Table of Contents
- Why is a multidivisional structure important?
- How does a multidivisional structure work
- What are the advantages of a multidivisional structure?
- What are the disadvantages of a multidivisional structure?
- What to read next
What’s it: A multidivisional structure (M-form) is an organizational structure with a complex design and multiple divisions or strategic business units, each managing the business independently. This structure allows the company to grow through diversification. At the same time, it reduces coordination and control problems because the divisions operate independently. They have a complete structure and are separate from the headquarters. Headquarters gives them autonomy and, at the same time, targets as guidance and control over their performance.
The Walt Disney Company is a good example of a multidivisional structure. The company operates several business segments such as television, broadcasting, theme park resorts, streaming media, consumer products, publishing, and international operations. In addition, each segment operates several subsidiaries.
Why is a multidivisional structure important?
As explained, the multidivisional structure is important because it allows companies to grow through diversification. Diversification allows them to achieve greater profitability. At the same time, they can also minimize the risk due to being concentrated in one business. So, when one business loses, they expect to profit from another business. And overall, their profitability did not fall deep.
But, if those businesses are operated through a single entity, operations and organization are more complex. Workload increases. And management may focus less on making decisions and developing strategies for different businesses, each of which requires a different approach.
And, designing the organization to be a multidivisional structure helps companies overcome these problems. The company gives autonomy to each unit to pursue the strategy and operate their business. Thus, they can focus on their respective markets and adapt to different business environments. Finally, they can achieve their respective advantages.
How does a multidivisional structure work
Continuing to grow is among the company’s goals. By expanding, they can make more money. They expand their business into new markets and industries to earn more revenue. In addition, when their size becomes large, they can achieve higher economies of scale, allowing costs to come down.
Making more profit is ideal. However, some businesses may fail before getting bigger profits. Complexity in organizations has resulted in some companies failing. As businesses and organizations become too large, they become difficult to control due to inefficient structures.
And, the multidivisional structure is an option to get more benefits with diversification. Broadly speaking, it involves the following points:
- Business units operate independently
- Each business unit has its own business function
- Headquarter provides autonomy and guides and controls through set targets
The multidivisional organization has a holding company and several subsidiaries. The holding company acts as the headquarter, usually small in size. Meanwhile, subsidiary companies operate business divisions or strategic units.
Business units operate in specific industries and are independent of each other. However, each has complete business functions: marketing, operations, human resources, and finance.
How the organization is structured in each can vary depending on the appropriate business model in each industry. For example, a particular unit may contain several functions to manage activities along the value chain, such as adding information technology and procurement functions.
Operations in the company
Business units pursue their own strategy and competitive advantage. Thus, they perform all the value creation functions necessary to deliver excellence.
The responsibility for day-to-day operations falls under the business unit manager. They plan, execute, monitor, and evaluate their unit’s strategy and performance. In addition, they also report to the headquarter.
Meanwhile, the corporate headquarters guide and control each unit by setting targets. Managers at headquarter receive reports from business unit managers on their performance and achievements so far.
Company headquarters employees, which include top executives and their support staff, focus more on strategic aspects than on the day-to-day operations of the business units. For example, they focus on financial controls for individual units. They developed a strategic system for lowering the overall cost structure across the organization, including finding ways to save costs in raising funds and controlling transfers between divisions.
Managers at headquarters are also responsible for developing and overseeing long-term growth strategies for the entire organization. They may also provide guidance for enhancing the value created by inter-unit projects.
What are the advantages of a multidivisional structure?
This structure allows companies to more effectively manage large organizations. As a result, they can manage businesses better. When the organization gets bigger, it doesn’t matter. In the end, they can continue to grow and target new markets to achieve higher profits.
When entering and competing in a new industry, coordination and control become difficult to control under one management. On the contrary, it could be done better through this structure because the management in the business unit is separate from those in the headquarter. Finally, each business unit can pursue its own growth and competitive strategy. Thus, each can pursue more markets to enter.
And, corporate headquarters acts to oversee decisions in each of the units. For example, they may provide advisory and auditing functions to control sub-units.
Other advantages of a multidivisional structure are:
Autonomy. The headquarter gives autonomy to business units to operate independently. Each can make decisions freely without being controlled by the headquarter.
Distributed roles. The corporate headquarters performs control and planning functions and allocates resources to business units. Meanwhile, business units focus on operations in their respective work areas.
More accountability. Autonomy encourages more accountability among business unit managers. Headquarters gives them the authority to regulate and manage operations, pushing them to be more accountable. And, periodically, they finally report their results to the headquarter.
More responsive. Business units are more responsive to changes in their market. They are closer to the opportunities and threats in their business environment than the headquarters. So, they can make decisions and develop strategies more quickly and precisely.
What are the disadvantages of a multidivisional structure?
Although it allows the company to achieve a competitive advantage and be more responsive to the business environment in each unit, the multidivisional structure also contains several drawbacks.
First, the company has duplicated business functions. Each unit operates separately and has its own business function. For example, each has a marketing function. Thus, to fill positions in the marketing department, companies must recruit more people.
In addition, duplication also reduces the benefits of economies of scale. Take the procurement function as an example. Each unit buys office equipment separately. Though, the items are likely the same. If purchasing is organized centrally, companies can save costs by obtaining discounts from suppliers for large-scale purchases. Long story short, the company gains purchasing economies of scale. However, since it is performed by individual units, such benefits are likely non-existent.
Second, one business unit can cannibalize other business units. For example, they may take on overlapping or substitute markets. Thus, when one unit is successful, the other unit fails. How significant the impact is on overall profits depends on how much profit is achieved by successful business units and losses in failed units. And the losses may outweigh the profits.
Third, the problem in decision-making is another disadvantage. Business unit managers have an interest in their operation area. So, they don’t think about other business units. Meanwhile, managers at the headquarter make decisions by considering all business units. And, there are times when each makes conflicting decisions.
For example, a business unit manager might decide to distribute bonuses to employees and management. This is because they appreciate their hard work in supporting growth and performance.
On the other hand, the headquarter tries to take efficiency measures by reducing costs. When agreeing with the decision of the business unit manager, it means an increase in costs. But, if disagreeing with it, the business unit manager may be upset and feel unappreciated for their efforts to grow the business.
Fourth, communication may be less effective. For example, organizational structure leads to a long chain of command. The company has a high hierarchical structure because it has many business units. Finally, it raises communication problems. Messages have to go through many layers, leading to ineffective communication and slow decision-making.
What to read next
- Organizational Structure: Why It Matters and What are the types
- Tall Organizational Structure: Characteristics, Advantages, Disadvantages
- Flat Organizational Structure: Characteristics, Advantages, Disadvantages
- Organizational Structure By Hierarchy: Advantages, Disadvantages
- Organizational Structure by Function: Advantages and Disadvantages
- Organizational Structure By Product: Advantages and Disadvantages
- Organizational Structure by Region: Advantages and Disadvantages
- Organizational Structure by Customers: How It Works, Advantages, Disadvantages
- Matrix Structure: How It Works, Advantages, Disadvantages
- Horizontal Organizational Structure: Characteristics, Advantages, Disadvantages
- Vertical Organizational Structure: Characteristics, Advantages, Disadvantages
- Shamrock Organization: How it Works, Advantages and Disadvantages
- Project-Based Organizational Structure: Strengths and Weaknesses
- Centralized Organizational Structure: Advantages, Disadvantages
- Decentralized Organizational Structure: Advantages, Disadvantages
- Formal Organizational Structure: Characteristics, Advantages, Disadvantages
- Informal Organizational Structure: Characteristics, Advantages, Disadvantages
- Multidivisional Structure: Importance, How it Works, Pros, Cons