As apposed to simple organizational structures, functional structures are useful for relatively big companies. Employees within the functional structure are differentiated to perform a specialized set of tasks. For instance, the marketing department would be staffed only with marketers responsible for the marketing of the company's products.
This specialization leads to operational efficiencies where employees become specialists within their own realm of expertise. The most typical problem with a functional organizational structure is however that communication within the company can be rather rigid, making the organization slow and inflexible. Therefore, lateral communication between functions become very important, so that information is disseminated, not only vertically, but also horizontally within the organization.
Functional structures are often characterized by a large degree of formalization, making each function reliant on standardized ways of operating. Decision-making power is often centralized at the top of the hierarchy.
Functional organizational structures are best suited for companies producing standardized goods and services at large volumes and low cost. Therefore, functional structures may be most effective for companies operating in rather stable environments with low rates of change and dynamism.
As apposed to e.g. a simple organizational structure, the functional structure works best when the surrounding environment is rather stable, and when customers expect a standardized range of products not subject to continuous change in e.g. taste, fashion or innovation. If the environment becomes more complex and uncertain, the functional structure may not be the best suited structure for the company, and the company may need to change their structure to be able to cope with new challenges and uncertainties.
Organizational structures such as the divisional structure and the matrix structure could be the solution for companies operating in more uncertain and complex environments, and the solution for companies offering a broad range of products to different customer segments.