Smart Business Study



Departmentation is an element of the organizing process. It is a means of dividing the large and complex organization into smaller and flexible administrative units. It involves horizontal differentiation of activities in an enterprise. A department is a distinct area, unit or sub-system of an organization over which a manager has authority for performance of specified activities. It is also known as division, branch, regiment, battalion, etc.

Meaning of Departmentation

Departmentation may be defined as the process of grouping individual jobs into departments. It involves grouping of activities and employees into departments so as to facilitate the accomplishment of organizational objectives. Once the total work of an enterprise is divided into individual functions and sub-functions, these functions are grouped together into work units on a particular basis.

Need and Importance of Departmentation

Departmentation is required due to the following reasons:

  1. Specialisation. Departmentation enables an enterprise to take advantage of Specialisation. When every department looks after one major function of business, division of work becomes possible.
  2. Expansion. One manager can manage only a limited number of subordinates. In the absence of departmentation, the size of the enterprise remains limited. Grouping of activities and personnel into departments makes it possible to expand an organization to an indefinite degree.
  3. Autonomy. Departmentation results in the division of the enterprise into semi-autonomous units. In these units, every manager is given adequate freedom. The feeling of autonomy provides job satisfaction and motivation which in turn lead to higher efficiency of operations.
  4. Fixation of Responsibility. Departmentation enables each person to know the specific part he is to play in the total organization. It provides a basis for building up loyalty and commitment. The responsibility for results can be defined more precisely and an individual can be held accountable for performance.
  5. Appraisal. Appraisal of managerial performance becomes easier when specific tasks are assigned to departmental personnel. The source of information, the skills and competence required for total managerial decisions can be located.
  6. Management Development. Departmentation facilitates communication, coordination and control. It simplifies the training and development of executives by providing them opportunity to take independent decisions and to exercise initiative.
  7. Administrative Control. Grouping of activities and personnel into manageable units facilitates administrative control. Standards of performance for each and every department can be precisely determined.

Bases or Types of Departmentation  

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

  1. Departmentation by Functions.
  2. Departmentation BY Products.
  3. Departmentation by Territory.
  4. Departmentation y Customer.
  5. Departmentation by Process or Equipment.
  6. Departmentation by Time.
  7. Combined Departmentation.

Functional Departmentation

Under functional departmentation each major or basic function is organised as a separate department. Basic or organic functions are the functions the performance of which is vital and essential to the survival of the organisation. For example, production, sales, financing and personnel are basic functions in a manufacturing enterprise. On the other hand, in a retail store buying, selling and finance are the major functions. If necessary, s major function may be divided into sub-functions. For instance, activities in the production department may be classified into quality control, processing of materials and repairs and maintenance. Thus, the process of functional differentiation may take place through successive levels in the hierarchy. The process can continue as long as there exists a sound basis for further differentiation. Functional differentiation is the most widely used for basis for grouping activities. It exists almost in every organisation at some level.

Departmentation by Functions


The main advantages of functional departmentations are as follows:

  1. It is the most logical, time proven and natural form of departmentation.
  2. It provides specialisation which makes optimum utilization of manpower.
  3. It ensures the performance of all activities necessary for achieving organizational objectives.
  4. It facilitates delegation of authority.
  5. It permits effective control over performance.
  6. It eliminates costly duplication of effort.
  7. It makes management easier because managers have to be experts only in a narrow range of skills.


  1. There is too much emphasis on specialisation. When each employee specialises only in a small part of the job, he cannot develop a balanced attitude towards the job as a whole. Team work suffers.
  2. There may be conflicts between departments as the responsibilities are interdependent and cannot always be clearly delineated.
  3. Functional departments may grow in size to justify their costs. Managers may try to build their functional empires.
  4. There may be difficulties in coordinating the activities of different departments. For example, the sales department may fail to honour delivery schedule due to problems in the production department. There may be inflexibility and complexity of operations.
  5. Decisions involving two or more departments may get delayed.
  6. Functional specialisation restricts development of managers with all round skills.
  7. Functional departmentation may not be able to handle diversified product lines.

Committees may be constituted to ensure effective coordination between functional departments. The functional basis is more useful to large organisations. Very often the functional basis is used at the top level and some other basis is applied at lower levels.

Product Departmentation

In product departmentation, every major product is organised as a separate department. Each department looks after the production, sales and finance of one product. Product departmentation is useful when product expansion and diversification, manufacturing and marketing characteristics of the product are of primary significance. It is generally employed when the product is relatively complex and a great deal of capital is required for plant and equipment such as in automobile and electronic industries. For instance, a big company with a diversified product line may have three product diversions-one each for plastics, chemicals and metals. Each division may be sub-divided into production, sales, finance and personnel activities.


  1. Product departmentation can reduce the problem of coordination between departments. All activities concerning a particular product line are integrated together.
  2. It focuses individual attention on each product line which facilitates product expansion and diversification.
  3. It leads to specialisation of physical activities.
  4. The performance of each product division and its contribution to overall results can be easily evaluated. Responsibility for the production of each product cab be fixed on product managers.
  5. As each product division is semi-autonomous and contains different functions, product departmentation provides an excellent training ground for managerial personnel.
  6. It is more flexible and adaptable to change.


  1. There is duplication of physical facilities and functions. Each product division maintains its own facilities and personnel due to which operating costs may be high.
  2. Advantages of centrailisation of certain activities like financing, accounting, distribution, etc. are not available.
  3. There may be underutilization of plant capacity when the demand for a particular product is not adequate.
  4. The firm may find it difficult to adapt itself to changes in demand and technology.

On the whole, product departmentation is suitable for those big enterprises which supply a wide variety of products with different manufacturing technologies and marketing methods.

Functional Vs. Product Departmentation

Point of DifferenceFunctional DepartmentationProduct Departmentation
NatureEvery major function a separate departmentEvery product line a separate department
Type of SpecialisationOccupational specialisationProduct specialisation
Organisational unitsFunctional departments and sub-departmentsProduct divisions
Responsibility for ResultsCannot be fixed on specific personsCan be fixed on specific persons
Executive DevelopmentLess scope for the development of all-round executivesMore scope for the development of all-round executives
Autonomy of operationsLessMore
When UsefulFor all types of firmsFor multi-product or diversified firms

Territorial Departmentation

Territorial Departmentation is very useful to a large-scale enterprise whose activities are geographically spread. Banks, insurance companies, transport companies, distribution agencies are examples of such enterprises. Under territorial or geographical departmentation activities are divided into zones, divisions and branches.

Departmentation by Teritories


  1. It helps in achieving the benefits of local operations. The local managers are more conversant with local customs, preferences, fashions, styles, etc. They can adapt and respond to the local demand situation with speed and accuracy. The enterprise can gain intimate knowledge of conditions in the local markets.
  2. It results in savings in freight, rents and labour costs. There are savings in time and money.
  3. There is better coordination of activities in a locality through the setting up of regional divisions. It provides for effective span of control.
  4. It facilities the expansion of business to various regions.
  5. It provides opportunity to train managers as they look after the complete operations of a unit.


  1. Due to geographical distance there is problem of communication.
  2. Coordination and control of different branches from the head office become less effective.
  3. There is duplication of physical facilities due to which costs of operations may be high.

Customer Departmentation

Under the basis of departmentation, activities are grouped according to the type of customers. For instance, a large cloth store may be divided into wholesale, retail and export divisions. This type of departmentation is useful for banks, departmental stores, etc. Each department specialises in serving a particular class of customers.

Departmentation by Customers


  1. Special attention can be given to the particular tastes and preferences of each class of customers. Customers’ satisfaction enhances the goodwill and sales of the enterprise.
  2. The benefits of specialisation can be derived.
  3. The enterprise gains intimate knowledge of the needs of each category of customers.


  1. As such departmentation is applied only to sales function, there may be difficulties in coordinating the activities of different functions.
  2. There may be under-utilisation of facilities and manpower, particularly during periods of low demand.
  3. Managers of customer departments may put pressures for special facilities and benefits.
  4. It may lead to duplication of activities.

Process or Equipment Departmentation

Under the basis, activities are grouped on the basis of production processes or equipment involved. This is generally used in a manufacturing enterprise and at lower levels of organisation. For example, a textile mill may be organised into ginning, spinning, weaving and dyeing departments. Similarly, a printing press may consist of composing, proof reading, printing and binding departments. Such departmentation may also be used in engineering and oil industries.

Departmentation by Process


Process departmentation provides the advantage of specialisation, proper maintenance of equipment and effective utilization of manpower. The machines are arranged in such a way that series of operations on materials is feasible making operations economical.


There may be difficulty in coordinating different process departments. Conflicts among managers of different processes may arise. Volume of production must be large enough to justify a separate department.

Time Departmentation

Under the basis, activities are grouped on the basis of the time of their performance. For example, a factory operating twenty-four hours may have three departments, one each for morning, day and night shifts. The idea is to obtain the advantages of people specialised to work in a particular shift.

               In case of departmentation by numbers, activities are grouped on the basis of their performance by a certain number of persons. For example, in the army soldiers are grouped into squads, battalions, companies, brigades and regiments on the basis of the number prescribed for each unit. The basis of departmentation is used at the lower levels of hierarchy.

Composite or Combined Departmentation

Departmentation is not an end in itself but a means for achieving organisational objectives. Each basis of departmentation has its own merits and demerits. Therefore, the relative advantages and limitations of various types of departmentation should be analysed in the light of the needs and circumstances of the particular enterprise. That basis of departmentation is the best which facilitates the achievement of organisational objectives most economically and efficiently.

Combined Departmentation

In practice, no single pattern is ideal to suit all situations. Therefore, no single basis is followed for grouping activities, Rather, most of the big enterprises follow a composite or combination of several bases. Generally, functional departmentation is used at the top level. Activities of the sales department may be grouped on product or territorial basis which may further be sub-divided on customer basis. Similarly, activities in the production department may be grouped on the basis of process or equipment employed.

Choosing a Basis for Departmentation (Fundamentals of Departmentation)  

Management must be very careful in choosing the basis of departmentation because once a pattern is chosen it is very difficult and costly to switch over to another pattern. The following factors should be kept in view while selecting a suitable basis of departmentation:

  1. Specialisation. The activities of an organisation should be grouped in such a way that it leads to the specialisation of work. Specialisation helps to improve efficiency and economy of operations. However, over-specialisation should be avoided because it results into loss of motivation among the personnel.
  2. Coordination. All activities are designed to achieve the organisational objectives. Coordination inn the performance of different activities is necessary so that they contribute maximum towards the organisational goals. Sometimes dissimilar activities may have to be put together in one department because close coordination between them is necessary.
  3. Control. The departmentation should be such that it facilitates measurement of performance and timely corrective action. It should enable the management to hold people accountable for results. Effective control helps to achieve organisational goals efficiently and economically.   
  4. Economy. Creation of new department involves extra cost of additional space, equipment and personnel. Therefore, the pattern and number of departments should be so decided that maximum possible economy is achieved in the utilisation of physical facilities and personnel.
  5. Attention. The various activities should be given adequate attention so that each necessary activity is performed and there is no unnecessary duplication of activities. Proper weightage should be given to different functions depending upon their significance and the organisational needs. The future importance of an activity should be considered. Key areas should be given special attention.
  6. Local Conditions. Local factors should be adequately considered in a scheme of decentralisation. Departmentation should be adjusted according to available resources.
  7. Human Consideration. Departmentation should not follow only technical aspects but human aspects of the organisation too. The existence of informal groups, cultural patterns, value system, attitudes of personnel, etc. should be given due consideration. Attention to the human factor will make departmentation more efficient and more effective. 

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