Divisional organization

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Example of a divisional organization

The divisional organization , also known as divisional organization or division organization , divides organizational units on the second hierarchical level according to object aspects (products, customer groups, sales areas) or areas of work . These units are called business units, divisions or divisions. This form of organization is a basic form of primary organization and is characterized by the form of the single-line system (which is based on the multi-line system ). The degree of decentralization in a divisional organization can vary:

  • Central division organization (low degree of division autonomy; few, small and homogeneous divisions; low complexity of control instruments)
  • Decentralized division organization (high degree of division autonomy; many, large and diversified divisions; high complexity of control instruments).

The divisional organization was introduced for the first time in the twenties by DuPont and General Motors . However, this form of organization in the USA only gained significant importance after the Second World War. Over time, this concept became more and more popular among large corporations and is now widely used.

It does not make sense to equate divisions with the more modern concept of strategic business units , since in the vast majority of cases the divisions lack the autonomous strategic ability and they limit themselves to operational decisions, while strategic decisions are made by the parent company (example: the ratio of General Motors to its Opel division before it was sold).

Corporate management

The division of responsibilities for strategic and operational tasks is a fundamental characteristic of the division organization (Bühner 1992). While strategic tasks ( strategic management ) are to be performed by the company management , the operational tasks ( operational management ) should be performed by the respective division (business area). The tasks of the company management can be defined as follows:

  • Definition of long-term objectives and corporate policy,
  • Management and control of the divisions and central areas,
  • staffing of the divisional heads,
  • Distribution of resources,
  • Definition of investment and research priorities.

Here, too, there are different forms of organization, which are particularly important for the strategic direction of the company. There is no fundamentally correct decision when choosing the organization of the company management, it depends, for example, on the company conditions.

  • In the corporate management, the members are responsible as heads for the central areas. The division heads are not represented.
  • In the corporate management, the members are responsible as heads of the business areas. The central areas are managed by other senior executives of the company.
  • The corporate management is formed by the central division heads and the business division heads.
  • The members of the management have only limited responsibility for the central areas and the business areas.
  • The members of the management are not responsible for the central areas and the business areas.

Business area

The business areas (divisions) themselves are divided into divisions. They can be run as a cost center, profit center or as an investment center.

  • Cost center : the division management has no influence on the type, quantity and price of the service to be provided. There are certain requirements that must be met with the least amount of resources possible.
  • Profit center : division management bears responsibility for costs and revenues. However, since the corporate strategy still has specifications, the scope for decision-making extends primarily to the production volume and the sales price.
  • Investment center: The scope for decision-making is expanded to include capital employed. Here the division management can decide on investments and liquidations itself.

The profit center corresponds most closely to the basic idea of ​​the business unit organization. The cost center lacks the necessary autonomy of the business areas, which is too pronounced in the investment center.

The division of the business areas according to products or product groups is the most frequently used. If the same production technology is used for different products, a production-technological subdivision is recommended. As an alternative or in addition to the division according to products, there is also the regionally oriented formation of business areas. This regionally-oriented addition is particularly important for large companies that operate worldwide. Especially when these companies have a high proportion of foreign business.

Central area - service provider for the business areas

The division of the business areas is overlaid by functionally structured central areas. These central areas are formed based on economies of scale, indivisible resources or coordination advantages. The main tasks of the central areas are the use of specialization advantages and economies of scale, the provision of services for the business areas or the fulfillment of general corporate tasks. They should also ensure that the business areas act in the interests of the company as a whole. Due to the MontanMitbestG and the MitbestG of 1976, many companies feel compelled to set up a central "Personnel" department. For companies subject to co-determination, these laws provide for a central labor director who is responsible for personnel issues and personnel development. In other areas (e.g. group marketing) it makes sense to set up a central area. Research and development tasks as well as tax and legal matters often require a separate central department due to the inability to divide resources.

For reasons of maintaining the profit responsibility of the business areas, the topmost principle in the formation of central areas should always be that nothing is centralized which is essential for the success of the business areas.

Advantages and disadvantages

advantages disadvantage
  • Relief of the top management
  • High motivation and a. through greater autonomy
  • Increased flexibility and coordination (through smaller units)
  • More precise assessment of success
  • Market proximity / market orientation
  • Purchase / sale of units easier, as well as disinvestments
  • Specific focus on the division strategies
  • Structural impetus for strategic thinking
  • Greater transparency of business activities
  • More precise performance assessment
  • Each department works independently
  • Avoidance of excessive bureaucracy and complication
  • Better customer, area or product orientation
  • The structure is strategically and structurally very adaptable
  • Synergy losses
  • Divisional egoism (cannibalism: substitution competition between the divisions)
  • Increased need for management positions
  • Greater need for coordination and high administrative effort
  • Potential difference between divisional and corporate goals
  • Loss of efficiency due to insufficient divisibility of resources and suboptimal company sizes
  • Transfer pricing as a new potential for conflict
  • Higher staff costs

If the business areas are largely autonomous, the company management can concentrate on essential strategic tasks, thereby relieving the burden. If the divisions are set up in a market-related manner, the market-oriented coordination already takes place in the business units, which means greater market and customer proximity and greater flexibility in the face of market changes. The identification and motivation of employees with a manageable division will be higher than with the larger company as a whole. It is possible to assign a specific area of ​​responsibility with regard to costs and profit to each individual division.

One disadvantage would be inefficient use of resources. Furthermore, duplications can quickly arise in the divisional organization; the same work is carried out in several divisions at the same time. With regard to the overall picture, an increased coordination effort is necessary to maintain a homogeneous overall picture. For some customers there can also be a disadvantage if the divisions are strictly separated from one another and customers within the company want to “switch” quickly between divisions. However, this can be counteracted by setting up central offices .

Summary

In summary, one can say that the division organization is ideal for large companies that are faced with a complex and dynamic environment. For these companies, the fundamental disadvantage of resource use has a rather minor impact, with product, market and customer orientation being of great importance.

literature

  • Rolf Bühner : Business administration. 10th edited edition. Oldenbourg, Munich et al. 2004, ISBN 3-486-27500-3 .
  • Rolf Bühner: Division organization. In: Erich Frese (Hrsg.): Manual dictionary of the organization (= Encyclopedia of Business Administration. Vol. 2). 3rd, completely redesigned edition. Schäffer-Poeschel, Stuttgart 1992, ISBN 3-7910-8027-X , Sp. 2274-2287.
  • Erich Frese: Basics of the organization. Concept - principles - structures. 8th, revised edition. Gabler, Wiesbaden 2000, ISBN 3-409-31688-4 .
  • Klaus Olfert, Horst-Joachim Rahn : Organization. 7th, revised and updated edition. Kiehl, Herne 2015, ISBN 978-3-470-49867-6 .
  • Arnold Picot , Helmut Dietl, Egon Franck: Organization. An economic perspective. 2nd, revised and expanded edition. Schäffer-Poeschel, Stuttgart 1999, ISBN 3-7910-1549-4 .
  • Peter Weinert: Organization. Organizational design, organizational methodology, case exams. Vahlen, Munich 2002, ISBN 3-8006-2838-4 .