Strategic Management MGT603
After the completion of this topic you understand the organizational structure its types. This chapter also
include strategic business unit. This also includes Restructuring, Reengineering, and E-Engineering.
The organization is structured according to functional areas instead of product lines. The functional
structure groups specialize in similar skills in separate units. This structure is best used when creating
specific, uniform products. A functional structure is well suited to organizations which have a single or
dominant core product because each subunit becomes extremely adept at performing its particular portion
of the process. They are economically efficient, but lack flexibility. Communication between functional
areas can be difficult.
The most widely used structure is the functional or centralized type because this structure is the simplest
and least expensive of the seven alternatives. A functional structure group's tasks and activities by business
function such as production/operations, marketing, finance/accounting, research and development, and
computer information systems. A university may structure its activities by major functions that include
academic affairs, student services, alumni relations, athletics, maintenance, and accounting. Besides being
simple and inexpensive, a functional structure also promotes specialization of labor, encourages efficiency,
minimizes the need for an elaborate control system, and allows rapid decision making. Some disadvantages
of a functional structure are that it forces accountability to the top, minimizes career development
opportunities, and is sometimes characterized by low employee morale, line/staff conflicts, poor
delegation of authority, and inadequate planning for products and markets.
Divisional structure is formed when an organization is split up into a number of self-contained business
units, each of which operates as a profit centre. such a division may occur on the basis of product or
market or a combination of the two with each unit tending to operate along functional or product lines,
but with certain key function (e.g. finance, personnel, corporate planning) provided centrally, usually at
The divisional or decentralized structure is the second most common type used by American businesses.
As a small organization grows, it has more difficulty managing different products and services in different
markets. Some form of divisional structure generally becomes necessary to motivate employees, control
operations, and compete successfully in diverse locations. The divisional structure can be organized in one
of four ways: by geographic area, by product or service, by customer, or by process. With a divisional
structure, functional activities are performed both centrally and in each separate division.
A divisional structure has some clear advantages. First and perhaps foremost, accountability is clear. That
is, divisional managers can be held responsible for sales and profit levels. Because a divisional structure is
based on extensive delegation of authority, managers and employees can easily see the results of their good
or bad performances. As a result, employee morale is generally higher in a divisional structure than it is in
a centralized structure. Other advantages of the divisional design are that it creates career development
opportunities for managers, allows local control of local situations, leads to a competitive climate within an
organization, and allows new businesses and products to be added easily.
The divisional design is not without some limitations, however. Perhaps the most important limitation is
that a divisional structure is costly, for a number of reasons. First, each division requires functional
specialists who must be paid. Second, there exists some duplication of staff services, facilities, and
personnel; for instance, functional specialists are also needed centrally (at headquarters) to coordinate
divisional activities. Third, managers must be well qualified because the divisional design forces delegation
of authority; better-qualified individuals require higher salaries. A divisional structure can also be costly
because it requires an elaborate, headquarters-driven control system. Finally, certain regions, products, or
customers may sometimes receive special treatment, and it may be difficult to maintain consistent,
companywide practices. Nonetheless, for most large organizations and many small firms, the advantages
of a divisional structure more than offset the potential limitations.
Strategic Management MGT603
A divisional structure by geographic area is appropriate for organizations whose strategies need to be
tailored to fit the particular needs and characteristics of customers in different geographic areas. This type
of structure can be most appropriate for organizations that have similar branch facilities located in widely
dispersed areas. A divisional structure by geographic area allows local participation in decision making and
improved coordination within a region.
The divisional structure by product is most effective for implementing strategies when specific products
or services need special emphasis. Also, this type of structure is widely used when an organization offers
only a few products or services, or when an organization's products or services differ substantially. The
divisional structure allows strict control and attention to product lines, but it may also require a more
skilled management force and reduced top management control.
When a few major customers are of paramount importance and many different services are provided to
these customers, then a divisional structure by customer can be the most effective way to implement
strategies. This structure allows an organization to cater effectively to the requirements of clearly defined
customer groups. For example, book publishing companies often organize their activities around customer
groups such as colleges, secondary schools, and private commercial schools. Some airline companies have
two major customer divisions: passengers and freight or cargo services. Merrill Lynch is organized into
separate divisions that cater to different groups of customers, including wealthy individuals, institutional
investors, and small corporations.
A divisional structure by process is similar to a functional structure, because activities are organized
according to the way work is actually performed. However, a key difference between these two designs is
that functional departments are not accountable for profits or revenues, whereas divisional process
departments are evaluated on these criteria. An example of a divisional structure by process is a
manufacturing business organized into six divisions: electrical work, glass cutting, welding, grinding,
painting, and foundry work. In this case, all operations related to these specific processes would be
grouped under the separate divisions. Each process (division) would be responsible for generating
revenues and profits. The divisional structure by process can be particularly effective in achieving
objectives when distinct production processes represent the thrust of competitiveness in an industry.
The Strategic Business Unit (SBU) Structure
Strategic Business Unit or SBU is understood as a business unit within the overall corporate identity which
is distinguishable from other business because it serves a defined external market where management can
conduct strategic planning in relation to products and markets. When companies become really large, they
are best thought of as being composed of a number of businesses (or SBUs).
These organizational entities are large enough and homogeneous enough to exercise control over most
strategic factors affecting their performance. They are managed as self contained planning units for which
discrete business strategies can be developed. A Strategic Business Unit can encompass an entire company,
or can simply be a smaller part of a company set up to perform a specific task. The SBU has its own
business strategy, objectives and competitors and these will often be different from those of the parent
As the number, size, and diversity of divisions in an organization increase, controlling and evaluating
divisional operations become increasingly difficult for strategists. Increases in sales often are not
accompanied by similar increases in profitability. The span of control becomes too large at top levels of
the firm. For example, in a large conglomerate organization composed of 90 divisions, the chief executive
officer could have difficulty even remembering the first names of divisional presidents. In multidivisional
organizations an SBU structure can greatly facilitate strategy-implementation efforts.
The SBU structure group's similar divisions into strategic business units and delegate's authority and
responsibility for each unit to a senior executive who reports directly to the chief executive officer. This
change in structure can facilitate strategy implementation by improving coordination between similar
divisions and channeling accountability to distinct business units. In the ninety-division conglomerate just
mentioned, the ninety divisions could perhaps be regrouped into ten SBUs according to certain common
characteristics such as competing in the same industry, being located in the same area, or having the same
Two disadvantages of an SBU structure are that it requires an additional layer of management, which
increases salary expenses, and the role of the group vice president is often ambiguous. However, these
Strategic Management MGT603
limitations often do not outweigh the advantages of improved coordination and accountability. Atlantic
Richfield and Fairchild Industries are examples of firms that successfully use an SBU-type structure.
The Matrix Structure
A matrix structure is the most complex of all designs because it depends upon both vertical and horizontal
flows of authority and communication (hence, the term matrix). In contrast, functional and divisional
structures depend primarily on vertical flows of authority and communication. A matrix structure can
result in higher overhead because it creates more management positions. Other characteristics of a matrix
structure that contribute to overall complexity include dual lines of budget authority (a violation of the
unity-of-command principle), dual sources of reward and punishment, shared authority, dual reporting
channels, and a need for an extensive and effective communication system.
Despite its complexity, the matrix structure is widely used in many industries, including construction,
healthcare, research, and defense. Some advantages of a matrix structure are that project objectives are
clear, there are many channels of communication, workers can see visible results of their work, and
shutting down a project can be accomplished relatively easily.
Restructuring, Reengineering, and E-Engineering
Restructuring and reengineering are becoming commonplace on the corporate landscape across the United
States and Europe. Restructuring--also called downsizing, rightsizing, or delayering--involves reducing
the size of the firm in terms of number of employees, number of divisions or units, and number of
hierarchical levels in the firm's organizational structure. This reduction in size is intended to improve both
efficiency and effectiveness. Restructuring is concerned primarily with shareholder well-being rather than
In contrast, reengineering is concerned more with employee and customer well-being than shareholder
well-being. Reengineering--also called process management, process innovation, or process redesign--
involves reconfiguring or redesigning work, jobs, and processes for the purpose of improving cost, quality,
service, and speed. Reengineering does not usually affect the organizational structure or chart, nor does it
imply job loss or employee layoffs. Whereas restructuring is concerned with eliminating or establishing,
shrinking or enlarging, and moving organizational departments and divisions, the focus of reengineering is
changing the way work is actually carried out.
Reengineering is characterized by many tactical (short-term, business function-specific) decisions, whereas
restructuring is characterized by strategic (long-term, affecting all business functions) decisions.
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