Geography-Focused Divisional Structures

While control issues for growing companies are generally product-based, which leads them to adopt some form of “product structure” that I have been discussing in previous posts, there are situations where control is best asserted through organizing operations based on location.  In this case companies may opt for a geographic divisional structure, which calls for divisions to be established and operated based on certain specific and relatively localized requirements identified for different geographic locations in which the company has significant operations.  Typically, a geographic structure will be a careful mix of centralization and decentralization—certain core functions will continue to be managed out of the headquarters office, where the CEO and other members of the senior executive team will be located, while other functions are placed and managed in facilities established to focus primarily on operating a particular geographically-defined area (e.g., a country or group of countries or a region of a specific country).

While a geographic division is usually created to align the core competencies of the company with the localized requirements of customers in a particular country or region (i.e., by customizing marketing and sales activities and product characteristics) a plant or other type of facility may be placed in particular location in order to gain access to important strategic advantages and resources.  For example, manufacturing operations may be moved to countries where low-cost, yet skilled, labor is available even though sales opportunities in those countries are not significant.  Similarly, R&D activities may be pursued in small countries like Finland and Switzerland to tap into their local knowledge bases in cutting-edge technologies even though products developed through such activities will ultimately be marketed and sold worldwide.  Setting up a geographic-focused division in China or India offers a number of advantages—access to low-cost manufacturing, skilled scientists and engineers and dynamic and growing consumer markets.

The most common use of a geographic division is when the customer base of a company grows beyond the immediate proximity of the headquarters office and the company needs to customize its products and sales and marketing strategies to the needs and expectations of customers in new and distant geographic markets while still retaining the advantages of centralization that are available in functional areas such as procurement and R&D.  For example, a retailer might group stores into regional units that are each overseen by a regional office that is principally responsible for making sure that the products available in the stores under its control are aligned with tastes and needs in the particular region which may be determined by divergent factors such as weather, income levels and other demographic factors—a clothing retailer would, during the winter months, stock more coats and gloves in the Midwest while feature swimwear in Southern California and Florida.  While regional offices are responsible for setting priorities for their particular product lines and communicating their needs to the corporate level, final decisions regarding company-wide purchasing are still made at the headquarters office in order to achieve cost savings through volume purchasing.  Done well, companies organized by geographic divisions can offer lower prices to all of its customers while being responsive to parochial customer requirements and acting like a local business.

A company may also establish a geographic structure when it trades in products that are too costly to transfer long distances to get to customers located far away from the place where the products are manufactured.  For example, a company that specializes in making containers (i.e., cans and bottles) used by customers in the soft drink, fruit and vegetable markets may locate its manufacturing facilities in locations in close proximity to those customers since containers can be bulky and thus very expensive to ship.  This structure allows the company to be price competitive and also encourages the development of close and strong relationships with customers.  Each facility would have its own functional resources in key areas such as manufacturing, purchasing, sales and quality control; however, the headquarters office would retain primary responsibility for R&D, engineering and finance.  A similar strategy can be used in order to place manufacturing activities near suppliers of key components and/or raw materials.  As an aside, decentralizing manufacturing allows the company to seek and achieve the optimal level of production efficiency and economies of scale for each plant. 

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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