A function-based organizational structure groups employees by business function such as marketing, finance, production etc. where each reports to a top executive. A product-based structure groups employees based on product lines, with each product group reporting to a product executive. A function-based structure has clear communication lines but can lack coordination between functions. A product structure enhances efficiency but risks functions not working together and duplication of roles. The optimal structure depends on an organization's goals and needs.

1. Part (a)
Distinguish a function based organization structure from a product based organization
structure
Companies typically develop an organizational structure to help them achieve goals and
objectives. These structures may derive from the management style of business owners and
managers or the divisions within the company. Organizational structure can be defined as the
method that an organization distributes employees and jobs so that its work can be performed and
its goals can be achieved. There are different types of organizational structures. This essay
discusses the advantages and disadvantages of two - the functional structure and the product
structure. The functional structure is the most common structure which has been widely used in
organizations as it groups people into departments by business activity. A product organizational
structure creates a structure centered on the company’s product lines. The two are discussed in
turn.
According to Talha, (2005) functional structure involves grouping together people who perform
similar tasks or use similar technology or materials in the same department. Anumb and Malik,
(2002) elucidate that the functional organizational structure groups people by typical broad
business activities. This means that an organization's reporting relationships are grouped based on
specialty, or functional areas. That is, there might be separate departments for marketing, finance,
human resources and production which may then be further subdivided as necessary. This results
in a vertical, hierarchical structure. Generally, all the functional heads will report directly to the
company president or CEO.

2. A product organizational structure has managers reporting to the president or head of the company
by product type. According to Vitez, (2012) each product group falls within the reporting
structure of an executive and that person oversees everything related to that particular product
line. Product-based structure means the regrouping of a functional structure and uses to organize
employees and work on the basis of different type of products. This type of structure brings
together all those involved in the production skills, technical skills and marketing skills of a
particular product or set of related products. Each division in the structure has its own internal
departments and function as self business unit. Kushnuma, (2007) recommends that companies
that manufacture a wide variety of products such as cars and foods would find this type of
structure appropriate to their organization. Product organizational structures are primarily used by
retail companies that have stores in various cities. Many companies tend to shift to product based
structure as they expand, and as new products ranges are developed and new markets entered.

3. Part (b)
Discuss the merits and demerits of the functional structure and the product structure
Each of the organization structures has advantages and disadvantages. Here these are discussed
for the functional organizational structure and the product organizational structure.
There are some definite advantages to grouping all staff by function. Generally, the functional
structure has efficiency and clear lines of authority, communication and accountability. Workers
easily coordinate and communicate within their departments. According to Morton, (2011), this
clear responsibility provides clear working division between different departments. Since the
employees all have different places they can play different roles in an organization. As a result it
is easy to find out what they should do or what they should not do. The organization will operate
more efficiently and the targets can be managed easily and achieved effectually. Staff is managed
by a person with experience in their same specialty who can adequately understand and review
their work. Anumb and Malik, (2002) argue that in a functional structure, staffers have the
opportunity to move up within their functional areas, which gives a reason for them to stay long-
term. The company gets the advantage of their expertise and company knowledge over time.
Staffers work with others in their field, which allows for knowledge sharing and lateral job moves
to learn new skills. Morton, (2011) refers to this as departmental coordination which enhances
team spirit and cohesion. Additionally, staff are easier and lesser supervised but highly support
each other leading to high performance. As a result employees can be better motivated,
distributed, rewarded and punished.
The functional structure has some disadvantages. Brews and Tucci, (2004) contend that a
departmental focus causes interdepartmental communication and coordination to suffer.
Hierarchical layers mean ideas for change must brave a bureaucratic chain of command.
Functional structures are the most controlled and mechanized but also the least nimble and
adaptive to changes in their environment. Functional areas may have difficulties working with
other functional areas. Employees can clearly feel perception of affiliation in their own
department but they lack the awareness of the whole organization. They may know their purpose
yet may not understand how they can achieve organization’s targets. There is often a perception
that they are competing with other functional areas for resources and a lack of understanding of

4. what other areas do for the company. As the company grows larger, the functional areas can
become difficult to manage due to their size. They can become almost like small companies on
their own, with their own cultures, facilities, and management methods. Functional areas may
become distracted by their own goals and focus on them, rather than on overall company
objectives. According to Kushnuma, (2007) there is duplication of resources. In order to separate
the various departments and make them independently, some of the resources which should be
shared may have been reduplicated. This system is blamed for inhibiting the career growth of
specialists and employees have poor exposure to the developments across the organizations. Every
department manager will pay more attention to his product and ignore the problem of integration,
because it is not his job. The functional structure cannot adapt to a new environment rapidly when
there are changes.
The product organization structure has some advantages which make it an appropriate type. Suttle,
(2012) states that using a product organization structure is most common in companies such as
retail stores. These organizations will separate out their products by group, such as apparel,
appliances, food or electronics. This helps owners and managers run their operations more
efficiently. According to Vitez, (2012), the advantage of this type of structure is that it organizes
products by category but can create completely separate processes from other product lines within
the organization. It enhances efficiency by grouping personnel with similar skill. It is cost
effective in the use of technology and equipment as it is grouped in one place and handled by
specialists. So, the division heads have a lot of control over operations and will not necessarily
depend on another, separate area to get things done. The department managers will keep an eye on
design and manufacturing activities, and employees become reliable to product not to function.
Kushnuma, (2007) asserts that it also allows the managers and employees to improve and expand
their skills and knowledge in the organization. The customization of more products into divisions
saves time and cost. Decentralization of the processes will facilitate rapid decision making
resulting into effectiveness. It will reduce the risk of product failure and also bring on
improvement in employee morale due to divisional decision making.
Product based companies have no direct contact with their customers. According to Suttle, (2012)
the processes of concentrating on products requires consistent product research which requires
highly qualified staff. Initially, they need to assess the market segments and develop the product

5. from their assessment. Following that, they must determine the price of products in line with the
customers’ expectation and produce the products to sell in the market. In this structure, more
attention may be given to products than other management areas. When product expansion occurs,
the number of personnel in R&D will increase. This increment will happen to each product
division. So, it will lead to duplication of work and increase the costs of staff. According to Vitez,
(2012) since the divisions are separately monitored, there is a potential difficulty that top
management may fail to coordinate all the units together. Thus, according to Kushnuma, (2007) a
significant downside to a product organizational structure is that it can segment the company into
divisions that do not work together. Managers may compete with each other in an unhealthy
manner that inhibits the natural growth of the business or its ability to achieve goals.
Having considered the advantages and disadvantages of the functional structure and the product
structure of organizations, it can be opined that the choice of which type to apply depends on the
benefits outweighing the costs to the organization. If there is more benefit in operating along
business activities; then the functional structure is suitable. If the growth of the organization
requires concentration on the products; then the product structure is applicable. Whatever the case,
it should be recognized that there are other structures apart from the two, including the matrix
structure, division structure and bureaucratic structure.

6. References
Brews, P. and Tucci. C., (2004) Exploring the Structural Effects of Internetworking. Strategic
Management Journal, 25(5), 429–452.
Anumb, C. and Malik, K., (2002) Organizational structures to support concurrent engineering in
construction. Industrial Management & Data Systems, 102(5), 260–270.
Kushnuma, I.,(2007). Type of Organizational structures. [online]. Accessed 21 October, 2014 at:
http://www.buzzle.com/articles/type-of-organizational-structures.html
Morton, D., (2011). The Functional Structure of an Organization. [online]. Accessed 21 October,
2014 at: http://www.ehow.com/about_6134117_functional-structure-organization.html
Suttle, R., (2012) Types of Organizational Structure in Management. Miami University.
Talha, S., (2005). Organizational structure. Massachusetts, Massachusetts Institute of Technology.
Vitez, O., (2012) Product Organization Structure. RDI, Business Management