Traditionally, businesses have been divided into functional areas such as marketing, production and finance. These functional areas are also known as ‘departments’. Each functional area has a manager and people who work below him or her, such as supervisors, then operatives and then the support staff. These are known as the different layers of hierarchy and reflect who has the responsibility and authority within the business. The diagram below shows a functional structure for a business that has only four functional areas.
This type of structure allows workers to specialise in the functional area in which they work e.g. finance and marketing. The structure has clearly marked levels and lines of authority, for example, the manager is above the supervisor in the hierarchy of the business.
A functional structure can be inflexible as it can be difficult for the business to realise that customers’ requirements have changed. This may happen if the business is large and has people working on the same product in different functional areas or different parts of the world. If the workers do not see or speak to each other very often they will not be able to discuss the goods or service. Therefore a functional structure is best suited to businesses that produce only one product or a closely related group of products.
IBM had a functional structure with a strict distinction between functional areas such as marketing and finance. It was believed that this structure led to delays of up to two years in the introduction of new models and this caused IBM’s profits to fall. IBM has now split its business into divisions, with each division responsible for one product.
Every division will have all of the functional areas you would expect to see; this is known as structure by product.