What’s it: An organizational structure by region is an organizational structure in which a company arranges its organization by geographic area or region. Several companies adopted this structure. International companies are one of them, where they operate in several countries through their units.
This structure allows the company to be more adaptive to the local environment in each region. So, they can make quick decisions and develop appropriate strategies.
However, the potential for duplicated jobs, resources, and functions is a weakness of this structure. In addition, some economies of scale may be lost when companies adopt it.
How does an organizational structure by region work?
Under this structure, the company divides its operations by region or geographic area. It allows companies to have reporting systems and functionalities in multiple locations. And they operate independent units in separate locations. They adapt operations and strategies to their respective local environments, including how to respond to market demands in each operation area.
In certain cases, each unit may report to an executive. In this context, the executive oversees several units. In other cases, the unit reports directly to top management who works at the business headquarters. Which approach to take from the two alternatives depends on several factors, including the size and nature of the company’s business.
Where does this structure fit?
As defined above, this structure is common to companies with operations in multiple regions or geographic areas. And they have offices or units in several locations.
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This structure is usually best when the company is near a customer or source of supply. The organization is directed towards decentralized decisions with more autonomy to units in each region. It allows for quick and precise decision-making. In addition, companies can develop appropriate strategies relevant to their local context or environment.
What companies usually adopt this structure?
Organizational structures by region are common for large companies. But, it may also be suitable for medium-sized businesses. Multinational companies, for example, adopt this structure because they operate in several countries.
This structure may also be an option for other smaller companies with operating areas in several locations. Examples are retail chains, hospitality, and fast food chains. They serve customers and have offices or units in different regions or geographic areas.
McDonald’s fast food outlet is a good example. The company expands in several countries and adapts its competitive strategy according to the context of its respective local markets, including the food menu offered. For example, in a Muslim country like Indonesia, they offer halal-certified food. In other cases, the company also serves rice – because Indonesians prefer rice to bread – and some spicy food favored by the locals.
In general, if a company’s operations span multiple geographic areas and need to localize its strategy, an organizational structure by region is the right choice. This is because each region has different tastes or responds uniquely to the marketing mix. Thus, by dividing operations into several independent units, companies can be more flexible in offering products and developing marketing strategies. In addition, they can better adapt to the local environment, enabling them to be more relevant to the target market and make more informed decisions. Finally, they can be more successful.
In addition, companies may adopt this structure, not because of the demand factor. But, that’s for reasons of cost, availability of supply sources, law, or distribution strategy. For example, Coca-Cola operates in several countries but offers standardized products by global branding and quality. The company divides its operations into several groups: Europe, the Middle East, and Africa Group; Latin America Group; and the Asia Pacific Group.
What are the advantages of an organizational structure by region?
Being more adaptive and flexible in responding to the local environment is the main advantage of an organizational structure by region. Companies provide more autonomy and decentralization in decision-making. Thus, each unit can adjust its strategy and operations according to the local market’s needs in its operation area. They can also react quickly to external factors in their local area.
Other advantages of the organizational structure by region are:
Serve better. Companies are able to adapt their approach to their local market. Thus, strategies and decisions are more relevant to the environment in each unit area. In addition, the company adapts to the culture, rules, language, and preferences of customers in the local market. Finally, it allows companies to better serve local needs.
Better communication. For example, companies adopt a different language or culture for their marketing activities. Thus, the marketing message conveyed is more acceptable to local consumers, enabling a successful marketing strategy.
More effective management. For example, companies can easily identify failing units and close operations or provide subsidies. This is similar to managing a product portfolio. Using analytical tools such as the BCG Matrix, management at the headquarters maps out which units can generate cash, which need to be subsidized or given additional investment, and which need to be divested.
Strong collaborative team. The teams in each unit focus on their local area. They may have the same cultural background because they were recruited from the local workforce. Finally, they can work together better without being constrained by problems such as language and cultural barriers.
Knowledge transfer. The geographic structure allows management at the headquarters to transfer local market knowledge for adoption in other units, if necessary.
Efficiency. Companies can save costs by operating near input sources. For example, a manufacturer has units in an area where raw materials can be obtained cheaper. And for manufacturing, the company operates other units where wages are cheap as in developing countries. And for marketing and research and development, the company is located in developed countries, where human resources and other supporting factors are abundant.
What are the weaknesses of the organizational structure by region?
Duplicated business functions, efforts, and resources are a weakness of the organizational structure by region. Each unit operates independently and has full business functions, from procurement and production to marketing. So, for example, they need to recruit and fill marketing positions for each unit. Likewise, they must develop a different marketing strategy for each unit.
Other disadvantages of the organizational structure by region are:
High cost. Duplicated resources and functions lead to high costs. For example, the company must hire and pay different marketing staff for each unit. However, it is different if the company operates the business under one organization as it only requires the same staff to handle multiple units.
Cannibalization. Units may start to compete with each other when they expand outside their local market, for example, through exports. An increase in sales in one unit can reduce sales by other units because they market the product in the same market.
Low economies of scale. For example, suppose a company adapts to local tastes by offering products unique to each region. In that case, economies of scale may be low. On the other hand, if the company offers a standard product, such as Coca-Cola, the economies of scale can be higher because it markets the same product for all units.
Management conflict. Headquarters management uniquely may have to conflict when making decisions. Because each unit has a great deal of autonomy, unit management tends to make decisions for the benefit of their local operations rather than for the organization as a whole (with other units in mind).
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