Product-based organisation structure: illustration, merits and demerits

Meaning of a product-based structure

In a product-based (product departmentalisation or product divisional) structure, the organisation is divided into units on the basis of the products or product lines it makes. Each product division is headed by a manager who is responsible for all, or most, of the activities needed for that product, production, marketing, and often its own purchasing, finance and personnel, and for its profit. Common services such as legal affairs, corporate finance and research may stay at head office. It is a form of divisional structure and is used by firms with several distinct product lines.

Illustration

An appliance company making three product lines would be organised as follows:

• Chief Executive
  • Refrigerators Division: Manager; its own production, marketing, finance and human resources
  • Air Conditioners Division: Manager; its own production, marketing, finance and human resources
  • Washing Machines Division: Manager; its own production, marketing, finance and human resources

Each division head reports to the chief executive and is judged by the profit of the division. Head office keeps common functions such as legal, corporate finance and research.

Merits

1. Better coordination within a product. All functions for one product work under one head, so production and marketing are easily matched.
2. Product specialisation. Managers develop deep knowledge of one product, its technology, customers and competitors.
3. Management development. Division heads manage a whole business and gain the general-management experience needed for top posts.
4. Room to grow. Launching a product line means adding one more division beside the existing ones, whose work carries on as before.
5. A scorecard for each head. Because a division's income and costs are its own, head office can see which divisions earn their keep and hold their heads to it.
6. Speed. Decisions about a product are taken within its division, closer to the market.

Demerits

1. Unsuitable for small firms. It is economical only when each product line is large enough.
2. Under-use of common facilities. Plant, sales staff or research that could be shared may be split and under-used.
3. Need for many capable general managers. Each division needs a head able to manage all functions.
4. Weak control by top management. Division heads may become too independent and pursue their own interests.
5. Higher costs. Each division repeats production, marketing and staff departments.
6. Divisions pulling apart. A head judged on one division's results may fight for a larger share of the firm's money, or chase that division's figures even when it costs the firm as a whole.

Suitability

The structure suits large firms with several distinct product lines, each with different technology, customers or markets, and where quick, product-focused decisions matter more than economies of a single functional department. A small firm with one product line is better served by a functional structure, and a firm whose markets differ more by region than by product may prefer territorial divisions.