Advantages of Multidivisional Structures

In my last post I introduced the concept of a multidivisional structure.  When executed properly, a multidivisional structure can offer several distinct advantages to larger companies operating in diverse business areas:

  • The multidivisional structure, with its clear division of labor between the corporate managers and the managers of each product division, should increase the overall effectiveness of the organizational structure of the company.  Division managers can be given sufficient autonomy and freedom to manage the day-to-day operations of their business and create their own organizational structure that is best suited to their specific products and markets.  At the same time, corporate managers can avoid getting bogged down in the details of divisional operations and can focus on long-term planning for the entire company and determining how each of the divisions fit into the company’s overall strategic goals and objectives.  In fact, since corporate managers are not involved in the day-to-day administration of the activities of the product divisions they have more time to oversee a larger number of businesses which means that the company as a whole has more freedom to expand into new products and markets.
  • The responsibility of the corporate managers to monitor the performance of the division managers means that the multidivisional structure offers a higher level of control and creates incentives for the division managers to be more efficient and cooperate with other product divisions.  Corporate oversight reduces the likelihood that division managers will increase their staffing unnecessarily or pursue new product initiatives that are inconsistent with the goals and objectives of the company as a whole.  One of the duties of the corporate management team is to create processes and systems for objectively tracking and evaluating the profitability and overall performance of the product divisions in order to determine how additional capital should be invested and when remedial measures should be taken in order to address performance problems and inefficiencies.  For example, the better performing divisions are more likely to obtain approval for their requests to fund new projects while the poorer performers would be closely scrutinized and likely would be unable to launch new initiatives until they get existing operations under control.
  • Since each product division in a multidivisional structure will be its own profit center, and thus can be easily evaluated to determine profitability and performance against objective budgetary goals, it will be easier for the corporate management team to determine which divisions provide the best opportunities for obtaining the highest rates of return on invested capital.  With this information, the company can make better decisions about the allocation of scarce resources and thus has a better chance of increasing the overall profitability of the company.

One of the problems with functional and product division structures is that it is often impossible to accurately measure the contribution that completion of particular tasks or activities is making to the profitability of a particular product.  However, since the divisions in a multidivisional structure are essentially self-contained business units it becomes much easier to identify how the activities of individual managers and employees impact “bottom line” performance and this tends to improve morale and increase enthusiasm within the workforce.  This is particularly true in situations where division managers are given the latitude to create their own incentive and reward programs that are customized to the specific activities of their division.

Typically success as a divisional manager is a prerequisite to promotion to a higher status corporate manager position in a multidivisional structure and this creates additional incentives for divisional managers to work to improve the performance of their divisions and impress the senior corporate managers with their ability to collaborate with other divisions to make the entire organizational structure operate more smoothly and effectively.

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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