Introduction to Multidivisional Structures

Last week I discussed product structures.  This week I wanted to provide an introduction to so-called “multidivisional” structures including an overview of some of the advantages and disadvantages of this alternative for designing the organizational structure.  Many companies stay focused on relatively similar products and markets as they continue to grow and mature; however, there are some companies that pursue expansion through extensive diversification of their product line for a particular market or industry and/or through entry into entirely new markets and industries by developing or acquiring completely different products.  For example, an automobile manufacturer might attempt a diversification growth strategy within its existing industry by offering additional models of cars and trucks designed to meet the needs of different types of consumers while a manufacturer of personal computers might look for growth in a new industry by establishing and/or acquiring a consumer electronics business.  Whenever companies use either of these strategies to increase the complexity and diversity of their business activities the product division structure, which is based on the creation and use of centralized support functions, will eventually cease to be the optimal way to organize the resources of the company given that the needs of the product divisions have become so specialized and dissimilar.  At that point consideration must be given to adopting a “multidivisional structure” in which each of the product divisions will also have their own support function resources and thus can operate as self-contained business units that are relatively independent of the other product divisions.

A simple organizational chart for a multidivisional structure would be more complex than the chart for a product division structure and would have four levels of management personnel as follows from top to bottom: the CEO; a corporate headquarters staff  that monitors the activities of the divisional managers and is organized into functional groups (e.g., sales and marketing, research and development, finance, and procurement) each managed by a senior executive such as a vice president or chief functional officer (e.g., CFO) who reports to the CEO; the divisional managers for each self-contained product-focused division, each of whom report to the CEO; and the functional managers within each division who manage the support functions for that division and report to the applicable divisional manager.  When the functional resources that formally resided in the centralized support functions are distributed throughout each of the product divisions the level of horizontal differentiation in the organizational structure increases, as might be expected when the variety of the company’s products and the industries in which it competes reaches the point where it is no longer practical to rely on centralized support units to provide the needed services across the entire range of the company’s businesses.  The addition of corporate managers, who will be responsible for communications between the corporate headquarters and the divisions and for coordinating activities among the divisions and making sure they work together as needed and share information, increases the level of vertical integration in the organizational structure.

Multidivisional structures are not likely to be considered by emerging companies during the early stages of development since they will usually be focusing on creating and/or expanding a relatively narrow product or market niche as an initial step toward future expansion; however, many Fortune 500 companies have evolved to the point where they believe a multidivisional structure is the best way for them to manage continuous growth and complexity while still retaining adequate control at the senior management level.  In my next two posts I will go over the advantages and disadvantages associated with using a multidivisional structure.

The content in this post has been adapted from material that will appear in Business Transactions Solutions (2008) 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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