Product Division Structures

In my last post I began discussing various types of product-focused ideas for organizational structures and the first alternative that companies may use is referred to as a “product division” structure.  Companies that follow this approach will create separate divisions for like groups of products that will handle the operational activities (i.e., manufacturing and distribution) associated with those products and will also establish several centralized functional units to provide support services to all of the product divisions.  The move to product divisions is generally triggered at the time that the operational requirements of the company’s product line become too complex to coordinate in a cost-effective manner in one single production group.  The creation of product divisions, each of which will have its own hierarchy overseen and controlled by a dedicated division manager, increases the level of horizontal differentiation within the company’s overall organizational structure.  Each product division manager is responsible for the specific activities undertaken by his or her division and is also the point person in interactions between the division and the centralized support functions to ensure that the division receives the necessary assistance and resources with respect to procurement, marketing and research and development.  Product division managers become another hierarchical level, thus increasing the vertical differentiation in the company’s organizational structure.

A simple organizational chart for a product division structure would have three levels of management personnel organized as follows from top to bottom: the CEO; the central support functions (e.g., sales and marketing, research and development, finance, and procurement), each overseen by a senior executive such as a vice president or chief functional officer (e.g., CFO) reporting to the CEO; and the product-focused divisions organized by grouping similar products, each managed by a product division manager and reporting to the CEO.  The success and efficiency of this type of structure depends heavily on the how effectively services can be provided by the central support functions to the product divisions.  While the central support functions have as their primary mission providing assistance to each of the product divisions it is common for each function to horizontally differentiate its activities by creating sub-groups for each product division that will specialize in serving the needs of that division.  In this way, the sub-groups can become “experts” in the requirements of their division and services can be provided to the division quickly and efficiently.  At the same time, since the sub-groups are also part of a large function-based unit they can smoothly transfer information and knowledge among one another so that all of the product divisions have access to the benefits of any new processes and other ideas that would be of value to each division.  As time goes by the various central support functions will hopefully become core competencies that can be used to the strategic advantage of the entire company.  The provision of services to the product divisions and the development and maintenance of function-based core competencies is the responsibility of the senior executive of each central support function and the CEO must monitor relationships between the support functions and the product divisions.

The product division structure, with its reliance on centralized support functions, make sense in situations where the company’s products and target markets are largely similar and it is not cost-effective to provide each product division with its own functional resources.  A product division structure allows the company to obtain certain advantages of centralization including economies of scale and a greater ability to monitor and control costs and makes overall strategic planning easier because senior management does not have to create separate plans for divisions that are essentially separate companies if they have their own functional resources.  There are, however, disadvantages to a product division structure that must be considered including the possibility that functional talent in areas such as R&D and marketing will seek employment elsewhere due to the relative lack of opportunities to specialize.  In addition, while central support functions can be the foundation of key core competencies there is a risk that having engineers and designers work for all of the product divisions will ultimately reduce product differentiation and lead to a “sameness” within the overall product line that will make it impossible for customers to distinguish between the brands and product features of the various divisions.

The content in this post has been adapted from material that will appear in Business Transactions Solutions (2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

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