Just as you'd think, a functionally organized business is structured around business functions like R&D, Production, Customer Service, etc.:
(from http://www.vertex42.com)
At the top is the Manager or CEO or President and all of the various business functions report to him or her. In the diagram, the administrative functions of Finance and HR are shown off to the side, but sometimes these are organized into an Admin dept. The advantage of a functional organization is that people of similar skills and knowledge are grouped into a single department. This makes training and apprenticeships easy, and it can provide an obvious career path for advancement within the department. One disadvantage is 'siloing' - an 'us vs. them' attitude between R&D and Marketing, for example. It can set up turf wars between departments when, say, Marketing needs a feature added to the product, but adding that feature is not an easy thing for R&D to do.
These kinds of organizations have to be managed carefully, or else no one takes ownership of the products and blame-passing for problems becomes the norm.
