After reading this article you will learn about:- 1. Meaning of Departmentation 2. Importance of Departmentation 3. Basis.

Meaning of Departmentation:

Departmentation is the foundation of organisation structure, that is, organisation structure depends upon departmentation. Departmentation means division of work into smaller units and their re-grouping into bigger units (departments) on the basis of similarity of features.

As the organisation grows in size, the work is divided into units and sub-units. Departments are created and activities of similar nature are grouped in one unit. Each department is headed by a person known as departmental manager.

Departmentation, thus, helps in expanding an organisation and also promotes efficiency by dividing the work on the basis of specialisation of activities and appointing people in various departments on the basis of their specialised knowledge.


Departmentation as is defined follows:

Louis A. Allen:

“Divisionalisation is a means of dividing the large and monolithic functional organisation into smaller, flexible administrative units”.

Pearce and Robinson:


“Departmentalisation is the grouping of jobs, processes and resources into logical units to perform some organisational task.”

Terry and Franklin:

“Departmentalisation is the clustering of individuals into units and of units into departments and larger units in order to facilitate achieving organisational goals.”

Importance of Departmentation:

The following points highlight the importance of departmentation:

1. Organisation structure:


Division of work into units and sub-units creates departments. Supervisors and managers are appointed to manage these departments. People are placed in different departments according to their specialised skills. The departmental heads ensure efficient functioning of their departments within the broad principles of organisation (scalar chain, unity of command, unity of direction etc.).

Thus, organisation structure is facilitated through departmentation. If there are no departments, it will be difficult to keep track of who is doing what and who is accountable to whom.

Departmentation creates departments, assigns tasks to people, fixes their responsibility and accountability to their departmental heads, creates a span of management so that work can be easily supervised. This network of authority- responsibility relationships is the basis of designing a sound organisation structure.

2. Flexibility:

In large organisations, one person cannot look after all the managerial functions (planning, organising etc.) for all the departments. He cannot adapt the organisation to its internal and external environment. Such an organisation would become an inflexible organisation. Creating departments and departmental heads makes an organisation flexible and adaptive to environment. Environmental changes can be incorporated which strengthen the organisation’s competitiveness in the market.

3. Specialisation:


Division of work into departments leads to specialisation as people of one department perform activities related to that department only. They focus on a narrow set of activities and repeatedly performing the same task increases their ability to perform more speedily and efficiently. Specialisation promotes efficiency, lowers the cost of production and makes the products competitive.

4. Sharing of resources:

If there are no departments, organisational resources; physical, financial and human, will be commonly shared by different work units. Departmentation helps in sharing resources according to departmental needs. Priorities are set and resources are allocated according to the need, importance and urgency regarding their use by different departments.

5. Co-ordination:

“The organisation is a system of integrated parts, and to give undue emphasis to any functional part at the expense of the entire organisation creates organisational islands, thus, resulting in inefficiency and significant behavioural problems”. Creating departments focuses on departmental activities and facilitates co-ordination.

6. Control:

Managers cannot control organisational activities if they have to be collectively supervised. Departmentation facilitates control by departmental manager over the activities of his department only. Activities are divided into smaller segments, standards of performance can be framed, factors affecting performance can be identified and control can be more objective in nature.

7. Efficiency:


Flow of work from one level to another and for every department, i.e., vertical and horizontal flow of work in the organisation increases organisational efficiency.

8. Scope for growth and diversification:

In the absence of departmentation, managers can supervise a limited number of activities, depending upon their skills and abilities. Departmentation enables them to expand their area of operation into new product lines and geographical divisions. Departmentation provides scope for organisational growth (along the same product lines) and expansion (adding new product lines).

9. Responsibility:

Since similar activities are grouped in one department headed by departmental managers, it becomes easy for top managers to fix responsibility of respective managers for achieving the desired results. If planned performance is not achieved, the department responsible becomes answerable. When responsibility is clear, authority can also be delegated to managers. Clear identification of responsibility and authority increases efficiency of the departmental activities.

10. Development of managers:

Departmentation enables departmental heads to be creative in making decisions with respect to their departmental activities. Training needs can also be identified because manager’s task is clear and specific. There are opportunities to improve performance in their area of specialisation.


This develops their potential to be promoted to higher managerial positions in the organisation. It also facilitates recruitment and selection of top managers from within the organisation rather than depending on outside sources.

Basis of Departmentation:

The form of organisation structure depends upon the basis of departmentation. Creating departments and sub-dividing the work of departments into smaller units creates organisation structure. With growing size of organisations, departments are created for activities of similar nature.

There are two broad forms of departmentation:

a. Functional departmentation, and 


b. Divisional departmentation.

a. Functional Departmentation:

Functional organisation creates departments along activities or functions of the undertaking (functions do not refer to managerial functions of planning, organising , staffing, directing and controlling). It is grouping of activities on the basis of similarities of functions.

The nature of activities performed by different organisations is different. For example, activities carried by a manufacturing organisation are production, finance, personnel and sales. For a trader, the major activities are buying and selling, a bank performs borrowing and lending functions. Functional departmentation is, “the grouping of jobs and resources within the company in such a way that employees who perform the same or similar activities are in the same department”.

It is the simplest, logical and most widely accepted form of creating departments. It is suitable for organisations where limited number of products are produced. The major functional departments further have derivative departments. Production department, for example, has sub-departments to manage purchase, production planning and control, manufacturing etc. Finance department creates departments to look into capital budgeting (fixed assets) and current assets, cash management and budgets.

Personnel department has sub-departments to take care of appointments, training, placement and promotion of employees. These sub-departments can be further sub-divided if needed. Advertising department (sub-department of marketing department), for example, can further have sub-departments like advertising in Newspapers, Radio, TV etc.

Organisation Chart Showing Functional Departmentation:

Functional Departmentation

Merits of Functional Departmentation:

It has the following merits:

1. Simple and logical basis of creating departments:

Production, marketing, finance and personnel are widely accepted and recognised functions of a manufacturing organisation and, therefore, it is a simple basis of departmentation.

2. Specialisation:

Since workers in one functional area focus on that area only, they acquire expertise and specialised skills in performing their duties. This offers the benefits of specialisation; efficiency and speed.


3. Co-ordination:

People working in one department are closely knitted and work collectively towards achievement of departmental goals. The departmental manager can co-ordinate various derivative activities.

4. Training and control:

The departmental manager is accountable for functions performed by his department. He ensures that activities are performed strictly according to rules and procedures laid down for the department. He can, thus, exercise control over his departmental activities. If workers are not able to carry out the activities efficiently, managers can train them to do so.

5. Supervision:

It is easy for managers to supervise the departmental activities as they have to supervise a narrow set of functional skills.


6. Suitable for stable organisations:

Organisations which do not frequently change their work units and work force are suitable for creating departments on the basis of functional activities.

7. Suitable for small organisations:

This basis of departmentation is suitable for small sized organisations which produce a limited line of products. Even for large organisations, it is suitable only for top levels. Thereafter, some other basis of departmentation has to be used. Marketing department, for instance, can be further branched out on the basis of territorial or geographical departmentation.

Limitations of Functional Departmentation:

This form of departmentation suffers from the following limitations:


1. Overall organisational goals:

The employees become so focused on departmental goals that they lose sight of the overall organisational goals.

2. Delayed decisions:

Since decisions are made by departmental heads for their respective departments, it may delay decision-making for the organisation as a whole.

3. Co-ordination:

Water-tight compartments are sometimes created amongst departments as people show loyalty towards their departmental managers. Top manager finds it difficult to co-ordinate various functional activities.


4. Accountability:

Top managers find it difficult to hold accountability of any one department for failure of the product in the market. For example, if the product does not earn profits, top managers cannot say with assertion whether the problem lies with production department or sales department.

5. Unsuitable for dynamic organisations:

As this is a suitable form of departmentation for stable organisations, organisations operating in the dynamic environment do not accept functional activities as the basis of departmentation. They use other basis of departmentation also to remain competitive in the market; either customer or product or territorial departmentation depending upon where and how they want to reach, grow and expand their business.

6. Complexity:

As organisations grow complex in terms of size and operations, they add more products to their line of products and expand into new geographical areas for marketing the existing products. Functional departmentation is not suitable in such cases.

b. Divisional Departmentation:

Divisional structures are created on the basis of smaller divisions where each division has its own functional activities (production, finance, personnel and marketing).

Major divisions that determine the organisation structure are as follows:

1. Product Departmentation:

This form of departmentation is suitable for companies that produce multiple products. Product departmentation is grouping of jobs and resources around the products or product lines that a company sells. With increase in operations of a company, it adds more products to its line of products which require various functional activities (production, marketing etc.). Product departmentation is suitable for product diversification where marketing characteristics of each product are different from others.

An organisation selling stationery, for example, also starts selling cosmetics and pharmaceuticals. While marketing strategies for cosmetics need to be intensive, it is not so in case of stationery or pharmaceuticals. Similarly, funds required for each product line are different.

The focus is on the product line and all functional activities associated with the product line. Departments are created on the basis of products and product manager has the authority to carry out functional activities for his department. Each product manager is in charge of his product line though general managers of various functional areas provide them the necessary support. It helps in coordinating the activities of different products.

Organisation Chart Showing Product Departmentation:

Product departmentation, along with various functional areas appear on the organisation chart as follows:

Product Departmentation

There could be further extension of this basis of departmentation. For instance, if product C is a car, the department can be branched out for commercial car, luxury car, special utility vehicle etc.

Merits of Product Departmentation:

Departmentation on the basis of product has the following merits:

(i) Better performance:

One manager may not have skills to carry out all operations for different product lines. By creating departments where each product department looks after one product or product line only, decision-making, fixing responsibilities and assessment of performance can be done efficiently. Sales people for one product will concentrate on sales promotion of that product only. This ensures better performance of employees of each department.

(ii) Flexibility:

Firms operating in the dynamic environment are well suited for this form of departmentation as it helps them respond to environmental changes, analyse competitors’ products and change their product line, if necessary. The focus is completely on one product and all functional activities related to that product rather than one functional activity related to all products. This promotes product specialisation which helps in product growth.

(iii) Fast decisions:

Since all decisions related to a product are taken by product manager (under the guidance of General Managers of different functional areas), decisions are taken quickly.

(iv) Co-ordination:

All the primary and auxiliary activities are managed by one manager. He can co-ordinate the efforts of people working under him.

(v) Control:

Every product manager wants to maximise profits of his product, for which he delegates authority to people of his department and establishes authority-responsibility relationships amongst them. Subordinates are trained to carry out functions related to each product. He, thus, controls activities of his department to ensure that the product contributes to the organisational goals.

(vi) Responsibility:

Product managers are accountable for results of their product departments. This promotes performance and profitability of different product departments.

(vii) Efficiency:

The costs and revenues of all the products can be compared. This helps in eliminating the unprofitable products and promoting the profitable ones thereby increasing organisational efficiency.

Limitations of Product Departmentation:

Some of the limitations of product departmentation are as follows:

(i) Co-ordination:

Coordination becomes difficult when departments focus excessive attention on activities of their departments without linking their performance with other departments.

(ii) Expensive:

This is comparatively a costly basis of departmentation than functional departmentation because every department appoints people to look after specialised activities, like accounting, finance, marketing, personnel etc. It results in duplication or multiplication of efforts because same functional activities are performed for different products.

(iii) Control:

If every product division works as an autonomous unit, tries to maximise its goals/profits without linking them with overall organisational needs, it will be difficult for top management to control the overall organisational activities.

2. Process or Equipment Departmentation:

In manufacturing organisations where the product passes through different stages of production, each stage is designated as a process and department is created for each process. It is called process departmentation.

Manufacturing paper, for example, requires processes like crushing the bamboo, making pulp, purifying the pulp, making paper rolls, and cutting it into rims. For each process, departments are created and headed by people skilled and competent to carry that process.

Since finished product goes through different processes, each process is assigned to a different department. This form of departmentation is suitable for medium and large-sized organisations where goods are produced through a series of operations.

Organisation Chart Showing Process Departmentation:

Process Departmentation

Merits of Process Departmentation:

The merits of process departmentation are as follows:

(i) Specialisation:

As work is divided into different processes, the process manager and his team specialise in that process by constantly carrying out activities related to that process only.

(ii) Economic considerations:

Specialisation results in economy of time, money and managerial skills.

(iii) Technological consideration:

Large organisations, where each process requires different technology, operate most suitably under process departmentation. It also helps in maintenance of the equipment’s related to a process because specialised technology requires specialised skills to maintain that process.

(iv) Facilitates training:

Since employees carry out only one operation or process on the work activity, managers can train people to efficiently carry out that process.

Limitations of Process Departmentation:

Process departmentation suffers from the following limitations:

(i) Co-ordination:

Output of one process department is input of the other. If different departments work at different speed, co-ordination amongst different processes becomes difficult. This can also result in conflict amongst process managers.

(ii) Boredom:

Repeated handling of the same job with a very short cycle (time required to complete that process) leads to boredom. This can affect efficiency of the process. An alternative to this is parallel pattern of process departmentation against the serial pattern (work moves in a series of steps) as described above. In the parallel process of departmentation, the number of steps to accomplish the task is the same.

For example, a job requires three steps for its completion. Step 1, Step 2, and Step 3. Rather than A (a worker) handling step 1, B handling step 2 and C handling step 3, A may carry out all the steps on product X, B carries out the same set of steps for product Y and C for product Z.

Though this reduces boredom on the work process, it requires trained workers who can carry out all the processes. This form of departmentation is suitable for small organisations where limited number of products with limited processes are produced.

3. Customer Departmentation:

When organisations sell to customers with different needs, departments are created on the basis of customers. Customer departmentation is “the organising of jobs and resources in such a way that each department can carefully understand and respond to different needs of specific customer groups”.

A lending institution, for example, gives loan to meet different customer requirements like housing loan, car loan, commercial loan etc. An educational institution which provides academic and non-academic subjects (vocational subjects), full-time or part-time courses, morning or evening shifts is a typical case of customer departmentation. Clear identification of customers and their needs is the basis of customer departmentation. This method of departmentation can be followed only in marketing division.

Organisation Chart Showing Customer Departmentation:

The organisation chart for customer departmentation (for a lending company) appears as follows:


Customer Departmentation

Merits of Customer Departmentation:

Customer departmentation has the following merits:

(i) Competitive advantage:

Contemporary marketing world revolves around customers. ‘Consumer is the king.’ By catering to varied customer needs, companies have an edge over competitors and, therefore, better chances of survival and growth.

(ii) Customer orientation:

The goal of an organisation is to earn profits by customer satisfaction. An organisation where the basis of departmentation is to sell goods according to customer needs justifies its existence.

(iii) Specialisation:

A department created for satisfying customer requirements becomes specialized in that area resulting in cost efficiency. Sales people understand consumer behaviour and provide them the desired services. They develop understanding with the consumers and build clientele for the organisation.

Limitations of Customer Departmentation:

Customer departmentation has the following limitations:

(i) Co-ordination:

Excessive involvement of employees in their respective departments makes it difficult for top managers to co-ordinate the functions of different departments.

(ii) Identification of consumer groups:

It is not easy to identify various consumer groups. A large industrial buyer for one product, for example, may be a small buyer for another product. The same product may be of industrial use for one buyer and personal use for another. Identifying buyers as industrial and non-industrial is not very easy.

(iii) Change in consumer behaviour:

Consumer department managers cannot easily frame policies for their departments because of changing consumer behaviour. Demand for the same product for same set of consumers differs during different times. Marketing managers have to balance the time and money spent in framing policies so that organisation can adapt to the changing customer environment.

(iv) Specialised staff:

Change in consumer behaviour, their demand for different goods at different times cannot be easily predicted. The departmental managers, therefore, must have specialised skills to determine the consumer needs.

4. Territory or Geographic Departmentation:

In territorial departmentation, organisation creates departments:

(i) Close to its customers because they are geographically dispersed over different areas, or

(ii) Near the sources of deposits.

Each geographic unit has resources to cater to the needs of consumers of that area. The production, purchase, personnel and marketing activities are looked after by departmental managers but finance is vested at the headquarters. General Manager of every department looks after functional activities of his geographical area but overall functional managers provide supporting services to the managers of different areas.

Thus, customers of different regions with different tastes and preferences for the same product are looked after by geographical departments set up in their territories. The product or customer differentiation, both can be the basis of geographic or territorial departmentation. This basis is suitable for large-sized organisations which have activities dispersed over different geographical areas.

Organisation Chart Showing Geographic Departmentation:

Division of organisation on the basis of geographic dispersal of activities appears on the organisation chart as follows:

Geographic Departmentation

Merits of Geographic Departmentation:

It has the following merits:

(i) Training and development:

Employees are trained to sell goods in specific areas according to customer needs.

(ii) Customer orientation:

The emphasis is on selling in different regions according to customer needs. ‘Consumer is the king’ is duly recognised by departmental managers as they develop their skills to know the customs, styles and preferences of customers of different regions. Managers are able to promote sales as they are aware of the local conditions of the area where they are operating.

(iii) Low cost of production:

If firms establish their areas of operation near the sources of raw material, they will be able to produce at low cost and take advantage of economies of operation.

(iv) Communication:

The sales people belong to local areas of operation. They can directly communicate with the consumers and frame policies to satisfy their needs.

Limitations of Geographic Departmentation:

Territorial departmentation has the following limitations:

(i) Co-ordination and control:

Since departments are widely dispersed, top managers find it difficult to control and co-ordinate their activities. While some of the functional activities are decentralised, others are centralised. Policy framers are at the head quarters and policy executors are at the regional offices. Different local conditions can create problems of understanding.

(ii) Expensive:

Since each department has auxiliary departments like personnel, accounting etc. to offer specialised services to managers, this is a costly method of departmentation. Before adopting this basis of departmentation, therefore, benefits must be weighed against costs. This method is suitable for large-scale organisations who can afford its cost.

(iii) Managerial skills:

Managers should be competent to perform functional activities (production, marketing etc.) related to their departments. They may not specialise in all the functional activities.

5. Departmentation by Time:

This method of departmentation is used in situations where work is done round the clock because:

1. The machine cannot be stopped before finishing the work.

2. The demand is high and the machine has to work overtime.

3. The nature of work entrusted to the organisations is such.

4. The services are essential in nature (health and fire services).

5. Workers work in shifts; morning, afternoon and night, so that work can progress continuously.

These points are illustrated below:

1. The machine cannot be stopped in manufacturing steel and workers, therefore, have to work in shifts.

2. During boom conditions, the demand increases and, therefore, extra load has to be borne by machines. This is possible through shift duties.

3. Airlines, where flights arrive and depart, work throughout the day.

4. Essential services like hospitals and fire stations deal with emergencies and, thus, people work in shifts.

Departments are created for each shift though the objectives and nature of work carried in all the departments is the same.

This method of departmentation results in optimum utilisation of machines as they work continuously which otherwise may remain idle. It is also good for workers who cannot work during day time. They can be gainfully employed during evening or night shifts.

There are problems of co-ordination and supervision of employees who work in shifts. Employees have to explain to the workers joining the next shift about the stage of completion at which they are leaving the work which may not always be possible.

It is also a costly form of departmentation as each shift has separate functional departments.

6. Departmentation by Size:

This method is followed in army where number of workers in the unit is important. The company’s performance is judged by the number of people working with it, and therefore, it adopts departmentation by size. Departments are created on the basis of number of people who form the department. Soldiers in army are grouped in numbers to form departments.

7. Departmentation by Task Force:

When organisation has a number of projects, it forms task forces which consist of people from different units having different skills to complete those projects. These groups are formed temporarily till completion of the project. They are similar to project organisations.