Divisional structure is an organizational structure based on separation of large autonomous production and business units (departments, divisions) and management levels corresponding to them, providing these units with operational autonomy and transferring responsibility for making profits at these levels (George & Jones, 2008).
It is believed that the introduction of a divisional structure creates more favorable conditions for the company’s growth; gives greater autonomy and independence in decision-making processes; allows to establish closer connection with consumers; improves coordination processes within the company; improves adaptability of the structure, its response to external influence. All this gives competitive advantage to the organizations with divisional structure (George & Jones, 2008). However, functioning of divisional organizational structures put a row of new problems in front of the company’s management.
First of all, there are difficulties with the distribution of corporate spending and the redistribution of resources. Giving divisions the right to earn profits, top management should ensure the right of its investment, basing on strategic interests and needs for restructuring. There may be contradictions between the headquarters and divisions. The inefficient use of resources occurs, inability to use them fully in connection with fixing them after concrete units, which results in the increase of general expenses (Cummings & Worley, 2008).
A significant barrier to the strategic development of the organization is the separation of interests of different departments. The tendency of degradation of the strategic orientation leads to “blurring”ť of corporate strategy, attempts to reduce it to a simple generalization of units’ development directions. Divisional management structures lead to the increase of hierarchical pattern, i.e. of the chain of command. They demand the formation of management sublevels for coordination of work of departments, groups, etc. (Henry, 2007)
A large number of levels of managerial vertical results in the situation, when 3 or more levels of management are formed between employees and managers of the departments, and 5 or more levels between employees and the top management of the company.
Disconnection of department structures from the company headquarters leads in its turn to poor coordination of departments’ activity, to the nonconcurrence, and often to the contradiction of interests of independent units and common interests of the corporation (Henry, 2007). This situation generates interdivisional conflicts, in particular, in case of the deficit of key resources, distributed centrally. The disadvantage of a divisional structure is also the shortening of goals within the departments, arising from the rapid method of feedback in the form of monetary compensation and bonus system (George & Jones, 2008).
In addition, the excessive development of the functional hierarchy (the same departments and services are present in each separate division) leads to some duplication of performed activities and the growth of corporate and overhead expenses together with the corresponding increase of personnel quantity (George & Jones, 2008).
This also leads to a possible limitation of professional development of units’ specialists, because their teams are not as large, as in case of linear-functional structures, but the departments as such, as a rule, actually keep linear or linear-command structure with all their disadvantages. In large divisional organizations the interdivisional career is generally hindered (Cummings & Worley, 2008). At the same time, the key figures in the management of organizations with the divisional structure are the control managers of functional and production divisions. Therefore, one of the disadvantages of the divisional structure is the high demand for the qualified managerial personnel (Henry, 2007).
It should also be noted that a number of experts, studying different types of organizational structures, tend to treat the divisional structure as a kind of traditional bureaucratic structures (Henry, 2007). Indeed, the structure, worked out by Sloan is considered as a pattern, it turns out that discipline, teamwork, and strong role of the center are particularly important for it. In addition, the units remain within the traditional linear-functional structure, which does not give particular flexibility to the whole organization.
Thus, the main disadvantages of the structure include: increase of hierarchy levels; excessive freedom of divisions; duplication of activity in different divisions; loss of control, complex information problems; and weak connections with the central department. Divisional structure requires relatively high spending on coordination considering the decentralization, up to implementation of separate budget funding and the system of internal price. Isolation of the central apparatus from the concrete areas of organization’s activity and the complexity of control over the structure may lead to some risk of organizational malversation, caused by the excessive independence of divisions. In addition, decentralization often causes the loss of benefits of cooperation, which again requires the implementation of centralization of certain functions.
In general, high cost and duplication of functions become serious obstacles in the implementation of divisional structures in enterprises. In this case, the possible ways to correct disadvantages may include: strengthening of top management; usage of the process approach; implementation of the system of budgeting and motivation; definition of the zone of competence of subordinate managers and delegation of power; clear delineation of functions; establishment of horizontal linkages; introduction of automated control systems. The key terms of the normal work of divisions are the presence of highly qualified specialists, independent market research, and usage of planning and engineering techniques.