Advantages of a Multidivisional Structure

ADVANTAGES of a multidivisional structure  Increased organizational effectiveness  A division of labor generally increases organizational effectiveness. In a multidivisional structure there is a clear division of labor between corporate and divisional managers. Divisional managers are responsible for the day-to-day operations of their respective divisions and for tailoring divisional activities to the needs of customers. Corporate managers are responsible for long-term planning for the corporation as a whole and for tailoring the mission of the decision to suit the goals of the whole organization.  Increased control  Corporate managers monitor the performance of divisional managers. The extra control provided by the corporate ofÏce encourages the stronger pursuit of internal organizational efÏciency by divisional managers.  Profitable growth  When each division is its own profit center (when its individual profitability can be clearly evaluated), corporate headquarters can identity the divisions in which an investment of capital will yield the higher returns. Thus corporate executives can make better capital resource allocations decisions to promote corporate growth. The multidivisional structure allow a company to grow without suffering from the problems of COMMUNICATION OR INFORMATION OVERLOAD that can occur when two roles are mixed, as they are in the functional structure.  Internal labour market  The most able divisional managers are promoted to become corporate manager. Thus divisional managers have an incentive to perform well because superior performance results in promotion to high ofÏce. DISADVANTAGES of a multidivisional structure  Managing the corporate-divisional relationship  The central management problem posed by a multidivisional structure is how much authority to centralize at the corporate level and how much authority to decentralize to the operating divisions. The balance between the two has to be managed all the time. Too much centralization of authority can straitjacket divisional managers they los control of decision making to headquarters managers who are far from the firing line, and the result can be poor performance.  Coordination problems between divisions  When a multidivisional structure is created, measures of effectiveness such as return on investment can be used to compare divisions’ performance, and corporate headquarters can allocate capital to the division on the basis of their performance. One problem with this approach is that divisions may begin to compete for resources, and rivalry between them may prevent them from cooperating. Such rivalry can lower organizational performance when a company’s effectiveness depends on the divisions’ sharing of knowledge and information about innovations to enhance the performance of all divisions.  Transfer pricing  Problems between divisions often revolve around the transfer price, the price at which one division sells a product or information about innovations to another division. To maximize its own return on investment, one division will want a high transfer price, but that will penalize the other divisions, which is, after all, part of the same organization. Thus, as each division pursues its own goals, coordination problems inside the organization can emerge. The role of corporate center is to manage such problems.  Bureaucratic costs  Multidivisional structure are very expensive to operate. The high costs of operating a multidivisional structure must continually be evaluated against the benefits the company obtains. And, if the benefits relative to the costs fall, the company should move to reduce the size of corporate headquarters, the number of divisions, or the costs of its support functions. It might be possible to change to a product division structure or to a product team structure and service the needs of its different products thought one set of centralized support functions.  Communication problems  It arises in tall hierarchies, particularly the distortion of information. These problems are common in multidivisional structures because they tend to be tallest of all organizational structure. The gap between the corporate center and the divisions is especially large.