2. Explain the major ways in which organizations are divided into departments.
DEPARTMENTALIZATION
Bureaucratic and other forms of organization subdivide the work into departments, or other units, to prevent total confusion. The process of subdividing work into departments is called departmentalization.
This lecture uses charts to illustrate four frequently used forms of departmentalization: functional, territorial, product-service, and customer.
Functional departmentalization defines departments by the function each one performs, such as accounting or purchasing. Dividing work according to activity is the traditional way of organizing the efforts of people. In a functional organization, each department carries out a specialized activity, such as information processing, purchasing, sales, accounting, or maintenance.
Exhibit 2 illustrates an organization arranged on purely functional lines. The major subdivisions further divide along their own functional lines as shown in Exhibit 3. The exhibit shows the functional organization within the materials management department.
The list of advantages and disadvantages of the functional organization, the traditional form of organization, reads the same as for bureaucracy. Functional departmentalization works particularly well when large batches of work have to be processed on a recurring basis and when the expertise of specialists is required.
Territorial departmentalization is an arrangement of departments according to the geographic area served. In this organization structure, all the activities for a firm in a given geographic area report to one manager, often with a title such as “Regional Vice President.”
Territorial departmentalization that divides an organization into geographic regions generally works well for international business. Yet in a new global business trend, organizations develop a central structure that serves operations in various geographic locations. A case in point is Ford Motor Company. To economize, Ford merged its manufacturing, sales, and product development operations in North America, Europe, Latin America, and Asia.
A key advantage of territorial departmentalization allows for decision making at a local level, where the personnel are most familiar with the problems. Territorial departmentalization also presents some potential disadvantages. The arrangement can be quite expensive because of duplication of costs and effort. For instance, each region may build service departments (such as for purchasing) that duplicate activities carried out at headquarters.
Product-service departmentalization is the arrangement of departments according to the products or services they provide. When specific products or services are so important that the units that create and support them almost become independent companies, product departmentalization makes sense. With very successful products, the organizational unit making the product becomes a division, such as the wireless product division of Verizon.
Exhibit 4 presents a version of product-service departmentalization. Notice that the four finance divisions offer products or services with unique demands of their own.
Organizing by product line offers numerous benefits because employees focus on a product or service, which allows each division or department the maximum opportunity to grow and prosper. Similar to territorial departmentalization, grouping by product or service helps train general managers, fosters high morale, and allows decisions to be made at the local level.
Customer departmentalization creates an organization structure based on customer needs. When the demands of one group of customers differ significantly from the demands of another, customer departmentalization often results. Many insurance companies, for example, organize their efforts into consumer and commercial departments. Manufacturers of sophisticated equipment typically consist of different groups for processing government and commercial accounts. Customer departmentalization resembles product departmentalization, and sometimes the distinction between these two forms of organization blurs.