Creating the Organization 365sales managers, engineering and design managers, and personnel managers. These man-
agers supervise the activities of their various departments, which surround the main core
of the business. Departmentalization is the second stage of organizational structure.
Stage Three: Divisional Structure
The volume of a business can grow only so large in a single location. Constraints such
as plant capacity, transportation costs, logistical issues, and the limits of the market itself
mean that if a firm continues to grow, it must expand to other locations. The next strat-
egy, then, concerns geographic expansion. Initially, firms attempt to manage both old
and new sites from the original location. As the number of sites increases and the
branches and outlets proliferate, however, this becomes impossible. Thus, the structure
of the firm must change to meet the demands of the new strategy. The new structure
calls for grouping the units within particular regions into geographic divisions. This new
structure adds another layer to the functionally differentiated department structure.
Both departments and regions report to the firm’s headquarters, creating the third stage
of structural development: the divisional structure.
Stage Four: Multidivisional Structure
Future growth in a single product, like growth in a single location, is a limiting strate-
gy because of satiated demand for the product and missed opportunities from related
products and markets. As firms continue to grow, they change to a strategy of related
diversification and vertical integration. For example, General Motors integrates with
Fisher Body; Jersey Standard expands its refining and marketing; DuPont develops new
product groups based on its chemical research and development; Sears moves into the
insurance business by merging with Allstate Insurance. This diversification puts new
demands on the old divisional structure. Stress and strain are created, inefficiencies arise,
and finally a new structure is developed—the multidivisional structure, the fourth
stage of development. Like the divisional structure, it groups similar products and activ-
ities together so employees can achieve maximum productivity.
Stage Five: The Conglomerate
The fifth and final structure is created when the strategy changes from related to unre-
lated diversification. When firms enter businesses completely unlike any in which they
have previously engaged, the old structure begins to break down. Executives in the older
divisions do not understand the new businesses and do not share the perspectives of the
newer managers. There is no reason to group these unrelated divisions together because
they do not share markets, products, or technologies. In fact, it is better to keep them
separate so that the performance of each can be measured independently. From this
change in strategy comes the conglomerate, also known as the holding company.
In summary, the “structure follows strategy” hypothesis says that an organization’s
boundaries arise from the pursuit of different strategies. The boundaries are fixed for
periods of time, but as the changes in strategy put stress on the organization’s structure,
a new structure arises. Each time a new structure comes into being, the enterprise’s
boundaries expand, as do the activities within those boundaries.