In my last post I described the events that lead to the creation of a functional structure for companies in their early stages of development. A functional structure has several commonly-recognized advantages for the company and its managers. First, the natural division of labor associated with the formation and maintenance of functional groups allows the members of each group to become more specialized and productive and creates opportunities for them to continuously learn and improve through their interactions with other group members. Second, since the members of each functional group are brought together and linked by their common skills, education and training, it is easier for them to supervise one another and control the activities and behavior of all of the members of the group. It is typical for each functional group to actually develop its own unique set of cultural values and norms that impact behavior within the group. Third, the consistent interaction and collaboration among group members ultimately leads to a team orientation that makes the group more effective in tackling and completing the projects assigned by the senior managers overseeing all of the functional groups. Ideally this will eventually result in one or more of the functional groups becoming a true core competency for the company that can be leveraged within the company’s overall strategic plan. Finally, the functional structure facilitates segregation of company assets and resources into the areas that are most important for the company’s success and thus makes it easier for senior management to identify, manage and control resource deployment during a time when the company is growing rapidly and adding new resources quickly.
On the other hand, a functional structure does ultimately lead to several serious potential problems that will need to be addressed by senior management and others involved in designing the appropriate organizational structure for the growing business:
As the company creates more functional groups, and each of those groups expands and develops it own unique hierarchy and system of interaction among members of the group, the chances of communication problems between groups increases substantially. Not surprisingly, each functional group begins to develop its own orientation toward how the activities of the entire company should be prioritized and these will often conflict with the views of other departments that depend on the group for cooperation and resources.
As the company grows and creates new functional groups and adds new products and services it becomes more difficult for senior management to identify and measure the contribution that each employee and functional group is making to the necessary activities of the company and the pursuit of the strategic goals and objectives set by the company leadership. These measurement problems ultimately lead to poor decisions about the portfolio of company products and services unless steps are taken to collect and properly evaluate all the information necessary to determine how and where the company’s limited resources can be effectively deployed.
As functional groups develop and grow, and the range of its products and services expands, an emerging company also experiences new issues arising from the need to conduct activities, and establish offices and other facilities, in different geographic locations around the country and world. As the company begins to disperse its activities away from a single headquarters office decisions need to be made with respect to each functional group about how to balance the need to centralize authority in order to retain control against the need to decentralize authority to allow offices and other facilities located in specific geographic areas to collaborate with one another to serve the needs of customers in those areas.
As the company grows, more and more customers will be drawn to its products and services and demand will begin to grow from the customer base for additional features and support beyond the company’s “standard” offerings that will meet their specific requirements. A functional-based structure is best suited to creating and supporting products and services that can be offered without customization to a continuously expanding customer base and functional groups such as sales and manufacturing will be challenged to invest time and resources in meeting the special needs of one customer or subgroups of customers with similar requirements while continuing to focus on their primary missions.
The expansion of the functional-based structure ultimately becomes a burdensome distraction on senior management that diverts their attention from important strategic issues that impact the entire company. It is common for the CEO to become immersed on a daily with reconciling communication and collaboration issues between functional groups and, as a result, he or she finds it difficult to focus on and plan for new initiatives such as development and launch of new products.
Continuing growth also creates other problems for a functional-based organizational structure that may not fit neatly into the categories described above. For example, as the company’s line of products and services expands it becomes increasingly difficult for the sales force to fully understand each offering and be able to effectively convey the benefits and advantages of every product or services to prospective customers. One result of this “information overload” is that the members of the sales and marketing groups have less and less time to focus on properly launching new products and services. Similarly, as the company pushes into new markets it becomes more challenging for sales and marketing to fully understand the requirements of new customers while still servicing the company’s existing customer base. More products and customers also makes things difficult for the manufacturing function since it becomes harder to ramp up and maintain higher and higher production levels while still attaining quality control objectives. Moreover, controlling production costs becomes more problematic as demand becomes harder to forecast and new equipment is needed to manufacture new products that cannot be accommodated using the company’s existing production technology and resources. Finally, since fast and continuous growth depends on a consistent stream of new products and technologies, members of the R&D function will be under substantial pressure to continuously improve and upgrade existing products and engage in high-risk efforts to come up with new innovations that open completely new markets for the company.
It is possible to address some of the problems described above while still retaining what is essentially a functional-based organizational structure. For example, if there are communication and coordination problems between two functions engaged in highly related activities, such as sales and marketing, senior management may modify the organizational structure by combining those two activities into a single functional group, in this case “sales and marketing.” This increases the integration of the key activities relating to direct contact with customers and allows senior management to continue to exert the necessary level of control. The functional-based organizational structure does, however, have significantly limitations that will eventually be reached once the company reaches a certain point in its growth and development. In general, this type of structure can be effectively used as long as the company is only producing a small number of similar products, produces the products in one or just a small number of locations, and confines its sales and marketing activities to one major group of similar customers. Once these conditions cease to apply—product lines get larger and more diverse, the geographic scope of the business expands into foreign markets and/or customer requirements become more specialized—the problems associated with a functional-based organizational structure become too difficult to manage and consideration needs to be given to alternative structural models (e.g., product-, customer- or geographic-focused divisions with their own dedicated functional resources) that allow managers to regain some degree of control over the activities of the company while better positioning the company to deal with its rapidly changing business environment.