Functional Structure in Functional Level Strategy Formulation

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Functional structure in the Functional level strategy formulation is most often called structural design. In a functional structure, teams or groups are created based on common functions in a bottom-up manner. The result is a set of functional units such as engineering, marketing, finance, human resource etc. that are controlled and coordinated from the top level management.

Functional structure are the most common type of structural design and have evolved from the concept of high specialisation, high control framework of manufacturing organisations tuned towards high efficiency.

Functional management is more technical oriented and less product or business oriented, while they are skilled in taking decisions in their functional areas, they are weak in the areas of product business plans, market study and product release management. If the organisation does have multiple product lines, then the functional hierarchy at lowest level does get divided along product lines, thereby creating deeper hierarchies.

Functional Structure

Functional structures are typically highly hierarchical; hence they inherit the properties of hierarchical structure.

  • Maximises Functional Performance: All the human knowledge, skills, and infrastructure required for a particular functional activity are consolidated in a single sub-organization, facilitating sharing of valuable expertise by superiors with their subordinates. The functional units are managed by leaders who have in-depth knowledge and experience; they can control the unit very effectively. Hence it harvests the potential of the unit without duplication of scarce resources, maximizing their utilization.

  • Cultivates Specialists: This type of structure promotes the career development of individuals aspiring to be technical specialists in their field in large organizations. If the organization has adequately crafted performance management that supports the visibility of individual skills, the functional structure makes it easier to coach others and climb the hierarchical ladder.

Weaknesses of Functional Structure

  • Restrictive Organisational View: Each functional unit has expertise in its field but lacks broader awareness about the organization’s objectives or products. The responsibility of successfully integrating the organization lies with few top-level executives, at the same time, the organizational structure limits the capabilities of the functional managers to occupy top management positions. Thus, even though such organizations might be effective initially, being controlled by a few founding members, their long-term efficiency is doubtful.

  • Slow Response: Functional units cannot respond to fast changes in customer demands or the product since only the top-level management has broad knowledge and decision-making authority. The administration also performs the role of coordinating tasks across functional units, thus unless the management does not formulate a complete plan of action, little progress can be made in individual operating units.

  • Poor Accountability: Due to the weak link between product and functional units, it is hard to correlate the profits of individual products to the budget and spending of individual units. The units that offer support to other functional units, like human resources or IT departments, do not contribute directly to the revenue, yet they are essential components that help in running the organization smoothly.

Most Effective Conditions

  • Small/medium size or few products: Functional units are effective when the organization has only a few products or is small in size; the drawback of a limited view of the entire organization gets negligible. One way to test it is to try to restructure the organization from hierarchical to horizontal, if the resulting structure is not too different, it implies that the organization is inherently lacking a horizontal dimension.

  • Stable external environment: Functional units are effective when the organization has routine technologies and there is less probability of the emergence of competitive technology that is radically different.

Product Divisional Structure

In a divisional structure, the teams are organized into a set of divisions, where each division corresponds to the end product or services provided by the organization. Each division has its own set of functional units like research, manufacturing, marketing, etc, and is completely self-contained. A divisional structure is less hierarchical than a functional one; it is formed by decomposing the functional structure along the product lines. Unlike functional management, divisional management is more skilled in product business and lesser in core technical competencies.

Strengths of Divisional Structure

  • Clear Accountability: Structuring along the product lines provides a clear correlation between the expense and profit of the individual divisions. The business objectives of the division can be formulated more objectively and the expectations can be better agreed upon.

  • Departmental Coordination: Objective accountability leads to better cohesion within the boundaries of the department; it creates a win-win situation where teams have a mutual benefit in collaborating.

  • Broader Skills Development: Active collaborations between different specializations provide employees with opportunities for learning new skills beyond their area of expertise. It is easier to comprehend the dynamics of a product and therefore is best suited for nurturing general managers in an organization.

  • Unstable Environment: Since each division is product based and self-reliant, it can respond much more quickly to changes in the external environment.

Weaknesses of Divisional Structure

  • Resource Duplication: To make each division independent, some of the resources which could have been shared are rather duplicated. Specialists with particular domain knowledge cannot be shared across divisional boundaries.

  • Inhibits Career Growth of Specialists: While divisional structures are good for nurturing top-level managers, they are bad for technical specialists. Technical people feel alienated from their peers in other divisions and have poor exposure to the developments across the organizations.

  • Divisional Affiliations: The employees feel more affiliated with their department and would still lack the sense of being part of a larger organization, they might know their purpose but might not understand how they might be related to the organization’s objectives.

  • Difficult Product Integration: When an organization produces multiple products which might be used together or are part of a larger product, the integration task becomes challenging since there is little coordination between the divisions. The product management task across different divisions requires regular sync-ups but the structure inherently provides little motivation for the product managers to seek this larger goal. Each divisional manager is more concerned about delivering his product and would view the integration as not part of his job or the problem.

Most Effective Conditions

  • Very Large Corporations: The divisional structure is most effective for large corporations that have indeed multiple products that are poorly interrelated.

  • Competitive Environment: The ability to respond rapidly to external changes makes the divisional structure best suited for a highly competitive external environment.

Advantages of Functional Structure

  • Clarity: Functional design has the great advantage of clarity. Everybody has a ‘home’. Everybody understands his own task. As a result, functional structures bring order and clarity to organizational activities.

  • Economies of scale within a function: It provides economy of scale within functions. It reduces duplication and waste. For example, the total floor space shared by several products in a functional organization leads to an economy of operations.

  • Specialization: Each departmental manager is concerned with only one kind of work and can concentrate all his energies upon it with minimum diversion. Specialization being built into the organization brings about a competitive advantage for the firm. By putting its limited resources into one specialized activity, ‘even the small company can compete with the giant corporation on quantity, delivery and price’.

  • Coordination: Coordination within functions is easy. Centralized decision-making ensures unity of performance.

  • In-depth skill development: The functional structure also promotes the skill development of employees. Employees are exposed to a range of functional activities within their departments allowing them to embody their outstanding skills in every activity of the company.

  • Suitability: The functional type of organization is best for small to medium-sized organisations producing one or a few products where the dominant competitive issue and goals of the organization emphasize functional specialization, efficiency,, and quality. In fact, Fayol’s model for the functional structure was a coal-mining company where there was only one product, demanding simple, mechanical operations. The operations were more or less standardized.

Limitations of Functional Structure

The weaknesses of the functional structure, unfortunately, are legendary as the following list indicates:

  • Effort focus: Every functional manager considers his function the most important one and develops a narrow dimension of the organization. He becomes so enamored with his own specialty that he forgets the organization’s overall goals. In his anxiety to achieve departmental goals, he may try to subordinate the welfare of the other functions.

    ‘The lust for aggrandizement on the part of each function is the price paid for the laudable desire of each manager to do a good job.’ Again, functional specialization may lead to extremely narrow, dull, and boring jobs in organization with routine technologies. The functional structure also contributes to a short-term perspective on the part of specialists.

  • Poor decision-making: No one except the man at the top sees the entire picture of the business. Consequently, decisions are easily misunderstood and poorly executed. Questions like ‘Who is right?’, and ‘Who has scored better?’ force organizational participants into a tug-of-war.

  • Sub-unit conflicts: As the functional organization balloons to a reasonable size, boundaries are erected between departments. The structure turns out to be a ‘Berlin Wall Building’. Coordination among departments becomes a tough exercise. No one functional group is completely responsible for performance. As a result, tendencies like buck-passing, sidetracking of issues, etc., develop.

    Overlapping authority and divided responsibility adds to the confusion and chaos prevailing. Accountability suffers. If functional structure is employed, important projects may suffer from a lack of focused coordinated attention.

  • Managerial vacuum: Emphasis on functional skill makes a man unfit for top management posts requiring a broad perspective on the organization’s activities. Functional structure does not prepare people for tomorrow, for it has no position in which a functional head can learn and prepare to handle complexities inherent in the chief executive’s position. In the course of time, a chronic shortage of top management generalists may be felt.

The weaknesses of the functional structure are legendary. As the functional organisation grows in size, it ‘rapidly becomes an organisation of misunderstandings, feuds, empires and Berlin Wall Building.’ It soon requires elaborate, expensive clumsy management crutches, coordinators, committees, meetings, troubleshooters, special dispatchers which waste everybody’s time without, as a rule, solving much!

The problem of coordination between functions becomes more difficult. The administrative distance between top management and functional department grows. Divisionalisation or product organisation structure helps in relieving this position.

Article Source
  • G A Steiner, J B Miner and E R Gay, Management Policy and Strategy, Macmillan, New York, 1982.

  • D F Harvey, Business Policy and Strategic Management, Charles E Merill, Columbus, 1982.

  • W F Glueck, and L.R. Jauch, Business Policy and Strategic Management, McGraw Hill, New York, 1984; T J Peters and R H Waterman, In Search of Excellence, Harper & Row, New York, 1982.

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