Organizational Structure and Design – BBA/MBA Notes

(d) Divisional Organization

Divisional structure, also called profit decentralization by Newman and others,2 is built around business units. In this form, the organization is divided into several fairly autonomous units. Each unit is relatively self-contained in that It has the resources to operate independently of other divisions. For example, each division has Its own manufacturing, engineering, marketing, etc. Each unit is headed by a manager who is responsible for the organization’s investment in facilities, capital, and people as well as for unit’s development and performance. Divisional structure is similar to dividing an organization into several smaller organizations but it Is not quite the same, since each smaller organization is not completely independent. Each unit is not a separate legal entity; it is still part of the organization. Each unit is directly accountable to the organization.

Basis of Divisionalisation

There are different bases on which various divisions in an organization can be created. The two traditional bases are product and territory. Later, many organizations have moved from these bases to create divisions on the basis of strategic business units. In each of these bases, functions involved and, therefore, departments created are different.

Product Divisionalisation

In this form, each major product or product line is organised as a separate Unit. Each unit has its own functional structure for various activities necessary for the product. Multi-product organisations use this as basis for divisionalisation. This is appropriate specially when each product is relatively complex and large amount of capital is required for each product. The product requires different type of efforts as compared to others in terms of marketing and/or production. For example. Century Mills has separate divisions for textiles, cement, and shipping. Reliance Industries Limited has six product divisions: textiles, polyster, fibre intermediates, polymers, chemical, and oil and gas. Each division caters to different customers and has different types of competition.

Territorial Divisionalisation

In this form, regional offices are established as separate units. Each regional office has its own set of functional departments and operates under the strategic policies and guidelines established by corporate management. This is useful for those organisations whose activities are geographically spread such as banking, transport. Insurance, etc. For example, Life Insurance Corporation of India runs Its life insurance business on the basis of territorial divisionalisation in which the entire geographical area of the country has been divided into five zones—eastern, central, northern, southern, and western. Each zone has further been divided into appropriate number of divisions, for example, northern zone into four divisions located at Jalandhar, Chandigarh, New Delhi, and Ajmer. Each division has a number of branches at different places covered by the division concerned.

Strategic Business Unit

In multi-product or multi-geographical area companies, divisions are created in the form of various strategic business units (SBUs). SBU concept was evolved by General Electric Company (GEC) of USA to manage its multi-product business. The fundamental concept in SBU is to identify the independent product/market segments served by an organization. Since each independent product/market has a distinct environment, a SBU should be created for each such segment. Thus, different SBUs are involved In distinct strategic business areas with each area serving the distinct segment of the environment. For example, GEC was earlier having nine product groups and forty-eight divisions which were reorganized into forty-three strategic business units, many of which crossed group, division, and profit centre lines. For instance, three separate divisions in food preparation appliances were merged in a single SBU to serve houseware market.

In India, many companies have organized their businesses on the concept of SBU. In fact, most of the companies in information technology sector which are engaged in development of software for different purposes and for different customer segments have adopted this approach.

Design of Divisional Organization Structure

In designing divisional structure, there are several issues, besides the basis of divisionalisation which should be adequately taken care of it. These are determination of number of divisions, provision of corporate staff activities, and relationship between corporate and divisional management.

i. Number of Divisions

Determination of number of divisions is quite related with the problem of basis of divisionalisation. The basic guiding principle in this context is that a separate division should be able to generate revenue enough to contribute to organizational objectives after meeting its expenses. The number of divisions will be determined on the basis of diversity in the base which has been selected for divisionalisation. Thus, higher the diversity, more will be number of divisions. However, apart from this, cost factor should also be taken into account.

ii. Provisions of Corporate Staff Activities

The provisions should be made for corporate staff activities because regardless of the degree of divisionalisation, certain activities are likely to be centralized as part of corporate staff. The basic problem in this context is what activities should be retained at the corporate level to make maximum use of resources. Some activities which can be shared easily by all divisions can be centralized at the corporate level like legal activities, research and development, etc. Further, some activities which may not fall within the purview of any division can be taken at the corporate level, for example, company law matters, determination of distribution pattern of earnings, etc.

iii. Relationship between Corporate and Divisional Management

The relationship between corporate and divisional management will depend on the degree of autonomy granted to divisions. On the one hand, strong corporate management may be constantly involved in divisional affairs; on the other hand, divisions may be allowed to operate independently, only being monitored through control system. The resolution of this dilemma depends on the respective corporate and divisional strategies and working and the abilities of corporate and divisional managers.

Organization chart of a divisional structure is shown in the following figure. At the corporate level, some departments will be created to look after the activities which do not strictly fall within the purview of any division. These departments often provide services to divisional management.

Merits

i. Divisional structure emphasizes the end result, that is, product or customer through which revenue is generated in the organization.
ii. Since a division focuses its attention on a particular product or service, its performance measurement is easier as the performance can be measured in the light of contributions made by the division.
iii. There is higher level of managerial motivation because managers work In the environment of autonomy.
iv. Through divisional structure, more managers with general outlook can be developed who can easily take up the job at the corporate level. Thus, there Is no problem in managerial succession.
v. Organizational size can be increased without any problem as new divisions can be opened without disturbing the existing system.
vi. Each product or customer Is able to get specialized service because the attention is focused by a division exclusively for It.

Demerits

i. Divisional structure is quite costly because all the facilities have to be arranged for each division. Therefore, unless a division justifies its cost, it should not be opened but its activities should be carried out by another division.
ii. Since there is lack of emphasis of functional specialization, many professionals do not feel satisfied with this structure.
iii. Often there is a lack of managerial personnel when a new division is opened because managers working within a division cannot work with same efficiency in other division as they must have acquired the technical competence of that division.
iv. Control system is a major problem of divisionalisation. Though each unit is measured in terms of its contributions to the organization, this system does not work properly specially if information monitoring system is not suitable.

The Divisional Organization is shown in the figure below:

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(e) Project or Matrix Organization

The major reform in the traditional functional structure has come from a group of closely related structures having titles such as project management, programme management, systems organisation, product management, brand management, and matrix structure. All these have in one thing common that they provide a horizontal grouping together of a number of functions which might otherwise be labelled as functional departments and exercising staff and functional authority. Out of these, project organisation structure and matrix organisation structure have become quite popular. Project organisation appears like a divisional structure, except that in the latter, various divisions are created on permanent basis while In the former they are created only for the life time of a project. When a particular project is completed, the concerned division may disappear. However, since a project may continue for quite a long time, a project may become a sort of permanent feature. For example, Middleton observes that “a project organisation can also be the beginning of an organisation cycle. The project may become a long-term or permanent effort that eventually becomes a programme or branch organisation. The latter in turn, may become separated from the parent organisation and be established as a full-fledged division functionally organised.”

The establishment of project organisation calls for appointment of a project manager who is responsible for the completion of the project. He coordinates the activities of the project. He prescribes what is to be done, when it is to be done, and how much resources are required. The functional personnel are drawn from various functional departments and functional managers decide who in their department will perform the task and how It will be done. Thus, project manager is a unifying and focal point for the project activities.

A project manager really does not have vertical authority on the personnel drawn from various functional departments unlike a divisional manager who has line authority over the people working in various functional departments assigned to his division. In the absence of any vertical authority, the project manager must convince the functional people so that they help him to finish the undertaking within the time. In reality, project manager faces an authority gap- He has responsibility for completing the project but does not have direct authority over the people associated with his project. Project organization structure is shown in following figure:

project organization

Features of Project Organization

i. It is one-time task and is definable in terms of a single, specific goal.
ii. It is infrequent, unique and unfamiliar to the present organization. Unfamiliarity usually leads to a disagreement as to how the activity should be managed.
iii. It is complex and calls for a high degree of interdependence among the tasks.
iv. There is a high degree of stake in the successful completion of the project. The time factors is critical because if the project is not completed within the stipulated time, the organization may lose heavily because of fine provision due to delay.

Merits

i. Project organization allows maximum use of specialized knowledge which is available to all projects on equal basis. Knowledge and skills can be transferred from one project to another project.
ii. It enables the organization to adapt to environmental demands particularly when environmental factors are fast changing.
iii. It provides more flexibility for the utilization of resources in the organization by allocating them to the projects where these are needed.

Demerits

i. Project organization creates feeling of insecurity and uncertainty among people in the organization. It has an ad hoc arrangement with limited life. Therefore, a question comes in mind what will happen after the project is over.
ii. People are not able to Identify themselves with any particular department in the organization because they do not have permanent tenure with any project. Thus, there is less loyally of people with the organization.
iii. There is lack of clarity among members about their role In the organization. For example, project relationships are not based on the principles of clarity of authority I and responsibility and fixed amount of authority. Thus, only those persons can work better who have high level of tolerance for ambiguity.
iv. Often, project manager faces numerous problems because he has to carry responsibility without authority. Thus, he has to rely on his personal qualities rather than on his official authority. Therefore, if organizational climate is not very congenial, there is high chance of his failure.

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