Functional Organizational Structure

In a functional organizational structure, groups and teams are organized based on function. Therefore, this organization follows a top-down structure, where most decision flows from top management to bottom. Thus, the bottom of the organization mostly follows the strategy detailed by the top of the organization.

When does a functional organizational structure make sense?

This type of organization is often way more structured than other forms of organizational types like flat structures, and they are much slower in the decision-making process, as the top-down approach might lead to politics and aligning of various interests within the organization.

Usually, a functional organizational structure might make more sense for scaled companies, which need to manage much larger teams in mature industries.

When a product reaches millions of people, fast experimentation becomes much riskier for the organization.

Thus, the decision-making process becomes more structured to avoid making fast decisions that might lead to massive failures.

While this approach helps the organization to consolidate and keep benefiting from the market it dominates, over time, as new industries arise, the risk is an organizational which is too stiff might lose its dominance completely.

In other words, on the one hand, it’s fine to use this sort of organizational structure for more mature organizations.

On the other side, it’s also critical to balance this with innovation units able to explore new markets and industries.

The functional structure is part of the siloed types and the divisional structure.

Siloed organizational structures are more top-down, and more bureaucratic, compared to more open types of organizational structures.

Again, a siloed organizational structure might be more effective for large organizations which navigate the existing and mature industry and that needs to keep their position within these industries.

What’s an example of a functional organizational structure?

Google (Alphabet) has a cross-functional (team-based) organizational structure known as a matrix structure with some degree of flatness. Over the years, as the company scaled and it became a tech giant, its organizational structure is morphing more into a centralized organization.

A good example of a functional organization is Google (Alphabet) today. Since the company has scaled to over 150 thousand employees, worldwide, it had to become a more siloed organization to handle that kind of scale.

In other words, Google, which in the early days was a flat organization, over time has morphed into a top-down organization.

This process is usually normal and it happens as a result of scale, and of consolidating a position in an industry (like search) that goes from new to mature.

Thus, Google of today is much different from Google of the early days.

How to balance function with innovation units?

Siloed organizational structures are quite effective to handle scale. However, it’s critical to balance them out with innovation units.

In other words, within an organization, there should be small teams, which look more like startups, that we can call “innovation units” whose main goal is to explore new industries.

Those innovation units must be kept separate from the main headquarter, they must be free to build their own culture (potentially also in conflict with the mainstream culture of the organization).

Those innovation units are critical to balance out the top-down approach of a functional organization, to make sure the company keeps exploring new markets and industries, which make make the whole organization disrupted.

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