GM543 Unit 3 Functional vs Divisional Comparison Example

One Contact From Quote to Installation: A Unit 3 Comparison of Functional and Divisional Forms for Healthcare Seating

[Student Name]

Purdue University Global

GM543: Strategic Organizational Design and Architecture

Unit 3 Structural Form Comparison

[Instructor Name]

[Date]

Harrow Contract Furniture, the hospital buyer and every figure are composite and illustrative; the frameworks and studies cited are real.

The Problem in the Buyer's Terms

A regional hospital system with nine buildings buys furniture through a group purchasing contract. Its clinical buyer, a former nurse manager, needs patient room recliners rated for 500 pounds, waiting room seating covered in fabric that tolerates bleach cleaning, and side tables with sealed edges that do not trap moisture. She expects one person to answer for the order from quote to installation, and she expects that person to understand why a seam placement matters for infection control.

Harrow Contract Furniture launched a healthcare seating line two years ago. Today the clinical buyer meets a territory manager who sells mostly office seating and who learned the product line from a two-page sheet. Her technical questions go to a seating engineer shared with the dealer catalog, who answers when catalog work allows. Her order joins a queue of nineteen project coordinators, none of whom has worked in healthcare. Last year Harrow quoted 31 healthcare projects and won 6, a win rate of about 19 percent against roughly 35 percent for office projects of similar size. Lost bids most often cited slow technical answers and unfamiliarity with clinical requirements.

Option A: The Functional Form, Improved

To keep the comparison fair, the functional option is not simply today's structure. It adds one improvement: a healthcare product manager inside the sales function who trains territory managers, maintains healthcare pricing and answers clinical questions. Engineering, plants and coordination stay as they are.

This option keeps everything the functional form does well. The seating plant continues to build healthcare frames on the same lines as office chairs, the engineering standard stays unified, and no headcount is duplicated. Galbraith notes that the functional form works best when the organization has a single product line or several lines that share most of their resources and customers (Galbraith, 2014). Healthcare shares the frames and plant but not the customers, the buying process or the technical questions.

The weakness is that the product manager advises but owns nothing. Territory managers still earn commission on any revenue, and an office deal of the same size is easier to win. Engineering priorities are still set by the catalog schedule. The buyer gets a better trained territory manager but still no single contact.

Option B: A Divisional Healthcare Unit

The divisional option creates a healthcare unit with its own general manager, three sales representatives who call only on healthcare buyers, a product manager, two engineers and two project coordinators. The unit owns healthcare customers, pricing, product development and project management. It buys frames and assembly from the shared seating plant under an internal service agreement that sets lead times and a transfer price.

This option gives the clinical buyer what she asks for: one representative who knows the clinical setting, an engineer who works only on healthcare, and a coordinator who follows the order to installation. Chandler's account of the multidivisional form explains why: when a company enters markets that differ in customers and requirements, a unit organized around each market can respond to it without competing for attention inside every function (Chandler, 1962).

The weaknesses are real. The unit duplicates some sales, engineering and coordination work. Its two engineers may drift from the shared frame standard. The service agreement with the plant must be enforced, or the plant will continue to schedule healthcare behind dealer runs. And a healthcare general manager needs a profit and loss statement, which means the finance function must split costs it has never split before.

The divisional unit buys focus on the healthcare buyer at the price of some duplication and a service agreement that must hold.

Applying Duncan's Decision Tree

Robert Duncan offered managers a sequence of questions for choosing structure (Duncan, 1979). The first asks whether the environment is simple or complex. For Harrow, the healthcare environment is complex: buyers, regulations, product requirements and competitors all differ from the office market.

The second question asks whether the complex environment can be divided into segments, each served by its own unit. Here the answer is yes. Healthcare customers buy through different channels, ask different questions and judge suppliers by different standards, while the office market continues to work through dealers. Duncan's tree points toward a decentralized, divisional form for a segment that can be separated this way, with a functional structure inside each unit.

The third question asks whether the environment is stable or changing, which determines how much integration the units need. Healthcare product standards change with infection control guidance, and Harrow's healthcare line is new, so the environment is changing. That calls for strong links between the healthcare unit and the shared plant and engineering standard, not a fully independent division. Lawrence and Lorsch found that the most effective firms in changing environments were both highly differentiated and well integrated (Lawrence & Lorsch, 1967). A healthcare unit without integration with the plant would trade one problem for another.

Comparing the Costs

The functional option adds one product manager at about $115,000 a year with benefits. It requires no change to finance, plants or engineering.

The divisional option adds a general manager at about $210,000, moves two existing engineers and two coordinators into the unit, and hires three specialist representatives at about $130,000 each including commission, for new annual cost of about $600,000 beyond current salaries. One-time costs include a new cost allocation system and the service agreement, estimated at about $90,000.

The benefits depend on the win rate. Healthcare bids average about $380,000. If the divisional unit raised the win rate from 19 to 30 percent on 31 bids a year, Harrow would win about 3.4 more projects, adding roughly $1.3 million in revenue. At Harrow's gross margin of about 34 percent, year one would bring about $440,000 of added gross profit, short of the new cost. If healthcare bids grow to 45 a year, as the strategy expects within three years, the same win rate would add about $1.9 million in revenue and roughly $640,000 in gross profit, covering the unit's cost.

The functional option is cheaper but likely raises the win rate only slightly, perhaps to 22 or 23 percent, because the buyer's main complaints, slow technical answers and no single contact, remain.

Verdict

The divisional healthcare unit is the better fit for the strategy, but only with two conditions. First, the unit must buy from the shared seating plant under a service agreement with a guaranteed slot each week, so that the plant's efficiency is kept and healthcare is not scheduled last. Second, the unit's engineers must stay inside the shared frame standard, with the seating engineering director approving any change to it. In the first year the unit will likely lose money, and the board should accept that cost in advance as the price of building a business the functional form cannot build.

References

Chandler, A. D. (1962). Strategy and structure: Chapters in the history of the industrial enterprise. MIT Press.

Duncan, R. (1979). What is the right organization structure? Decision tree analysis provides the answer. Organizational Dynamics, 7(3), 59-80. https://doi.org/10.1016/0090-2616(79)90027-5

Galbraith, J. R. (2014). Designing organizations: Strategy, structure, and process at the business unit and enterprise levels (3rd ed.). Jossey-Bass.

Lawrence, P. R., & Lorsch, J. W. (1967). Organization and environment: Managing differentiation and integration. Harvard University Press.