10-4b Divisional Structure

EXHIBIT 10.4 A FUNCTIONAL ORGANIZATIONAL STRUCTURE FOR A GLOBAL BUSINESS

Chief Executive Officer

Manufacturing R&D Finance Sales

Europe Latin America Asia Europe Latin America Asia

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EXHIBIT 10.5 THE ORGANIZATIONAL STRUCTURE OF BOEING COMMERCIAL AIRPLANES

Chief Executive Officer

Business Strategy & Marketing Supply Chain Management & Operations Sales Engineering Finance Commercial Aviation Services

Airline Programs

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Global businesses that use a functional structure typically have a narrow product line or a highly integrated product mix, such as aircraft manufacturers or oil and gas firms. Boeing Commercial Airplanes provides an example of a global business with a functional structure. Exhibit 10.5 presents the organizational structure of Boeing Commercial Airplanes. Global businesses in the mining and energy industries also tend to have functional structures.

The functional structure has several advantages. First, the functional structure promotes economies of scale. Manufacturing all products in a single plant, for instance, enables the organization to acquire the latest and most scale-intensive machinery. Constructing only one production facility instead of a separate facility for each product line reduces duplication and waste. Second, the functional structure promotes in-depth skill development of employees by providing a well-defined career ladder that allows employees to be exposed to a range of activities within their own functional expertise. Third, the functional structure encourages collaboration, efficiency, and quality within the function.

Although the functional structure offers advantages to the global business, some businesses do not adopt this structure because it is not appropriate for them due to several reasons. First, there can be an inability to respond to environmental changes that require coordination between the functional areas. In these cases, the coordinating mechanisms across functions can become overloaded. Tasks become backlogged and top management cannot respond fast enough. This lack of speed in decision making has proven fatal for several global businesses, as indicated in the opening vignette of this chapter “Organizational Restructuring at Royal Dutch Shell.” Second, each employee has a restricted view of the organization’s primary goals. This can lead to local optimization at the expense of global optimization. In other words, employees may make decisions that optimize a given function (e.g., sales), but not the global business as a whole. Third, accountability is diffused because profit and loss accounts are calculated for the entire firm rather than for each function.11

A divisional structure refers to one type of organizational structure in which functions are grouped together to serve the needs of products, markets, or geographical regions.

divisional structure

an organizational structure in which functions are grouped together to serve the needs of products, markets, or geographical regions

EXHIBIT 10.6 A DIVISIONAL STRUCTURE FOR A GLOBAL BUSINESS WITH THREE DIVISIONS

Chief Executive Officer

product structure

a special case of the divisional structure where products are grouped into separate divisions according to their similarities or differences

Corporate Headquarters

Division I Division II Division III

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While the functional structure is organized according to the various inputs that enable an organization to produce its goods and services, the divisional structure is instead organized according to the various outputs of the global business. A divisional structure for a global business with three divisions is presented in Exhibit 10.6.

Note that although each division is managed as a separate business, coordination across the divisions is overseen by a group of managers at corporate headquarters who are responsible for allocating resources among divisions and deciding upon the long-term strategy of the firm. Corporate headquarters is also included in Exhibit 10.6. One of the primary issues in a divisional structure is the degree of autonomy granted to the divisions when making decisions that are strategic, and which involve a significant amount of resources.

One advantage of the divisional structure is that functions are able to focus their activities upon a specific kind of product, market or geographical region. This narrow focus helps a division to create high-quality products and provide high-quality customer service. Second, divisions develop a common identity and approach to problem solving, which increases cohesiveness and results in improved decision making and performance. Third, because each division has the full complement of functional resources, it can respond to the requirements of individual products, markets, or geographical regions and quickly adapt as these needs change. In addition, each division can be held fully accountable for its performance and this enables better control. One more advantage of the divisional structure is that employees’ identification with their division increases their commitment, loyalty, and job satisfaction.

The primary disadvantage of the divisional structure is that it requires high operating and managing costs, which is a consequence of each division having its own set of functions, in addition to the corporate headquarters adding a new management level for which to pay. Because divisional structures normally have more managers and more levels of management than functional structures, communication problems may arise as various managers in various divisions attempt to coordinate their activities. A third disadvantage of divisional structures is that divisions may start to compete for organizational resources and may start to pursue divisional goals at the expense of the goals of the global business as a whole.

A product structure is a particular kind of divisional structure that groups products into separate divisions according to their similarities or differences. Exhibit 10.7 presents product structure for a global business with four product divisions.

ExxonMobil is an example of a global company with a product structure. Its product divisions include Upstream, Downstream, and Chemical. The Upstream division includes exploration, development, production, and gas and power marketing. The Downstream division includes refining and supply, fuels marketing, and lubricants and specialties. Honda is another example of a global company with a product structure; its product divisions are automobiles, motorcycles, and power products. A third example of a company with a product structure is IBM; its five IBM product divisions include the following:

EXHIBIT 10.7 A PRODUCT STRUCTURE FOR A GLOBAL BUSINESS WITH FOUR PRODUCT DIVISIONS

Chief Executive Officer

Product A Division

Corporate Headquarters

Product B Division Product C Division Product D Division

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• Global Technology Services, which provides information technology infrastructure services and business process services; • Global Business Services, which provides professional services and application outsourcing services; • Software, which consists of middleware and operating systems software. Middleware software enables clients to integrate systems, processes and applications across a standard software platform. Operating systems are the software engines that run computers; • Systems and Technology, which supplies clients with business solutions requiring advanced computing power and storage capabilities; and • Global Financing.

A market structure is a particular kind of divisional structure that groups products into separate divisions according to the needs of different customers. The market structure is also called customer structure or customer class structure. Exhibit 10.8 illustrates a product structure for a global business with three market divisions.

Hilton Hotels Corporation is an example of a global business with a market structure. It is organized around the following divisions, which serve different markets or customer classes around the world: Hilton, Hilton Garden Inn, Doubletree, Embassy Suites, Homewood Suites by Hilton, Hampton, Scandic, Conrad, and Timeshares. Hilton Hotels Corporation manages approximately 3,000 properties totaling about 500,000 rooms in 80 countries and territories.

A geographical region structure is a particular kind of divisional structure that groups products into separate divisions according to the needs of the different geographical regions the company serves. The geographical region structure is also called area structure.

EXHIBIT 10.8 A MARKET STRUCTURE FOR A GLOBAL BUSINESS WITH THREE MARKET DIVISIONS

Chief Executive Officer

Corporate Headquarters

Consumer Division Commercial Division Government Division

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market structure

a special case of the divisional structure where products are grouped into separate divisions according to the needs of different customers

geographical region structure

a special case of the divisional structure where products are grouped into separate divisions according to the needs of the different geographical regions the company serves