What is the Divisional Organizational Structure?
The divisional organizational structure organizes the activities of a business around geographical, market, or product and service groups. Thus, a company organized on divisional lines could have operating groups for the United States or Europe, or for commercial customers, or for the green widget product line. Each such division contains a complete set of functions. Thus, the green widget division would handle its own accounting activities, sales and marketing, engineering, production, and so forth.
This approach is useful when decision-making should be clustered at the division level to react more quickly to local conditions. The divisional structure is especially useful when a company has many regions, markets, and/or products. However, it can cause higher total costs, and can result in a number of small, quarreling fiefdoms within a company that do not necessarily work together for the good of the entire entity.
Example of the Divisional Organization Structure
ABC International has just passed $250 million in sales, and its president decides to adopt a divisional organizational structure in order to better service its customers. Accordingly, he adopts the following structure:
Commercial division. Focuses on all commercial customers, and has its own product development, production, accounting, and sales employees.
Retail division. Focuses on all retail customers in the United States, and has its own product development, production, accounting, and sales employees.
International division. Focuses on all retail customers outside of the United States. It shares product development and production facilities with the retail division, and has its own accounting and sales employees.
Advantages of the Divisional Organization Structure
The key points in favor of the divisional structure involve placing decision making as close to the customer as possible. The advantages are noted below.
Accountability
This approach makes it much easier to assign responsibility for actions and results. In particular, a division is run by its own management group, which looks out for the best interests of the division.
Competition
The divisional structure works well in markets where there is a great deal of competition, where local managers can quickly shift the direction of their businesses to respond to changes in local conditions.
Culture
You can use this structure to create a culture at the divisional level that most closely meets the needs of the local market. For example, a retail division could have a culture specifically designed to increase the level of service to customers.
Local Decisions
The divisional structure allows decision-making to be shifted downward in the organization, which may improve the company's ability to respond to local market conditions.
Multiple Offerings
When a company has a large number of product offerings, or different markets that it services, and they are not similar, it makes more sense to adopt the divisional structure.
Speed
This approach tends to yield faster responses to local market conditions.
Disadvantages of the Divisional Organization Structure
The key points against the divisional structure involve the cost of duplicating functions and a reduced focus on the overall direction of the company. The disadvantages are noted below.
Cost
When you set up a complete set of functions within each division, there are likely to be more employees in total than would be the case if the business had instead been organized under a purely functional structure. Also, there must still be a corporate organization, which adds more overhead cost to the business.
Economies of Scale
The company as a whole may not be able to take advantage of economies of scale, unless purchases are integrated across the entire organization.
Inefficiencies
When there are a number of functional areas spread among many divisions, no one functional area will be as efficient as would have been the case if there had instead been one central organization for each function.
Rivalries
The various divisions may have no incentive to work together, and may even work at cross-purposes, as some managers undercut the actions of other divisions in order to gain localized advantages.
Silos
All skills are compartmentalized by division, so it can be difficult to transfer skills or best practices across the organization. It is also more difficult to cross-sell products and services between the divisions.
Strategic Focus
Each division will tend to have its own strategic direction, which may differ from the strategic direction of the company as a whole.
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The Four Major Types of Organizational Structures in Business
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The types of organizational structures in business are just as important as its products, marketing plan and long-term strategy. Businesses need a sturdy structure to attract and retain talented employees, as well as create a workable organizational hierarchy.
Typically, businesses choose from four types of organizational structure. Each comes with its own set of advantages and disadvantages. Choosing the right one for your business is imperative because poor organizational structure leads to confusion among employees, poor decision-making among managers and, ultimately, less than ideal results for a business.
Students in Point Park University’s online Bachelor of Arts in Organizational Leadership classes learn about management strategies and approaches to organizational design as part of a curriculum that prepares them for success as business leaders.
Picking The Right Organizational Structure
While there are variations, most companies are created based on one of the following four organizational structures. The goal for business leaders is picking the structure that works best for their particular situation.
Functional
A functional structure is the most traditional approach. It calls for grouping together people who do similar tasks based on their area of specialty. In other words, you’ll find all the accountants in finance and all the marketers in marketing. Managers led each area and report up to a director or executive who may oversee multiple departments.
The advantage here is clear: it provides those with similar abilities the ability to easily communicate and work on projects together. That’s also the reason this is the most popular business structure. The disadvantage is that teams may get “siloed,” unaware of what is happening in other areas of a company.
Divisional
In a divisional structure, people are grouped together based on the product or service they provide, not the work they do. For example, a large corporation such as General Electric has divisions for electronics, transportation, and aviation, each with its own team of accountants, marketers, etc. Global corporations may have divisions based on different geographic areas. On a smaller scale, a restaurant that also provides catering services may have separate divisions to oversee weddings, corporate events and business within the main restaurant.
Matrix
A matrix structure is a hybrid of the functional and divisional structures. It may involve employees reporting to different bosses depending on their current assignment. For example, a software design specialist may report to her boss in IT, but she’s also brought onto specific projects because of her expertise. When that happens, she will report to a different boss as long as that project continues.
The disadvantage is that employees may find it confusing to report to multiple bosses. But clear communication on priorities at all levels can eliminate these issues. The matrix structure requires a great deal of planning but can allow for the creation of the best possible teams to tackle the biggest challenges.
Flat
The flat structure dispenses with the usual hierarchy of a functional structure, decentralizing management and doing away with the need for middle manager bosses. Employees essentially act as their own boss, giving them the ability to communicate directly with peers on ideas and projects.
The advantage is a lot more freedom for employees, which requires a group of self-starters who don’t need managers checking up daily on their work. A flat structure is common in incubators and startups where the focus is on product and services design, not production or top-down management structures.
All four types of organizational structures in business can work well in the right situations. While most companies will choose from the functional or divisional approaches, a flat approach is becoming increasingly popular with modern companies.