The Functional Organizational
Structure
1
Learning Objectives
01
02
03
Understand the
evolution of
organizational
structure
Describe the
functional
organizational
structure
Identify the
core functional
areas of an
organization
Growth of a Company
Entrepreneur
starts a
company
Business is
good! – needs
to hire
someone to
help
Business continues to
grow – hire more
people and assign
them to functions:
Sales, Operations,
Accounting, etc
Functional Areas hire
more people –
Hierarchical structure
emerges
This is the most common
organizational structure
This Results in a
Functional
Hierarchical
Organizational
Structure
Functions of the organization are
hierarchically managed
Functional areas perform tasks and
make decisions related to their
function
Processes cut across functions and
these task and decision will impact
other functional areas
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Functional Hierarchical Organizational
Structure
Sales & Mkt
Acct & Fin
Operations
R&D
Functional Areas of an Organization
• Functions are distinct (e.g. marketing, operations,
accounting) but
– Are interdependent
– Data flows from and to other functional areas
• Integrate of data across functional areas impacts
organizational effectiveness
– Increases communication across functions
– Increases efficient processes
– Leads to
• More timely information
• More accurate information
• Better decision making
Core Functional Areas
•
•
•
•
Purchasing
Production and/or Operations
Sales & Marketing
Finance & Accounting
Additional Potential Functional Areas
•
•
•
•
•
Warehousing
Research and Development
Human Resources
Information Systems
Varies some by Industry and Business
• But core are similar
Procurement
•
•
•
•
•
•
•
All activities related to carefully sourcing and obtaining
goods and services needed to support business
operations
Sourcing
– What goods and services does firm need?
– Who should the goods and services be purchased
from
Negotiating and Contracting
– Negotiate pricing and terms with suppliers
Monitoring and managing supplier performance
– Quality control
Receiving
– Inspection
Also helps manage the supply chain
And more
Production
• The function of a business that
produces products or delivers services
to customer
• Controls Identifying inputs
– Parts
– Labor
• Schedules production
• Minimizes production costs
• Maintains machines and equipment
• And more
Marketing and Sales
•
•
•
•
•
•
Help develop products
Determining pricing
Promoting products to customers
Taking customers’ orders
Helping create a sales forecast
And more
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2
Accounting and
Finance
•
•
•
•
•
•
•
Accounts payable (AP) and accounts receivable
(AR)
Payroll
Budgeting
Reporting and financial statements
Legal and Compliance
Controlling
And more
This structure can Lead to
“Functional Silos”
The Silo Effect
• This is NOT what you get when
you drive across I80 in Iowa
• It is what you get when you
focus on the functional areas of
a business
• The silo effect can have negative
consequences
• Optimization of functional
goals vs. organizational
goals
• Focus on functional
process and not cross
functional goals
• However, to deliver goods and
services, an organization needs
to communicate and coordinate
across all business functions
Functional Optimization
Warehouse
Silo
Sales
Silo
Production
Silo
Accounting
Silo
Customer
Focus on Organizational Goals
Sales
Warehouse
Customer
Production
Accounting
Functional Information Needs
• Employees working in one functional area
need data from employees in other functional
areas
– Functional area information systems should be
integrated, so shared data are accurate and
timely
• Managers think in terms of business
processes that integrate the functional areas
– Need to share information between functions and
functional areas
– ERP software provides this capability by means
of a single common database
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The Functional Structure
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Michael Porter’s Value Chain
Functional
Areas and
Business
Processes
• To understand ERP, you must
understand how a business
functionals
– Functional areas of operation
– Business processes
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Sharing data effectively and
efficiently between and
within functional areas
leads to more efficient
business processes
Business
Processes
Integrated information
systems: Systems in which
functional areas share data
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Summary
Basic functional areas: Marketing and Sales, Supply Chain
Management, Accounting and Finance, and Human Resources
Marketing and Sales: Sets product prices, promotes products
through advertising and marketing, takes customer orders,
supports customers, and creates sales forecasts
Supply Chain Management: Develops production plans, orders
raw materials from suppliers, receives raw material,
manufactures products, maintains facilities, and ships products to
customers
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QUESTIONS
The End
BUSINES
PROCESSES
Summary
• Basic functional areas: Marketing and Sales,
Operations/Production/Supply Chain
Management,Purchasing Accounting and Finance,
and Others (Human Resources, Project
Management, etc.)
• Marketing and Sales: Sets product prices, promotes
products through advertising and marketing, takes
customer orders, supports customers, and creates
sales forecasts
• Supply Chain Management: Develops production
plans, orders raw materials from suppliers, receives
raw material, manufactures products, maintains
facilities, and ships products to customers
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Summary (cont’d.)
• Accounting and Finance: Financial accounting to
provide summaries of operational data in
managerial reports, controlling accounts, planning
and budgeting, and cash-flow management
• Human Resources: Recruits, hires, trains, and
compensates employees, ensures compliance
with government regulations, and oversees the
evaluation of employees
• Information systems capture, process, and store
data to provide information needed for decision
making
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Summary (cont’d.)
• Accounting and Finance: Financial accounting to
provide summaries of operational data in
managerial reports, controlling accounts, planning
and budgeting, and cash-flow management
• Human Resources: Recruits, hires, trains, and
compensates employees, ensures compliance
with government regulations, and oversees the
evaluation of employees
• Information systems capture, process, and store
data to provide information needed for decision
making
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Summary (cont’d.)
• Employees working in one functional area
need data from employees in other functional
areas
– Functional area information systems should be
integrated, so shared data are accurate and
timely
• Managers think in terms of business
processes that integrate the functional areas
– Need to share information between functions and
functional areas
– ERP software provides this capability by means
of a single common database
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