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.

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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. This also makes it easier to judge the performance of the managers in charge of a division, which may impact their compensation arrangements.
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. This only works if the senior management team is willing to shift decision-making responsibility to the divisions.
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. This means that different divisions could have different cultures, which might make it difficult to transfer employees between divisions.
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. By doing so, each division can orient its structure around the proper servicing of the products for which it is responsible.
Speed. This approach tends to yield faster responses to local market conditions, as long as local managers are given the power to make decisions impacting their areas of responsibility.

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. However, purchasing integration also calls for a central purchasing function, which may duplicate some aspects of the divisional purchasing groups.
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. This can make it difficult for the parent organization to achieve efficiencies across 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. A division’s strategy might even contravene what the senior management team is trying to accomplish for the organization as a whole.