THE DIVISIONALIZED FORM

Presented by J. B. Nangpuhan II (MPA Student) for the class (Organizational Design) of Dr. S. K. Kim at Chonnam National University, South Korea. 2010

 

SUMMARY

 

KEY TERMS:

·         division – 분배

·         headquarters – 본사

·         diversification – 다양화

·         standardization of outputs – 출력의 표준화 

INTRODUCTION 

 

Prime Coordinating Mechanism:	Standardization of Outputs
Key Part of Organization:	Middle line
Main Design Parameters:	Market grouping, performance control system, limited vertical decentralization
Situational Factors:	Diversified markets (particularly products or services); old, large; power needs of middle managers; fashionable

Like the Professional Bureaucracy, the Divisionalized Form is not so much an integrated organization as a set of quasi-autonomous entities coupled together by a central administrative structure. Whereas those “loosely coupled” entities in the Professional Bureaucracy are individuals, we can locate it to the units in the middle line of the Divisionalized Form. These units are generally called divisions, and the central administration, headquarters. And here, the flow of power is not bottom-up, but top-down.
This configuration is most widely used in the private sector of the industrialized economy like USA’s Fortune 500. We can also find it in other sectors – multiversity (multiple campus institution), hospital system comprising a number of specialized hospitals, and in a socialist economy.

The difference of this configuration to the other four is that it does not constitute a complete structure from the strategic apex to the operating core, but rather a structure superimposed on others – each division has its own structure. We shall see later that the divisions are drawn toward the Machine Bureaucracy configuration. However, the focus of the Divisionalized Form is on the structural relationship between the headquarters and the divisions; between the strategic apex and the top of the middle line.

 

I.        THE BASIC STRUCTURE

A.      The Design Parameters

The most important feature of the Divisionalized Form is that it relies on the market basis for grouping units at the top of the middle line. Divisions are created according to markets served and are then given control over the operating functions required to serve these markets.

Each division contains its own purchasing, engineering, manufacturing, and marketing activities. This dispersal (and duplication) of the operating functions minimizes the interdependence between divisions, so that each can operate as a quasi-autonomous entity, free of the need to coordinate with the others. Thus, the span of control at the strategic apex can be widened as a result of a large number of divisions.

The divisionalized structures can turn out to be centralized in nature rather than decentralized. The division managers can hold the lion’s share of the power, precluding further vertical decentralization (down the chain of authority) or horizontal decentralization (to staff specialists and operators).

In general, the headquarters allows the divisions close to full autonomy to make their own decisions, and then monitors the results of these decisions. This monitoring is done after the fact, in specific quantitative terms – on the case of the business corporations, by measures of profit, sales growth, and return on investment. So the prime coordinating mechanism in the Divisionalized Form is the standardization of outputs, and a key design parameter is the performance control system. The ideal configuration is: market-based units at the top of the middle line; parallel and vertical decentralization to those units (but not necessarily within them); and reliance on standardization of the outputs of these units through the use of performance control systems to effect headquarters’ control of the divisions. But there are instances where other coordinating mechanisms and design parameters can be used in this configuration.

 

B.      The Structure of the Divisions

The means of control of the divisions by headquarters is through performance controls backed up by management training, indoctrination, and direct supervision. In theory, Divisionalized Form can be superimposed on any of the other configurations. But its best partner is the Machine Bureaucracy within the divisions since they are more on standardization of outputs, the key functioning of the divisionalized structure. Since each division must respond to the control measures of the headquarters, they should first – set consistent goals, and second – those goals must be operational with quantitative measures of performance control. This leads to a centralization of the structure although the division managers are given quasi-autonomous power to do whatever they are authorized to do within their divisions as long as they provide quantifiable outputs.

 

C.      The Powers of the Divisions and the Headquarters

Both communication and decision flows in the Divisionalized Form reflect one central fact: There is a sharp division of labor between the headquarters and the divisions. Communication between the two is circumscribed and largely formal. The divisions are given the power to run their own business. They control the operations and determine the strategies for the markets that fall under their responsibility. What powers then are retained in the headquarters? There are six of them:

1.       The headquarters forms the organization’s overall product-market strategy; by managing the strategic portfolio, establishing, acquiring, selling, and closing down divisions in order to change its mix of products and markets. In fact, this is the main reason for using this configuration.

2.       They allocate the overall financial resources; by drawing excess funds from the divisions that do not need them, by raising additional funds in the capital markets when necessary, and by allocating available funds among the divisions that do need them.

3.       They design the performance control system – their key to control the divisions with the help of the technostructure; by deciding on performance measures and reporting periods, by establishing formats for plans and budgets, and by designing an MIS to feed performance results back to headquarters.

4.       In an instance where failures arise within the division, the headquarters replaces and appoints the managers of the divisions.

5.       Aside from the MIS, the headquarters monitors divisional behavior on a personal basis. In here, there is slight direct supervision, but too much of it defeats the purpose of the divisionalized structure.

6.       The headquarters provides certain support services common to the divisions.

 

In Figure 11-2 on page 225 of our reference book, it shows the Divisionalized Form represented symbolically. In here, headquarters is shown in three parts: a small strategic apex of top managers; a small technostructure to the left, concerned with the design and operation of the performance control system as well as some of the management-development programs; and a slightly larger staff support group to the right. Four divisions are shown below the headquarters, with a bulge put in at the level of division manager to indicate that the middle line is the key part of the organization. All four divisions are represented as Machine Bureaucracies to illustrate our point that divisionalization encourages the divisions to use this configuration.

 

II.      CONDITIONS OF THE DIVISIONALIZED FORM

A.      Market Diversity

One situational factor above all drives the organization to use this configuration is market diversity. The organization faced with a single integrated market simply cannot split itself into autonomous divisions; while the one with distinct markets has an incentive to create a unit to deal with each. This enables the organization to manage its strategic portfolio centrally, while giving each component of that portfolio the undivided attention of one unit.

According to Chandler, structural divisionalization results from strategic diversification. Other researches see it the other way, that divisionalization encourages further diversification. As discussed in Chapter 3, market diversity is composed of three kinds: product and service, client, and region. In theory, all three can lead to divisionalization. The term carbon-copy bureaucracy is used for a hybrid of Divisionalized Form and Machine Bureaucracy – as a result of setting up identical regional divisions and then concentrates certain critical functions at headquarters. Each division is a replica – a carbon copy – of all the others, performing the same activities in the same ways, unique only in its location.

 

B.      Technical System

In one sense, technical system is a factor, specifically its economies of scale. Divisionalization is possible only when the organization’s technical system can be efficiently separated into segments, one for each division. For example, whereas a geographically diversified cement company can duplicate its processing facilities many times across the face of the nation, a likewise diversified aluminum company with the same sales volume may be unable to if it cannot afford more than one smelter.

 

C.      Environment

In respect to the factors of environment, the Divisionalized Form differs fundamentally from the other four configurations. Each of those has its own particular environment, specifically one of the four boxes of the static-dynamic, simple-complex matrix discussed in Chapter 6. In other words, whereas it is primarily the broad environmental dimensions of stability and complexity that position the other configurations, it is another, more restricted environmental dimension – market diversity, in particular, product diversity – that positions the Divisionalized Form.

Nevertheless, the Divisionalized Form does have a preferred environment, which it shares with the Machine Bureaucracy. This configuration works best in environments that are neither very complex nor very dynamic; in fact, the very same environments that favor the Machine Bureaucracy.

When an organization attempts to operate in other kinds of environment – complex or dynamic ones – where the outputs cannot be measured by performance controls, a hybrid structure normally results. One is Machine Bureaucracy where the division relies on rules and regulations. Another is personalized divisionalized form where direct supervision will be done by headquarters managers through personal surveillance. Also, it can result to socialized divisionalized form where the headquarters seeks to control the behavior of the divisions primarily through socialization by appointing trusted managers who have undergone extensive program of indoctrination.

Competition is another variable. However, the need for efficiency drives all organizations to make sure their structures match their situation.

 

D.      Age and Size

As organizations grow large, they become prone to diversify and then to divisionalize. One reason is protection: Large manufacturing firms tend to be organized as Machine Bureaucracies, structures that try to avoid risks. Diversification spreads that risk. Another reason is that, the larger a firm becomes vis-à-vis its competitors, the more it comes to dominate its traditional market. Also, firms grow larger to explore more opportunities elsewhere. Finally, some aggressive general managers push for further diversification and further growth. In fact, many corporations growing so large tend to be called multiple-divisionalized form forming divisions on top of divisions (e.g. regional divisions may be superimposed on product divisions).

Age is also associated with the Divisionalized Form. The reason is that the managers sometimes get bored with the traditional markets and find diversion through diversification. In other cases, due to competition, some management are forced to look for new ones with better potential.

 

E.       Power

Another important situational factor is power. Power can explain federation: Small organizations need to band together to match the power of the bigger ones, and governments or owners use their power to force unwilling partners to federate. This can also be illustrated by aggressive managers who push for divisionalization for them to have more autonomy and more power to control their divisions. This can also happen in the government as it grows larger.

 

III.    STAGES IN THE TRANSITION TO THE DIVISIONALIZED FORM

The stages of transition are best illustrated in Figure 11-3 on page 234. In the figure, it begins with a large corporation that produces all its products through one chain called integrated form – a pure functional structure (either Machine Bureaucracy or Adhocracy). As it begins to market some intermediate products of its production processes, it makes the first shift toward divisionalization, we call it the by-product form. As it moves further by considering by-products more important than end products, it leads to a structure closer to divisionalization, we call it as related-product form. Finally, it goes to the point where the different products have no relationship with each other, takes the corporation to the conglomerate form, we call it a pure divisional form.

 

A.      The Integrated Form

This form is used by the corporation whose production activities form one integrated, unbroken chain. Only the final output is sold to the customers. The tight interdependences of the different activities make it possible for such corporations to use the Divisionalized Form – that is, to grant autonomy to units performing any of the steps in the chain – and so they organize themselves as functional Machine Bureaucracies (or Adhocracies, if they face complex, dynamic environments). It is also called the pure functional form. Large firms using this structure also tend to be vertically integrated and capital-intensive.

 

B.      The By-product Form

As the integrated firm seeks wider markets, it may choose to diversify its end-product line and shift all the way over to the pure divisional structure. It will start by marketing its intermediate products on the open market. This introduces small breaks in its processing chain, which in turn call for a measure of divisionalization in its structure, called the by-product form. Each link in the processing chain can now be given some autonomy in order to market its by-products, although it is understood that most of its outputs will be passed on internally to the next link in the chain. But because the processing chain remains more or less in tact, headquarters retains considerable control over strategy formulation and some aspects of operations as well. Specifically, it relies on action planning to manage the interdependences between the divisions. Figure 11-4 on page 236 shows an illustration of the by-product form.

 

C.      The Related-product Form

The organization then moves to the related-product form when there is continuous diversification of by-product markets, further breaking down their processing chain until what the divisions sell on the open market becomes more important than what they supply to each other. What typically holds the divisions of these firms together is some common thread among their products, sometimes a core skill or technology, sometimes a central market theme. The divisions often sell to many of the same outside customers as well. In effect, the firm retains a semblance of an integrated product-market strategy. An example of this is a firm manufacturing washing machines which may set up a division to produce the motors.

 

D.      The Conglomerate Form

As the related-product structure firm expands into new markets or acquires other firms, with less and less regard for a central strategic theme, the organization moves to the conglomerate form. It adopts a pure divisionalized structure, the one we described earlier in this chapter as the basic structure. Each division serves its own markets, producing product lines unrelated to those of the other divisions. As a result, the headquarters planning and control system becomes simply a vehicle for regulating performance, specifically financial performance.

 

IV.    SOME ISSUES ASSOCIATED WITH THE DIVISIONALIZED FORM

This particular topic enumerates some of the advantages traditionally claimed for the Divisionalized Form. Then followed by assessing the advantages as compared to another alternative – discussing only the administrative and economic consequences of divisionalization. Next will be the social consequences specifically the problems of Divisionalized Form poses for social responsibility and centralization of power in society. All these discussions focus on the conglomerate form in the private sector. Conglomerate because it is the purest form of divisionalization, private sector because it is where this configuration is best suitable. In closing, discussion will be of some issues with a description of the Divisionalized Forms as the most vulnerable of the five configurations, a structure symbolically on the edge of a cliff.

 

A.      The Economic Advantages of Divisionalization

There are four basic advantages over the functional structure with integrated operations:

1.       The Divisionalized Form encourages efficient allocation of capital. Headquarters can choose where to put its money, and so can concentrate on its strongest markets, milking the surpluses of some divisions in favor of others.

2.       By opening up opportunities to run individual businesses, the Divisionalized Form helps to train general managers. This is because there is individual responsibility and autonomy.

3.       The Divisionalized Form spreads its risk across different markets.

4.       And last, perhaps the most important, the Divisionalized Form is strategically responsive. The division can fine-tune their bureaucratic machines while the headquarters concentrates on its strategic portfolio. It can acquire new businesses and divest itself of older, ineffective ones.

 

If one wishes to compare diversified with nondiversified organizations, the functional form is the correct basis of comparison to Divisionalized Form. Strategic diversification, because it leads to structural divisionalization, encourages the efficient allocation of capital within the organization. It trains general managers, reduces risks, and increases strategic responsiveness. In other words, it solves many of the economic problems that arise in the Machine Bureaucracy.

As a result of all these advantages, the independent firm appears to be more strategically responsive than the corporate divisions, although perhaps less motivated to achieve consistently high economic performance. Indeed, many divisionalized corporations depend on these firms for their strategic responsiveness, since they diversify not by innovating themselves but by acquiring the innovative results of independent entrepreneurs.

 

B.      The Contribution of Headquarters

The headquarters function of control is supposed to be performed by the board of directors of the independent firm. In this case, what does a headquarters offer to the division that an independent board of directors does not? One is the management of the individual business. A strong set of forces encourages the headquarters managers to usurp divisional powers, to centralize certain product-market decisions at headquarters and so defeat the purpose of divisionalization. The headquarters may believe they can do better than division managers.

Another function of headquarters (at least in theory) are: establishment of objectives, monitoring of their performance in terms of these objectives (an appropriate use for the MIS), maintenance of limited personal contacts with division managers, approval of major capital expenditures of the divisions. In practice, however, many boards – notably those widely held corporations – do these things ineffectively, leaving management carte blanche to do what it likes. Here, there seem to have a major advantage of the Divisionalized Form. Overall, the pure Divisionalized Form (that is, the conglomerate form) may offer some advantages over a weak system of boards of directors and inefficient capital markets; but most of those advantages would probably disappear if certain problems in capital markets and boards were rectified.

 

C.      The Social Performance of the Performance Control System

The Divisionalized Form requires that headquarters control the divisions primarily by quantitative performance criteria, and that typically means financial ones – profit, sales growth, return on investment, and the like. The problem is that these performance measures become virtual obsessions, driving out goals that cannot be measured – product quality, pride in work, customers well served, an environment protected or beautified. In effect, the economic goals drive out the social ones. Every strategic decision of the large corporation involves social as well as economic consequences; hence, the control system drives it to act at worst socially irresponsibly.

 

D.      The Problems of the Concentration of Power

As discussed earlier, not only do large organizations tend to divisionalize but also that divisionalization encourages organizations to grow large, and larger organizations to grow larger/bigger. From the society’s point of view, there are potential economic costs to bigness, notably the threat to competitive market. In the case of conglomerate diversification, there is the added danger of what is known as “reciprocity” – “I buy from you if you buy from me” deals between corporations.

But the social costs of bigness may be the most serious ones. For one thing, big means bureaucratic. Moreover, there are forces in the Divisionalization Form that drive it to centralize power not only at the divisional level but also at the headquarters level. In the case of the giant corporation, this results in the concentrating of enormous amounts of power in very few hands. The concentration of power within the corporation also leads to conglomeration, divisionalization, and the concentration of power in spheres outside the corporation. Unions federate and governments add agencies to establish counterveiling powers – ones to match those of the corporation.

In general, the pure Divisionalized Form does not work effectively outside the private sector. If the government (unions, multiversities, and other federated institutions) try to use Divisionalized Form, they should forget control beyond the appointment of socialized managers.

 

IN CONCLUSION: A STRUCTURE AT THE EDGE OF A CLIFF

Our discussion has led to a “damn if you do, damned if you don’t” conclusion. The pure (conglomerate) Divisionalized Form emerges as a configuration symbolically perched on the edge of the cliff, at the end of a long path.

We then conclude that the Divisionalized Form has the narrowest range of all the configurations. It has no real environment of its own; at best, it piggybacks on the Machine Bureaucracy in the simple, stable environment, and therefore always feels drawn back to that integrated structural form. The pure Divisionalized Form may prove inherently unstable, in a social context a legitimate tendency but not a legitimate structure. The economic advantages it offers over independent organizations reflect fundamental inefficiencies in capital markets and stockholder control systems that should themselves be corrected. And it creates fundamental social problems.

It is, after all, the interdependencies among its activities that give an organization its justifications, its reason to “organize.” Perhaps the pure Divisionalized Form, with so few of these interdependencies, really is an “ideal type” – one to be approached but never reached.

 

Reference: Mintzberg, H. (1993). Structure in Fives: Designing Effective Organizations. Upper Saddle River, NJ: Prentice-Hall, Inc. 215-252