competence is not so easy to measure, it must be the manager’s focus.

If it fails to do so, a creeping loss of expertise or the failure to recognize and develop new areas of expertise in good time is a real danger.

The advantage of bundling the areas of expertise in specific organizational units should be used urgently to ensure the company’s competitiveness in this area.

We will see later that the other forms of organization do not offer such favorable conditions in this respect.

Responsibility for Results

The leaders of a functional organization must take responsibility for the outcomes of cross-functional collaboration.

Logically, specialist functions are tasked with responsibilities for outcomes that, while primarily reliant on their specific expertise, also necessitate collaborative efforts across various disciplines.

The assignment of these responsibilities is relatively flexible and is often intuitive. This means, there are several alternatives of which one appears to be the most logical.

Here are some examples:

It is common to delegate responsibility for the performance, the quality, and the cost of the product to the development organization.
Responsibility for customer satisfaction, market share target, and contribution margin achievement is typically assigned to the sales organization.
Short, reliable delivery times and high flexibility to market fluctuations are expected from production.

That’s logical, isn’t it?

But none of these responsibilities can be accomplished by just one single functional unit. All require cross-functional collaboration.

Even though it looks intuitive in the first place, it becomes complicated in the real world.

Sales naturally likes to decide on the product, because it knows exactly what customers need.
Production likes to decide on the product because it knows exactly what is easy to build.
Controlling likes to decide on the product, because it knows what makes money.
Purchasing likes to decide on the product, because it knows how the material cost can be lowered.

This randomly chosen example shows that the allocation of responsibilities appears intuitive and logical at first glance. In practice, however, this proves to be less trivial.

Such overlapping competencies potentially occur in all areas.

Preventing chaos necessitates precise definitions, thorough communication, and a corporate culture that emphasizes cooperation.

As indicated by the examples above, for every cross-functional responsibility only one responsible unit needs to be decided. This unit carries the duty to collect all requirements, organize the work, and realize the best overall solution.

Control model

After the responsibility has been settled, the performance of the whole functional organization needs to be controlled.

This is essential for identifying shortcomings, determining necessary actions, and swiftly resolving emerging issues.

In order to measure the performance of the functional units, key figures are defined and targets are set.

Setting Performance Indicators

How should the management usually steer a functional organization?

Consider which key figures are relevant and important for the success of the company.
For each key figure, find the area that has the greatest influence on this key figure and whose expertise is best suited to realizing the key figure.
Make this area responsible for this key figure and communicate this decision within the organization.
Look at the key figure regularly in your management meetings.

While the first two points can be observed relatively frequently, the third point is less commonplace.

Ask your functional units which KPI they are responsible for. I wouldn’t be surprised if you don’t get a satisfactory answer everywhere.

I rarely see the fourth point. Often, only the KPIs with obvious problems are looked at.

I strongly recommend regularly reporting all key figures. This not only shows appreciation for employees who are performing well but also provides management with a balanced and realistic overview of the company’s performance.

The Control Mechanism.

Steering a functional organization with functional key figures has two effects:

As part of his overall responsibility, the head of the company delegates partial responsibility to managers who are qualified and resourced for this.
As each area needs the other areas to achieve its goal, a network of dependencies is created that forces cooperation.

I’d like to use an example to illustrate this while acknowledging that it may not apply universally to all competency-based organizations.

Example how KPIs enforce collaboration

In this example, the development department is held responsible for product quality because development defines the product and therefore has a great deal of leverage to ensure that the product functions perfectly.

To measure this, the amounts of failures that occur in the first 12 months of customer operation are measured and a target value is defined.

When evaluating this KPI, an overrun becomes evident that is attributable to the failure of a specific part.

The responsibility for solving this problem is defined. According to the assigned quality responsibility, it is an R&D problem.

Within the large R&D department, the engineer responsible for the defective part is now responsible for solving the problem.

To do this, he must:

Clarify with sales how the customer uses the product.
Obtain information from the quality organization as to exactly where and under what circumstances the problem occurs.
Clarify with production what manufacturing parameters could contribute to the problem.
Work with the supplier quality department on the supplier quality reports.
Investigate with other development colleagues if influencing factors from other parts or technical systems triggered the damage.
Conclude the true root cause and implement the corrective measure that resolves the problem.

Even if the root cause is not in the broken part itself but falls under a colleague’s area of responsibility, or if the root cause is in a different functional department than R&D, he must still make sure that the cause is fixed and the problem is resolved.

If one of the partners involved does not contribute to finding a solution, the responsible engineer calls in his boss. He will then try to establish cooperation with the colleague at his management level.

If even that doesn’t work, the escalation goes one management level higher. If such issues escalate to the head of the company, it is an indication that there is a problem with the culture of cooperation in his company that he needs to address urgently.

What do I want to show with this example?

The functional organization model requires a high level of commitment and a strong culture of cooperation from employees since problems must be solved across a network of many separate organizational units that do not share the same management.

Pitfalls in Steering a Functional Organization

The worst mistake I have observed is that the boss does not regard the key figures for managing the functional areas as a top priority at all, but only monitors his own key figures.

Typically, these refer to financial goals.

The budgets of the functional areas then become the only KPI that concerns the boss.

A huge amount of attention, time, and energy is then focused on tracking this key figure, while the other key figures automatically become a lower priority or are even non-existent.

What is the consequence?

The need for collaboration disappears.

Everyone reduces their workload, primarily by reducing the effort required for tasks that other functional departments need.

As a result, the performance of the organization deteriorates. The costs are offset by fewer and fewer results.

What is the solution?

Certainly, it is essential to allocate clear budgets to functional departments.

The controlling function ensures that departmental budgets are properly allocated and that cost and performance KPIs are in equilibrium. Balancing these KPIs is the primary role of the controlling function.

If this is the case, then budget compliance must be a matter of course that the boss no longer has to worry about at all.

He can then focus on balancing the performance of the various departments and ensuring the overall optimum based on functional performance.

Financial success should result from performance and collaboration, not merely from budget tracking.

Advantages of the functional organization

As I wrote in the introduction, you should make consistent use of the advantages of the functional organization if you work with this form of organization.

To do this, you should be aware of the advantages, which is why I am listing the most important advantages of a functional organization here.

Intuitive and Easy-to-Understand

When questions or problems arise in day-to-day business, it is usually easy to identify a functional area that presumably has the necessary expertise to answer the question or solve the problems.

This is because, in a functional organization, the names of the organizational units provide information about the area of responsibility and, thus, about the expertise. This makes orientation easy.

Even if no clear decision has been made about responsibilities, the appropriate contact person can likely be identified using logic and general knowledge.

Makes Satisfied

In a competency-based, functional organization, employee satisfaction can be enhanced by recognizing and valuing their competence and experience.

Expertise in one’s field is a vital motivational factor that not only boosts employee motivation but also strengthens team cohesion and a sense of belonging.

Makes Focused

The targeted allocation of specialist skills presents a significant advantage, as it naturally shifts focus towards the key success factors of this field.

As a result, both management’s and employees’ attention is focused on clearly defined areas of activity and clear results. There is hardly any ambiguity as to what is expected of the respective organizational unit.

Makes Efficient

By bundling expertise in organizational units, it is easy to implement professional and procedural standards.

There is only one group of experts at a time, who decide how they want to work and what they want to focus on.

This creates clarity and efficiency. In other words, there is always one responsible manager who cares about how the work should be done.

This minimizes overlaps and duplication of work and leads to an overall more efficient use of available resources.

If done right, one prime path is continuously improved, and tools and processes are standardized.

Improves Quality and Performance

In a functional organization, teams are formed based on their expertise and skills.

This structure enables employees to specialize in their fields, fostering deep expertise that enhances work quality and efficiency.

Individuals can refine their abilities through task repetition, thereby improving their performance, increasing speed, and becoming real masters of their craft.

Disadvantages of the functional organization

Although this form of organization is so widespread, it has considerable disadvantages.

You should be aware of the disadvantages, which is why I am listing and explaining them here.

Difficult to Lead

One might assume that managing a functional organization is straightforward. Coordinating a few direct reports to the boss should be manageable.

Nevertheless, a functional organization is fundamentally competence-based. Consequently, all employees anticipate that the boss will make informed and competent decisions.

But nobody can know everything. Typically, the boss has advanced through a specific field of expertise, where they are most knowledgeable.

In this area, there is a risk of micromanagement due to their expertise. They must be cautious not to make too many detailed decisions. However, if they make too few decisions, employees may become dissatisfied, as they expect the boss to set the right priorities and directions based on their experience.

In the functional units that are unfamiliar to the boss, they may give too little direction or the employees may not feel that the decisions are trustworthy.

In my observation, an approach based on the motto: “I’ll stay out of it and we’ll solve it together as a team” is not successful in a large functional organization.

A functionally organized company always tends to over-prioritize the functional areas in which the boss himself has expertise,

Mitigation Strategy:

In a functional organization, great attention must be paid to the career planning of future leaders. Candidates for senior management positions must be systematically built up over the years by rotations through the various functional areas of the organization. This gives the potential candidate a minimum level of expertise in various specialist functions that will enable them to be an accepted boss for everyone later on.

Furthermore, the current need for action in the company should always be taken into account when nominating the boss. The boss should have his core competence where the biggest strategic or tactical problems need to be solved.

Management Overload

The head of a company even the top management, must ensure day-to-day operations, and at the same time, constantly adapt the company’s strategic direction to the realities and developments in the business environment.

Since all specialist functions, both strategic and operational, report to the same management level, it is very likely that the upper management is overloaded. There are simply not enough hours in the day to process all decision-making requirements on time.

In my experience, it’s often the strategy that doesn’t get enough attention because the day-to-day business takes up all the resources.

In general, there is the danger of slow and poorly evaluated decisions because of work overload on top management level.

Mitigation Strategy:

For large organizations, a mixture of a divisional organization at the upper management levels and a functional organization at the middle and lower management levels can be a good compromise.

Difficult Interdisciplinary Cooperation

Even in a functional organization, no organizational unit can achieve its goals alone; it always requires the cooperation and support of others.

Responsibility for interdisciplinary cooperation in a functional organization lies with the highest levels of management. Consequently, middle and lower management levels focus solely on achieving their divisional target. (Department egoism)

Helping others is not in the nature of a functional organization. On the contrary, it often leads to an advantage to undermine the goals of others if it serves the fulfillment of one’s own goals.

Even if departments want to support each other, it requires the flow of information and potentially an adjustment of resources.

This presents a significant challenge, as it is impossible for the management to organize the collaboration of all functional units. The sheer number of units is too great for a handful of top managers to supervise efficiently.

As a result, departments often operate in isolation from one another. Information flow and decision-making across departmental boundaries become time-consuming and error-prone.

Mitigation Strategy:

To ensure interdisciplinary collaboration in a functional organization, additional process organizational forms can be implemented alongside the structural organization.

The most common form is the project organization.

Another solution lies in the application of a matrix organization, where managers are given not only functional responsibility but at the same time process responsibility across functional boundaries.

Reduced Overall Performance

Employees in functional departments have a limited view of the big picture.

The focus on the customer or the market suffers, as this seems to be the responsibility of the sales unit alone.

The focus on the financial performance suffers as well, as the employees focus on the departmental budget only.

Innovations can be hindered, as they often require interdisciplinary collaboration.

Each department prioritizes its own goals instead of pursuing the overall goal of the company.

Simply put, achieving the overall optimum in a functional organization is the task of the top management level.

This works for small companies, perhaps also for somewhat larger ones.

Large companies definitely need support structures to compensate for the mismanagement caused by the divisional target control system.

Overall, it can be observed that functional organizations promote silo thinking and division boundaries, although cooperation and team spirit are critical to success in this form of organization.

Mitigation Strategy:

The most effective solution against silo thinking and divisional egoism is a strongly communicated corporate strategy and a strong culture of cooperation.

Delving into detail on those two topics would be worthy of individual articles.

Lack of Measurability of Intangible Results

As described in the section on the control method, each area in a functional organization needs its own control parameter by which its success is measured.

Particularly in the area of intangible services, recording performance using key figures is challenging.

How do you measure the output of development?
How do you measure the output of human resources?
What is the output of the controlling department?

I believe the problem is evident.

The difficulty of measuring immaterial output tempts us not to consider output at all and to see efficiency only as a function of input.

However, this can backfire badly because it is not recognized when further savings are at the expense of performance and therefore the result suffers.

As intuitive as this form of organization is, it is still difficult to measure and optimize its performance.

Mitigation Strategy:

Fighting this problem is hard.

My recommendation is to conduct dedicated performance reviews by the management team. In the absence of KPIs, we must make the effort to evaluate performance based on judgment and experience.

Hinders Cross-Functional Careers

The functional organization is difficult in terms of personnel development and human resources.

By emphasizing specialist knowledge, it promotes expert careers.

This isn’t to suggest that experts can’t be effective managers. However, it is crucial to nurture and advance individuals who are leaders, rather than merely experts, into leadership roles.

Mitigation Strategy:

Implement detailed and long-term personnel development plans.

These plans should fully encompass all aspects of leadership. In addition to the subject area of personnel management, they should also include the broadening of professional competence across several specialist areas, cultural aspects such as cooperation, and values such as a sense of responsibility for the overall company’s success.

What About the Silo Thing?

Let’s be honest. Functional organizations have a problem with silo thinking. That is unavoidable.

On the other hand, the advantages of a functional organization cannot be denied. That is why it is so popular and many companies have become very successful with a functional organizational structure.

In my opinion, combating silo thinking and divisional egoism is the most important task of all management in a functional organization. This goes from the head of the company down to the team leader.

But that alone is not enough; cross-functional structures that promote cooperation are needed. These can be project organizations, simultaneous engineering teams or matrix organization approaches.

I will go into all these things in detail in further articles.

Flat Hierarchy?

In many publications, you can read that one advantage of functional organizations is a flat hierarchy.

But why is this point not included in my list of benefits?

To answer this question, I want first to go into another question:

What is the advantage of a flat hierarchy?

Well, it is expected that decisions can be made quickly and support can be provided promptly because there are fewer leaders who assign or deny responsibility to each other.

(And, by the way, fewer middle managers cause also less personal cost.)

To ensure that decision-making and support requirements are quickly recognized and addressed, each manager should not be overloaded with too many cases. Otherwise, these tasks will accumulate.

A good measure of this is the span of control. It indicates how many employees a manager has to look after.

In my experience, it should be between 5 and 15.

5 employees per manager when it comes to very complex and less standardized tasks.
15 employees per manager, when the task is standardized and repetitive.

Knowing the number of employees allows for the calculation of the optimal number of management levels to achieve peak performance.

Generally, this should not vary significantly across different organizational structures, hence I perceive no substantial benefit.

Quite the opposite.

In a functional organization, there is a risk that functional areas based on tasks will require fewer staff members than the span of control would suggest. This results in more low- and mid-manager level managers and as a consequence in more management levels.

In this case, the hierarchy would be even deeper in a functional organization.

One mistake should be avoided:

Do not first decide the number of management levels and then calculate the number of employees to be hired based on the span of control. (No joke, this has actually happened before.)

Concluding Remarks

A functional organization is oriented towards the tasks required to achieve a company’s business objectives.
The responsibility for fulfillment, the competence responsibility and the responsibility for results are carried by every manager.
Specific Performance Indicators for every department are used to evaluate performance.
Advantages are: Intuitive and easy-to-understand; Makes satisfied; Makes Focused, Makes Efficient; Improves Quality and Performance.
Disadvantages are: Difficult to Lead; Management Overload; Difficult Interdisciplinary Cooperation; Reduced Overall Performance; Lack of measurability of intangible results; Difficult cross-functional careers.
Silo thinking and Department egoism are inherent in a functional organization and require management attention and special counter measures.
The depth of the hierarchy depends on the span of control and the amount of personnel needed for the business.

Thanks for taking the time, to read this long article. I hope you enjoyed it. If you want more details on specific points, don’t hesitate to contact me.

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