Call Now

Get The App


Meaning of organizational structure

Organizational Structure refers to shape, size and flow of management information system. Structure largely dictates how operational objectives and policies will be established to achieve the strategic objectives. Shape and size of organizational decides the structure of the organization. Small firm–simple or functional structure (CENTRALISED CONTROL), Medium size firm –divisional structure (DECENTRALISED CONTROL), large firm – either matrix or SBU (DECENTRALISED CONTROL)

In reality company introduces strategy and grows but because of poor organizational structure   performance goes down. Seeing this condition organization immediately changes structure so it is structure which follows the strategy.

According to Chandler, changes in strategy lead to changes in organizational structure. There is no one optimal organizational design or structure for a given strategy. What is appropriate for one organization may not be appropriate for a similar firm.

Chandler’s Model of Strategy-Structure Relationship

  • New strategy formed
  • Administration problem
  • Performance will go down
  • Performance will go up
  • New organizational structure is established


Figure 7.1:  Chandler’s Model of Strategy-Structure Relationship

Types of organizational structure

  1. Simple Structure
  2. Functional Structure
  3. Divisional Structure
  4. Multi-Divisional Structure
  5. Strategic Business Unit (SBU) Structure
  6. Matrix Structure
  7. Hourglass Structure
  8. Network Structure



simple structure

Simple organizational structure is most appropriate for companies that follow a single- business strategy and offer a line of products in a single geographic market.

A simple structure is an organizational firm in which the owner-manager makes all major decisions directly and monitors all activities, while the company’s staff merely serves as an executor.

There is direct involvement of owner-manager in all phases of day-to-day operations. In this simple structure, communication is frequent and direct, and new products tend to be introduced to the market quickly.

When business grow more then to coordinate more complex organizational functions, companies should abandon the simple structure in favor of the functional structure. The functional structure is used by larger companies and by companies with low levels of diversification.


Functional Structure

 The functional structure consists of a chief executive officer or a managing director andsupportedbycorporatestaffwithfunctionallinemanagersindominantfunctions such as production, financial accounting, marketing, R&D, engineering, and human resources.

Functional structure is widely used in the business world .Functional structure is simple and low cost. A functional structure groups tasks and activities by business function, such as marketing, research and development, production or operations, ma finance, Human resources, logistic, accounting, etc.

Functional structure is inexpensive, and also promotes specialization of labor, encourages efficiency, minimizes the need for an elaborate control system, and allows rapid decision making.

The functional structure enables the company to overcome the growth- related constraints of the simple structure, facilitating communication and coordination.

However, compared to the simple structure, there are some potential problems. Such as there can be problem of communication and coordination. Thus, the chief executive officer must integrate functional decision- making and coordinate actions of the overall business across functions. Functional head often develop a myopic (or narrow) perspective, losing sight of the company’s strategic vision and mission. And when that kind of issue takes place then entry of multidivisional structure comes in.


Divisional Structure

 Divisional structure is ideal when business grows year after year. And start facing faces problem in managing different products and services in different markets. Divisional structure generally becomes necessary to motivate employees, control operations, and compete successfully in diverse locations.

Divisional structure has many advantages such as Accountability, Career development opportunities for managers, Local controls.

Accountability –In divisional structure accountability is clear. Divisional managers can be held responsible for sales, profit and performance. There is authority and delegation in divisional structure. Because of delegation employee can see his or her performance. As a result, employee morale goes up.

Career development opportunities for managers-Divisional structure creates career development opportunities for managers,

Local controls-Divisional structure allows local control. This leads to a competitive climate within an organization, and allows new businesses and products to be added easily.


  1. Costly
  2. Duplication of staff services, facilities and personnel.
  3. Highly qualified staff needed
  4. Head quarter driven control system
  5. Special treatment to performing location

Divisional structure can be crested on different logical base

  1. Based on Geography –Example CA institute
  2. Based on Product- General Motors, DuPont, and Procter & Gamble
  3. Based on Customers –Publishers, Airlines, Banks
  4. Based on Process – Pharmacy Company

However, a key difference between these two designs is that functional departments are not accountable for profits or revenues, whereas divisional process departments are accountable for profits.



Multi-Divisional Structure

Multidivisional or M-form structure was developed in the 1920s, in response to coordination- and control-related problems in large firms.

Multi-Divisional structure is also known as M-form structure.

Multidivisional structure constitutes

  1. Corporate head quarter with CEO and other top functional head 
  2. A small corporate office that would determine the long-term strategic direction of the firm and exercise overall financial control over the semi-autonomous divisions.
  3. Creating separate divisions, each representing a distinct business
  4. Each division would house its functional hierarchy;
  5. Division managers would be given responsibility for managing day-to-day operations;

This would enable the firm to monitor more accurately the performance of individual businesses, simplifying control problems, facilitate comparisons between divisions, improving the allocation of resources and stimulate managers of poorly performing divisions to seek ways to improve performance.

However, because financial controls are focused on financial outcomes, they require that each division’s performance be largely independent of the performance of other divisions. So, the Strategic Business Units come into picture.


Strategic Business Unit (SBU) Structure

A strategic business unit (SBU) structure consists of at least three levels,

  1. A Corporate headquarters at the top,
  2. SBU groups at the second level,
  3. Divisions grouped on some related base

SBU is a single or grouping of related businesses, which are strategic from point of view of growth of the organization. SBU concept is relevant to multi-product, multi-business enterprises. In SBU, a multi-business organization groups its different businesses into a few distinct business units in a scientific way. SBU is created for composite planning treatment. The purpose is to provide effective strategic planning treatment to each one of its products or businesses.

Case studies: Sony changed into SBU structure with its ten internal companies in to four strategic business units. Sony wanted to make better use of software products and content. Sony wanted to make Sony’s music, films and games in its televisions and audio gear to increase Sony’s profitability.

With SBU strategy, Sony is one of the few companies that have integrated software and content across a broad range of consumer electronics products.


Characteristics of SBU Structure

Three most important characteristics of a SBU are:


  1. Planning independent
  2. Competitors separate
  3. Manager responsible to profit
  1. Planning Independent-It is a single business or a collection of related businesses which offer scope for independent planning and which might feasibly standalone from the rest of the organization.
  2. Competitors separate-It has its own set of competitors.
  3. Manager responsible to profit-Each SBU have its own CEO. CEO has responsibility for strategic planning and profit performance. CEO has control of profit-influencing factors.

The attributes of an SBU and the benefits a firm may derive by using the SBU Structure are as follows:


•             Scientific method of grouping

•             Similar or different markets

•             Creating right setting

•             Improvement over the territorial grouping of businesses

•             Enabling organizational to analyze the task

•             Non related products or businesses are separated

•             Can be built on similar technologies

•             Competence and Competitive advantages

•             Enable grouping of related businesses

•             Planning separate

•             Competitors separate   

•             Manager or CEO separate

1.            Scientific method of grouping-SBU structure is a Scientific method of grouping the businesses of a multi-business corporation which helps the firm in strategic planning.

2.            Similar or different markets-SBU structure can be used in Similar or different markets. Even if technology or products differ, it may be that the customers are similar. For example, frozen food (kwality wall ice cream), washing powders (surf) and margarine (Blue band) production may be very different; but all are sold through retail operations, and Unilever operates in this entire product.

3.            Creating right setting-SBU structure help company in creating right setting for correct strategic planning and correct relative priorities for resources to the various businesses.

4.            Improvement over the territorial grouping of businesses-SBU structure is an improvement over the territorial grouping of businesses and strategic planning based on territorial units.

5.            Enabling organizational to analyze the task-SBU structure helps company in enabling organizational to analyze the task. Enable organization to segregate the assortment of businesses or portfolios and regrouping them into a few, well defined, distinct, scientifically demarcated business unit.

6.            Non-related products or businesses are separated- In SBU structure each product are separated. Not related products are grouped differently so that proper allocation of resources can be possible.  

7.            Can be built on similar technologies-SBU Can be built on similar technologies or all provide similar sorts of products or services.

8.            Competence and Competitive advantages-SBU Structure help company to develop core competencies and competitive advantages. Unilever has core competency in marketing skills.

9.            Enable grouping of related businesses-SBU structure helps enable grouping of related businesses that can be taken up for strategic planning different from the rest of the businesses. Products or businesses within an SBU receive same strategic planning treatment and priorities.

10.         Planning separate-Each SBU have separate strategic planning. Each SBU is distinct from another. Each SBU have different vision, mission, objectives and goals.

11.         Competitors separate- Each SBU will have its own distinct set of competitors and its own distinct strategy.

12.         Manager or CEO separate-Each SBU will have a separate manager or CEO. He will be responsible for strategic planning for the SBU and its profit performance.

Explore All Chapters