Q.A company, which manufactures a popular brand of toys, has been enjoying good market reputation. It has a functional organisational structure with separate departments for Production, Marketing, Finance, Human Resources and Research and Development. Lately, to use its brand name and also to cash in on new business opportunities, it is thinking of diversifying into the manufacture of a new range of electronic toys, for which a new market is emerging. Which organisation structure should be adopted in this situation? Give concrete reasons with regard to the benefits the company will derive from the steps it should take.

The company currently operates with a functional structure, which groups activities by specialised departments like Production and Marketing. However, diversifying into a completely new product line — electronic toys — creates a different set of demands. A functional structure works well for a single product or a narrow range, but it becomes slow and rigid when handling multiple distinct businesses. Each department would have to split its attention between the old toys and the new electronic toys, leading to confusion, delayed decisions, and diluted focus.

The correct choice here is a divisional structure. Under this, the company should create a separate division for the new electronic toys, with its own dedicated sub-units for production, marketing, finance, and so on. This keeps the existing toy business running smoothly while the new division operates with full autonomy.

The concrete benefits the company will gain are:

• Product focus and accountability: The head of the electronic toys division can take full responsibility for its success or failure, without being distracted by the old product line.
• Faster decision-making: Since all functions for the new product are under one roof, the division can respond quickly to the emerging market for electronic toys. …

The company currently operates under a functional structure, where departments like Production, Marketing, Finance, HR, and R&D each handle their specialised tasks across the entire product line. This works well when a firm makes a single product or a narrow range of similar products — everyone becomes highly skilled in their function, and there is clear hierarchy. But the moment a company decides to diversify into a completely new product category (here, electronic toys), the functional structure begins to show its limits.

Why? Because in a functional structure, every department must serve both the old and new product lines simultaneously. The same marketing team that promotes traditional toys must now also understand the electronics market. The same production unit must split its capacity between plastic dolls and circuit boards. This creates confusion, delays, and a lack of focus. The new product line — electronic toys — is a different beast: different raw materials, different manufacturing processes, different customer base, different competitors, and different regulatory concerns (safety standards for electronic goods, for instance). A single functional department cannot give it the dedicated attention it needs.

The appropriate choice here is a divisional structure. In this setup, the company creates a separate division — say, the “Electronic Toys Division” — that operates almost like an independent company. This division would have its own dedicated sub-departments for production, marketing, finance, HR, and R&D, all focused exclusively on electronic toys. The existing functional structure continues to handle the traditional toy line, while the new division runs in parallel.

Now, what concrete benefits does the company gain from this step?

First, focus and accountability. The head of the Electronic Toys Division is fully responsible for its profit or loss. There is no passing the buck to a shared marketing or production department. This sharp accountability drives better performance — the division manager will push for cost control, timely launches, and quality because the results are directly visible.

Second, faster decision-making. In a functional structure, a decision about the new product line would have to travel up and down through multiple functional heads. In a divisional structure, the division manager can take many decisions independently — about pricing, supplier selection, promotional campaigns — without waiting for approval from a centralised marketing or finance head. This speed is critical when a new market is emerging and competitors are also rushing in.

Third, product specialisation. The electronic toys division can develop deep expertise in its domain. Its R&D team can focus on circuit design and child-safe electronics; its marketing team can study the preferences of parents and children for tech toys; its production team can invest in the right assembly lines. This specialisation leads to better products and higher customer satisfaction. …