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A functional structure in an organization is characterized by departments being organized based on their functions or specialties. In this type of structure, employees are grouped according to similar skills and expertise, such as marketing, finance, human resources, and production. This arrangement enables more efficient management because each department can focus on its specific tasks, fostering specialization and enhanced efficiency in operations.

This structure facilitates clear lines of communication within departments, allows for the development of expertise, and creates a more streamlined decision-making process as employees work closely with others in their functional area. This can lead to improved productivity and a better overall understanding of the specific functions within the organization.

In contrast, organizing units by geographic location or customer segments would define different structural characteristics, such as a divisional structure, where the focus is on delivering products or services to specific markets or regions rather than on specific functions. Reporting to multiple managers typically refers to a matrix structure, which differs from the clear hierarchy prevalent in a functional structure.