Divisional structure: explanation, illustration, merits and demerits

Meaning of divisional structure

In a divisional structure the organisation is divided into semi-autonomous divisions, each responsible for a product line or, in other designs, for a market or a geographical region. Each division has its own functional departments, production, marketing, finance, human resources, and is headed by a divisional manager who is accountable for its performance and, usually, its profit. The divisions are thus profit centres. Head office keeps overall strategy, the allocation of capital and certain common services, and controls divisions mainly through results. Divisions may be formed on the basis of products, territories or customers.

• Product divisions: each division handles one product line (for example appliances, lighting and cables).
• Territorial (geographical) divisions: each division serves a region (north, south, east, west, or overseas markets), suiting firms whose customers' needs differ by area.
• Customer divisions: each division serves one class of customer (retail, corporate, government), as banks often organise their business.

The divisional structure grew as firms diversified: a functional structure that works for one product becomes overloaded when a firm makes many unrelated products, because the heads of production or marketing cannot give enough attention to each.

Illustration

A diversified company organised by product divisions:

• Board of Directors
  • Chief Executive Officer, supported by corporate staff (finance, legal, research)
    • Personal Care Division: Divisional Manager; its own production, marketing, finance and human resources
    • Foods Division: Divisional Manager; its own production, marketing, finance and human resources
    • Packaging Division: Divisional Manager; its own production, marketing, finance and human resources

Each division is a self-contained unit under its own manager, who answers to the Chief Executive for the division's results; the corporate staff serve all three.

Merits

1. Top management freed from operational detail to concentrate on strategy.
2. Focus on a product or market, which improves understanding of customers and competitors.
3. Room to grow: a new product line needs only a new division, leaving the others undisturbed.
4. Better coordination within a division, since all functions report to one head.
5. Clear results: revenues and costs can be traced to each division, so its profit measures its performance and fixes responsibility.
6. Development of managers: divisional heads gain experience of every function and are prepared for top posts.
7. Speed: each division acts as an autonomous unit and decides within its own sphere.

Demerits

1. Short-term focus when divisions are judged only by current profit.
2. Need for many able general managers.
3. Control problems: divisional heads, with authority over everything in their division, may pursue their own goals and ignore the organisation's.
4. Loss of economies of scale in purchasing, research and staff services.
5. Higher costs, because each division repeats the same functions.
6. Rivalry for funds: divisions compete for capital and one may gain at another's expense.

Suitability

It suits large, diversified organisations with distinct products, markets or regions, where adaptation to each segment is more important than the economies of a single functional set-up.