Divisionalization

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Divisionalization

The context of organisational design

Generally speaking, there are a number of factors which influence how an organisation is structured. Research suggests there are four main contingencies influencing the structure of an organisation. These are:

  • · the size of the organisation
  • · the technology utilised by the organisation
  • · the strategy of the organisation
  • · the environmental context within which an organisation operates

Organizational Design Factors

The link between strategy (the long-term goals and objectives of an organisation) and structure was first documented by the business historian Alfred Chandler Jr (1962). In a study of around a hundred US firms he concluded that continued organisational growth led to vertical integration (for example, firms buying previously separate suppliers) and to diversification of the product range. Chandler argued that the logical structure for such an organisation was the divisional structure (see following sections).

In general a large organization can be split into divisions in accordance with the products or services. Divisional managers are responsible for all operations (production, sales and so on) relating to their product. In general, a divisional structure will lead to decentralization of the decision-making process and divisional managers may have the freedom to set selling prices, chose suppliers, make product mix and output decisions and so on.

Companies who organize as divisions can do so along:

  • Geographical regions
  • Product lines

Why?

  • Delegation and control closer to the product
  • Motivation
  • Quicker decisions
  • Take account of regional issues
  • Exploit managerial expertise
  • Divisions may be in competition
  • Risk avoidance - because no diversified portfolio at division level
  • Increased costs - duplication, lack of scale.

Prerequisites

  • Alignment and Integration
  • Are divisions similar or diverse?
  • Some functions could be centralized and others at Div level

Broken down into

  • Cost Centers- Providing services to other divisions - Focus: Keeping costs down
  • Investment Center - provides services - Focus: Maximise ROI
  • Profit Center - Focus on selling

Advantages of divisionalization

a) Divisionalization can improve the quality of decisions made because divisional managers (those taking the decisions) know local conditions and are able to make more informed judgments. b) Decisions should be taken more quickly because information does not have to pass along the chain of command to end from top management. c) The authority to act to improve performance should motivate divisional managers. d) Divisional organization frees top management involvement in day-to-day operations and allows them to devote more time to strategic planning. e) Divisions provide valuable training ground for divisional managers to become members of top management in future.

Disadvantages of divisionalizaton

a) Danger with divisional accounting is that the business organization will divide in to number of self-interested segments, each acting at times against the wishes and interests of other segments. b) It is claimed that the costs of activities that are common to all divisions such as running the accounting department may be greater for a divisionalized structure than for a centralized structure. c) Top management, by delegating decision making to divisional managers, may lose control since they are not aware of what is going on in the organization as a whole


Example of the The divisional structure

The divisional structure, pioneered in the 1920s in the United States by General Motors and DuPont, is designed essentially to foster self-contained units. Each unit or division is generally autonomous, with a divisional manager responsible for performance and holding completestrategic and operational decision-making authority. An example of a pertro-chemical divisional structure is where the divisions are based around particular products/manufacturing processes and include such entities as the Agricultural division, Petrochemicals division and Plastics division. Each of the divisions is headed by an executive who is totally responsible for results. As in all divisional structures, there is a central headquarters that provides support services to the divisions. This typically includes financial, legal and tax services. Additionally, of course, the headquarters acts as an external overseer, evaluating and controlling performance. Divisions,therefore, are autonomous within given parameters.

A closer look within each division typically reveals a functional structure and role culture. In other words, the divisional structure creates a set of essentially semi-autonomous ‘little companies’. Within each of these ‘companies’ lies another organisational form, and it is almost always of the functional variety. A problem associated with the functional structure is the potential for functional units to become so enamoured with their specialty that they forget the organisation’s overall goals. The divisional structure attempts to remedy this by placing full responsibility for a product or service in the hands of the divisional manager. This structure,therefore, focuses on end results, rather than means. The divisional structure frees the headquarters staff from concerns with day-to-day operating details, so they can pay attention to the long term. Big picture strategic decision making is done at headquarters.

For instance, senior executives at the Petro-chemical headquarters can wrestle with the world’s future chemical needs, while the divisional managers can go about the business of producing petrochemicals, plastics, etc as efficiently as possible (Pettigrew,1985). It should be obvious that the autonomy and self-containment characteristics of the divisional form make it an excellent vehicle for training and developing general managers. The divisional structure gives managers a broad experience within the autonomous units. So a large corporation with fifteen divisions has fifteen divisional managers who are developing the kind of generalist perspective that is needed in the organisation’s top spot.

Another strength of the divisional form is that its autonomous units can be lopped off with minimal effect on the entire organisation. Ineffective performance in one division has little effect on other divisions. As such, the divisional structure spreads the risk by reducing the chance that a poorly performing part of the organisation will take down other parts of the organisation with it. The divisions have the responsiveness, accountability and benefits of specialisation and are able to process information as if they were organisations unto themselves. Yet, they also have the benefits of large size that allow economies of scale in planning, acquisition of capital and spreading of risk.

Despite these advantages there is no shortage of weaknesses inherent to the divisional structure. First is the duplication of activities and resources. For instance, each division may have a marketing research department. In the absence of autonomous divisions, all the organisation’s marketing research might be centralised and done for a fraction of the cost that divisionalisation requires. Another disadvantage is the propensity of the divisional form to stimulate conflict. There is little incentive in this structural design to encourage cooperation among divisions. Further conflicts are created as divisions and headquarters argue about where to locate support services. The more the divisions succeed in having these services decentralised to their level, the less dependent they are on headquarters, and the less power headquarters personnel can wield over them.

The divisional form also creates control problems. Personnel are frequently unable to transfer between divisions, especially when the divisions operate in highly diverse product or service markets. This reduces the flexibility of headquarters executives to allocate and coordinate personnel. Additionally, the divisional form may make coordination of customer relations and product development a problem. If the divisions are in competing or closely adjoining markets, they may compete with each other for the same sale. Similarly, the competition between divisions over product development can be dysfunctional. The classic illustration is the ‘NDH’ (not developed here) syndrome. An innovation developed by one division, and then authorised by headquarters to be instituted in all divisions, frequently fails because it was NDH. This rivalry and territorial protectionism can make coordination by headquarters extremely difficult. The primary criterion determining the use of the divisional structure is product or market diversity. When an organisation chooses a diversification strategy – to become a multi-product or multi-market organisation – the divisional form becomes preferable to the functional structure. When an organisation diversifies, conflicts along the horizontal dimension between functions become too great and a change in structural design becomes necessary. Other factors influencing the selection of a divisional structure include size, technology and environment. As size increases, it becomes more difficult to coordinate functional units and to keep members’ attention focused on organisational goals. All technologies are not compatible with the divisional form. ‘Divisionalization is possible only when the organisation’s technical system can be efficiently separated into segments, one for each division’ (Mintzberg, 1989). Thus, it is difficult for companies providing nuclear power to divisionalise (except geographically), because economies of scale and the commitment of hundreds of millions of pounds to very high fixed-cost technical systems precludes divisibility. Finally, the environment affects the divisional form. The divisional structure works best when the emphasis is on standardisation, and the competitive environment is relatively simple, well-defined and stable.


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