Divisional Structure

First the background

An organizational structure/ multi-divisional form defines how activities such as task
allocation, coordination, and supervision are directed toward the achievement of
organizational aims.

Organizational structure affects organizational action and provides the foundation on which
standard operating procedures and routines rest. It determines which individuals get to
participate in which decision-making processes, and thus to what extent their views shape the
organization's actions. Organizational structure can also be considered as the viewing glass or
perspective through which individuals see their organization and its environment.

An organization can be structured in many different ways, depending on its objectives. The
structure of an organization will determine the modes in which it operates and performs.
Organizational structure allows the expressed allocation of responsibilities for different
functions and processes to different entities such as the branch, department, workgroup,
and individual.

Organizations need to be efficient, flexible, innovative and caring in order to achieve a

sustainable competitive advantage.

The M-form, or multi-divisional form, originated in the early 20th century, and was most
quickly adopted and taken advantage of in the US. While it was first utilized in specific
industries like the petroleum and some technology companies in the 1950s, by the 1960s
many large American companies had already implemented the M-form. In contrast to the
tradition U-form (unitary form), companies that made the transition showed up to 30%
increase in profits in the first year alone. In some industries, up to 80% of the companies
made the change, and the added degree of specialization proved profitable for most.

The M-form utilizes both scientific management and bureaucratic controls together. By
combining the positives of both forms of management, companies were able to increase
efficiency and therefore profits. For small companies, a combination of the two may not be
necessary, since they have few employees and are limited in resources. For larger
corporations, however, using M-form allows the workers on all levels to specialize, while the
company as a whole is still organized in a strict hierarchy (Williamson).

Standard Oil was one of the first companies to apply the ideas of the M-form. Because within
the large corporation there were so many subsidiaries, Standard Oil operated as many small
individual companies, all eventually reporting to the company headquarters. Because they
were forced to expand into the railroad and pipeline businesses, they were forced to create
new branches of the company that the oil experts were not equipped to manage. Creating new
branches of management to handle the new parts of the company was one of the first
implementations of the M-form in the US. Also, as mergers became more frequently in the
US during this time, corporations needed the ability to add and drop branches of management
quickly and efficiently.
Because of the increase in profits, many companies were incentivized to convert to the M-
form by the early 1970s. Companies like GM, which adopted the new business strategy,
began to divide each car into its own new division within the larger company of GM. Both
Williamson and Chandler were proponents of the M-form, and praised it greatly in the 1970s
and 1980s. While they pointed out certain flaws in the management style, this was the only
management style to date that allowed "the firm [to] run efficiently while at the same time be
able to adapt to changing market conditions (Williamson 1985, 284)" (Koblenz).

M-form also became popular because it allowed companies to more easily see where
production was lacking and how valuable each entity was. This, in turn, provided a better
platform for creating incentives for workers, which further increased productivity. "Because
the central auditing office evaluates all the divisions in an M-form company using the same
accounting methods, they can easily see which divisions are more efficient (Maskin, Qian
and Xu 1999)" (Koblenz). For companies like GM, this was very helpful in understanding
which cars to focus on and which entities were not helping the company to grow.

For shareholders, the decentralization provided by the M-form was also very promising. As it
allowed for almost unlimited company growth as well as more efficiency, companies began
to grow faster. With more upper level management involved in this new system (who were
paid in part through stock options), shareholder value became a higher priority since the
workers benefited more through it.

The rapid development of the M-form in the middle of the 20th century didn't happen by
chance- select firms noticed an opportunity to increase profit and efficiency, as well as allow
themselves the freedom to expand while decreasing the riskiness assumed in using the other
organizational methods.

The divisional structure or product structure consists of self-contained divisions. A division is

a collection of functions which produce a product. It also utilizes a plan to compete and
operate as a separate business or profit center. According to Zainbooks.com, divisional
structure in the United States is seen as the second most common structure for organization
today.

Employees who are responsible for certain market services or types of products are placed in
divisional structure in order to increase their flexibility. The divisions may also have their
own departments such as marketing, sales, and engineering.

A divisional structure is an organizational framework that divides a company into semi-

autonomous units, or divisions, based on specific criteria. These divisions often operate as
independent businesses with their own functions like marketing, finance, and operations.
Types of Divisional Structures

There are primarily three types of divisional structures:

1. Product-based: Divisions are created based on different products or services offered

by the company.
a. Example: A consumer electronics company might have divisions for
smartphones, laptops, and televisions. Such companies are Apple, Samsung,
Meta and etc
2. Geographic-based: Divisions are formed based on geographical locations or regions.
a. Example: A multinational corporation might have divisions for North
America, Europe, Africa and Asia; National Corporation can have divisions
for the southern, central and northern region. Such companies are Coca-Cola,
Millenium BIM, BCI and etc
3. Customer-based: Divisions are organized around specific customer segments or
markets.
a. Example: A service company might have divisions for enterprise customers,
small businesses, and consumers. Millenium BIM has the regular customers
and the Prestige division, BCI has the regular customers and the Exclusive
division.

Best for: Large enterprises that operate in multiple markets, such as multinational companies
or conglomerates, as it allows each division to focus on its specific market or product line.

Pros of a divisional organizational structure:

 Understand individual markets, sectors, and products better.

 Promotes flexibility.
 Faster responses to changes or needs that are locality or regional-based.
 Autonomous approaches lead to team experimentation and allow organizations to test
multiple strategies, driving innovation.

Cons of a divisional structure:

 Can result in duplication efforts like multiple applications that do the same thing.
 Isolated teams and data with poor knowledge transfer.
 Poor documentation.
 Lack of organizational communication.
 Departments compete against one another.
 Lack of hierarchy understanding.

Factors that influence your organizational structure choice

To build a structure from scratch, you’ll need to start by outlining a long-term strategy and
mapping out goals. Your future vision of your company determines which type of
organizational structure will work best for you.

When ideating your company strategy and organizational structure, consider your company’s
various contextual elements, traits, characteristics, and challenges. These will help you
choose the appropriate organizational structure for your company. Consider the following
factors:

 Company size: How many employees will your company have? What will be its
operational reach? How complex will your teams be?

 Business goals and strategy: What are your business objectives? How will you
succeed? What does that path look like? What traits will help your company thrive?

 Industry dynamics: What external factors will impact your company? Is your sector
a digital laggard or an early tech adopter? How regulated is your industry? Look to
other companies in your industry to see how they structure their org chart.

 Company values: What are your company’s core beliefs and values? What role will
company culture play in your organization? Will you be more relaxed or need to be
more authoritarian in your people management?

 Product or service complexity: How complex are your selling goods or services?
Will you have multiple product lines? Depending on the customer profile, will they
need to be packaged and marketed differently? How mature is your product and
industry?

Conclusion or Summary

In essence, a divisional structure is suitable for large organizations with diverse product lines,
geographical markets, or customer segments. It offers flexibility and responsiveness but
requires careful management to avoid potential drawbacks.