In Multidivisional Organizational Structure, each business unit is placed in a self-contained division and supplied with all support functions. Thus each part essentially operates separately from the other parts of the company. The office of corporate headquarters is created to control and oversee the divisions. Headquarters also provides corporate support functions, such as finance and R&D. Divisional managers have operating responsibility; corporate managers have strategic responsibility. Each division is treated as a profit center and can adopt the structure and control systems that best serve its strategy.
A multidivisional structure has several advantages.
- Enhanced corporate financial control is one advantage of the multidivisional structure. The profitability of the different divisions is very clear, allowing the corporate staff to readily determine the best resource allocation scheme.
- Enhanced strategic control is another benefit, because corporate staffs are freed from operating responsibilities, and can concentrate on corporate strategy.
- The structure overcomes limits to growth because it permits the company to operate many businesses without information overload or requiring too much intervention from corporate managers.
- Because divisional performance has greater visibility, divisional managers realize that corporate managers can detect inefficiencies, and thus are motivated to perform at a higher level.
Implementing a multidivisional structure has drawbacks as well, and the advantages must be balanced against them.
- Managing the balance of power between corporate and divisional managers is difficult. The problem lies in deciding how much authority to centralize at the corporate level and how much to decentralize at the divisional level. Too much centralizing puts divisional managers in a straitjacket. Too much decentralizing, however, may cause the company to lose control over its strategy, damaging corporate performance.
Case Study: GM’s Multidivisional Structure Changes Over Time
Over the years, General Motors has changed its structure several times, beginning with the 25 autonomous operating divisions that comprised the firm in the 1910s. To better compete with centralized, single-business Ford Motors, CEO Alfred Sloan invented the multidivisional structure in 1920. This structure allowed GM to benefit from the cost savings that come from centralization, while keeping the flexibility and innovation inherent in a decentralized structure. Sloan saw advantages from the multidivisional structure, including improved accountability, easier resource allocation, and higher autonomy and morale. In the 1980s, to better compete with the cost-efficient Japanese automakers, GM again re-structured, reducing the number of divisions and centralizing design and engineering. All GM vehicles began to look alike, sales dropped, and the structure was abandoned. Today, the firm continues to struggle with issues of centralization, experimenting to find the right level.