From Functional Structure to Divisional Structure

Several weeks ago I posted several comments on the use of a functional organizational structure.  The organizational structure of the company can be changed to provide managers with more control over the company’s activities by increasing vertical and horizontal differentiation and the amount of integration between the subunits (i.e., functional groups and departments) that have arisen within the organizational structure.  When increasing vertical differentiation, organizational designers generally increase the number of levels in the organizational hierarchy, determine the degree to which authority and final decision making will be centralized at the top of the hierarchy, and introduce tools (i.e., rules and standard operating procedures) that can be used to standardize the way in which employees at the lowest levels of the hierarchy behave when carrying out their day-to-day activities.  An increase in horizontal differentiation involves grouping various functional groups so that the skills and resources in these groups can be focused on specific strategic goals and objectives.  Common examples are the creation of product-, customer- or geographic-based teams or divisions with there own dedicated resources for key functional areas such as manufacturing, sales, marketing and service/support.  Increased integration is necessary for coordination of activities between subunits and motivating employees and generally is accomplished through creation of task forces, teams and integrating roles.

The need for increased differentiation and integration once the limitations of a functional structure have been reached generally leads companies to transition toward a divisional structure in which functional resources are intentionally and formally grouped together in order to address and satisfy the specific requirements of particular products, markets or customers.  The goal of every type of divisional structure is to break the activities of the company down into smaller, and hopefully more manageable, business units with sufficient autonomy and expertise to overcome the problems that arose within the functional structure.  For example, product divisions can be used in situations where the biggest control problem for managers in the functional structure is the inability to keep up with a rapidly expanding product line.  On the other hand, if the challenge for management is the need to launch and maintain sales and manufacturing activities in different regions around the United States and/or in foreign countries, geographic-based divisions should be formed.  Finally, if the company has developed relationships with a large number of different customer groups it should consider breaking out its business into market-based divisions.  Over the next few weeks I’ll be providing more comments on one of these structural alternatives—product divisions. 

The content in this post has been adapted from material that will appear in Business Transactions Solutions and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

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