The divisional organizational structure is characterized by centralized decision-making and decentralized management. In other words, it combines decentralized management with independent accounting and allocates responsibility and authority to each division to a maximum degree, thus enabling the top leaders to get rid of daily production operations to become a truly powerful decision-making body.
The advantage of this organizational structure is that it is more suitable for the facilitation of the distribution of knowledge, and complies with the requirements of increased information transmission and processing. Thus it improves information processing efficiency, simplifies ways of information transfer, and improves the efficiency of solving problems. All of the following are disadvantages of a divisional type of organizational structure except the issue mentioned below.
It is helpful in improving market competitiveness and overall economic benefits of the divisions. Divisions can diversify risk to facilitate the assessment and evaluation of the operating performance of each one, and it also helps to improve the management capability of each divisional manager.
The divisional organizational structure also has the following disadvantages:
Although the divisional organizational structure has these deficiencies, it is still widely used by many large companies. Very large companies with a wide variety of business and wide market coverage demonstrate the superiority of the divisional system.
The divisional organizational structure can be organized by product or geography. In the divisional product structure, the firm organizes itself regarding a product or product lines. Firm selling tools, for example, could organize itself regarding large power tools, small power tools, and hand tools. The functional areas within a divisional structure may be centralized or separated by product lines. This type of structure offers the advantage of enabling managers to identify specific profits and losses in a particular product category.
When a divisional structure is organized in geographical terms, the same products are divided according to specific sales regions. The East Coast and West Coast, for example, may sell the same product, but the responsibility for those sales would be delegated to separate internal organizations. To justify this type of divisional organizational structure, its advocates argue that different areas of the country (or the world) require a different approach to running the business. Because laws, customs, and customers differ from one region to another, specialists must be employed to organize the sale of a product according to unique geographical, political and demographical requirements.
The alternatives to divisional organizational structure include linear, functional, and matrix types.