What’s it: An organizational structure by product is a structure in which companies organize based on what they sell. Each product will be under a different division. They operate independently and have complete individual business functions such as production, marketing, finance, and human resources.
This structure allows the company to achieve a competitive advantage in the respective product markets. In addition, each division has the autonomy to allocate resources and define appropriate strategies according to their specific market conditions. And this autonomy also allows them to quickly respond to changes in their market and adapt strategies.
However, this structure has a major drawback: duplicated work and business functions. And hence, it consumes more resources and costs. Also, at times, success in one product line cannibalizes another.
Which companies generally adopt an organizational structure by product?
This structure is common for companies with product portfolios such as conglomerates. Their business is diversified into several product lines, each targeting a different market. And each line operates independently through a division or business unit. Furthermore, each division allocates and prioritizes resources according to each strategy.
By managing product lines separately, each division can pursue specific competitive advantage strategies tailored to their respective markets. This arrangement is crucial because each line requires more specialized knowledge. Thus, companies are more likely to succeed by adapting the strategy to suit each market.
Then, when the business environment changes, each division can quickly take action. Finally, they can adapt to the business environment more effectively than centralized management.
How does an organizational structure by product work?
Having various products and each producing on a large scale often requires a specific approach to success. Each has different threats and market opportunities, thus requiring different competitive strategies. Conversely, management may find it difficult to determine priorities if managed under a single organization.
And structuring the organization by product is an option. So how does the company do it? Let’s take a car company as an example.
Say the company has three product lines:
- Passenger car
- Commercial car
- Electric car
Instead of producing all three lines in one organization, the company organizes it by dividing the organization into three divisions. Each section deals only with one product line. And each operates independently and has individual business functions.
Take passenger cars as an example. This division has business functions such as operations, marketing, human resources, and finance. In other words, they operate and are responsible for everything needed to be successful, including buying raw materials, manufacturing, hiring employees, selling products, and making a profit. The same also applies to the other two lines of business.
What are the advantages of an organizational structure by product?
Product-based organizational structures are ideal for companies with many products. It allows them to focus and compete effectively. Finally, they achieve a competitive advantage in their respective product lines. And they can grow and make more money.
In addition, other advantages of the organizational structure by product are:
Diversification. Companies can make a profit from different product lines. And, when one line suffers a loss, they can expect profit from the other line. Finally, in total, their profits did not fall.
Specialization. Each division focuses on its specific line, enabling more effective management than managing multiple product lines under one management. Likewise, employee-specific skills can be assigned to each line. It allows employees to learn new skills and gain expertise in specialized areas.
Knowledge transfer. This structure allows the organization to expand its knowledge or expertise. Although each division focuses on one product line, they can transfer best practices. Ultimately, it underpins the company’s overall success.
Flexible. The company gives autonomy to each division to manage operations and develop the strategy. Thus, they respond to market changes more flexibly and quickly. In addition, it shortens the development cycle, allowing companies to bring products to market faster to beat the competition.
Positive competition. Each division will pursue high profits to contribute more to the company. It ended up encouraging positive competition between them.
What are the disadvantages of an organizational structure by product?
Duplicated resources and functions are the main disadvantages of this structure. For example, the company must recruit a different marketing team for each division. Likewise, the procurement of raw materials, production, and finance must be done separately.
Other disadvantages of the organizational structure by product are:
High cost. Duplication leads to greater costs. In some cases, it is more efficient to unify certain business functions, enabling the company to achieve higher economies of scale.
Take buying office equipment as an example. Each division buys separately, and they may not get discounts from suppliers. But, conversely, when done centrally, companies can achieve purchasing economies of scale by getting more discounts.
Cannibalization. Success on one line may cannibalize the other. For example, in the car manufacturer example above, when the electric car division is successful, it may threaten the passenger car division because both target the same market. When more electric cars are sold, fewer passenger cars are sold as customers switch to electric cars.
Losing control. The central company gives broad autonomy to divisions, which may eventually lose control. And, each division pursues its own goals rather than the company’s goals as a whole.
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- Organizational Structure By Product: Advantages and Disadvantages
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- 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