Grouping activities in accordance with the functions of an enterprise â€“ functional departments — embodies what enterprises typically do. Since all enterprises undertake the creation of something useful and desired by others, the basic enterprise functions are production (creating utility or adding utility to a good or service), selling (finding customers, patients, clients, students, or members who will agree to accept the good or service at a price or for a cost), and financing (raising and collecting, safeguarding, and expending the funds of the enterprise). It has been logical to group these activities into such departments as engineering, production, sales or marketing, and finance.
Often, these particular functional designations do not appear in the organization chart. First, there is no generally accepted terminology: A manufacturing enterprise employs the terms â€œproduction,â€? â€œsales,â€? and â€œfinanceâ€?; a wholesaler is concerned with such activities as â€œbuying,â€? â€œselling,â€? and â€œfinanceâ€?, and a railroad is involved with â€œoperations,â€? â€œtraffic,â€? and â€œfinance.â€?
A second reason for the variance of terms is that basic activities often differ in importance: Hospitals have no selling departments; churches, no production departments. This does not mean that these activities are not undertaken, but merely that they are unspecialized or of such minor importance that they are combined with other activities.
A third reason for the absence of sales, production, or finance departments on many organization charts is that other methods of formation of departments may have been deliberately selected. Those responsible for the enterprise may decide to organize on the basis of product, customer, territory, or marketing channel (the way goods or services reach the user).
Functional departments are the most widely employed basis for organizing activities and is present in almost every enterprise at some level in the organization structure. The characteristics of the selling, production, and finance functions of enterprises are so widely recognized and thoroughly understood that they are the basis not only of departmental organization but also at the top level.
Coordination of activities may be achieved through rules and procedures, various aspects of planning (e.g. Goals and Budgets), the organizational hierarchy, personal contacts, and sometimes liaison departments. Such a department may be used between engineering and manufacturing to handle design or change problems.
The most important advantage of functional department formation is that it is a logical and time-proven method. It is also the best way of making certain that the power and prestige of the basic activities of the enterprise will be defended by the top managers. This is an important consideration among functional managers, for they see on every side the encroachment of staff and service groups, which sometimes threaten the security of the principal line executives. The functional departments follow the principle of occupational specialization and thereby facilitate in the utilization of people. Other advantages are that it simplifies training because the top managers are responsible for the end results, furnishes a means of tight control at the top.