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What is a divisional organizational structure?
Ever heard of Pepsi, McDonald's, or Johnson & Johnson?
Of course, you have!
Well, all these companies function on a divisional organizational structure, and for very good reason.
Divisional structure works by organizing companies by product, market, or location. For example, a retail company may organize their team by clothing type; a department for children’s clothes, a department for women’s clothes, and a department for men’s clothes. A music app might organize its company by market; a department for music geared to young people and a department geared towards music for older people. A chain restaurant may divide its organization by location because people have different tastes in different locations, e.g. a McDonald's in the U.S. will be serving up different food than a McDonald's in Asia.
In a divisional structure, each division has its own management, HR, finance, and marketing teams. The managers report to the CEO. This means that each division is like its own self-contained company, which can be both advantageous and disadvantageous as we’ll discuss below.
So what type of organization is well-suited for a divisional organizational structure?
Big companies that produce many goods, work across many locations, or provide goods to a wide range of demographics work best with a divisional organizational structure.
What are some divisional organizational structure advantages and disadvantages?
Here are some pros and cons of divisional organizational structure.
- High degree of transparency: Big companies can struggle to stay on top of their employees and both superior and poor performance can go unnoticed. A divisional structure helps solve this problem because each division has its management to monitor individual performance.
- Creates company culture and loyalty: Another problem big companies face is a lack of culture and loyalty due to the facelessness that having so many employees creates. Again, a divisional organizational structure solves this problem with its self-enclosed nature; managers can create their own, relevant code of behavior and values and promote them within their group. Also, when employees of a particular division feel that they belong to a specific group rather than to a huge corporation, company loyalty develops. This is important because attrition rates are high when employees feel no loyalty.
- Stay on top of competition: Companies that operate with a localized divisional organizational structure have teams on the ground that can respond quickly to local competition and local trends.
- High operating costs: Having separate HR, finance, and marketing teams within each division comes with a high running cost, as well as the headache of having to hire for all these roles multiple times over.
- Creates competition: The segregated nature of a divisional structure encourages employees to develop close ties to their fellow division employees specifically, not with employees from other divisions. This can create a sense of ‘us vs. them’, with divisions each trying to get a step ahead of the other.
The good news is that this competition can be easily neutralized by organizing company events where employees from different divisions can interact and create a shared vision. Another idea would be to create opportunities for divisions to work together once in a while on specific projects.
A company that serves many locations may split up its divisional structure by location. A restaurant chain, for example, would benefit from having separate, self-enclosed teams, especially if they had restaurants in different countries where people’s tastes differ. Then, the management of each team can respond to local changes or competition on the ground and the HR team can easily source locals for new jobs.
If a company produces several items or services, it can be worth their while having a divisional organizational structure divided by product. For example, a retail company that produces women's, men’s, and children’s clothing can split up their organization into those three categories. This would enable each team to focus on producing excellent products of their type and stay on top of the market.
Sometimes, a company serves very different types of markets. For example, a music app like Spotify can have different categories of music, e.g. some intended for youth, and some for older folks. Dividing a company like this by market enables it to keep its various markets happy by having whole teams dedicated to providing the right music for the right market.
Picture a company that manufactures cars. They have a process that eventually culminates in a completed car. For each process, they can have a divisional team, e.g. a team that produces internal car parts, a team that produces external car parts, a team that tests the car, and a team that markets the car.
Below is an example of a divisional structure divided by location.
No matter what organizational structure you choose for your company, an organizational structure is only one aspect of effectively organizing your company.
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