When considering a divisional organizational structure, there are two common ways of dividing up the firm: divisional by products, and divisional by geography. This article explores the two different forms, and situations where they can make sense for a firm to structure itself with these divisional organizational structures.
Product-based divisional organizational structures
Product-based divisional structures are where a firm is organized around separate product lines. One group of products are one division and another group of products (potentially in a different industry) are in a different product line.
Situations when product-based divisional structures can make sense
In general, a product-based divisional structure makes sense when there are limited similarities between the product lines (and so limited opportunities to share resources across the lines), or if there are specific reasons why you want to isolate one product line from the other. Examples of this can include:
- The products are completely different: If the products have no overlap – common in unrelated diversification – then there may be no reason to have them in the same division. Not only may there be limited opportunities to share resources, but having different product areas under one division may increase confusion or distraction.
- The products target different audiences: If the products are targeting different audiences – potentially a cost-conscious audience and a more premium segment of the market, there may be benefits in having them as separate divisions. Different routines and practices may be needed to effectively compete in different segments of the market, and having the areas in one division may mean the firm gets stuck in the middle – not able to effectively compete in either area.
- Different underlying resources used: Finally, there may be benefits in organizing the divisions separately if they need different underlying resources. Even if the products are related from the perspective of the customers, if they require different capabilities, it may be easier to operate the different areas as separate divisions.
Geography-based divisional structures
A geograph-based divisional structure is when different regions have their own division – allowing them to make independent decisions. This may range from just autonomy in terms of sales (with some functions shared across divisions), to entirely different development and manufacturing occurring by region.
When geography-based divisional structures can make sense
Geography-based divisional structures may make sense when different regions have different demands, requiring adaptation to the specific market needs of the regions. Different features or services may be required by region, and there may be limited opportunities to standardize products across areas. For example, geography-based divisional structures are common in law firms – given the different legal arrangements in each country, it is important that each region is able to organize itself to meet the specific local conditions.