This MCQ module is based on: Functional vs Divisional Organisation Structure
TOPIC 14 OF 24
Functional vs Divisional Organisation Structure
🎓 Class 12
Social Science
CBSE
Theory
Chapter 5 — Organising
⏱ ~28 min
🌐 Language: [gtranslate]
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5.6 Organisation Structure — The Outcome of Organising
The Wipro restructuring story (Part 1) demonstrated that organising is not a one-time activity. As an enterprise grows in size or complexity, the need for an adequate organisation structure? is felt strongly. Only those enterprises which do not focus on growth can maintain a particular structure for a long period of time. NCERT cautions that such stagnancy may prove to be detrimental — companies which do not change at all will close down or cease to grow.
As an organisation grows, coordination becomes difficult due to the emergence of new functions and increase in structural hierarchies. Thus, for an organisation to function smoothly and face environmental changes, it becomes necessary to pay attention to its structure.
📜 Why Structure Matters
"Organisation structure is an indispensable means; and the wrong structure will seriously impair business performance and even destroy it."
— Peter Drucker (cited in NCERT)
The organisation structure can be defined as the framework within which managerial and operating tasks are performed. It specifies the relationships between people, work and resources. It allows correlation and coordination among human, physical and financial resources, enabling a business enterprise to accomplish desired goals. The organisation structure of a firm is shown in an organisation chart?.
Span of Management
To a large extent, the span of management? gives shape to the organisational structure. Span of management refers to the number of subordinates that can be effectively managed by a superior. This determines the levels of management in the structure. A narrow span produces a tall structure with many levels; a wide span produces a flat structure with fewer levels. A proper organisation structure is essential to ensure smooth flow of communication and better control over operations.
📌 Why Structure Is Vital
An organisation structure provides the framework which enables the enterprise to function as an integrated unit by regulating and coordinating the responsibilities of individuals and departments. It clarifies roles, prevents duplication and facilitates coordination across the levels of management.
Sunita's Travel Agency — A Quick Illustration
Take the NCERT example of Sunita, who opened her own travel agency. Its success depends on a harmonious relationship between customers and employees. To achieve this, Sunita has divided the entire work of the agency into three sub-heads based on functions — Operations, Sales and Administration. Operations include travel counsellor, reservation/ticketing and customer care. Sales includes the Accounts executive. Administration includes Book-keeper, Cashier and utility personnel. This division of work on the basis of functions has produced an organisational structure that specifies the line of authority and responsibility — a textbook functional structure.
5.7 Types of Organisation Structures
The type of structure adopted by an organisation will vary with the nature and types of activities performed. NCERT classifies organisational structures under two categories:
(i) Functional Structure
Activities grouped on the basis of functions like production, marketing, finance, HR, R&D. Best when size is large with diversified activities and operations need a high degree of specialisation.
(ii) Divisional Structure
Activities grouped on the basis of products, projects or regions. Each division is multifunctional and self-contained, with its own functional sub-units. Suited to firms with multiple product lines.
5.8 Functional Structure
The grouping of jobs of similar nature under functional headings, 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 of Functional Structure
- Occupational specialisation — emphasis on specific functions promotes efficiency in manpower utilisation.
- Better control & coordination within a department — similarity in tasks performed.
- Increased managerial & operational efficiency — resulting in increased profit.
- Minimal duplication of effort — leading to economies of scale and lower cost.
- Easier training of employees — focus is on a limited range of skills.
- Due attention to every function — no function gets neglected.
❌ Disadvantages of Functional Structure
- Functional empires — overall enterprise objectives may be sacrificed for departmental interests; one function may be over-emphasised.
- Coordination problems — information has to be exchanged across functionally differentiated departments.
- Conflict of interests — for example, sales insisting on a customer-friendly design may cause difficulties in production. Inter-departmental conflicts can also arise without clear separation of responsibility.
- Inflexibility — people with the same skills/knowledge may develop a narrow perspective and fail to appreciate other points of view.
- Restricted managerial development — functional heads do not get experience in diverse areas, so they are unable to gather experience for top-management positions.
Suitability of Functional Structure
It is most suitable when the organisation is large, has diversified activities, and operations require a high degree of specialisation. NCERT positions it as the natural starting structure for any growing manufacturing or services concern with stable, well-defined functions.
5.9 Divisional Structure
Many large organisations with diversified activities have reorganised themselves away from the simpler functional structure towards a divisional structure? — particularly true of those enterprises which have more than one category of products to offer. Although every organisation performs a set of homogeneous functions, as it diversifies into varied product categories, the need for a more evolved structural design is felt to cope with emerging complexity.
In a divisional structure, the organisation structure comprises 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 — within each division, functions like production, marketing, finance and purchase 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.
Within each division, the functional structure tends to be adopted. However, functions may vary across divisions in accordance with a particular product line. Each division works as a profit centre where the divisional head is responsible for profit or loss of his division. For example, a large company may have divisions such as cosmetics, clothing, etc.
✅ Advantages of Divisional Structure
- Product specialisation — develops varied skills in a divisional head and prepares him for higher positions; he gains experience in all functions related to the product.
- Accountability for profits — revenues and costs related to different departments can easily be identified; provides a proper basis for performance measurement and remedial action.
- Flexibility & initiative — each division functions as an autonomous unit; faster decision making.
- Easy expansion & growth — new divisions can be added without interrupting existing operations, by merely adding another divisional head and staff.
❌ Disadvantages of Divisional Structure
- Conflict among divisions — disputes may arise over allocation of funds; a particular division may seek to maximise its profits at the cost of others.
- Increased costs — duplication of activities across products; providing each division with a separate set of similar functions raises expenditure.
- Ignoring company-wide view — divisional managers, with authority over all activities of a division, may gain power and assert independence, ignoring overall organisational interests.
Suitability of Divisional Structure
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 is well advised to adopt a divisional structure.
5.10 Comparative View — Functional vs Divisional
| Basis | Functional Structure | Divisional Structure |
|---|---|---|
| Formation | Formation is based on functions. | Formation is based on product lines and is supported by functions. |
| Specialisation | Functional specialisation. | Product specialisation. |
| Responsibility | Difficult to fix on a department. | Easy to fix responsibility for performance. |
| Managerial Development | Difficult, as each functional manager has to report to top management. | Easier — autonomy plus chance to perform multiple functions helps managerial development. |
| Cost | Functions are not duplicated, hence economical. | Duplication of resources in various departments, hence costly. |
| Coordination | Difficult for a multi-product company. | Easy — all functions related to a particular product are integrated in one department. |
5.11 Wipro Post-Restructure — Reading the Structure
Recall the opening case of Part 1. Before restructuring, Wipro operated essentially as a single, function-led IT services company. After restructuring, it operated as three product-line subsidiaries — Telecommunications, Engineering and Financial Services — each:
- generating about US$ 300 million in annual earnings;
- self-sufficient with its own accounting books, personnel and administrative functions;
- headed by leaders with a "much higher degree of growth responsibility" (Premji);
- operating after one entire layer of executives was removed (de-layering).
This is a textbook divisional structure. Each subsidiary mirrors what NCERT describes: a profit centre with multifunctional support, divisional accountability, expansion-friendly design, and faster decision-making after de-layering. Customer-orientation — Wipro's overarching planning goal — was the very reason for choosing a divisional design over the older, functional one.
⚖️ Key Insight
The same set of activities (telecom, engineering, finance) could have been arranged as functional sections within one big company. Wipro's leadership chose to arrange them as autonomous product-line divisions. Structure followed strategy: the goal of competing with IBM and Accenture demanded faster decisions, customer focus and expansion capacity — exactly what a divisional design delivers.
5.12 Indicative Comparison — Functional vs Divisional Efficiency
The chart below is an indicative pedagogical sample contrasting how the two structural designs typically score on six standard dimensions used by NCERT (Specialisation, Speed of decisions, Flexibility, Cost-efficiency, Coordination, Managerial development). It is meant for classroom discussion, not as empirical data.
Activity 5.4 — Spot the Structure
Read newspapers regularly and try to identify the structures various business organisations being mentioned in the news have adopted. Have their structures led to improved and desired results in any way?
- Functional examples: Single-product manufacturing firms (e.g. cement, steel) typically organise around production, marketing, finance, HR. Reports of cost discipline and quality consistency suggest functional design at work.
- Divisional examples: Multi-product conglomerates (e.g. Tata, Reliance, ITC) organise around product divisions — autos, telecom, retail, FMCG, hospitality — each with its own P&L head. Faster expansion announcements and divisional results show divisional design at work.
- Result reading: Compare two consecutive annual reports; if one division grew sharply while another stayed flat, divisional structure made differential success visible; in a functional firm, that visibility would be lost in aggregated function-level reports.
Activity 5.5 — Sunita's Travel Agency
Sunita's travel agency is currently functionally organised — Operations, Sales and Administration. She is now planning to expand into three new lines of business: corporate travel, leisure travel and pilgrimage tourism, each with very different customer expectations. Recommend a structural change with reasons.
- Recommend a shift to a divisional structure with three divisions — Corporate, Leisure, Pilgrimage — each running its own Operations, Sales and Administration.
- Reason 1: Product specialisation — corporate travellers want efficiency, leisure customers want experiences, pilgrims want logistics; one functional sales team cannot serve all three equally well.
- Reason 2: Accountability — each division becomes a profit centre, so Sunita can compare performance and reallocate funds.
- Reason 3: Flexibility & growth — adding a fourth division (e.g. medical tourism) later requires only a new divisional head, not a full reorganisation.
- Trade-off: some duplication of functions across divisions will raise costs; Sunita can mitigate this by keeping a small shared corporate centre for finance and HR.
Activity 5.6 — Source: Structural Transformation at ONGC
NCERT presents an ONGC mini-case: until the 1990s, ONGC's system was run by functional heads, often with delays exceeding a year on field decisions. Group loyalties took precedence over task requirements; performance evaluation criteria were "completely at loggerheads with requirements on fields." McKinsey recommended an asset-based approach with clearly-defined responsibilities, leading to a structure of 14 assets and 11 centralised services.
- Old structure: Functional — slow decisions, group loyalties dominating, mismatched performance criteria, "wrangling over responsibilities."
- New structure: Asset-based (a divisional design where each oil/gas asset is a self-contained unit with control over service personnel and procurement powers).
- Why the shift worked: Asset managers became responsible for the performance of their strategic business units and rightly exercised control over all personnel working with them — solving accountability and speed problems at once.
- Lesson: Where responsibilities are shared and ambiguous across functions, divisional/asset-based structures restore accountability and speed.
📝 Competency-Based Questions — Structure & Types
Source-based scenario: XYZ Ltd. is a fast-growing multi-product Indian company with four product lines — cosmetics, garments, footwear and skincare. Until last year it operated as one large functional company with HR, Marketing, R&D, Purchasing, Production and Finance as departments. In its latest annual report it announced a structural change — each product line will now be a separate division with its own profit-and-loss responsibility, headed by a divisional manager who reports to the Managing Director.
Q1. The structural change announced by XYZ Ltd. is best described as a move from:
L3 ApplyAnswer: (b) Functional to divisional structure — The earlier company had a single set of functions; the new company has product-line divisions with separate P&L heads. This is the textbook NCERT shift made by firms with multiple product lines.
Q2. Identify two NCERT-listed advantages and two NCERT-listed disadvantages that XYZ Ltd. is likely to experience after the change.
L4 AnalyseAnswer: Likely advantages: (a) Product specialisation — each divisional head will gain end-to-end exposure to one product line; (b) Accountability for profits — revenues and costs identifiable per division. Likely disadvantages: (a) Duplication of functions — each division now runs its own HR, Marketing, etc., raising costs; (b) Conflict among divisions over allocation of funds and possible neglect of company-wide interests.
Q3. Critically evaluate the statement: "Functional structure is always cheaper, so XYZ should reverse the change." Use NCERT logic.
L5 EvaluateAnswer: The statement is misleading. NCERT's comparative table does say functional structure is more economical (no duplication) — but cost is only one of six dimensions. For a four-product company, NCERT explicitly advises divisional design because: (i) coordination across products is "difficult" in a functional setup; (ii) responsibility is "difficult to fix" functionally; (iii) divisional flexibility and product specialisation outweigh the cost of duplicated functions when product lines are diverse. Reversing the change would re-create exactly the coordination and accountability problems the firm was trying to solve. Hence the statement is invalid for this case.
Q4. (HOT) XYZ Ltd. wants to keep one feature of functional structure even after going divisional. Recommend which one feature to retain at the corporate centre, and justify why.
L6 CreateSample answer: Retain a shared corporate Finance & HR function at headquarters, while each division runs its own Marketing, Production, R&D and Purchasing. Justification: Finance benefits most from "minimal duplication" (the strongest functional advantage) — consolidated treasury reduces interest cost, single audit reduces compliance cost. Group HR ensures uniform values, talent rotation across divisions and managerial development (which divisional silos otherwise hinder). The chosen hybrid combines the cost-efficiency of functional with the accountability and product specialisation of divisional — much like Tata Group operates with a small group HR and finance overlay above its product divisions.
🔗 Assertion–Reason Questions (Class 12 Format)
Options: (A) Both A & R true, R correctly explains A · (B) Both true, R does not explain A · (C) A true, R false · (D) A false, R true.
Assertion (A): Each division in a divisional structure is a profit centre.
Reason (R): The divisional head is responsible for the profit or loss of his division and revenues and costs of the division can be identified separately.
Answer: (A) — Both true; R correctly explains A. NCERT explicitly states that each division "works as a profit centre where the divisional head is responsible for the profit or loss." Easy identification of revenues/costs is the operational reason that makes profit-centre status workable.
Assertion (A): The functional structure is suitable for a small single-product company.
Reason (R): The functional structure is also the most expensive structure to operate.
Answer: (C) — A is true (functional design suits enterprises whose size is large enough to justify specialisation but products/operations are not too diversified — a single-product or simple-product firm fits well). R is false — functional structure is actually cheaper because functions are not duplicated, hence economical (per NCERT comparative table). The reason inverts NCERT.
Assertion (A): The Wipro restructuring described in the chapter created a divisional structure.
Reason (R): Wipro separated itself into product-line subsidiaries — telecommunications, engineering and financial services — each self-sufficient with its own accounting, personnel and administrative functions.
Answer: (A) — Both true; R correctly explains A. Self-sufficiency by product line, with own functional sub-units inside each subsidiary, is the very definition of a divisional structure given by NCERT. The cause-property relation is direct.
Frequently Asked Questions
What is organisation structure?
Organisation structure is the framework within which managerial and operating tasks are performed. It specifies the relationships among different positions, departments and levels — defining who reports to whom, who has authority over what, and how work flows.
What are the two main types of organisation structure?
NCERT identifies two main types: (1) Functional structure — departments by function like production, marketing, finance, HR. (2) Divisional structure — departments by product, territory or customer, each with its own functional sub-units.
What are the advantages of functional structure?
Functional structure offers specialisation, lower costs through pooled expertise, better coordination within each function, easier control by top management, and economies of scale. It suits firms with limited product variety in stable environments.
What are the disadvantages of functional structure?
Functional structure can produce departmental rivalries, slow decision-making across departments, narrow specialists with limited general perspective, and it becomes unwieldy as the firm grows or product range diversifies.
What are the advantages of divisional structure?
Divisional structure builds product specialisation, fixes accountability divisionally, accelerates decision-making, develops divisional managers as future top executives, and supports rapid growth and expansion.
What are the disadvantages of divisional structure?
Divisional structure duplicates resources because each division has its own functional team — increasing cost. Inter-divisional rivalry can hurt overall performance. Managers may favour their own division at the firm's expense.
When should a firm choose functional vs divisional structure?
Choose functional when products are few and technology is stable. Choose divisional when products are many and markets diverse. Most large firms use a mix — divisional at the top, functional inside each division.
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