A business’ structure creates order by organizing people into hierarchies, establishing a chain of command and communication and formalizing how employees and departments interact. A new business doesn’t need much structure -- after all, it may only be a one-person enterprise. But growth requires organization so personnel can be best deployed. Businesses traditionally have organized according to general job functions, resulting in departments such as personnel or accounting. Continued growth often requires reorganization. Creating multiple divisions can bring order to an increasingly complex company.

Division Into Strategic Business Units

In a multidivisional organization, management establishes broad divisions before further subdividing employees, often by function. The broad divisions might be formed around geography, product line, type of customer or some combination of these. Establishing divisions geared toward some specificity allows those within a division to concentrate their efforts as one coordinated unit. Indeed, divisions are often called strategic business units, or SBUs. These SBUs are set up as if they were autonomous businesses in their own right.


SBUs are often set up according to the traditional structure that groups people into functional departments. However, if an SBU finds it advantageous to structure itself differently, it has the flexibility to use whatever organizational scheme will best accomplish the division’s goals. Some departments are retained by the central headquarters for the sake of efficiency. For instance, a company might find it advantageous to house human resources at headquarters so all training can be centrally controlled.


Grouping personnel into divisions gives employees a unity of purpose. Common divisional goals increase coordination among workers, who can share information, personnel and resources. These advantages tend to increase product adaptation to the market, along with responsiveness to customers or the demands of a geographical location. When something goes wrong, the causes and responsibility are easier to pinpoint than would be the case if contributing personnel were spread throughout a company. If a division performs poorly, it can be sold off without too much complication. Finally, a company’s next generation of leaders can be trained in executive thinking by managing SBUs.


The traditional functional organizational structure has several advantages having to do with economies of scale, including encouraging expertise through specialization and thereby increasing efficiency. Consolidating resources also provides savings through economies of scale. By contrast, the multidivisional structure duplicates resources and personnel across different divisions. The duplication means less efficiency and savings. Segregating divisions can give rise to interdivisional rivalry. Divisions may find it difficult to communicate, coordinate and cooperate with one another.


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