Departmentalization is the grouping of activities and responsibilities by sub-units of the organization. These sub-units are called departments.
Departmentalization by function is a method of organizing work by grouping together people who perform similar or closely related tasks. One of the main advantages of departmentalizing by function is the development of localized expertise, or unit specialization. Each person within a functional unit gains knowledge and experience from working on one task for a long period of time. Over time, many become skilled at producing highly accurate loss ratios and can therefore determine premium rate schedules that will ensure healthy profits for the insurance company.
Departmentalization by purpose is a method of organizing work by grouping together people who are responsible for achieving a single purpose. The employees in a given department are not necessarily doing the same tasks, but all of their work focuses on a common objective. Such departments are usually set up (1) to cater to a particular geographic region; (2) to produce, market and sell one particular product from a broaden family of products; (3) to serve one particular client or group of clients.
A disadvantage of departmentalization by purpose is that because each department is somewhat self-contained, stuff is often duplicated. This is an added cost.
Matrix organization is a departmentalization by two dimensions such as function and purpose, simultaneously. Matrix organizations are found in all types of settings. Originally developed in aerospace companies, the idea of the matrix spread rapidly to such diverse companies as General Electric, Citibank, and Shell Oil and is used in government agencies as well. One of its most prevalent uses has been in universities, where academic departments such as accounting, marketing and finance often form a “matrix” with undergraduate, masters, doctoral or executive programs. Faculty members in such a university are responsible to both the department chair and the program director or administrator.
Matrix organizations are not limited to the combination of function and purpose. Any two dimensions could be combined. The primary advantage of the matrix organization is that it takes advantage of the best aspects of the other methods of departmentalization. The matrix organization is not without problems. Because each employee reports to two supervisors, he or she may receive conflicting directives. Because of this, many managers prefer the one-boss reporting relationships in simpler organization structures.