What is Departmentalization?

Departmentalization is the grouping of activities and responsibilities by  sub-units  of the organization. These  sub-units  are called departments. The division of labor or degree of departmentalization is driven by the need for specialization whether by process or purpose within an organization. The most common way of process departmentalization is the division of the firm into business functions, such as purchasing, manufacturing, sales, accounting, etc.

Departmentalization specifies how employees and their activities are grouped together. It is a fundamental strategy for coordinating organizational activities, because it influences organizational behavior in the following ways:

  • Departmentalization establishes the chain of command – the system of common supervision among positions and units within the organization. It frames the membership of formal work teams and typically determines which positions and units must share resources. Thus, departmentalization establishes interdependencies among employees and subunits.
  • Departmentalization focuses people around common mental models or ways of thinking, such as serving clients, developing products, or supporting a particular skill set. This focus is typically anchored around the common budgets and measures of performance assigned to employees within each departmental unit.
  • Departmentalization encourages specific people and work units to coordinate through informal communication. With common supervision and resources, members within each configuration typically work near one another, so they can use frequent and informal interaction to get the work done.


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. For example, a manufacturing company may create a production department, sales and marketing department, an accounting department, and a human resources department.

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.

  • Geographic Departmentalization.  Organizing departments along geographic lines is often a good idea for large multinational firms with offices around the world. All activities related to the organization’s activities in each region are handled by a department in that region. One advantage of this method is that it ensures the development of expertise specific to the political, social, and cultural needs of the region. Moreover, sending managers to work in each region provides excellent training for upper level management positions where a broad perspective is required for success.
  • Product Departmentalization.  An organization can also divide itself by its product lines. It creates a department for each product and that department controls all activities related to the product including development, production, marketing, sales, and distribution. This structure provides the organization the advantage of developing personnel with a high level of expertise and specialization for each of its products.
  • Customer/Market Departmentalization.  Each type of customer usually has different needs and organizations often departmentalize along differing customer types such as consumers, businesses, and governments. For example, think about an aerospace engineering firm and the different needs of their consumer, business and government clients. This structure may be advantageous because it allows its personnel to specialize in developing products and serving the needs of particular markets and classes of customers.

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.

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