What Is a Divisional Structure? (With Pros and Cons)

By Indeed Editorial Team

Updated December 5, 2022

Published May 18, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Businesses have a variety of organizational structures to choose from, such as the divisional structure. This system is a way of grouping divisions that have specific characteristics. While this type of structure can be beneficial, it may also have drawbacks, which can help you develop your business knowledge. In this article, we explain what this type of structure is, review its pros and cons, and share divisional structure alternatives so you can deepen your understanding.

What is a divisional structure?

A divisional structure is a system that creates divisions for each organizational function, such as geographical regions or product lines, with enough core functions and resources to support them. For example, each division might have an accounting department, IT support, and marketing experts. Here is further information on these two types of structures:

Product departmentalization

This divisional organizational structure groups departments by product line, in which a manager oversees a range of activities that relate to the goods and services. Various departments are part of the structure, which help with manufacturing, marketing, sales, and other business elements. The purpose of these departments may vary, but one of their core objectives is to assist with activities related to the product line.

Geographic departmentalization

This type of departmentalization groups activities based on geographical regions. For example, there might be a North American division and a European one. As consumers from different regions often have different tastes, this structure allows employees in various departments to accommodate customers' needs in their areas. This compartmentalization approach provides flexibility regarding which products the division offers to consumers and which advertising initiatives executives select.

Related: What Is a Structure of Business? Understanding 3 Main Types

Pros of a divisional structure

When company leaders choose this type of organizational structure, they may access a variety of benefits. Here are the main advantages of a divisional organizational structure:

Focuses on particular regions or products and services

When a company selects a divisional organizational structure, each division can focus on a geographical area or a product line, making it easier to meet its goals. As the focus is on a specific area or group of products, all division members have the same objective, serving the wants of clients in a region or supporting the manufacturing and sale of products and services.

Supports the overarching business goals of the division

Leaders commit to the primary goals of their divisions within a divisional organizational structure. This is because they can focus on regions or product lines without being distracted by unrelated concerns. Many divisions have presidents or vice-presidents, and their high ranks in the company can make it easier for them to access capital. Leaders can use this money to support the achievement of business objectives.

Read more: What Is Product Differentiation? A Complete Guide

Builds morale

A company can have better morale when organized divisionally. This is because staff members in different departments, from entry-level employees to management, work toward the shared goal of moving the division forward. This focus can contribute to creating and maintaining a positive corporate culture.

Related: How to Boost Employee Morale and How It Affects Employees

Increases accountability

When a company features divisions, each one functions independently, making it easier for leaders to analyze which ones are performing effectively. It can also make it easier to ensure that division heads are responsible for their actions and decisions and show which divisions are not succeeding. Company heads may discontinue divisions not meeting expectations and expand those exceeding business targets.

Related: What is Accountability in the Workplace?

Enhances responsiveness to outside influences

As divisions focus on their regions or product lines, they can react to outside influences quickly if they negatively impact their operations. For example, managers may rapidly respond to changes within a trade union or the economy. This responsiveness can make it easier to solve problems and allow the division to benefit from changing circumstances.

Divisional structure cons

Every organizational structure has its drawbacks, including divisional. Learning about the possible pitfalls of this type of corporate structure may help you make a wise and informed decision about whether the divisional organizational style suits your goals. Here are the main cons:

Costs can be high

The divisional model often requires more employees, heavily increasing the overall expenses. If a business has a functional structure instead of a divisional one, costs may be lower. Another potential issue is that a corporate organization is generally necessary when there are divisions to help oversee all operations. The cost of running that element of a company adds to the total expenses.

Competition within a company

When divisions cannot work together effectively, competition may occur because team members may want their divisions to be the most successful and not help others. As a result, rivalries may appear, making it harder for the company to achieve its goals.

Related: Achieving Team Cohesion in the Workplace (With Strategies)

Small organizations may not benefit

Smaller organizations aren't always able to adopt the divisional organizational structure. For example, a small company that creates goods and services and operates in various geographical locations may not have enough capital to run multiple divisions with employees at various levels in each. Companies may choose to spend more time developing their operations before becoming divisional, which can help them avoid extra expenses.

Economies of scale

With divisional structures, companies may have trouble enjoying the benefits of economies of scale, which is a proportionate saving in costs achieved by a higher production level. The benefits of economies of scale can include higher wages, greater returns to investors, the capacity to scale a company in new regions, product improvements, and attracting new investors.

The primary issue is that divisions are creating their own products or services and may not all use the same processes to create their products or offer their services. If they don't use the same methods, making specific products or delivering particular services may cost much more. Companies that aren't divided into divisions may find it easier to produce items and services cheaply because manufactured products are for one set of consumers instead of different product lines and locations.

Related: What Are Economies of Scope? (And How to Achieve Them)

Inefficiencies may occur

Because divisions can experience inefficiencies in quality and productivity, the functional areas may be less efficient than those under central leadership. While it's possible to run a divisional company efficiently, this may present more challenges. Conversely, under central leadership, it may be simpler to track what various departments in a company are doing and make adjustments if inefficiencies occur. Examples of inefficiencies include poor systems and processes, redundancy, and subpar strategic focus.

Inefficiencies can cost a company money, so minimizing them is a goal set by most business leaders. With central leadership, it can be easier to ensure that processes are as efficient as possible. When a structure is divisional, company leaders might approach each division separately to tailor suggested improvements to their specific business activities.

Trouble transferring skills

Companies may have trouble transferring skills between divisions if the teams develop a silo mentality. Silos are divisions that operate independently and rarely share information. Companies may also experience difficulties in ensuring that members follow organizational guidelines correctly because of other challenges, such as issues of cross-selling goods and services between divisions.

While company leaders can try to ensure that they're knowledgeable about what's happening in each silo within a division, that level of awareness may require more time, money, and energy. Company heads may invest more effort into ensuring that skilled employees can move from division to division and may choose to spend time making sure that all members of divisions are doing things according to established best practices.

Company structure alternatives

Here are some other forms of company structures:

Team-based organizational structure

This company structure groups staff members by teams. This is an innovative hierarchy instead of a traditional structure, and its primary benefit is that it can make it simpler for a company's members to cooperate and solve problems. A potential issue is that this model can make it harder for employees to get promotions, as teams may have limited roles.

Related: Team-Based Organizational Structure (With Advantages)

Network organizational structure

Modern businesses may have several elements, including multiple locations, vendors, freelancers, and subcontractors. A network structure can help these types of companies foster better communication. One of the primary benefits is that a network structure can help leaders visualize complicated corporate relationships, improving business agility. One of the potential issues of this structure is that employees may not be sure who's responsible for making certain decisions.

Related: What Is a Network Organizational Structure? (With Benefits)

Explore more articles