Most companies start as entrepreneurial ventures using a simple structure, which is an organizational design with low departmentalization, wide spans of control, authority centralized in a single person, and little formalization.28 The simple structure is most widely used in smaller businesses, and its strengths should be obvious. It’s fast, flexible, and inexpensive to maintain, and accountability is clear. However, it becomes increasingly inadequate as an organization grows because its few policies or rules to guide operations and its high centralization result in information overload at the top. As size increases, decision making becomes slower and can eventually come to a standstill as the single executive tries to continue making all the decisions. If the structure is not changed and adapted to its size, the firm can lose momentum and is likely to eventually fail. The simple structure’s other weakness is that it’s risky: Everything depends on one person. If anything happens to the owner-manager, the organization’s information and decision-making center is lost. As employees are added, however, most small businesses don’t remain as simple structures. The structure tends to become more specialized and formalized. Rules and regulations are introduced, work becomes specialized, departments are created, levels of management are added, and the organization becomes increasingly bureaucratic. Two of the most popular bureaucratic design options grew out of functional and product departmentalizations and are called the functional and divisional structures.

A functional structure is an organizational design that groups similar or related occupational specialties together. You can think of this structure as functional departmentalization applied to the entire organization. For example, Revlon Inc. is organized around the functions of operations, finance, human resources, and product research and development.

The strength of the functional structure lies in the advantages that accrue from work specialization. Putting like specialties together results in economies of scale, minimizes duplication of personnel and equipment, and makes employees comfortable and satisfied because it gives them the opportunity to talk the same language as their peers. The most obvious weakness of the functional structure, however, is that the organization frequently loses sight of its best interests in the pursuit of functional goals. No one function is totally responsible for results, so members within individual functions become insulated and have little understanding of what people in other functions are doing.

The divisional structure is an organizational structure made up of separate business units or divisions.29 In this structure, each division has limited autonomy, with a division manager who has authority over his or her unit and is responsible for performance. In divisional structures, however, the parent corporation typically acts as an external overseer to coordinate and control the various divisions, and often provides support services such as financial and legal. Health care giant Johnson & Johnson, for example, has three divisions: pharmaceuticals, medical devices and diagnostics, and consumer products. In addition, it has several subsidiaries that also manufacture and market diverse health care products.

The chief advantage of the divisional structure is that it focuses on results. Division managers have full responsibility for a product or service. The divisional structure also frees the headquarters staff from being concerned with day-to-day operating details so that they can pay attention to long-term and strategic planning. The major disadvantage of the divisional structure is duplication of activities and resources. Each division, for instance, may have a marketing research department. If there weren’t any divisions, all of an organization’s marketing research might be centralized and done for a fraction of the cost that divisionalization requires. Thus, the divisional form’s duplication of functions increases the organization’s costs and reduces efficiency.