Divisional Organizational Structures

Divisional Organizational Structures

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. Divisional structure is based on external or internal parameters like product /customer segment/ geographical location etc.

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. Divisional structure is based on external or internal parameters like product /customer segment/ geographical location etc. For example, each division is responsible for certain product and has its own resources such as finance, marketing, warehouse, maintenance etc.  

Business Division:

A division of a business or business division is one of the parts into which a business, organization or company is divided. The divisions are distinct parts of that business.  In case of a multi-divisional organizational structure, there is one parent company or head-office, and that parent company/head-office owns smaller companies/departments that use its brand and name. The whole organization is ultimately controlled by central management, but most decisions are left to autonomous divisions/departments.

Dividing the firm based on output into several autonomous units, provides the optimal level of centralization in a company. Central management could still dictate the overall direction of the firm, while each division operates autonomously to cater to its own needs, is held accountable for its own profits, and can remain productive even if the other divisions fail.

In a simplistic scenario, these divisions are all part of the same company and that company is legally responsible for all of the obligations and debts of the divisions. However, this may change in case of large organizations, where various parts of the business may be run by different subsidiaries, and a business division may include one or many subsidiaries. Each subsidiary in such a case is a separate legal entity owned by the primary business or by another subsidiary in the hierarchy. Often a division operates under a separate name and companies often setup business units to operate in divisions prior to the legal formation of subsidiaries.

Given below are common methods of differentiation:

  1. By Product
  2. By Geographical Location
  3. By Type of Customer
  4. By Process

Differentiation by Product

As a company moves from a single product or service to manufacturing a wide range of products it may find that the functional structure is no longer effective. This is especially true if the products are very different from each other in terms of the technology, raw material and manufacturing process used and the final product. In such a situation, the company may then have to adopt a structure which revolves around individual products or product lines. Grouping activities according to a specific product or service, thus placing all activities related to the product or the service under one manager. Each major product area in the corporation is under the authority of a senior manager who is specialist in, and is responsible for, everything related to the product line.

 

Johnson & Johnson manufactures and markets a wide range of specialized surgical sutures and accessories as well as a range of products for children. Product based departmentalization ensures that the two major product lines operate as independent profit divisions since there is almost no commonality in terms of the manufacturing process, marketing skills and market segments served.

LA Gear is another example of company that uses product departmentalization. Its structure is based on its varied product lines which include women’s footwear etc.

Hindustan Lever manufacturing and marketing detergents, toiletries, chemicals, and agro-based products

Procter and Gamble (P&G), USA, operates under three entities in India - two listed entities 'Procter & Gamble Hygiene and Health Care Limited' and 'Gillette India Limited', as well as one 100 per cent subsidiary of the parent company in the US called 'Procter & Gamble Home Products'. P&G with its range of Vicks products, Clearasil cream and soap have structures revolving around different products.

The extent of differentiation would vary from one company to another. One company may club all its toilet soaps, detergents, and washing powders in one product line, while another may differentiate between toilet soaps and detergents or even between individual toilet soaps if they cater to distinct market segments or have a very different raw material base.

The main advantages of using a product based organization structure are that it facilitates optional utilization of specialized machinery and technological processes, permits greater co-ordination, where specialized customer service is required, and enables product managers to be responsible for the profit generation of their department.

The biggest disadvantage of this type of structure is that it leads to duplication of managerial manpower thus leading to higher costs. It also requires a strong leader to control the various product groups so that they do not become alienated from the overall organizational objectives.

Differentiation by Location

When an organization is departmentalized on the basis of location of different tasks and activities, then the organization is geographically organized. The biggest advantage of differentiating the functions geographically is that it allows for maximum utilization of local resources and talents, as well as speedy decision-making in response to changes in local conditions. In fact, where the participation of local people is essential to the success of the organization as in voluntary and social organizations, a geographic differentiation is ideal. The problems associated with this type of structure relate to problems of top management control and require a large number of executives with general management skills to head the various area operations.

The organization structure of Coca-Cola has reflected the company’s operation in two broad geographic areas – the North American sector and the international sector, which includes the Pacific Rim, the European Community, Northeast Europe, Africa and Latin America groups.

Differentiation by Type of Customers

Another kind of possible grouping is by the type of customer served. Grouping activities on the basis of common customers or types of customers. Jobs may be grouped according to the type of customer served by the organization. The assumption is that customers in each department have a common set of problems and needs that can best be met by specialists. The sales activities in an office supply firm can be broken down into three departments that serve retail, wholesale and government accounts.

A Delhi based company manufacturing electronic typewriters and desk top photocopiers had organized its sales force on the basis of its two product lines. Its major customer segments were Government organizations (public sector companies, ministries, departmental undertakings, public libraries etc.) and private sector companies. The company was not very successful in its marketing efforts. Investigation revealed that the same customer (organization) was being visited by two different salesmen (one each for typewriter and copier) resulting in unnecessary duplication of effort and time. Moreover, the Government and private sector organizations each had a very different set of criteria governing their decision to purchase. The sales approach which succeeded in a private sector company could not be similarly applied to a government set-up. The company then re-organized its sales force into two teams, one catering to the government sector and the other to the private sector, with each team having responsibility for both the product lines. With the reorganized structure the company was able to make a dent in the highly competitive market.

An example of this would be to look at Hewlett Packard (HP), the computer and printer company. HP operates in several countries and they may be separate geographies under each product lines like Printer division, Printing & Multifunction division, Handheld Devices division and the Servers division etc. However in different countries they operate as distinct legal entities with subsidiaries like Hewlett Packard (India) Software Operation Private Limited (India), Hewlett Packard (Thailand) Ltd. (Thailand), Hewlett Packard Customer Delivery Services SL (Spain) etc., all using the HP brand name.

Another more obvious example is that Google Video is a division of Google, and is part of the same corporate entity. But the YouTube video service is a subsidiary of Google because it remains operated as YouTube, LLC, a separate business entity even though it is owned by Google.

Differentiation by Process

Grouping activities on the basis of product or service or customer flow. Because each process requires different skills, process departmentalization allows homogeneous activities to be grouped together.  Departmentalization by process, benefit from the advantages that are found in high specialization, and tends to be very efficient in some instances. A high degree of specialization leads to the development of proficiency and professional competence, as well as it enables, and implies, the development of centralized control functions.

Example: Applicants might need to go through several departments, namely validation, licensing and treasury, before receiving a driver’s license.

Related Links

Creation Date Thursday, 29 December 2022 Hits 1257

You May Also Like

  • Record to Report Process

    Record to Report Process

    Record to report (R2R) is a finance and accounting management process that involves collecting, processing, analyzing, validating, organizing, and finally reporting accurate financial data. R2R process provides strategic, financial, and operational feedback on the performance of the organization to inform management and external stakeholders. R2R process also covers the steps involved in preparing and reporting on the overall accounts. 

  • General Ledger Process Flow

    General Ledger Process Flow

    In this article, we will explain the general Ledger journal processing flow from entering journals to running the final financial reports. Understand the generic general ledger process flow as it happens in automated ERP systems. The accounting cycle explains the flow of converting raw accounting data to financial information whereas general ledger process flow explains how journals flow in the system.

  • The Accounting Process

    The Accounting Process

    In this article we will focus on and understand the accounting process which enables the accounting system to provide the necessary information to business stakeholders. We will deep dive into each of the steps of accounting and will understand how to identify accounting transactions and the process for recording accounting information and transactions.

  • The Subsidiary Ledgers

    The Subsidiary Ledgers

    For any company that has a large number of transactions, putting all the details in the general ledger is not feasible. Hence it needs to be supported by one or more subsidiary ledgers that provide details for accounts in the general ledger. Understand the concept of the subsidiary ledgers and control accounts. 

  • Organizational Design

    Organizational Design

    An organizational design is the process by which a company defines and manages elements of structure so that an organization can control the activities necessary to achieve its goals. Good organizational structure and design helps improve communication, increase productivity, and inspire innovation. Organizational structure is the formal system of task and activity relationships to clearly define how people coordinate their actions and use resources to achieve organizational goals.

  • What is a General Ledger?

    What is a General Ledger?

    The purpose of the general ledger is to sort transaction information into meaningful categories and charts of accounts. The general ledger sorts information from the general journal and converts them into account balances and this process converts data into information, necessary to prepare financial statements. This article explains what a general ledger is and some of its major functionalities.

  • Introduction to Legal Entities Concept

    Introduction to Legal Entities Concept

    Modern business organizations operate globally and leverage a large number of registered legal entities, and operate through complex matrix relationships.  To stay competitive in the current global business environment, they must often develop highly diverse and complex organizational structures that cross international borders. Learn more about Legal Entities and their importance for businesses.

  • General Ledger Overview

    General Ledger Overview

    What Is a General Ledger? General Ledger (also known in accounting as the GL or the Nominal Ledger) is at the heart of any accounting system. A general ledger is the master set of accounts that summarize all transactions occurring within an entity. Ledger is the skillful grouping and presentation of the Journal entries. Learn the accounting fundamentals, general ledger process, and general ledger flow.

  • GL - Accrued Expenses

    GL - Accrued Expenses

    Accrued expenses, sometimes referred to as accrued liabilities, are expenses that have been incurred but have not been recorded in the accounts. Discuss the need to record accrued liabilities and why they require an adjustment entry. Understand the treatment for these entries once the accounting period is closed and learn to differentiate when the commitments become liabilities.

  • What is a Business Eco System?

    What is a Business Eco System?

    The goal of a business is to generate capital appreciation and profits for its owners or stakeholders by engaging in provision of goods and services to customers within the eco system/framework governed by respective laws(local/international).  The eco system involves various entities that the business works with for delivery of a product or service.

Explore Our Free Training Articles or
Sign Up to Start With Our eLearning Courses

Subscribe to Our Newsletter


© 2023 TechnoFunc, All Rights Reserved