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CHAPTER 7 • IMPLEMENTING STRATEGIES: MANAGEMENT AND OPERATIONS ISSUES 223

TABLE 7-7 Advantages and Disadvantages of a Functional
Organizational Structure
Advantages Disadvantages
1. Simple and inexpensive 1. Accountability forced to the top
2. Capitalizes on specialization of business 2. Delegation of authority and responsibility
activities such as marketing and finance not encouraged
3. Minimizes need for elaborate control 3. Minimizes career development
system
4. Low employee/manager morale
4. Allows for rapid decision making
5. Inadequate planning for products and markets
6. Leads to short-term, narrow thinking
7. Leads to communication problems

becomes necessary to motivate employees, control operations, and compete successfully
in diverse locations. The divisional structure can be organized in one of four ways: by
geographic area, by product or service, by customer, or by process. With a divisional
structure, functional activities are performed both centrally and in each separate
division.
Cisco Systems recently discarded its divisional structure by customer and
reorganized into a functional structure. CEO John Chambers replaced the three-
customer structure based on big businesses, small businesses, and telecoms, and now
the company has centralized its engineering and marketing units so that they focus on
technologies such as wireless networks. Chambers says the goal was to eliminate dupli-
cation, but the change should not be viewed as a shift in strategy. Chambers’s span of
control in the new structure is reduced from 15 to 12 managers reporting directly to
him. He continues to operate Cisco without a chief operating officer or a number-two
executive.
Sun Microsystems recently reduced the number of its business units from seven to
four. Kodak recently reduced its number of business units from seven by-customer divi-
sions to five by-product divisions. As consumption patterns become increasingly similar
worldwide, a by-product structure is becoming more effective than a by-customer or a
by-geographic type divisional structure. In the restructuring, Kodak eliminated its global
operations division and distributed those responsibilities across the new by-product
divisions.
A divisional structure has some clear advantages. First and perhaps foremost,
accountability is clear. That is, divisional managers can be held responsible for sales and
profit levels. Because a divisional structure is based on extensive delegation of authority,
managers and employees can easily see the results of their good or bad performances. As
a result, employee morale is generally higher in a divisional structure than it is in a
centralized structure. Other advantages of the divisional design are that it creates career
development opportunities for managers, allows local control of situations, leads to a
competitive climate within an organization, and allows new businesses and products to be
added easily.
The divisional design is not without some limitations, however. Perhaps the most
important limitation is that a divisional structure is costly, for a number of reasons. First,
each division requires functional specialists who must be paid. Second, there exists some
duplication of staff services, facilities, and personnel; for instance, functional specialists
are also needed centrally (at headquarters) to coordinate divisional activities. Third,
managers must be well qualified because the divisional design forces delegation of
authority; better-qualified individuals require higher salaries. A divisional structure can
also be costly because it requires an elaborate, headquarters-driven control system.
Fourth, competition between divisions may become so intense that it is dysfunctional
and leads to limited sharing of ideas and resources for the common good of the firm.
Table 7-8 summarizes the advantages and disadvantages of divisional organizational
structure.