Difference between functional organization and divisional organization

Every organization, whether it is profit seeking organization or not-for-profit organization, has a specific management system according to which it dispenses its operations and activities. These different structures define the ways in which the information is disseminated within the organization, the modes of communications used along with the explicit and implicit hierarchies and the responsibilities which govern the administration of that organization.

Definitions and meanings:

Functional organization:

An organization in which the business activities are segregated based on different types of functions performed in the organization is known as a functional organization and such an organizational structure is known as functional structure. For example, function of finance, function of treasury, function of IT, function of marketing, function of sales etc.

Divisional organization:

An organization in which the activities of a business are separated based on different divisions is known as a divisional organization and such an organizational structure is known as divisional structure. These divisions can be based on geography, niche market, product group, service group etc.

Difference between functional organization and divisional organization:

1. Basic meanings:

An organization that follows a functional structure is governed according to the varying number of functions in that organization. The management and leadership in such organizations is put in place based on these functions, hence responsibilities are bifurcated according to the organization’s different functional areas. In an organization which has adopted a divisional structure, the commercial activities of the organization are divided into different divisions. These divisions have their own bureaucracy and their performance is measured based on the results of distinct divisions. The basis of division is dependent upon the type of business and its markets and products/services.

2. Delegation of responsibility:

In a functional structure, responsibility of a certain function is delegated to the relevant functional department for the whole business, therefore sometimes it can become difficult to hold a specific section or personnel accountable in case of an error or misinterpretation. However, in a divisional structure every division is accountable for its own results which minimizes the chances of mingling or duplication of different functions or sections with each other. The management of each division has to present its own results and therefore is answerable based on those results.

3. Decision making:

Managers of a functional organization do not enjoy complete autonomy in their decision making process. This is because, every function has to effectively liaison with the other relevant function/functions to make informed decisions which decreases the level of decentralization in the organization and may result in delayed decision making and loss of employee motivation. On the other hand, in a divisional structure, different business divisions do not collide or interrupt each and the management of every division is distinct which provides each of them a considerable degree of autonomy in their decision making process.

4. Costs:

The functional organizations are more cost effective than divisional organizations. The reason being, in a functional organization, each function is performed for the whole business from a single center of cost which saves expenditure as well as the need of repetition of procedures. However, in a divisional organization, for similar functions each division formulates its own cost centers, which scatters costs and increases the risks of duplication of processes that ultimately leads to an increased cost for the whole organization.

5. Suitability:

A functional organization is most suited for small to medium sized organizations because these organizations usually have simple procedures which can be managed by a single set of different functional units. A divisional structure is suitable for larger businesses and organizations because it is highly likely that such organizations will have different streams of activities which may need individual attention and differing expertise or human resource, therefore these organizations separate their different business lines into different divisions.

Functional organization versus divisional organization – tabular comparison

A tabular comparison of functional organization and divisional organization is given below:

Functional organization vs Divisional organization
Basic idea
The organization is segregated based on different functions. The organization is segregated based on different divisions.
Delegation of responsibility
Every function is responsible for whole business. Each division is responsible for its own results.
Decision making
The management in a functional structure is not totally autonomous in its decision making process. The management in a divisional structure is more independent in its decision-making process.
Cost
Functional organizations are more cost effective than divisional organizations. Divisional organizations incur costs for all the different divisions of the business, therefore are less cost effective than functional organizations.
Suitability
Is suitable for small to medium sized businesses. Is suitable for large companies with different business sections.

Conclusion – functional organization versus divisional organization

The organization structure an organization adopts, depends upon many different factors including size of the business, specific business activates, growth plans etc. However, irrespective of the organizational structure it is necessary for every organization to align its business structure with its organizational culture because, the structure of any organization represents the framework through which its cultural approach is implemented practically in order to achieve its goals in the longer run.

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