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For this set of videos,

we'll look at some of the historical examples of the multidivisional

organization.

So the multidivisional structure was documented very well by Alfred D.

Chandler in his similar book, Strategy and Structure that was published in 1962.

It was kind of the book used in many MBA programs for the next 30 years.

And so this book goes through the history of the pioneering companies to become

multidivisional.

They were DuPont, General Motors, Sears, and Standard Oil,

today known as Exxon-Mobil.

My own dissertation was on the diffusion of the multidivisional.

And so the second bullet point actually comes out of my own dissertation.

So by 1967, two-thirds of the Fortune 500 Companies in my sample,

I had 325 of them in my sample, two-thirds of them were multidivisional.

So the key idea is the multidivisional structure is an adaptation to the strategy

of diversification which in itself is what we talk about as organizational

complexity.

And this is from page 314 of his book, "Unless (mutlidivisional) structure

follows (diversification) strategy, inefficiency results".

His idea in his book was if you keep adding more and more businesses and

you keep sending all these reports up to the CEO and the top managers,

there's something called daily routine drives out planning.

So the CEO is going to be involved in the day to day operations of lots of different

businesses and there's going to be little time left for

strategic planning of what to add to the business, what to subtract.

It's just going to be a daily routine for the top management team.

At the bottom of the screen there the interesting thing also

in the book Strategy and Structure is before reading the book,

I used to think multidivisional means becoming more decentralized.

And that would be the Dupont example.

The Dupont was family-owned, highly centralized, and

they became multidivisional by decentralizing.

However, if you looked at the history of GM,

they were basically holding companies which was essentially, a holding company

is like you're trying to avoid taxes by having a shell of a company.

But it really doesn't do anything other than internalize and

reduce taxes across what would be transfers between different companies.

So when GM became multidivisional, they actually had to add some financial

controls and become more centralized than they were.

So what Chandler makes clear in his book is that it depends on

where your reference point is from where you start of whether multidivisional's

becoming decentralized or centralized.

However, the majority of companies still I would say are going from the or

the Dupont example, they tend to be small and centralized and

over time they become decentralized.

Your question for discussion is what is referred to here as a holding company form

of organization Is a loosely-divisionalized

structure in which the controls between the headquarters unit and

the separate operating parties are limited and often unsystematic.

The divisions enjoy a high degree of autonomy under a weak executive structure.

So what management mechanisms (e.g, incentives, audits of divisions, and

cash flow allocations) must be put in place to convert a holding company into

a well-functioning multi-divisional structure?

Please reflect on this question and post your response in the discussions for

this video.

Thank you.

Now when we look about an organizational structure,

there are three primary features of this structure.

The first is the division of task.

Who does what?

So for example, suppose you had ten people to work with you,

would you have five groups of two?

Would you have two groups of five and why?

One answer to that question of course is it depends on the problem at hands.

So for example, if you're in a tug of war pulling rope and you're trying to

pull the rope, having one team of ten coordinated pulling at the same time might

be the optimal division of task for that particular problem.

The second feature is the depth of the hierarchy, the span of control.

When you have a manager how many people can that manager manage effectively?

And at what point do you get to the span of control being greater than the person

can handle, in which case you'll start to have inefficiencies in the organization?

And then the third one we've already mentioned a few times now is how much

decentralization and how much centralization is best?

And then also as problems change the best structure in 2015 may

not be the best structure a couple of years from now in 2018.

This picture I found interesting because I never really thought,

I tended to think of a multidivisional structure as just being a bunch of

functional organizations put in separate.

But this picture here shows you that you can actually have one business that's

a functional organization.

That's the SBU 1 and 2 or SBU 1 is just a simple structure, maybe informal.

SBU is a functional structure but for a mid-sized company.

For SBU 4, it can be a business unit that within itself is a matrix but

it's a division of this board of directors and the president of the company.

So in other words you can have embedded within a multidivisional structure,

different types of structures that we've been discussing in this module.

And this is from a different textbook which is really essentially the same

picture but just gives nice examples.

So in other words you can have an oil division within this conglomerate and

it can be structured functionally by that CEO.

And the pharmaceutical one can be structured as a product team structure

where you have lots more interaction.

And then the plastics division can actually be a matrix organization.

Which once again,

the details we'll discuss in future slides within this module.

So the multidivisional structure then is typically used for diversification.

They can be used for related diversification and

for unrelated diversification.

And there's some nuances in the differences between the multidivisional

structure.

So related diversification you have businesses where

there's a lot of technical knowledge that can be shared across the divisions.

We talked before about Pepsi restaurants and

Pepsi restaurants had KFC, Taco Bell, and Pizza Hut.

A lot of knowledge can be transferred from one of those divisions to the other.

So that's a transfer of core competencies across those strategic business units.

Therefore, you can have more centralization of decision making

across those related units.

A different type of multidivisional structure that was if you have highly

unrelated businesses.

So suppose you have a telecommunications division and

a bakery division, not a lot of technical overlap between those two.

So there you might want to leave them separate to make their decisions and

have an almost pure decentralized decision making.

But you still have some control, of course, of the finances at the top.

Okay, so that's our basic discussion of multidivisional.

I look forward to seeing you for

our next video when we get into a discussion of matrix organizations.

3-1.3: Multidivisional Structure

Corporate Strategy

Meet the Instructors