A functional organizational structure
A functional organizational structure is where the organization is grouped around key functional areas – such as manufacturing, supply chain, sales, marketing, and aftersales support. Reporting to the CEO is the head of these functional areas.
A divisional organizational structure
A divisional organizational structure (also referred to as the M-form) is when the firm is organized into divisions. Common groupings of divisions are around different geographies or different product lines. These divisions may operate relatively seperate from one another with limited shared resources. There may, for example, be separate manufacturing, advertising, and other functions in decisions A relative to divisions B, C or D. Reporting to the CEO in a divisional organizational structure will be the divisional heads – for example, the head of particular regions or product lines.
The difference between a functional and divisional organizational structure
The key differences to distinguish between a functional and divisional organizational structure is how the firm is grounded and the reporting to the CEO:
- Groupings: In a functional organizational structure the firm is grouped into functional areas (e.g., manufacturing, advertising, sales, supply chain), whereas in a divisional area the groupings may be product line or geography.
- Reporting to the CEO: In a functional organizational structure head of the functional areas report to the CEO (e.g., VP of Manufacturing, VP of Sales), whereas in a divisional organization the reports to the CEO will be divisional (e.g., VP of Region 1, VP of Region 2, or VP or Product Line 1, VP of Product Line 2).
Situations where functional and divisional organizational structures make sense
Whether a functional or a divisional organizational structure makes sense for the firm largely depends on the needs of the business.
Functional organizational structure
The functional organizational structure can make sense when:
- The firm operates in a single industry area or geography setting, negating the need to split the firm into divisions
- There is a desire to achieve economies from sharing functional resources across different parts of the business, which may potentially be easier to achieve if the firm is organized around resources.
Divisional organizational structure
In comparison, the divisional organizational structure may be most appropriate when the firm operates in different product areas and geography settings each with every different demand. By splitting the firm into different divisions, the company may be better placed to devise a different approach for each market or product line.