ORGANIZATIONAL STRUCTURE:Divisional Structure, The Matrix Structure

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Strategic Management MGT603

Lesson 33

ORGANIZATIONAL STRUCTURE

Learning Objective

After the completion of this topic you understand the organizational structure its types. This chapter also

include strategic business unit. This also includes Restructuring, Reengineering, and E-Engineering.

Organizational Structure

Functional Structure

The organization is structured according to functional areas instead of product lines. The functional

structure groups specialize in similar skills in separate units. This structure is best used when creating

specific, uniform products. A functional structure is well suited to organizations which have a single or

dominant core product because each subunit becomes extremely adept at performing its particular portion

of the process. They are economically efficient, but lack flexibility. Communication between functional

areas can be difficult.

The most widely used structure is the functional or centralized type because this structure is the simplest

and least expensive of the seven alternatives. A functional structure group's tasks and activities by business

function such as production/operations, marketing, finance/accounting, research and development, and

computer information systems. A university may structure its activities by major functions that include

academic affairs, student services, alumni relations, athletics, maintenance, and accounting. Besides being

simple and inexpensive, a functional structure also promotes specialization of labor, encourages efficiency,

minimizes the need for an elaborate control system, and allows rapid decision making. Some disadvantages

of a functional structure are that it forces accountability to the top, minimizes career development

opportunities, and is sometimes characterized by low employee morale, line/staff conflicts, poor

delegation of authority, and inadequate planning for products and markets.

Divisional Structure

Divisional structure is formed when an organization is split up into a number of self-contained business

units, each of which operates as a profit centre. such a division may occur on the basis of product or

market or a combination of the two with each unit tending to operate along functional or product lines,

but with certain key function (e.g. finance, personnel, corporate planning) provided centrally, usually at

company headquarters.

The divisional or decentralized structure is the second most common type used by American businesses.

As a small organization grows, it has more difficulty managing different products and services in different

markets. Some form of divisional structure generally becomes necessary to motivate employees, control

operations, and compete successfully in diverse locations. The divisional structure can be organized in one

of four ways: by geographic area, by product or service, by customer, or by process. With a divisional

structure, functional activities are performed both centrally and in each separate division.

A divisional structure has some clear advantages. First and perhaps foremost, accountability is clear. That

is, divisional managers can be held responsible for sales and profit levels. Because a divisional structure is

based on extensive delegation of authority, managers and employees can easily see the results of their good

or bad performances. As a result, employee morale is generally higher in a divisional structure than it is in

a centralized structure. Other advantages of the divisional design are that it creates career development

opportunities for managers, allows local control of local situations, leads to a competitive climate within an

organization, and allows new businesses and products to be added easily.

The divisional design is not without some limitations, however. Perhaps the most important limitation is

that a divisional structure is costly, for a number of reasons. First, each division requires functional

specialists who must be paid. Second, there exists some duplication of staff services, facilities, and

personnel; for instance, functional specialists are also needed centrally (at headquarters) to coordinate

divisional activities. Third, managers must be well qualified because the divisional design forces delegation

of authority; better-qualified individuals require higher salaries. A divisional structure can also be costly

because it requires an elaborate, headquarters-driven control system. Finally, certain regions, products, or

customers may sometimes receive special treatment, and it may be difficult to maintain consistent,

companywide practices. Nonetheless, for most large organizations and many small firms, the advantages

of a divisional structure more than offset the potential limitations.

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A divisional structure by geographic area is appropriate for organizations whose strategies need to be

tailored to fit the particular needs and characteristics of customers in different geographic areas. This type

of structure can be most appropriate for organizations that have similar branch facilities located in widely

dispersed areas. A divisional structure by geographic area allows local participation in decision making and

improved coordination within a region.

The divisional structure by product is most effective for implementing strategies when specific products

or services need special emphasis. Also, this type of structure is widely used when an organization offers

only a few products or services, or when an organization's products or services differ substantially. The

divisional structure allows strict control and attention to product lines, but it may also require a more

skilled management force and reduced top management control.

When a few major customers are of paramount importance and many different services are provided to

these customers, then a divisional structure by customer can be the most effective way to implement

strategies. This structure allows an organization to cater effectively to the requirements of clearly defined

customer groups. For example, book publishing companies often organize their activities around customer

groups such as colleges, secondary schools, and private commercial schools. Some airline companies have

two major customer divisions: passengers and freight or cargo services. Merrill Lynch is organized into

separate divisions that cater to different groups of customers, including wealthy individuals, institutional

investors, and small corporations.

A divisional structure by process is similar to a functional structure, because activities are organized

according to the way work is actually performed. However, a key difference between these two designs is

that functional departments are not accountable for profits or revenues, whereas divisional process

departments are evaluated on these criteria. An example of a divisional structure by process is a

manufacturing business organized into six divisions: electrical work, glass cutting, welding, grinding,

painting, and foundry work. In this case, all operations related to these specific processes would be

grouped under the separate divisions. Each process (division) would be responsible for generating

revenues and profits. The divisional structure by process can be particularly effective in achieving

objectives when distinct production processes represent the thrust of competitiveness in an industry.

The Strategic Business Unit (SBU) Structure

Strategic Business Unit or SBU is understood as a business unit within the overall corporate identity which

is distinguishable from other business because it serves a defined external market where management can

conduct strategic planning in relation to products and markets. When companies become really large, they

are best thought of as being composed of a number of businesses (or SBUs).

These organizational entities are large enough and homogeneous enough to exercise control over most

strategic factors affecting their performance. They are managed as self contained planning units for which

discrete business strategies can be developed. A Strategic Business Unit can encompass an entire company,

or can simply be a smaller part of a company set up to perform a specific task. The SBU has its own

business strategy, objectives and competitors and these will often be different from those of the parent

company.

As the number, size, and diversity of divisions in an organization increase, controlling and evaluating

divisional operations become increasingly difficult for strategists. Increases in sales often are not

accompanied by similar increases in profitability. The span of control becomes too large at top levels of

the firm. For example, in a large conglomerate organization composed of 90 divisions, the chief executive

officer could have difficulty even remembering the first names of divisional presidents. In multidivisional

organizations an SBU structure can greatly facilitate strategy-implementation efforts.

The SBU structure group's similar divisions into strategic business units and delegate's authority and

responsibility for each unit to a senior executive who reports directly to the chief executive officer. This

change in structure can facilitate strategy implementation by improving coordination between similar

divisions and channeling accountability to distinct business units. In the ninety-division conglomerate just

mentioned, the ninety divisions could perhaps be regrouped into ten SBUs according to certain common

characteristics such as competing in the same industry, being located in the same area, or having the same

customers.

Two disadvantages of an SBU structure are that it requires an additional layer of management, which

increases salary expenses, and the role of the group vice president is often ambiguous. However, these

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limitations often do not outweigh the advantages of improved coordination and accountability. Atlantic

Richfield and Fairchild Industries are examples of firms that successfully use an SBU-type structure.

The Matrix Structure

A matrix structure is the most complex of all designs because it depends upon both vertical and horizontal

flows of authority and communication (hence, the term matrix). In contrast, functional and divisional

structures depend primarily on vertical flows of authority and communication. A matrix structure can

result in higher overhead because it creates more management positions. Other characteristics of a matrix

structure that contribute to overall complexity include dual lines of budget authority (a violation of the

unity-of-command principle), dual sources of reward and punishment, shared authority, dual reporting

channels, and a need for an extensive and effective communication system.

Despite its complexity, the matrix structure is widely used in many industries, including construction,

healthcare, research, and defense. Some advantages of a matrix structure are that project objectives are

clear, there are many channels of communication, workers can see visible results of their work, and

shutting down a project can be accomplished relatively easily.

Restructuring, Reengineering, and E-Engineering

Restructuring and reengineering are becoming commonplace on the corporate landscape across the United

States and Europe. Restructuring--also called downsizing, rightsizing, or delayering--involves reducing

the size of the firm in terms of number of employees, number of divisions or units, and number of

hierarchical levels in the firm's organizational structure. This reduction in size is intended to improve both

efficiency and effectiveness. Restructuring is concerned primarily with shareholder well-being rather than

employee well-being.

In contrast, reengineering is concerned more with employee and customer well-being than shareholder

well-being. Reengineering--also called process management, process innovation, or process redesign--

involves reconfiguring or redesigning work, jobs, and processes for the purpose of improving cost, quality,

service, and speed. Reengineering does not usually affect the organizational structure or chart, nor does it

imply job loss or employee layoffs. Whereas restructuring is concerned with eliminating or establishing,

shrinking or enlarging, and moving organizational departments and divisions, the focus of reengineering is

changing the way work is actually carried out.

Reengineering is characterized by many tactical (short-term, business function-specific) decisions, whereas

restructuring is characterized by strategic (long-term, affecting all business functions) decisions.

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