The functional organization where employees are organized into departments (engineering, sales, marketing, human resources, etc…) is the most common organizational structure.  The functional organization was a very suitable structure in the industrial era. In the information economy, this traditional structure suffers from three dysfunctions that can lower productivity and stunt overall results. 

So, what are the 3 dysfunctions of the functional organization?

Functional Organization Dysfunction #1: Unclear Overall Accountability

The functional organizational structure seeks to optimize internal resources and efficiencies within each department.  The development team will focus on building a platform that can make it easier and less costly to produce a series of products based on the same platform.   The marketing team can create an effective system for lead generation, conversion and nurturing.  The sales team will work hard to figure out how to sell what is handed to them from the “factory”.  

Imagine your company is embarking on developing a new product.  As the CEO and at one of your weekly executive staff meetings (you do hold weekly staff meetings, right?), you ask the seemingly simple question “Who is accountable for the success of this new product?”.   The head of engineering is likely to say, “I am pretty sure we can build this product on time”.  The head of marketing will say “We spent a good amount of time defining a great product and we’ll be ready to do a great launch when engineering and manufacturing give it to us”.  The head of Sales will say “we are late to market, can we have it tomorrow?”

No one is able to raise their hand and say “I am accountable for the overall success of this product”.  The functional organizational results is an unclear overall accountability for new product initiatives.

Functional Organization Dysfunction #2: Empire Building Mindset

Senior executives leading a functional team have the tendency to prioritize their own team (empire) even at the expense of benefiting the whole organization.  They look at growth and resources in the context of their own functional area since their goal is to increase the capacity of their team to perform and deliver results.  This can become a problem, especially when an executive is more effective than others at advocating for his own team.  Imagine, for example, an eloquent marketing VP winning the argument for additional resources for her own functional area even though it would have been far better overall to increase funding in product development.  Needless to say, inherent biases can distort the outcome of important decisions at the expense of the overall performance of the company. 

Functional Organization Dysfunction #3: Impaired Communication Flow

The functional organization can impair lateral communication as team members will tend to escalate cross functional issues up to their managers for resolution rather than working to resolve it with their peers in another function.   This often tend to also happen at the Executive level where a VP will look for the CEO to resolve an issue he or she may have with another VP rather than addressing it laterally and directly.

This tends to slow down communication and open up the likelihood of misinformation.  Slow communication results in lower productivity because slower communication means slower decisions and slower decisions means less doing.  

Alternatives to the Functional Organization

There has been a lot of research, studies and experimentation with alternate organizational structures including:

– Matrix organization

– Market segment focused organization

– Flat organization

– Divisional structure

– Geographical divisional structure

The right organizational structure for your company will depend on a broad range of factors including your industry, the size of the company, stage of development and culture amongst others.  An new approach called Holacracy seems to be emerging as a very suitable alternative for many organizations in the fast moving, information-driven and hyper-connected world.  

Zappos is an example of a company switching to the Holacracy approach.

Photo courtesy of Zappos Insights

Tony Hsieh, the CEO of Zappos puts it this way:

“Research shows that every time the size of a city doubles, innovation or productivity per resident increases by 15 percent. But when companies get bigger, innovation or productivity per employee generally goes down. So we’re trying to figure out how to structure Zappos more like a city, and less like a bureaucratic corporation. In a city, people and businesses are self-organizing. We’re trying to do the same thing by switching from a normal hierarchical structure to a system called Holacracy, which enables employees to act more like entrepreneurs and self-direct their work instead of reporting to a manager who tells them what to do.”

Summary

While the functional organizational structure may have served the industrial era well, it is time to consider replacing it with a more responsive approach that eradicate the 3 dysfunctions and more importantly empowers employees to unleash their awesome creativity and talent in an environment unburdened by the outdated top down confining structure of old.  Holacracy has the potential to be the right answer for many (if not all) organizations to the age old question “what is the best organizational structure?”