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Functional Areas of Business

What you'll learn to do: Identify the primary functional areas within a business and describe their contribution to the organization

The decisions about how best to use the factors of production to provide the goods or services of the

business require a team of people working in a variety of jobs. As businesses grow larger and their products

and services become more complex, the number of functional areas within a business grows. Each

functional area makes specific and valuable contributions to the organization as a whole. In this section we

will explore some of the most common functional areas in a business and how each contributes to the

overall success of the business.

Learning Outcomes

Identify the primary functional areas within a business

Identify key people and explain the activities within each functional area

Introduction

Just as different functions in the human body are performed and regulated by different organs, different

functions within a business are performed and controlled by different parts of the business. One of the

reasons for separating business operations into functional areas is to allow each to operate within its area of

expertise, thus building efficiency and effectiveness across the business as a whole. The key functional areas

of a business are the following:

Management

Operations

Marketing

Accounting

Finance

Management

The primary role of managers in business is to supervise other people’s performance. Most management

activities fall into the following categories:

Planning: Managers plan by setting long-term goals for the business, as well short-term strategies

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needed to execute against those goals.

Organizing: Managers are responsible for organizing the operations of a business in the most efficient

way, enabling the business to use its resources effectively.

Controlling: A large percentage of a manager’s time is spent controlling the activities within the

business to ensure that it’s on track to achieve its goals. When people or processes stray from the path,

managers are often the first ones to notice and take corrective action.

Leading: Managers serve as leaders for the organization, in practical as well as symbolic ways. The

manager may lead work teams or groups through a new process or the development of a new product.

The manager may also be seen as the leader of the organization when it interacts with the community,

customers, and suppliers.

Operations

Operations is where inputs (factors of production) are converted to outputs (goods and services).

Operations is like the heart of a business, pumping out goods and services in a quantity and of a quality that

meets the needs of the customers. The operations manager is responsible for overseeing the day-to-day

business operations, which can encompass everything from ordering raw materials to scheduling workers to

produce tangible goods.

Marketing

Marketing consists of all that a company does to identify customers’ needs and design products and services

that meet those needs. The marketing function also includes promoting goods and services, determining

how the goods and services will be delivered, and developing a pricing strategy to capture market share

while remaining competitive. In today’s technology-driven business environment, marketing is also

responsible for building and overseeing a company’s Internet presence (e.g., the company website, blogs,

social media campaigns, etc.). Today, social media marketing is one of the fastest growing sectors within the

marketing function.

Accounting

Accountants provide managers with information needed to make decisions about the allocation of company

resources. This area is ultimately responsible for accurately representing the financial transactions of a

business to internal and external parties, government agencies, and owners/investors. Financial

accountants are primarily responsible for the preparation of financial statements to help entities both inside

and outside the organization assess the financial strength of the company. Managerial accountants provide

information regarding costs, budgets, asset allocation, and performance appraisal for internal use by

management for the purpose of decision-making.

Finance

Although related to accounting, the finance function involves planning for, obtaining, and managing a

company’s funds. Finance managers plan for both short- and long-term financial capital needs and analyze

the impact that borrowing will have on the financial well-being of the business. A company’s finance

department answers questions about how funds should be raised (loans vs. stocks), the long-term cost of

borrowing funds, and the implications of financing decisions for the long-term health of the business.

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Answer the following questions to see how well you understand the topics covered in this

chapter. This short quiz does not count toward your grade in the class, and you can retake it

as many times as you wish.

Use this quiz to decide whether to study the chapter further or move on.

Choose the BEST answer.

Question 1

What business function is responsible for making sure that organizational strategies and goals

are aligned with staffing plans?

operations

management

accounting

Question 2

InfoTech is a computer application firm based in Silicon Valley and has been responsible for

introducing some of the highest rated applications available for personal productivity. Two

brothers originally founded the company, but they quickly realized they needed to convert the

business into a corporation and establish functional areas within the company to handle

various aspects of operations. The company is now considering expanding operations by

building a production facility in another country. The Board of Directors has approved this

move, and now it will become the responsibility of which functional area to secure the

necessary funding for the expansion?

marketing

accounting

finance

Question 3

What function is responsible for ensuring that products and services, which are produced or

provided, meet high quality standards?

finance

accounting

operations

Check Your Knowledge

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Licenses and Attributions

Introduction to Functional Areas (https://courses.lumenlearning.com/wmopen-

introbusiness/chapter/functional-areas/) from Introduction to Business by Linda Williams and Lumen

Learning is available under a Creative Commons Attribution 4.0 International

(https://creativecommons.org/licenses/by/4.0/) license. UMGC has modified this work and it is available

under the original license.

Functional Areas of Business (https://courses.lumenlearning.com/wmopen-

introbusiness/chapter/functional-areas-of-business-2/) from Introduction to Business by Linda Williams

and Lumen Learning is available under a Creative Commons Attribution 4.0 International

(https://creativecommons.org/licenses/by/4.0/) license. UMGC has modified this work and it is available

under the original license.

© 2022 University of Maryland Global Campus

All links to external sites were verified at the time of publication. UMGC is not responsible for the validity or integrity of information located at

external sites.

5/20/22, 10:59 PMCommon Organizational Structures

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Common Organizational Structures

Organizations can be structured in various ways. The structure of an organization determines how it

operates and performs.

Functional Structure

Key Terms

silo—in business, a unit or department in which communication and collaboration occur vertically,

with limited cooperation outside the unit

departmentalization—organization into groups by function, geographic location, or other factors

Organizations commonly use a functional structure, which divides people into smaller groups by areas of

specialty such as IT, finance, operations, and marketing. Some refer to these functional areas

as silos because they are operate vertically and are disconnected from each other. In a functional

organizational structure, the company’s top management team typically consists of several functional

heads, such as the chief financial officer and the chief operating officer. Communication generally occurs

within each department and is transmitted across departments through the department heads.

Functional structures appear in a variety of organizations across many industries. They may be most

effective within large corporations that produce relatively homogeneous goods. Smaller companies that

require more adaptability and creativity may feel confined by the silos that functional structures tend to

produce.

Advantages of a Functional Structure

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Functional Structure at FedEx

This organizational chart shows a broad functional structure at FedEx. Each function—such as HR, finance, and marketing—is

managed from the top down via functional heads (CFO, CIO, vice presidents, etc.).

Functional departments arguably permit greater operational efficiency, because employees with shared

skills and knowledge are grouped together. Each group of specialists can therefore operate independently.

Management acts as the point of cross-communication between functional areas. This arrangement

enables specialization.

Disadvantages of a Functional Structure

A disadvantage of this structure is the tendency for functional groups to not communicate with one

another, potentially decreasing flexibility and innovation. Functional structures may also be susceptible to

tunnel vision, with each function perceiving the organization only from its group's frame of reference.

Recent trends to mitigate these disadvantages include using cross-departmental teams and promoting

cross-functional communication.

Divisional Structure

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Key Terms

parent company—an entity that owns or controls another entity

division—a section of a large company

subsidiary—a company owned by a parent company or holding company

A divisional structure groups organizational functions into divisions by product or region. Each division

contains all the necessary resources and functions to support a particular product line or geography (e.g.,

its own finance, IT, and marketing departments). Product and geographic divisional structures may be

characterized as follows:

Product departmentalization. A divisional structure organized by product departmentalization means

that the various activities related to the product or service are under the authority of one manager. If

the division builds luxury sedans or SUVs, for example, the SUV division will have its own sales,

engineering, and marketing departments distinct from the departments within the luxury sedan

division.

Geographic departmentalization. Geographic departmentalization involves grouping activities based

on geography, such as an Asia/Pacific or Latin America division. Geographic departmentalization is

particularly important if tastes and brand responses differ across regions, as it allows for flexibility in

product offerings and marketing strategies (an approach known as localization).

A common legal structure known as the multidivisional form (M-form) also uses the divisional structure. In

this form, a parent company owns subsidiary companies, each of which uses its brand and name. The

whole organization is ultimately controlled by central management; however, most decisions are left to

autonomous divisions. This business structure is typically found in companies that operate worldwide—for

example, Virgin Group is the parent company of Virgin Mobile and Virgin Records.

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US Department of Energy Organizational Chart

DOE divisions are organized under three undersecretaries. Each DOE division has a specific responsibility: nuclear security,

science, or energy.

Advantages of a Divisional Structure

Generally, divisions work best for companies with wide variance in product offerings or regions of

geographic operation. The divisional structure can be useful because it affords the company greater

operational flexibility. In addition, the failure of one division does not directly threaten the others. In the

multidivisional structure, subsidiaries benefit from the use of the brand and capital of the parent company.

Disadvantages of a Divisional Structure

Some disadvantages of this structure include operational inefficiencies from separating specialized

functions—for example, finance personnel in one division not communicating with those in other divisions.

Disadvantages of the multidivisional structure can include increased accounting and tax implications.

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Matrix Structure

The matrix structure is a type of organizational structure in which individuals are grouped by two different

operational perspectives simultaneously. This structure has both advantages and disadvantages but is

generally best employed by companies large enough to justify the increased complexity.

In matrix management, the organization is grouped by two perspectives the company deems most

appropriate. Common organizational perspectives include function and product, function and region, or

region and product. In an organization grouped by function and product, for example, each product line will

have management that corresponds to each function. If the organization has three functions and three

products, the matrix structure will have nine (3 × 3) potential managerial interactions. Thus, matrix

structures are inherently more complex than other more linear structures.

Advantages of a Matrix Structure

Proponents of matrix management suggest that it allows team members to share information more readily

across task boundaries, countering the tendency to construct silos within functional management. Matrix

structures also allow for specialization that can both increase depth of knowledge and assign individuals

according to project needs.

Disadvantages of a Matrix Structure

A disadvantage of the matrix structure is the increased complexity in chain of command when employees

are assigned to both functional and project managers. The higher manager-to-worker ratio that sometimes

results can increase costs or lead to conflicting employee loyalties. It can also create a gridlock in decision

making if a manager on one end of the matrix disagrees with another manager. Blurred authority in a

matrix structure can reduce agility in decision making and conflict resolution.

A matrix structure should generally only be used when the operational complexity of the organization

demands it. A company that operates in various regions with various products may require interaction

between product development teams and geographic marketing specialists—suggesting a matrix may be

applicable. Generally, larger companies with a need for a great deal of cross-departmental communication

benefit most from this model.

Team-Based Structure

The team structure is considered a newer structure for large organizations. It is less hierarchical, less

structured, and more fluid than traditional structures like functional or divisional organization. A team is a

group of employees—ideally with complementary skills and synergistic efforts—working toward a common

goal. Teams are created by grouping employees in a way that generates a variety of expertise and

addresses a specific operational component of an organization. These teams can change and adapt to fulfill

group and organizational objectives.

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Some teams endure over time, while others—such as project teams—are disbanded when a project ends.

Teams that include members from different functions are known as cross-functional teams. Although

teams are described as less hierarchical, they typically still include a management structure.

Critics argue that using the word team to describe modern organizational structures is a fad, and that some

teams are not really teams at all but rather groups of staff. That said, team-building is now a frequent

practice of many organizations and can include activities such as bonding exercises and even overnight

retreats to foster team cohesion. To the extent that these exercises are meaningful to employees, they can

be effective in improving employee motivation and company productivity.

Integration With Other Structures

One aspect of team-based structures that will likely persist indefinitely is the integration of team cultures

within a broader structure (e.g., a functional structure with teams interspersed). Such integration allows for

the authority and organization of a more concrete structure while at the same time capturing the cross-

functional and projected-oriented advantages of teams.

For example, imagine Procter & Gamble brings together a group of employees from finance, marketing, and

research and development—all representing different geographic regions. This newly created team is

tasked with creating a laundry detergent that is convenient, economical, and aligned with the company’s

manufacturing capabilities. The project team might be allocated a certain number of hours a month to

devote to team objectives; however, members of the team would still be expected to continue with their

responsibilities within their functional departments.

Network Structure

Key Terms

synergistic—cooperative, working together, interacting, mutually stimulating

hierarchical—classified or arranged according to various criteria into successive ranks or grades

In the network structure, managers coordinate and control both internal and external relationships with

their firm. The network structure is a newer type of organizational structure often viewed as less

hierarchical (i.e., more flat), more decentralized, and more flexible than other structures. Managers

coordinate and control relations that are both internal and external to the firm.

The concept underlying the network structure is the social network—a social structure of interactions. At

the organizational level, social networks can include intraorganizational or interorganizational ties

representing either formal or informal relationships. At the industry level, complex networks may include

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technological and innovation networks that may span several geographic areas and organizations. From a

management perspective, the network structure is unique among the other structures in that it focuses on

the internal dynamics within the firm.

A network organization sounds complex, but it is a simple concept. Take, for example, a T-shirt design

company. Because the company is mainly interested in design, it may not want to get too heavily involved

in either manufacturing or retail—both necessary aspects of the business. So, although the company may

rent retail space, it may purchase production capabilities from partner organizations with manufacturing

facilities. While the core company focuses mainly on designing products and tracking finances, this

network of partnerships enables much more than just a design operation.

Advantages of a Network Structure

Proponents argue that the network structure is more agile compared to other structures (functional,

division, and even some team structures). Silos are minimized and communication flows freely, possibly

opening up more opportunities for innovation. Because the network structure is decentralized, it has fewer

tiers in its organizational makeup, a wider span of control, and a bottom-up flow of decision making and

ideas.

Disadvantages of a Network Structure

On the other hand, this more fluid structure can lead to more complex relationships in the organization. For

example, lines of accountability may be less clear, and reliance on external vendors can be quite high.

These potentially unpredictable variables essentially reduce the core company’s control over operational

success.

Modular Structure

Key Terms

disaggregation—division or breaking up into constituent parts, particularly categories which have

been lumped together

modular—consisting of separate units, especially where each unit performs a specified function

and can then be mixed and matched with other units to connect, interact, or exchange resources

In the modular structure, an organization focuses on developing specialized and relatively autonomous

strategic business units (SBUs). The modular structure divides a business into small, tightly knit SBUs that

focus on specific elements of the organizational process. Interdependence among the units is limited

because the focus of many SBUs is more inward than outward, and loyalty within SBUs tends to be very

strong.

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The term modularity is widely used in studies of technological and organizational systems. Product systems

are deemed modular when they can be broken down into a number of components that can then be mixed

and matched to connect, interact, or exchange resources. Modularization leads to disaggregating the

traditional form of hierarchical governance into relatively small, autonomous organizational units, or

modules. Modules are not generally interdependent, so the modular organization is extremely flexible.

For example, a firm that employs contract manufacturing rather than in-house manufacturing is using an

independent organizational component. The organization can switch between different contract

manufacturers that perform different functions (and the contract manufacturer can similarly work for

different companies). Another modular model, one that is more internally focused, involves various

consumer services catering to dramatically different needs or demographics. In health care, for example,

the surgery unit may interact with various other hospital departments at different times for different

reasons.

Advantages of a Modular Structure

One advantage of the modular structure is that loosely coupled structures can enable organizations to be

more flexible and restructure more easily. For example, a company using a modular structure can respond

more quickly to different market needs. An organization can also fill its internal corporate needs by

creating a new modular department that operates interdependently with the whole.

Disadvantages of a Modular Structure

On the other hand, more internalization and more tightly coupled structures can produce better

communication and intellectual property gains. As a result, critics of the modular organization argue that a

firm's modularity should be limited to the extent that its flexible nature affords gains. Various degrees of

modularity are possible but not necessarily useful if the pros do not outweigh the cons. Managers must

carefully consider whether or not a modular structure would be useful, either entirely or partially, for their

own organizations.

Licenses and Attributions

Common Organizational Structures (https://courses.lumenlearning.com/boundless-

management/chapter/common-organizational-structures/) from Boundless Management by Lumen

Learning, originally published by Boundless.com, is available under a Creative Commons Attribution-

ShareAlike 4.0 International (https://creativecommons.org/licenses/by-sa/4.0/) license. UMGC has

modified this work and it is available under the original license.

© 2022 University of Maryland Global Campus

All links to external sites were verified at the time of publication. UMGC is not responsible for the validity or integrity of information located at

external sites.

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