Perhaps the simplest structure is the functional structure. The functional structure is used to organise the firm around traditional functional areas, such as finance, accounting, marketing, operations, and so on. This structure separates the specialised knowledge of each functional area through horizontal differentiation and can direct that knowledge toward the firms key products or services.
Firms with operations outside their domestic borders might also adopt a functional structure. The key difference between a purely domestic organisation and a multinational organisation with functional structure is the scope of the responsibilities functional heads in the multinational firm bear. This structure is most commonly used when the technology and products of the firm are similar throughout the world.
Some major advantages of this structure:
- It is best suited for small and medium-sized firms because of their limited product diversification.
- It facilitates specialisation of the firms functional knowledge.
- It helps in reducing the duplication of the firms functional resources.
- It facilitates coordination within the firms functional areas.
A global functional structure can also reduce headquarterssubsidiary conflicts because it integrates operations throughout the world into their functional areas and charges functional department executives with global responsibility. This, in turn, enhances the overall international orientation of managers. For example, the higher a marketing manager rises in the marketing department, the more that manager needs to think about and understand the firms global marketing issues.
The primary disadvantages of this structure include the following:
- It can limit the attention paid to customers as functional groups focus on their specific areas.
- It can result in the organisation responding more slowly to market changes.
- It often creates problems of coordination across the firms functional groups.
- It leads to a narrow view of the organisations overall goals.
- It often burdens chief executives with decisions that involve multiple functions.
In an international setting, a functional structure can be disadvantageous when the firm has a wide variety of products and these products have different environmental demands, such as different government restrictions or customer preferences, standards or performance requirements. These disadvantages are exacerbated when different functional departments experience different demands across geographical areas. For example, if accounting practices are similar in two different countries but advertising approaches differ between the two countries, the accounting and marketing departments are likely to experience coordination difficulties.