Product Based Organizational Structure

The organizational structure of your business helps your employees achieve company goals. When developing your organizational structure, consider how you can make it easy for your team to work together while removing any obstacles they may encounter. For businesses with several product lines or divisions, the product-based organizational structure — in which employees are grouped based on the product they work on, rather than individual roles or other attributes — may be the most effective approach. Consider the advantages and disadvantages of this organizational model when deciding whether it will help your business to achieve its overall objectives.

A common organizational model is the functional structure, in which employees are grouped by the main tasks they're responsible for. For example, all sales employees are in the sales department, which is headed by the sales manager and sales director. They are grouped because they share the same functional role of selling goods to the company’s customers. Likewise, marketing employees are in the marketing department, and manufacturing employees are in the manufacturing department.

The product organization utilizes the functional approach but creates large business units within the company for each major product the company offers. As such, each of those product division units consists of functional departments required to support that product.

For example, if a company has a bakery division and clothing division, each of those product-based divisions will have its own sales department, marketing department, manufacturing department and other functional groups. The product-based organizational structure is best for businesses that have distinct product groups that require specialized functional teams to support each product.

There are several benefits, both for employees and businesses, to utilizing a product-based organizational structure. From a business standpoint, one of the key advantages is that with a product model, failure in one division doesn’t necessarily affect other company divisions. If the bakery division of the company is losing sales, the clothing division can still be successful and have the resources it needs to grow. This can help businesses manage overall risk for the company.

The product-based organizational model also enables businesses to operate with more flexibility, as each business division can follow the unique processes they need for each product without having to accommodate processes for the other divisions. This can enable the company to shorten their development and manufacturing cycles and bring products to market faster to beat the competition.

From an employee perspective, the product-based organizational structure allows employees to specialize in their function for a specific industry. This enables employees to learn new skills and gain expertise in niche areas, which can help them further their career goals within the company so they can take on leadership roles. The unique experience can also provide employees with new opportunities in their product industry.

Like any organizational structures, there are disadvantages to consider. This particular structure is only useful for larger businesses with diversified product lines. Otherwise, this organizational model can cause problems. One of the key disadvantages to avoid are operational inefficiencies. Because each division functions independently, there may be several employees or whole departments that perform duplicate functions, causing a loss of profitability and productivity.

As a result of the product-based organizational structure, there may not be any effective lines of communication between divisions. This makes it difficult for employees to share information on important lessons to keep in mind or specific training and learning materials. When one marketing department learns something important, they may have no process in place for sharing it with the other marketing department.

It can be difficult for a product-based organizational structure to scale without increasing redundancy within the organization. If each product division requires a functional department for marketing, sales, production and accounting, the company needs to find efficiencies so as not to lose profitability.

Consider the product organizational structure advantages and disadvantages before deciding whether or not this model is right for you. There are several factors to research and investigate if you’re thinking about implementing this model for your business:

• Diversity of products: Are the products you offer different enough to warrant their own divisions? Are they manufactured using the same process? Do they have the same target market? Be sure to establish just how different your products are. If they're too similar, you may end up with many operational inefficiencies in your processes.
  
  
• Structure of each division: Will your product divisions require unique functional structures or will they all be structured the same way? Does one product require a manufacturing department while another product requires a research and development arm? You may be a good contender for a product division.
  
  
• Employee expertise: Does your company already have employees who specialize in one product or will you need to staff your new divisions with new employees? Keep in mind that hiring and ramping up employees takes time and resources.
  
  
• Communicate strategies: How will your product divisions share information? Poor communication between product groups can cause companies to lose profitability and productivity. Be sure to have a process in place so functional counterparts can share information as necessary.
  
  
• Scaling opportunities: Will your product divisions be able to scale without causing additional redundancies? Establish how much redundancy your company can handle before it becomes a problem. Would you consider sharing resources between divisions if that improved profitability?

While there are many benefits to utilizing a product-based organizational structure in business, it’s best to be aware of the disadvantages so that you can actively avoid them.

If the product-based organizational structure isn’t right for your business, there are many other types of organizational structures you can utilize. Each structure comes with its own advantages and disadvantages, so it’s critical to understand which organizational model can best help your company to reach its objectives.

Consider these other organizational models:

• Pyramid: The business leader is at the top of the hierarchy and oversees a small number of directors and managers. Those employees then oversee a large number of employees who are at the bottom of the hierarchy. Depending on the size of the company, there may be several layers of management.
  
  
• Flat: There are no hierarchies in this model. All employees are on an equal level, and they have the processes to self-manage themselves to help the company reach its goals.
  
  
• Functional: Employees are grouped by their main tasks and are led by a business leader who oversees those tasks. For example, all customer service employees are in a customer service department that's overseen by a customer service manager.
  
  
• Project: Employees from different functional teams are grouped into a project department that's overseen by a project manager. They work together to complete the project successfully.
  
  
• Matrix: Two or more organizational models are combined in this structure based on initiatives the company is working on. It’s most common to combine functional and product structures on a project basis.
  
  
• Market: If a company serves multiple distinct consumer bases, it's beneficial to organize divisions based on the kinds of customers it serves, such as wholesalers, end consumers and corporate businesses.
  
  
• Flatarchy: A combination of flat and pyramid structures, this model is dynamic. Employees can shift from being in a hierarchy to a flat model for the purposes of a project and vice versa.