Divisional Performance

Introduction

As a business expands it eventually reaches the stage where it becomes appropriate to split it up into smaller, more manageable units to decentralise.  Reasons may include:

  • Size – a large organisation with centralised management become unpracticall
  • Nature of work – specialists become necessary to deal with the diverse and complex activities of a business
  • Motivation – managers need incentives to perform well
  • Uncertainty – volatile market conditions are better coped with by a manager with a smaller, closer, sphere of influence
  • Fiscal – profits can, subject to legal restrictions, be diverted in such a way as to minimise tax liabilities

It may well be the case that some degree of decentralisation arises as a result of the way in which a business expands.  If the expansion is by take-over of companies that then become subsidiaries within group, a decentralised structure automatically arises.

One condition for a successful decentralisation is that the various divisions should be more or less interdependent of each other.  However, in practice, this is unlikely to be the case and a certain amount of inter-divisional trading will take place.  A transfer pricing policy is needed if goods and services are passed between divisions.

Two of the main organisational structures are functional or divisionalised, represented as follows:

FUNCTIONAL STRUCTURE:

Functional Structure

DIVISIONAL STRUCTURE:

 Divisional Structure