Business Studies Part I
Business Studies Part II

Organsation Structure: Types

The type of structure adopted by an organisation will vary with the nature and types of activities performed by an organsation. The organisational structure can be classified under two categories which are as follows:

(i)       Functional structure and

(ii)     Divisional structure

Grouping of jobs of similar nature under functional and organising these major functions as separate departments creates a functional structure. All departments report to a coordinating head. For example, in a manufacturing concern division of work into key functions will include production, purchase, marketing, accounts and personnel. These departments may be further divided into sections. Thus, a functional structure is an organisational design that groups similar or related jobs together.

Advantages: The functional structure has many advantages to offer. Important among them are as follows:

(a)     A functional structure leads to occupational specialisation since emphasis is placed on specific functions. This promotes efficiency in utilisation of manpower as employees perform similar tasks within a department and are able to improve performance.

(b)    It promotes control and coordination within a department because of similarity in the tasks being performed.

(c)     It helps in increasing managerial and operational efficiency  and this results in increased profit.

(d)    It leads to minimal duplication of effort which results in economies of scale and this lowers cost.

(e)     It makes training of  employees easier as the focus is only on a limited range of  skills.

(f)      It ensures that different functions get due attention.

Disadvantages: The functional structure has certain disadvantages which an organisation must take into consideration before it adopts it. Some of them are as follows:

(a)     A functional structure places less emphasis on overall enterprise objectives than the objectives pursued by a functional head. Such practices may lead to functional empires wherein the importance of a particular function may be overemphasised. Pursuing departmental interests at the cost of organisational interests can also hinder the interaction between two or more departments.

(b)    It may lead to problems in coordination as information has to

be exchanged across functionally differentiated departments.

(c)     A conflict of interests may arise when the interests of two or more departments are not compatible. For example, the sales department insisting on a customer friendly design which may cause production difficulties. Such dissension can prove to be harmful in terms of fulfillment of organisational interest. Inter- departmental conflicts can also arise in the absence of  clear separation of responsibility.

(d)    It may lead to inflexibility as people with same skills and knowledge base may develop a narrow perspective and thus, have difficulty in appreciating any other point of view. Functional heads do not get training for top management positions because they are unable to gather experience in diverse areas. Suitability: It is most suitable when the size of the organisation is large, has a diversified activities and operations require a high degree of specialisation.

Divisional Structure

Many large organisations with diversified activities have reorganised themselves away from the simpler and basic functional structure towards a divisional structure which is more suited to their activities. This is particularly true of those enterprises which have more than one category of products to offer. This is because although every organisation performs a set of homogenous functions, as it diversifies into varied product categories, the need for a more evolved structural design is felt to cope with the emerging complexity.

In a divisional structure, the organisation structure comprises of separate business units or divisions. Each unit has a divisional manager responsible for performance and who has authority over the unit. Generally, manpower is grouped on the basis of different products manufactured. Each division is multifunctional because within each division functions like production, marketing, finance, purchase etc, are performed together to achieve a common goal. Each division is self-contained as it develops expertise in all functions related to a product line.

In order words, within each division, the functional structure tends to be adopted. However, functions may vary across divisions in accordance with a particular product line. Further, each division works as a profit center where the divisional head is responsible for the profit or loss of his division. For example, a large company may have divisions like cosmetics, clothing etc. Advantages: The divisional structure offers many benefits. Prominent among these are as follows:

(a)     Product specialisation helps in the development of varied skills in a divisional head and this prepares him for higher positions. This is because he gains experience in all functions related to a particular product.

(b)    Divisional heads are accountable for profits, as revenues and costs related to different departments can be easily identified and assigned to them. This provides a proper basis for performance measurement.

It also helps in fixation of respons- ibility in cases of poor performance of the division and appropriate remedial action can be taken.

(c)     It promotes flexibility and initiative because each division functions as an autonomous unit which leads to faster decision making. 

(d)    It facilitates expansion and growth as new divisions can be added without interrupting the existing operations by merely adding another divisional head and staff for the new product line. 

Disadvantages: The divisional structure has certain disadvantages.

Some of them are as follows:

(a)     Conflict may arise among different divisions with reference to allocation of funds and further a particular division may seek to maximise its profits at the cost of other divisions.

(b)    It may lead to increase in costs since there may be a duplication of activities across products.

Providing each division with separate set of similar functions increases expenditure.

(c)     It provides managers with the authority to supervise all activities related to a particular division. In course of time, such a manager may gain power and in a bid to assert his independence may ignore organisational  interests. Suitability: Divisional structure is suitable for those business enterprises where a large variety of products are manufactured using different productive resources. When an organisation grows and needs to add more employees, create more departments and introduce new levels of management, it will decide to adopt a divisional structure. Table 1 provides a comparison of functional and divisional structure to provide further clarity on the topic.

Thus, it can be said that business operates in a dynamic environment and those enterprises which fail to adapt to change are unable to survive.  Hence, management must continuously review its plans and objectives and accordingly the organisation structure of the enterprise should also be subjected to periodic review to determine if modification is required. An organisation structure, at all times should contribute towards the achievement of the enterprise’s objectives and should provide scope for initiative so that contribution.

Comparative view: Functional and Divisional Structure


Functional Structure

Divisional Structure


Formation is based on functions

Formation is based on product lines and is supported by functions


Functional specialisation.

Product specialisation.


Difficult to fix on a department.

Easy to fix responsibility for performance.

Managerial Development

Difficult, as each functional manager has to report to the top management.

Easier, autonomy as well as the chance to perform multiple functions helps in managerial development.


Functions are not duplicated hence economical

Duplication of resources in various departments, hence costly.


Difficult for a multiproduct company.

Easy, because all functions related to a particular product are integrated in one department.



Functional Structure

Divisional Structure



It is based on functions.

It is based on product lines and is supported by functions.



It is difficult to fix responsibility on a department.

It is easy to fix responsibility for performance.



Functional specialisation

Product specialisation.