Everything you need to know about the bases of departmentation. Departmentation or departmentalization refers to (a) Dividing the total effort into operating tasks (production, sales, finance, personnel, etc.);

(b) Grouping of tasks into functions, activities or jobs to be performed by individuals or groups of individuals;

(c) Combining functions, sub-functions into effi­cient work groups; and

(d) Combining work-groups into departments. Departmentation is part of the organization process.


Some of the bases of departmentation are:- 1. Functional Departmentation 2. Product Departmentation 3. Territorial Departmentation 4. Customer Departmentation 5. Process or Equipment Departmentation

6. Departmentation by Marketing Channel 7. Departmentation by Time 8. Composite or Combined Departmentation 9. Numerical Departmentation.

Learn about the Bases and Patterns for Departmentalizing Organisational Activities

Bases of Departmentation – By Function, By Product, By Territory, By Process or Equipment, By Customers and By Numbers or Time (With Advantages and Disadvantages)

There are several bases for departmentation which are as follows:

A. Departmentation by Function


B. Departmentation by Product

C. Departmentation by Territory

D. Departmentation by Process or Equipment

E. Departmentation by Customers


F. Departmentation by Numbers or Time.

A. Departmentation by Function (Functional Departmentation):

This is the most logical and simple form of departmentation. Functional departmentation is the process of dividing the organization into units on the basis of the firm’s major functions. For example, in a manufacturing company, the activities essential to the existence of the company are production, marketing, and finance.

Thus, it becomes Production Department, Marketing Department and Finance Department. However, in non-manufacturing concerns these functions differ. In a transport company, the key areas may be operations, sales and finance. Thus, public utility concerns like electricity, transport, banking, insurance and hospitals have their own distinct key functional areas.


In all these cases, under functional departmentation, major or primary departments are created along the key functional area of the respective business. When the organization grows, major departments can be subdivided. These sub-divisions are called derivative departments. The essential idea is to take advantage of specialization.


1. It is the most logical and simple form of departmentation;

2. It makes efficient use of specialized resources and skills;


3. It makes supervision easier, since each manger has to be an expert in only his functional area of operation;

4. It fosters development of expertise in specialized areas.


1. Functional departmentation is often found to be inadequate to meet the growing needs of the business, particularly as the organization expands or diversifies its activities;


2. Further, decision-making becomes slow as the functional mangers have to get the approval of the headquarters;

3. It is also difficult to determine accountability in a functional structure. If a product fails, the question as to who is responsible cannot be easily answered; and

4. Functional mangers tend to develop narrow perspective and lose sight of the bigger picture.

5. Members of each department feel isolated from those in other departments.


B. Departmentation by Product (Product Departmentation):

Organizations grow in size either by broadening its product line, or by expanding geographical. As the size of the organization increases, it is rather forced to look for other models in- tune with the requirements. In such situations, managements will opt for various other types of departments, to overcome the limitations of functional structure. One such new model is product Departmentation.

It involves grouping of activities necessary to manufacture a product. There is a separate department called Product Department which takes into account all the activities related to the manufacturing of a major product. As against functions in the functional departmentation, basic products or services become the primary or major departments in the product departmentation.


1. Product departmentation places emphasis on the basic products which are critical to the survival of the organization.

2. Responsibility for cost reduction and profits can be established at the division level. Cost centers can be established, high profit areas can be encouraged and unprofitable product lines can be dropped.


3. Proper coordination can be achieved as all the functional managers work as a team under close supervision of the product manager.

4. Enables quick-response to changes in environment as compared with functionally organized firm.

5. Provide managers a training ground in general management which is useful managerial development, and

6. Expansion and diversification is made easy by creating new departments for the new products that are added to the existing lines.


1. Requires adequate availability of persons with general management abilities.


2. The product departments may try to become too autonomous thereby presenting top management with a control problem.

3. Product departments are engaged in the duplication of efforts.

4. Each product unit has its own functional departments. These may not be sufficiently large to make maximum use of facilities. Thus product departmentation becomes an expensive organizational form.

C. Departmentation by Territory (Territorial Departmentation):

The process of creating departments along the geographical lines is termed territorial departmentation. This method is adopted when an organization operates in different geographical area, each with distinct needs. It makes it easier for the organization to cope with variations in laws, local customs and customer needs.

Public utilities like transport companies, insurance companies, etc. adopt territorial departmentation. Similarly, a large scale organization operating both in domestic and international markets may have separate departments for both the markets. Again, different departments or divisions may be created for different regions of the world. For example, multinational companies organize their global activities with regional



1. It is possible to concentrate on markets and marketing channels in different geographical areas;

2. Develops opportunities for more efficient marketing activities because of better face-to-face communication with local interest; and

3. It helps in effective utilization of locally available resources.

4. It is able to cater to the region-specific variations in terms of preferences and sentiments of the people.

5. It facilitates decentralization of authority and places more responsibility at lower levels.


6. It provides a training ground for managers to develop themselves.


1. There are problems in training people to think in terms of markets rather than products.

2. It results in duplication of activities which leads to high cost of operations.

3. Requires more persons with general management abilities; and

4. Top management control becomes difficult because of the distance between the corporate headquarters and the regional offices.


D. Departmentation by Process or Equipment:

Under this method, activities are grouped on the basis of production process or equipments used. Such type is used in textile industries, oil mills, printing press, etc.


1. It facilitates proper and effective utilization of specialized equipments and resources.

2. It helps to achieve economic advantages as it sets processes in such a way that a series of operation is possible.


1. It creates the problem coordination as the work of each process depends on the work of previous process.

2. It paves way for conflicts among managers of different departments.

E. Departmentation by Customers (Customer Departmentation):

Arranging the activities of a business on the basis of needs of customers is called departmentation by customers. For example, educational institutions following full-time courses, part-time courses, evening courses, correspondence courses, week-end courses, etc. to meet the requirements of different types of students.


1. Facilitates concentration on customer needs. This is in line with the customer orientation.

2. Customers feel that they have an understanding supplier and enhance goodwill of the concern among the public.

3. Helps the organization to get the correct feel of the market dynamics in terms of preferences of the customers, competitors’ strategies, etc.


1. Difficult to coordinate operations between competing customers’ demands;

2. Requires considerable expertise’ on the part of mangers in understanding customers’ problems and specific needs;

3. There is a possibility of underutilization of facilities and employees specialized in terms of customer groups.

4. Small organizations particularly cannot afford the expenditure involved because some amount of duplication of the facilities is inevitable.

F. Departmentation by Numbers and Time:

In the case of departmentation by numbers, activities are grouped on the basis of the number of persons required to perform an activity. For example, in the army, troops are divided on the basis of numbers like battalion, regiments, etc. Under departmentation by time, activities are grouped on the basis of time, i.e., working hours. The use of shift system under factory operations is an example of departmentation by time.

Bases of Departmentation – Key Ways in which an Organisation may Decide to Divide the Work

There are several key ways in which an organization may decide to divide the work:

1. Functional Departmentation:

This is the most popular form of departmentation where activities grouped together by common functions. For example in a university functional structure would mean a set of departments like marketing, management, business economics, finance etc. Thus, similar and related occupational specialties are grouped together. Functional structure tries to incorporate the positive aspects of specialization.

Features of Functional Structure:

Functional structures are characterized by the following:

(a) Specialization by function- Functional structure orients people toward a special activity. It helps to concentrate competence in particular ways.

(b) Sub-goal emphasis- Functional structure compels departmental heads to concentrate on sub-unit goals. Departmental heads are judged based on how well they meet the standards, achieve the target etc. This leads to sub-unit goal emphasis.

(c) Growth always Pyramidal -The functional structure grows ver­tically and takes the pyramidal shape as more departments are created under a common superior who can only supervise limited number of subordinates.

(d) Line staff division- A clear distinction between line and staff activities is observed in all functional structures. In fact, functional organization is a modified form of line and staff structure. Line functions have direct responsibility for achieving the basic purpose of the organization. Staff functions play supportive role. Line commands, staff advises.

(e) Functional relationship- In a functional structure, managers enjoy what is known as functional authority. Here functional experts exercise authority over subordinates belonging to other departments.

(f) Centralisation and decentralization- One man heads up all of one kind of work. In a functional organization authority is centralized to a great extent. As a result, coordination within functions is simplified.

(g) Span of control- The span of management is limited in functional struc­tures. As a result, they tend to be ‘tall’ structures. Managers exercise close supervision and rely on impersonal rules, procedures to manage individuals in organization.

Important advantages of a functional structure may be listed thus:


i. Clarity:

Functional design has the great advantage of clarity. Everybody has a ‘home’. Every­body understands his own task. As a result, functional struc­tures bring order and clarity to organisational activities.

ii. Economies of Scale within Func­tion:

It provides economy of scale within functions. It reduc­es duplication and waste. For example, the total floor space shared by several products in functional organisation leading to economy of operations.

iii. Specialisation:

Each depart­mental manager is concerned with only one kind of work and can concentrate all his energies upon it with minimum diver­sion. Specialisation being built into the organisation brings about competitive advantage for the firm. By putting its limited resources into one spe­cialised activity, ‘even the small company can compete with the giant corporation on quantity, delivery and price’.

iv. Coordination:

Coordina­tion within functions is easy. Centralised decision-making ensures unity of performance.

v. In-Depth Skill Development:

The functional structure also promotes skill development of employees. Employees are ex­posed to a range of functional activities within their depart­ments allowing them to embody their outstanding skills in every activity of the company.

vi. Suitability:

The functional type of organisation is best for small to medium sized organisation producing one or a few products where the dominant competitive issue and goals of the organisation emphasize functional specialization, efficiency and quality. In fact, Fayol’s model for functional structure was a coal-mining company where there was only one product, demanding simple, mechanical operations. The operations were more or less standardized.


i. Effort Focus:

Every functional manager considers his function the most important one and develops a narrow view of the organisation. In his anxiety to achieve departmental goals he may try ignore the overall goals of a firm.

ii. Poor Decision-Making:

No one except the man at the top sees the entire picture of business. Consequently, decisions are easily misunderstood and poorly executed. Questions like ‘who is right?’ ‘Who has scored better?’ Force organisational participants into a tug-of-war.

iii. Sub-Unit Conflicts:

As the func­tional organisation balloons to a reasonable size, boundaries are erected between departments. The structure turns out to be a ‘Berlin Wall Building’. Coor­dination among departments becomes a tough exercise. No one functional group is totally responsible for performance.

As a result, tendencies like buck-passing, sidetracking of issues, etc., develop. Overlap­ping authority and divided responsibility adds to the con­fusion and chaos prevailing. Accountability suffers. If func­tional structure is employed, important projects may suffer for lack of focused coordinated attention.

iv. Managerial Vacuum:

Emphasis on functional skill makes a man unfit for top management post requiring a broad perspective on the organization’s activities. Functional structure does not prepare people for tomorrow, for it has no position in which a functional head can learn and prepare to handle complexities inherent in the chief executive’s position. In course of time, a chronic shortage of top man­agement generalists may be felt.

The weaknesses of the functional structure are legendary. As the functional organisation grows in size, it ‘rapidly becomes an organisation of misunderstandings, feuds, empires and Berlin Wall Building.’ It soon requires elaborate, expensive clumsy management crutches, coordinators, committees, meetings, trouble shooters, special dispatchers which waste everybody’s time without, as a rule, solving much! The problem of coordination between functions becomes more difficult. The administrative distance between top management and functional department grows. Divisionalisation or product organisation structure helps in relieving this position.

2. Product Departmentation:

Departmentation by product (also called divisionalisation) is adopted in the case of a multi-product enterprise. The product structure is organized according to organizational output. The structure is divided into several fairly autono­mous units. Each unit is relatively self-contained and is headed by a product manager who is responsible for the company’s investment in capital, facilities as well as the unit’s progress.

Divisionalisation prevents some products from being neglected and others being overemphasized. Accountability is clear. If the product fails, the division/product manager is held responsible. Sometimes an organization may change its management structure.

A simplified version of a divisional structure is depicted below:

 The differences between functional and product departmentation may be listed thus:

Functional vs. Product Departmentation:

Functional Structure:

i. Organisation divided along func­tional lines.

ii. Focus on functional expertise, skills.

iii. Control and coordination not easy to achieve.

iv. Economical.

v. Can’t fix responsibility on any one functional head.

vi. Develops specialists.

vii. Less autonomy.

viii. Useful for all types of firms.

Product Structure:

i. Organisation divided along major product lines.

ii. Focus on product development, exploitation of market opportu­nities.

iii. Control and coordination relative­ly easy.

iv. Expensive to create independent units.

v. Easy to pin point responsibility on product/divisional managers.

vi. Develops and grooms generalists who could step into top manage­ment posts easily.

vii. Divisional heads enjoy more free­dom and autonomy.

viii. Useful in case of diversified firms having a large product portfolio.


The resources of one complete administrative unit are deployed on the product. All the activities for a single product or purpose are brought under one manager. It is easy to fix accountability. Procedures and systems can be standardized leading to better integration across different specialties. The different units like marketing, sales, engineering, finance and personnel are dedicated to the interests of one or a few related products. All this increases emphasis on prod­uct development, market exploitation etc.

Further, autonomous units enable a manager to acquire a broad range of experience. The individual responsibility and independence forces him to face challenges and run an entire company with its frustrations and satisfactions. Thus, divisionalised form serves as an excellent vehicle for training and development of general managers. Managers know what they are doing and can direct themselves toward the performance of the whole instead of becoming prisoners of their own work effort and skill.

Divisionalised form, further, allows for a wide span of control. It focuses the vision and efforts of managers directly on business performance and results. The divisions have the responsiveness, the accountability and the benefits of specialisation and are able to process information as if they were organiza­tions unto themselves. Unprofitable lines are not allowed to be carried on the backs of the profitable ones. Whenever necessary the autonomous units can be lopped off with minimal effect on the entire organization.


Divisionalisation tends to create additional departments and divisions leading to duplication of effort. The overhead costs of each product division are quite high. There is little incentive to promote cooperation among divisions. Conflicts surface frequently as divisions and headquarters argue about where to locate support services. Often, it is difficult to draw a clear distinction between dif­ferent units and settle the priorities. A tremendous amount of managerial time and energy is wasted on adjudicating disputes between them with reference to allocation of scarce resources.

The smallest adjustment between departments becomes a trial of strength or a matter of prestige and honour. The rivalry and territorial protectionism by the individual divisions can make coordination by headquarters extremely difficult. Further, the autonomy of divisional manager is exercised within limits and this breed’s resentment as divisional heads feel that authority is inadequate to meet the challenges. Divisionalisation makes high human demands on self-discipline, on mutual tolerance on subordinating one’s self interest. High-quality managers possessing these exceptional qualities are rarely available.

3. Geographic/Territorial Departmentation:

Geographic departmentation, also known as the departmentation by territory, facilitates adaptation to territorial differences. Large companies that distribute products on a massive scale nationally often cannot coordinate all regions from the headquarters. Each region of the country has distinct needs, tastes and facilities that demand coordination. Geographic departmentation helps in exploiting the local advantages.

Decisions regarding product design, pricing and marketing may be left to the discretion of the territorial managers who are close to customers and know their needs better. Territorial departmen­tation reduces transport costs and provides an excellent opportunity to build community goodwill.

Strengths and Weaknesses:

Territorial departmentation helps the local manager to assess the needs of local customers closely and serve them well. It is easy to pin point responsibility on zonal centres. It results in savings in freight, rent and labour costs. Economics of localised operations are also available. Business expansion across various regions is possible. Each regional head can focus attention on a region in an exclusive manner and gain considerable experience in handling the peculiar problems of a local unit independently.

On the negative side, geographical distance gives rise to the problems of communication, coordination and con­trol – especially between the head office and the branches. Duplication of physical facilities may increase the costs of operations. It may cause friction between local managers who, on most occasions, are notable to show equally good results. People with general management capabilities may not be readily available to run regional centers in a competent way.

4. Customer Departmentation:

Under the departmentation by customer, separate departments are created to serve the needs of particular customers. Such an organization helps managers to satisfy the customer’s requirements more conveniently and successfully.

Such forms of departmentation are more common in banking, book publishing and food industry.

Departmentation by customer is shown diagrammatically hereunder:

Strengths and Weaknesses:

Special attention can be paid to cater to the unique needs of each class of customers. Customized products /services can be offered. It is easy to build rapport with customers through such efforts. Customer loyalty will improve in course of time, followed by increased sales.

On the negative side, departmentation by customer suffers from the following weaknesses:

i. It is almost impossible to consider all the customers, their interests, habits and customs.

ii. Departmentation by customer leaves coordination problems between sales personnel and production people.

iii. Organizations may discriminate the ‘rich and first class customers’ from ‘poor and second-class customers’.

iv. It may lead to duplication of effort and increase overhead costs too.

5. Process or Equipment Departmentation:

Under the departmentation by process or equipment, activities are grouped on the basis of various manufacturing processes. Similar types of labour and equipment are brought together. It permits intensive and economical usage of costly equipment.

Strengths and Weaknesses:

Departmentation by process is useful when machines or equipment used require special operating skills. It is better suited to manufacturing companies whose activities can be neatly grouped into various processes. This kind of structure enables an organisation to reap the benefits of specialisation, optimum mainte­nance of equipment and resources etc.

On the negative side, departmentation by process makes coordination of various functions and products difficult. Conflicts may arise between different managers working at various levels quite frequently. Of course, where the manufacturing activity cannot be divided into distinct processes, this structure cannot be used.

6. Departmentation by Marketing Channel:

In this form, same product is marketed through two or more different channels (unlike customer departmentation). Each channel may ultimately sell to the same customers. Major departments are organized around each of the firm’s marketing channel to meet the unique and diverse channel demands.

7. Departmentation by Time:

In some organizations that work round-the-clock (for example, public utilities like Railways, Post and Telegraph offices. Hospitals, Call centres etc.) Depart­mentation is based on time. We often notice the doctors, nurses and railway employees changing shifts on the basis of day, evening and night.

One basic advantage of departmentation by time is that it makes manpower utilization efficient. The primary disadvantage of the departmentation by time is that workers may ignore ‘total system’ view of organization, rather concentrate on the narrow, specified and technical aspects of organization. Departmentation by time is highly convenient and applied in public utilities.

8. Composite or Combined Departmentation:

To satisfy the requirements of various situations, managers these days favour a kind of ‘mixed’ departmentation. Functional departmentation is preferred at the top level. Marketing activities are split on the basis of products that are offered for sale (consumer products, leather products, plastic products, etc.). Sales function may be further split on the basis of territory/customer etc. The hybrid structure, thus, combines aspects of both the functional and divisional forms with some jobs grouped into departments by function and others grouped by products or markets.

Choosing a Basis for Departmentation:

There is no ideal pattern to suit all occasions and situations, as far as depart­mentation is concerned. A manager can choose any structural form, taking a holistic view of several factors.

These are listed below:

i. Specialisation:

The activities of an organisation should be grouped in such a way where people find it easy to specialize in areas of their exper­tise. This exercise, however, should not be overdone. Overspecialization would come in the way of organisational flexibility and freedom.

ii. Coordination:

Activities combined and grouped under one head and one department must have similar goals. People working in a department must pursue departmental goals with zeal, passion and commitment. Departmental loyalties, at times, put people at a serious disadvantage because they fail to see the big picture. This, of course, should be avoided at all costs.

iii. Control:

Departmentation must enable the organisation to put activities on track. The firm should be able to measure performance easily and see where things have gone wrong and initiate corrective measures quickly. Without timely rectificational steps, the whole effort goes waste.

iv. Cost-Benefit Analysis:

Additional departments should not prove to be a costly and prohibitive exercise. To the extent possible, administrative ease and convenience must also be paid close attention.

v. Attention to Key Activities:

Activities that require top management blessings, support and attention should be separated from the routine, mundane things. Even within a department, duplication of effort must be avoided. Proportionate and balanced emphasis must be given to all activities that demand managerial focus and attention at all times. Where an activity assumes greater importance, specialists could be asked to take care of the work for a specific period of time

vi. Resource Constraints:

Departmentation exercises must be carried out keeping organisational resources and capabilities in mind. If we do not have people to carry out specialized, advance research in a micro-area there is no use creating a department—as a show piece. Such orna­mental exercises must be avoided at all costs. Any department created must be able to utilize resources at its command to the fullest possible extent and deliver results. In the end, all departments must function in a self-supporting basis.

Bases of Departmentation – Patterns that may be Followed for Grouping Activities into Departments (With Advantages and Disadvantages)

There are many alternative bases (or patterns) for departmentalizing organizational activities.

The following patterns may be followed for grouping activities into departments:

1. Departmentation by functions;

2. Departmentation by products (or services);

3. Departmentation by territories (or regions);

4. Departmentation by customers (or markets);

5. Departmentation by processes (or equipment).

1. Departmentation by Function:

This refers to grouping the activities of an enterprise on the basis of major functions to be performed (such as purchasing, personnel, production, financing, marketing, etc.). Each major function is organized as a separate department under functional departmentation. The functional departmentation has become quite popular due to added dimensions to various functions. The actual number of departments in which an enterprise can be divided depends upon the size and nature of the organization.

Advantages of Functional Departmentation:

A number of advantages are claimed for functional departmentation which are as follows:

i. Simple grouping of activities – This is one of the simplest ways of grouping of activities in an organiza­tion. It is widely used for both economic and non-economic organizations.

ii. Logical arranging of activities – This is considered as the natural and logical way of arranging the various activities of the organization.

iii. Promoting occupational specialization – This promotes occupational specialization as experts in various functional areas can be employed along with same kind of equipment and other facilities.

iv. Optimum utilization of resources – This leads to effective utilization of manpower, equipment and facil­ities in all departments. This ensures economies in the performance of departmental functions.

v. Facilitating coordination – This facilitates the coordination of the activities within the department itself and at the inter-departmental level.

vi. Emphasis on basic activities – This gives greater emphasis on basic activities of an organization. Departmental managers are given due importance by the top management.

vii. Facilitating delegation of authority – This facilitates delegation of authority. It permits effective control over performance of employees.

viii. Developing specialists – This facilitates training and career development of the specialist managers. It forces the organization to build expertise and excellence around a particular function.

Disadvantages of Function-Wise Departmentation:

Functional departmentation suffers from the following limitations:

i. Developing functional business – This tends to develop functional business as employees do not work in cooperation with other functional departments. This affects organizational harmony.

ii. Poor inter-departmental coordination – This is responsible for poor inter-departmental coordination in respect of operations. As a result, the process of unification is bound to be affected.

iii. Friction among managers – It leads to friction among various departmental heads as one department may ignore the interests of another department.

iv. Delay in decision-making – The size of the department may tend to become unmanageable with the growth of the organization. It leads to excessive delay in decision-making.

v. Ineffective control – It is difficult to evaluate the performance of the departments precisely. This makes the management and control work more difficult.

vi. Creating problems for the organization – Functional departments have a collective as well as an individ­ual impact on the overall functioning of an organization. Sometimes, even if a particular department does not operate properly, it may create serious problem for the entire organization.

vii. Dissatisfactory handling of product line – It is unsuitable where more emphasis lies on the products than on the functions. This type of departmentation handles diversified product lines unsatisfactorily.

2. Departmentation by Products (or Services):

This refers to the grouping of activities of an enterprise on the basis of major products. All activi­ties related to a particular type of product are put together under one department under the direction of a production manager. This pattern of departmentation is most common with large multi-product organiza­tions. It is useful when the expansion and diversification of the product are of primary significance. Here, manufacturing, sales, finance, and personnel functions are arranged separately for each type of product. Each department is responsible for manufacturing a product and selling it to customers.

Advantages of Product-wise Departmentation:

Product-wise departmentation offers the following advantages:

i. Facilitating coordination of various functions – It facilitates the coordination of performance of vari­ous functions. All activities relating to a particular product line are integrated together.

ii. Encouraging decentralization of authority – It encourages decentralization of authority in a systematic and logical manner. The product head is vested with the authority to deal with functions relating to a con­cerned product.

iii. Reducing burden of top executive – It reduces the burden of work on the top executive, as product heads get more authority. Therefore, the chief executive can comfortably concentrate on key functions of management.

iv. Facilitating product diversification – It enables the department to focus attention and effort on the manufacture and sale of departmental products. It facilitates expansion and diversification of departmental products.

v. High degree of flexibility – It is more flexible and adaptable to new environments. It is flexible as a new product division can be easily added. It can easily identify unprofitable products and these can be excluded from the product line.

vi. Facilitating training and development of managers – It facilitates the training and development of managers in charge of product departments. Every product manager gets operational authority for perform­ing a variety of functions. This helps in the development of all-round managerial talent.

vii. Easy to fix responsibility – It helps in fixing and making accountability quite clear to product heads. The product head cannot shift his accountability on others as the profitability of each product can be known to the management.

Disadvantages of Product-Wise Departmentation:

Product-wise departmentation suffers from the following limitations:

i. Increase in operational costs – It is expensive because of the duplication of the functions and activities in various product departments.

ii. Excessive marketing costs – It requires excessive marketing costs for maintaining a sales force for each type of product.

iii. Problem of control – The control at the executive level becomes more difficult due to the increase in the number of employees.

iv. Difficulty in coordination – It leads to difficulty in coordination as a manager tries to seek more power and authority to manage his unit and to multiply his activities.

v. Neglecting organizational goals – It puts more emphasis on departmental goals and performance. As a result, overall organizational goals are neglected. The product heads may concentrate more on short-term goals at the cost of long-term objective of profitability.

vi. Disliked by dealers – It may not be liked by dealers who have to deal with different salesmen of the same enterprise for different products.

vii. Idle capacity – Machines and equipment in each product department may not be fully used. This generates idle capacity in each product department.

3. Departmentation by Territories (or Regions):

Territorial (or geographical) departmentation area wise and each area are in charge of a single per­son. Geographical departmentation becomes essential for organizations having widely scattered business operations with nation-wide or global markets. Here, all activities in a given area are grouped and placed under the control of one manager. Banks, insurance compa­nies, the Indian Railways, the Posts and Telegraph department, etc., have departmentalized their activities in terms of geographical locations (like zones, divisions, departments, branches, etc.).

Advantages of Territorial Departmentation:

Territorial departmentation offers the following advantages:

i. Serving customers’ needs – It serve customers’ needs and interests in an efficient way. It makes distribu­tion systems more meaningful and responsive to local requirements.

ii. Increase in local sales – It helps in increasing regional sales as it can gather knowledge about tastes and preferences of the customers in the local market.

iii. Securing economies of localized operations – It secures various economies of localized operations as goods are produced and distributed locally instead of producing them at distant places. This ensures savings in transportation costs.

iv. Promoting zone-wise coordination – It facilitates zone-wise unification and coordination of various activities.

v. Encouraging training and development programmes – It encourages training and development pro­grammes for versatile managerial personnel. It provides opportunities to managers to improve their skills in various fields.

vi. Facilitating effective control – It facilitates effective control as accounts are prepared area-wise. The prof­itability of each area can be known to the management. The manager of a particular zone can be held responsible for his performance.

Disadvantages of Territorial Departmentation:

Territorial departmentation suffers from the following limitations:

i. High cost of operation – It requires the employment of a large number of personnel. It involves a high cost of operation due to the repetition and duplication of activities in every territory.

ii. Complicating the task of coordination of divisions – Operational autonomy to various divisions may complicate the task of coordination. The managers in different areas may adopt different styles of functioning which suit only local needs.

iii. Secondary pattern for departmentation – It is used only as a secondary pattern for departmentation. It can be profitably applied to big organizations where operations are widely scattered. A small business concern cannot afford this pattern of departmentation.

iv. Ineffective control – Control of different divisions (or branches) from the head office becomes less effective due to the distance barrier.

4. Departmentation by Customer (or Markets):

This pattern of departmentation is often used by the enterprise engaged in producing and distrib­uting goods and services for various groups of customers (or markets). Here, activities of an organization are grouped according to the types of customers (or markets) to be served. This type of departmentation serves different needs of various sets of customers (or markets) in an efficient manner. This type of classification is resorted to by enterprises engaged in specialized activities. For example, a bank may divide its loan section into a number of departments, such as loans to consumers, industrial users, wholesalers, retailers, etc.

Advantages of Customer-Wise Departmentation:

Customer-wise departmentation offers the following benefits:

i. Serving customers’ needs efficiently – It places focus on the needs and wants of a particular group of customers. Here, attention is given to the tastes and preferences of each class of customers.

ii. Enhancing reputation of the organization – It fulfills the expectations and needs of the customers in an efficient manner. Satisfaction on the part of the customers enhances the image of the organization.

iii. Formulating customer-oriented policies – The activities of an enterprise are grouped on the basis of various customers to be served. It facilitates the formulation and implementation of suitable policies required to deal with different customers.

iv. Specialized services to customers – It develops specialization among the departmental staff. As a result, it can offer specialized services to customers.

Disadvantages of Customer-Wise Departmentation:

Customer-wise departmentation suffers from the following drawbacks:

i. Inefficient coordination between customer departments – There may be problems in coordinating the activities of various customer departments.

ii. Idle facilities – There may be under-utilization of facilities of some customer departments. This may lead to idle capacity.

iii. High cost of operations – The cost of operations is high due to duplication of activities.

5. Departmentation by Processes (or Equipment):

This refers to grouping the activities of an enterprise on the basis of production processes. This pattern of grouping activities is used by manufacturing organizations. Activities which are needed to be performed with respect to a particular process are grouped in that particular process. It is widely used in processing industries (such as oil refineries, chemicals, sugar, cement, engineering tools, etc.). Here, the output of one process becomes the raw material of the next process.

Advantages of Process-Wise Departmentation:

i. Processing in a logical sequence – It is suitable to a manufacturing unit where the output of a particu­lar process becomes the input for the next process. The same is repeated till the production of the finished product.

ii. Advantages of specialization – The principles of specialization and division of labour are followed under this method of departmentation.

iii. Economical operations – It ensures the effective utilization of manpower and the proper maintenance of equipment. The machines are arranged in a systematic manner to carry out operations smoothly.

Disadvantages of Process-Wise Departmentation:

i. Heavy cost of operations – It requires separate rooms for operations. Other facilities and equipment should also be given to all the processes. This results in a high cost of operations.

ii. Ineffective coordination of processes – Conflict may arise among managers of different processes. This may lead to ineffective coordination among various process departments.

Bases of Departmentation – Common Types of Departments Set-Up by an Organisation: With Merits, Demerits and Factors

Departmentation or departmentalization refers to (a) Dividing the total effort into operating tasks (production, sales, finance, personnel, etc.); (b) Grouping of tasks into functions, activities or jobs to be performed by individuals or groups of individuals; (c) Combining functions, sub-functions into effi­cient work groups; and (d) Combining work-groups into departments. Departmentation is part of the organization process.

Classification of Departments:

There are several types of departments set up by an organization, common among these are as follows:

(1) Functional departmentation;

(2) Geographical or territory-wise departmentation;

(3) Product-wise departmentation;

(4) Customers-wise departmentation;

(5) Numerical departmentation.

(1) Functional Departments:

Single Department for Similar Functions:

Departmentation by functions is a popular mode of grouping the activities of an organization. Under it, activities are grouped on the basis of the functions to be performed by them. In a manufacturing company, for example, the basic functions consist of production, marketing and finance. In a wholesal­ing business, the activities may be grouped under buying, selling and finance.


1. It is a scientific and time-tested method.

2. It reflects the importance of basic functions of an organization.

3. It follows the principle of specialization.

4. It enables effective control and coordination of functions.


1. It is not suitable for an organization performing widespread and diverse functions.

2. It creates excessive work-load and responsibility for departmental heads.

3. It carries specialization a bit too far. If each employee specializes only in a small part of a func­tion, he may not be able to develop an integrated view of the function as a whole.

4. It creates difficulty in coordination of different functions.

(2) Geographical or Territory-Wise Departments:

Separate Department for Each Geographical Area:

It is highly suitable for organizations which have a wide network of activities dispersed over a large geographical area. Manufacturers having product assembly-plants and wholesalers generally set up departments for their activities in different territories.


1. It leads to economy in terms of time and money. The organization stands to gain from lower freight incurred on carrying goods to far-off places as also lower labor costs.

2. It enables the organization to know about consumer tastes and preferences in local markets.

3. It facilitates effective control and coordination.


1. It requires employment of a number of managerial personnel.

2. It dilutes control from the headquarters.

3. It may lead to duplication of activities.

(3) Product-Wise Departments:

Separate Department for Each Product:

An organization that produces a number of products often creates a separate department for each major product to look after its production, quality control, sales, financing and personnel.


1. It enables the organization to focus attention and effort on the manufacture, quality control, sales, and personnel engaged for the purpose.

2. It can hold each department responsible and accountable for the products allocated to it.

3. It facilitates effective control and coordination of activities.

4. It enables the organization to keep an eye on the activities of competitors in the dynamic exter­nal environment and adjust and adapt to the needs of given situation.


1. It necessitates employment of a number of managerial personnel, thus adding up to administra­tive costs.

2. It makes the control and coordination of activities difficult.

3. It may result in duplication of activities.

(4) Customer-Wise Departments:

Separate Departments for Different Needs of Customers:

It takes into account the various needs of customers. For example, the loan section of a commercial bank may be divided into a number of departments, each specializing in loans to farmers, traders, industrialists and professionals. Departmental stores also serve as examples of departmentation by customers.


1. It responds to different needs of customers.

2. It promotes specialization among organization workers.

3. The organization benefits from knowledge about different tastes and preferences of customers.


1. It creates difficulties in coordination of activities of different departments. .

2. It may lead to under-utilization of resources in some departments.

3. It may lead to duplication of activities.

(5) Numbers or Time-Centric Departments:

Establishment of Numbers or Time-Centric Departments, not Common:

It is not usual to find numbers or time-centric departmentation. Example of numbers-based depart­ments is, for example, found in the armed forces. Persons engaged for performance of the same activity—defense of the country and fighting the enemy—are grouped into different units, namely, battalions, companies, brigades and regiments. Each battalion is part of a company which is part of a brigade that itself forms part of a regiment.

In a time-centric department, activities performed by a department are grouped on the basis of the extent of time of their performance. For example, in an organization where employees work more than one shift, there is a separate department for each shift which looks after all management aspects of workers forming part of that department.


1. Membership of each work-unit is limited to a manageable number.

2. Given an ideal span of management, the person heading each work-unit can manage its affairs efficiently.

3. Since each work-unit is part of a bigger unit, it can conform to its culture and methods of work.

4. Members of work-units nurture a sense of pride because of being part of the flagship orga­nization. In the armed forces, for example, even a soldier in a squad gets ego boost when his regiment is awarded and praised for its bravery.


1. A member of small unit of a large department comprising several small units like his own may feel lost among a huge number of fellow-workers.

2. Even outstanding members of a small unit may be overlooked for rewards, promotion, etc.

3. Lack of performance by one unit may reflect on the image of the flagship department.

Factors to be Kept in Mind While Creating Departments:

While setting up departments, management of the organization should pay attention to the fol­lowing factors:

(a) Work to be done and the processes employed to do it;

(b) Ability and skill-levels of employees who would be placed in each department;

(c) Promotion of specialization among employ­ees;

(d) Single or variety of technology used in production of goods and services;

(e) Ability and readiness of department to adjust and adapt to meet challenges posed by competitors;

(f) Ease of coordination between different activities; and

(g) Optimum utilization of resources available with the organization.