1. activities pertaining to different functions. (d) Direct

1. Departmentalization by Functions:

It refers to grouping of activities of the enterprise into major functional departments. The functions are usually classified into production, selling and financing. The other commonly recognized functions requiring separate groupings are buying, accounting, personnel and research. However, these functions vary according to the organization.

Departmentalization by functions is the most widely used basis for grouping activities into administrative units and they are found in almost every enterprise at some levels or the other. An illustration of functional organizational structure is as follows:

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This is a hypothetical organizational structure of a multi-product company having both institutional and retail sales.


(a) Functional departmentalization in an enterprise represents a very natural and logical way of grouping different activities of the enterprise.

(b) Such grouping ensures specialization. By concentrating on similar group of activities, specialized knowledge and skill are acquired, which can be utilized for the efficient running of the departments. This leads to economy in operations and efficiency in the use of manpower and other resources.

(c) It facilitates coordination within the employees of a particular function. It is easier for a manager in-charge of a particular function to synchronize activities and unify efforts of personnel engaged in that particular function than to coordinate activities pertaining to different functions.

(d) Direct and adequate attention to the basic activities guarantees the availability and effective utilization of outstanding abilities.

(e) Functional departmentalization is a time-proven method and can easily be justified by the management.


(a) Centralization tends to become excessive and thereby causes delay in decision making and flow of information. Decision on problems covering two or more functions can only be made at the top of the organization. However, in the communication process of the same to the bottom of the organization pyramid decision making and its implementation is further delayed.

(b) Functional departmentalization tends to make the functional executives so much conscious of their respective functional areas that the business, as a whole, very often remains out of the sight of those executives. This results in consumption of time in emphasizing the mission of the enterprise and makes coordination between different functional areas more difficult.

(c) A company, which is functionally organized, does not offer a good training ground for managers who are expected to be expecting in more than one function. A manager supervising a particular function more often becomes an expert in handling problems of that particular function alone and gets no hand-on knowledge of other functions.

2. Departmentalization by Product or Services:

When activities associated with each product or group of closely related products are combined into relatively autonomous and integrated units within the overall framework of the company, such an organization is said to have product departmentalization.

Under this arrangement, an executive is put in charge of all the activities relating to a product or product line and enjoys extensive authority over production, sales, development, service and other functions pertaining to that particular product. Place or location of product unit is irrelevant here. We have illustrated a process-centric divisional structure of a Tea manufacturing company as follows:


Product or process departmentalization enjoys the advantage of specialized product knowledge and promotes coordination of different activities connected with a particular product. Since, the responsibility for the result of each product is fixed, the executive, who is in charge of the product, is motivated for expansion, improvement and diversification of the product.

It helps an organization to compare one product line with another, which facilitates dropping of unprofitable product lines and expansion of profitable product lines. Due to the formation of autonomous units, it also enables the organization to gain the advantages of better coordination, better customer services and better control of resources.


Product or process departmentalization can, at times, lead to difficulties in coordination. The manager of the product, who has been successful in running his department, may well be prompted to acquire more power for himself. However, this can be remedied through centralization of certain key activities and major policy decisions at the top of the organization.

Also it requires organization to hire more persons with managerial abilities who are fit to take the role of general manager, thereby raising the managerial cost. Costs are also increased due to the duplication of centralized services and staff activities.

At the top management level, it can also create a problem of control for obvious difficulty in monitoring of activities of various product departments. Decision-making problems may also be faced by such organizations because top management may not like to delegate decision-making powers to the departmental heads.

3. Departmentalization by Locations or Territories:

Sometimes activities of an enterprise are physically or geographically dispersed in the interest of efficiency and economy in operations and this requires local administration to look after the geographically dispersed units. Such an organization is viewed as territorial departmentalization. Koontz and O’Donnell have mentioned two valid reasons favouring territorial departmentalization:

(a) To avoid absenteeism, managers must not ignore local factors, as many local issues may be responsible for the absenteeism

(b) To take advantage of certain economies of localized operation Grouping by locations signifies adaptation to local needs and this facilitates prompt actions. Activities within the scope of one’s area or authority can be more effectively coordinated and controlled. Such departmentalization also offers opportunity to the top management to allow employees to gain experience with minimum of risks to the firm. However, communication gap, delay in decision, etc., are its major disadvantages.

4. Departmentalization by Time:

When operations extend far beyond the normal work period of an individual, it may well be spread over certain shifts. Such a grouping is frequently termed as departmentalization by time. It is a normal practice in enterprises who are engaged in continuous processes, e.g., public utilities, restaurants and many others.

Units so created on time basis, perform similar operations. Problems are clustered round to the extent of each shift and shall be self contained. Also, the relationships between specialized activities in normal times and during extra hours can be synchronized. Grouping by time is more common with the production function of an enterprise.

5. Departmentalization by Process and Equipment:

Activities may also be grouped into different departments on the basis of process involved or equipment used. Such a grouping is usually resorted to in a manufacturing concern. Thus, a cotton textile unit may have separate units for spinning, weaving, dyeing, inspection and shipping. Better supervision, optimal use of equipment, specialization and avoidance of duplication of investment are the important contribution of such departmentalization. In this case also, we follow the same pattern of departmentalization, as illustrated in the divisional structure.

6. Grouping by Customers:

This type of departmentalization is more popular in sales activities of the enterprise. This pattern is usually followed when paramount interest is required to be shown in the welfare and interest of the customers. Customers may be classified on the basis of age, sex, income and taste. Customer departmentalization assures full attention to the different customer groups. It helps enhancing company’s image and goodwill. Since, customers are divided into identifiable groups the pattern permits the use of specialized knowledge for each of such groups.