Everything you need to know about the basis of departmentation. Departmentalization divides the people and function into identifiable units to achieve organizational goals.

It must be emphasized that there is no other best way of departmentalizing that is applicable to all organizations or to all situations. The pattern depends upon given situations on what managers believe yield the best results for them in a situation they face.

The different ways in which departmentation may be carried out are:-

1. By Simple Numbers 2. By Time 3. Function 4. Product or Services 5. Process or Plant 6. Geographical Region 7. Customers and Clientele 8. Marketing Channel 9. Committees 10. Matrix or Grid Method 11. Composite Departmentation.


Additionally, learn about the criteria for grouping activities and choosing a basis for departmentalization.

Basis of Departmentation with Advantages and Disadvantages

Basis of Departmentation –  By Simple Numbers, Time, Function, Product, Process, Geographical Region, Marketing Channel and a Few Others (With Examples)

The main objective of the departmentation is to achieve the organized objective, so various activities are grouped or divided on the following bases:

1. By simple numbers;

2. By time;


3. By function;

4. By product or services;

5. By process or plant;

6. By geographical region;


7. By customers and clientele;

8. By marketing channel;

9. By committees; and

10. Matrix or Grid Method of Departmentation.

1. By Simple Numbers:

The number of persons pursuing a set of activities can be the basis of departmentation. In this pattern the department (a number of persons formed into a group) is set a task and it reports to a manager to whom it is responsible for the fulfillment of the task.

This method is limited in scope and is suitable in the following situation:

(1) Where the work is of repetitive nature and mainly of unskilled. Where some skill is involved, it is so standardized that it can be picked up through training, almost equally well, by every day in group thereby making the elements in the group homogeneous or near homogeneous.

(2) Where manpower is the most important condition of success of the activities.

(3) Where group efforts are more important than individual efforts.


(4) Where the group task can be measured and related the number in a group.

For Example — the departmentation of this type are found in the companies of the army organisation, cleaning staff in a municipality, workers of the State Electricity Board.

This method is not suitable for higher management levels. Although the departmentation is by simple numbers, there is a basic homogeneity of the task assigned to the group.

2. By Time:

This method of forming groups has limited applicability. If often goes with the first method so that number in the group working for a defined period makes the joint criterion of grouping.


For Example—a shift in a factory work especially where twenty four hours operation is necessary.

3. Departmentation by Functions:

The word ‘Function, refers to any task involved in the performance of activities of an enterprise that can be clearly distinguished from any other task. In other words 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 base for further differentiation.

Functional departmentation offers one of the most logical methods of divisioning or grouping enterprise activities. It is one of the most commonly used methods, either independently or in combination with others.

For Example—an enterprise may have production, sales, purchase, accounts and personnel as primary functions and each function is performed by a separate department named after it such as production department, marketing department, personnel department, etc. These functions can further be divided into various sub-functions as the size of the business increases and the number of departments may be increased for these sub-functions.


This may be called divisions or sub-departments. Such as there may be market research department, advertising department, sales departments, under the marketing department.

Advantages or Merits of Functional Departmentation:

The following are the merits of the functional form of departmentation:

(i) Advantage of Specialisation:

This is the most important form of advantage. Under this one can achieve specialization easily as time and energy can be devoted to similar groups of activities and thus man power is used and utilized efficiently.

(ii) Sound and Logical Way of Grouping Activities:


It represents a very sound and logical way of grouping activities of the enterprise.

(iii) All the Necessary Activities are Performed:

In this form of departmentation there is no possibility of leaving any activity of the enterprise unperformed. All the necessary activities are performed through the respective departments efficiently. It eliminates all the unnecessary activities.

(iv) Facilitates Control and Co-Ordination:

This departmentation facilitates control and co-ordination of activities within the department and at the inter-department level. The departmental head, controls and co-ordinates the activities of person within the department under his supervision. The activities of various departments can also be co-ordinated either at the initiative of the Chief Executive or of the departmental heads.

(v) Employment of Functional Experts:


Functional experts are employed in various functional areas to perform various activities requiring specialized knowledge.

(vi) A Time Proven Method:

Functional departmentation is a time proven method and simple and easy to understand. It can easily be justified by the management.

(vii) Provides Flexibility:

It provides flexibility. There is much scope for expansion as the size of the organization increases. More departments may be established by sub-dividing the basic function.

(viii) Delegation of Authority:


It lays emphasis and facilitates delegation of authority and thus reduces the burden of the Chief Executive.

Disadvantaged, Demerits or Limitations of Functional Departmentation:

Following disadvantages can be experienced by grouping the activities or functional basis:

(i) The Outlook of a Functional Manager Tends to be Very Narrow:

He thinks only in terms of his own department and not the business as a whole. If sometimes leads to clashes between two in charge of the departments.

(ii) Problem of Co-Ordination:


Due to narrow outlook, the internal frictions develop among functional managers and in such cases co-ordination becomes a problem.

(iii) Problem of Motivation:

There is too much emphasis in specialization. It may hamper the broadening of outlook of various people. It may also cause motivation problems. The personnel of a department may feel that the work they are doing is an important and that they are an insignificant part of the total picture.

(iv) Delay in Decision Making and Flow of Information:

Decision on major issues are taken at the top level and communicated to the bottom through the chain of command. It delays the process of decision-making, communication decision to the bottom and its implementation.

(v) The Promotion Prospects for the Departmental Managers become Weak:

The enterprise cannot offer comprehensive training to all promotable managers because each one is expert only in dealing with the activities of a particular function.

(vi) Unsuitable:

This basis of departmentation is quite unsuitable where either geographical centralization is required or emphasis on product line is called for.

(vii) General Cost Increases:

Functional specialization may reduce costs through higher efficiency but such savings may not be sufficient to compensate for the increased expenses resulting through departmentation. Managers may try to build their functional empire. In spite of all these limitations the functional departmentation is very popular and common.

4. Departmentation by Product or Services:

In the product departmentation, departments are created on the basis of products. Under this departmentation all activities related to a particular product line may be grouped together under the direction of a semi-autonomous division manager.

This basis of departmetation is very popular in large organisation producing different types of products or offering different types of services. Here product lines are segregated and each product line has its own manager. Product departmentation is preferred when product expansion and diversification, manufacturing and marketing characteristics of products are of primary concern.

In this, each department is responsible for manufacturing, selling and further developing the one distinct product line. The head office establishes the objectives of various divisions in terms which are significant for the enterprise as a whole and the performance of each such division is measured from these objectives. A product department may further be divided as functional basis.

This departmentation is used when the product is relatively complex and a great deal of capital is required for plant and equipment such as in automobile industry.


Following are the advantages of product departmentation:

(i) It is Easy to Evaluate the Performance:

It is easier to evaluate the performance of each product line and there, an unprofitable line of product may be dropped and a profitable line may be enlarged.

(ii) Product Departmentation Can Reduce the Problem of Co-Ordination:

The problem of co-ordination present in the functional departmentation is removed here. The functions of manufacturing, selling, etc. of different products are performed by different executives in charge and therefore the chief executive is not to bother much about co-ordination. So far as the co-ordination of different activities connected with a particular line of product is concerned that is looked after by the head of particular product.

(iii) Advantage of Specialised Product Knowledge:

Product departmentation enjoys the advantage of specialized product knowledge.

(iv) Manager is Interested in the Expansion, Improvement and Diversification Programmes of the Product:

Because he is mainly responsible for the better performance of a particular product which is entrusted to him.

(v) Detailed Information are Received:

In this it becomes easier to receive, to evaluate and to compare the performance of each department. Further, the top management gets detailed information regarding the production and marketing of each product line.

(vi) Good Training Ground for Managerial Personnel:

This provides an excellent training ground for managerial personnel because each department manager knows much about functions performed in each department.

(vii) Suitable in the Organisation where Product Lines are Complex Arid Diverse:

This form of departmentation is most suitable in organisations where product lines are complex and diverse and require specialized knowledge for selling and marketing.

(viii) Provides Flexibility:

It provides flexibility. A new product line can be added without dislocating the existing lines of product.

Disadvantages of Product Departmentation:

The disadvantages of Product departmentation are as follows:

(i) Duplication of Physical Facilities:

In this type of departmentation there is duplication of physical facilities and many functions. Each product division maintain its separate facilities and functional personnel.

(ii) Centralisation of Certain Activities Cannot be Achieved:

Advantages of centralization of certain activities like accounting, financing, marketing, etc. cannot be achieved.

(iii) Problem of Co-Ordination for the Chief Executive:

The Product departmentation may sometimes lead to difficulties in co-ordination. There is a tendency on the part of the product manager to centralize all the related activities in himself and thus poses a problem of co-ordination for the chief executive. This may lead to functional decentralization.

(iv) Not Suitable for Small Enterprises:

This method is not suitable for small enterprises as the managerial costs go high because of decentralization of various product lines. It is not suitable even for big enterprises if they do not match the cost of decentralization by their improved efficiency.

(v) Some Business Centres Fall under Utilisation of Plant:

There may be under utilization of plant capacity if the demand of a product is not sufficient.

Some business houses combine these two bases of departmentation i.e., functional as well as product bases. Finance and personnel functions are performed in respective departments. In this way, the advantages of functional and product departmentation are achieved.

5. Departmentation by Process or Equipment:

A manufacturing enterprise may departmentalize its activities on the basis of production, processes or equipment involved. For example- a textile mill may organize its departments into spinning, weaving, calendaring and dyeing.

This type of departmentation may also be followed in engineering and old industries. The justification of a separate department around equipment is that it is not always possible to install a costly equipment in every department which needs its use. Further, only skilled personnel are required to operate the equipment.


(i) Advantage of Specialization:

It has the advantages of functioning, maintenance of equipment and manpower utilization.

(ii) To Achieve Economic Advantage:

The important purpose of setting up this type of department is to achieve economic advantage. The machines or equipments relating to one operation is set-up in one department and departments or machines are arranged in such a way that a series of operations on materials is feasible making operations economic.


The important disadvantages are as follows:

(i) Production be Large:

The chief disadvantage of this system is that the volume of production must be large enough to warrant a separate department.

(ii) Difficulty of Co-Ordination:

There may be difficulty of co-ordination of the departments based on different processes.

(iii) Conflict among Managers:

There may be conflicts among managers of various processes. The instances of this type of conflict are available.

This method obviously has limited application but being suitable only for a special and composite type of plant, process or equipment.

6. By Geographical Region:

Departmentation by geographical region is sometimes seen as essential and necessary when the enterprise produces and sells in the wide material market, often in international markets. Factories are often preferred at different locations for reasons of raw materials, utilities, labour, inputs and transport. These may produce the same, different or complementary products.

For Example—Bata’s factories at different locations in the country are good examples. Regional or territorial basis of departmentation is more common in the marketing activities. Further, Departmental Stores, Chain Stores and regional sales divisions assist dispersal of sales and services uniformly and economically all over the country. The management functions which include planning, decision-making, directing and control are facilitated taking each territory as a profit centre.


The advantages of this departmentation are as follows:

(i) Better Adjustment is Possible:

Better adjustment with the social and socio­economic environment is possible to a great extent.

(ii) Greater Access to Local and Territorial Economies and Facilities Possible:

Since regional factories or territorial sales offices are opened, considering regional and locational advantages such benefits accrue to the enterprise.

(iii) Decision-Making and Communication are Facilitated:

Regional autonomy vests in the department to a great extent, therefore decision-making and communication is possible to a great extent. The regional departments look up to the central office in large policy matters, but in matters of regional operations can move with speed and responsive flexibility.

(iv) Advantage in Respect of Credit Control and Other Routine Staff Matters:

In matters of functions like finance, personnel and public-relations—which are intrinsically convenient to operate from the centre (headquarters), certain limited and local responsibilities of accounting, credit control, etc., and routine staff matters can always be left with advantage to be operated by the territorial department.


The principal disadvantages of the geographical region are as follows:

(i) Duplication of Personnel:

In this departmentation the duplication of personnel, large manpower requirement, high overheads, territorial loyalty and problem of co-ordination and control is in existence to a great extent.

(ii) Danger of Imbalance in the Working:

Therefore, it is very essential that a balance has to be stuck as to the extent how far, territorial departmentation should be carried out.

For Example— In a fertilizer marketing organisation the market is widely dispersed in the sprawling, amorphous rural areas of the country. A second level of departmentation at area level, a number of areas working under a region is always useful and necessary. This helped local participation of the concerned state departments and institutional authorities, local knowledge and quick responses to market shifts, competitors’ activities and local problems.

7. Departmentation by Customers:

Under this departmentation, the customers are the key to the way the activities are grouped. A marketing organisation may group its activities according to the classes of customers served by it, depending on their volume of demand, language and the like.

Such type of division is important where attention to various types of customers is of the prime importance.

The customers may be divided on any one of the following ways:

(i) Large and small customers,

(ii) Rich and poor customers,

(iii) Government and non­government customers,

(iv) Industrial and consumer customers,

(v) Age (old adult or child),

(vi) Sex (Ladies and Gents),

(vii) Income,

(viii) Taste etc.

(ix) Nature of business etc.

Another example we may write is of a departmental store, where it may have children’s department, ladies department, gents department, each catering to the various requirements of different classes of customers.


The main advantages of customers departmentation are as follows:

(i) Satisfaction of customers the chief aim- In this type of departmentation the satisfaction of customers is the chief aim. Satisfaction enhances the reputation of the concern among the customers.

(ii) Needs of widely varied customers can be satisfied- It can be done through specialized staff with a motive of providing services to clearly defined groups of customers.

(iii) Special importance to certain categories of customers are also attached.

(iv) Advantage of specialization- This can also be derived through this method of departmentation.


The important disadvantages of this type of departmentation are as follows:

(i) Difficulties in co-ordination- Since this type of departmentation is applicable only to the sales function, a co-ordination among sales and other functions become difficult.

(ii) Under-utilisation of facilities- There may be under-utilisation of facilities and manpower as separate departments are created to serve the different classes of customers.

(iii) Pressure for favour and special treatment- A pressure can be exerted at any time of the customer, department managers for special treatment in respect of various facilities and amenities in order to meet their demands.

8. Marketing Channel Departmentation:

In this type of departmentation many procedures and marketers have found that retailing to customers directly is not feasible. Therefore, considering the size and complexity of the business and the spread of the market, this is particularly true of the consumer market and the agricultural inputs market.

For Example—A fertilizer company would find it impossible be react to millions of farming families all over the rural areas. Such products as mass consumption items; pharmaceuticals, farming inputs, etc. rely on the support of the marketing channel to— (a) reach the consumers, and (b) to steer competition.

Thus, a fertiliser company sells chemical fertilizers throughout half the country to twenty five million farming families through the following channels—(i) Wholesalers; (ii) Dealers; (iii) Retailers; (iv) The Co-operative system; (v) The agro-service centres; and (vi) Direct depot.

Because of the fact that the competition in the business is growing day-by-day and the market is becoming wider, the ‘Marketing Channel’ basis of departmentation is bound to compel more and more attention. Even the product lines are being increasingly influenced by the demands of the channels with regard to product specification, packing, warehousing, logistics and terms of sale.

9. By Committees Departmentation:

This method of departmentation is seen in operation in academic and research institutions and universities, although in any organization where the major functions are mainly deliberative and directive and where the output of the function demands independent specialist views to be brought to bear on it, this method may be adopted.

Therefore, an All India Professional Institute may have the following major functions— (i) Examination; (ii) Training and education; (iii) Research; (iv) Professional development; (v) Discipline; (vi) Publications and journals; and (vii) International professional co-operation.

Each function has a plan, a task, a long-term and short-term strategies. There is an elected Governing Body of the Institute. The governing body constitutes a committee with selected members from the governing body and co-opted experts where necessary, from outside, each in charge of the above several functions. Further, there is a permanent secretariat to each committee which implements the decisions of the respective committee ratified by the Governing body.

This form is not suitable however in a business enterprise managed for profit.

10. Matrix or Grid Method of Departmentation:

The Matrix or Grid Structure is a mosaic of task and functions. In this, the project has a sizeable programme. The task in the project is mostly large and rewarding but temporary in nature. Here, the project is such as must call together various skills and knit them into a machinery aimed at accomplishing the project.

The opposite demands on the organisation structure are met by the innovation known as the Matrix or Grid Structure.

The functional departments continue the general running of the professional institute as a permanent institution. At the same time it supports the requirements of the different projects and programmes needing multi-functional support.


The advantages of Matrix or Grid method, method of departmentation are as follows:

i. Unity of command- In this the project leader or manager is accountable for the success of the project.

ii. Completion of network- The project manager can draw on the specialist services of the other departments to complete the network.

iii. Completion of work with ease and flexibility- In this the functional services are released with ease and flexibility. These may join other projects which may replace the completed ones or they may attend to other basic objectives of the institutions.

iv. Functional conflicts- The method provokes functional conflicts which is healthy especially in academic institutions.

v. It produces economy of efforts and expenses.

vi. It helps in organising projects and consultation services.


The disadvantages of Matrix or Grid departmentation are as follows:

i. Inter-functional and inter-disciplinary conflicts may arise in this.

ii. Difference between project manager and the functional heads may come up.

iii. When the organization has other demands, on the functional services, its other objectives besides the project competing claims and quarrels on the functional resources may result.

In a healthy climate of co-operation and team-work, the system, on the whole will work very satisfactorily.

Basis of Departmentation – Functional Departmentation, Product Based Departmentation, Territory Based Departmentation, Departmentation by Customers and a Few Others

Divisionalization/departmentation is based on the following factors:

Basis # 1. Functional Departmentation:

It means grouping the business functions in terms of functions like production, marketing, HR, Finance, R&D and so on. There may be a number of sub departments in each of these main functional departments.

For example, production department may have purchase, materials control, product planning, product design, quality control; the marketing department may have departments like advertising, sales force control, sales promotion, market research, physical distribution etc., and finance department may have cash management, credit and collection, budgeting, financial control, accounting and so on.


i. Logical one – It is more logical and time tested method to create departments in manufacturing industries in terms of functions.

ii. Domain specific training – Each department can train the staff belonging to a given specialization. It simplifies training.

iii. Flexibility – This method affords flexibility in that more departments can be added and some can be eliminated in sync with changes in environmental dynamics.

iv. Appointment of specialist – Specialists can be appointed for various functional domains. As a result operational efficiency of the organization is expected to improve significantly.


i. Narrow focus – Over emphasis on specialization causes the functional heads to remain narrow focused. They tend to have empire building tendencies. They are inclined in promoting the narrow interests of their departments at die cost of other departments.

ii. Inter-departmental conflict – Inter-departmental conflicts are quite natural in function-wise classification as their responsibilities are inter-dependent.

iii. Lack of broad view – Too much specialization makes the functional heads unfit to hold top managerial position. They lack a broad view of the organization. Thus, it limits the development of functional heads.

iv. Coordinating difficulties – There are difficulties in coordinating the activities of different departments. For example, sales department may not be able to honour its promise of delivering certain units of a product due to delayed production by production department.

Basis # 2. Product Based Departmentation:

Under this type, departments are created in terms of products produced by an enterprise. Where an enterprise produces a number of products whether related or unrelated to one another, activities are grouped according to the products churned out by it.

There would be a central office which would provide certain basic support for different departments/divisions. Each division would function autonomously with minimum intervention from the corporate office.


i. Discrimination of profitable and non-profitable lines – It is easier for the top management to determine profitable and non-profitable line of business and take appropriate action.

ii. Scope of product expansion – It focuses individual attention on each product line which facilitates product expansion and diversification.

iii. Individual contribution – The performance of each division and its contribution to overall result can be known easily.

iv. Accountability fixation – It is easier to fix accountability for the profitability of each product.

v. Excellent training ground – As each product division is semi-autonomous and contains different functions, it provides an excellent training ground for top managerial position.

vi. Flexibility – This is more flexible and adaptable.


i. Higher operating cost – The operating cost is higher for organizations practising product based departmentation as there is need to replicas specialized facilities and manpower.

ii. Underutilization of capacity – When the demand for a given product dwindles, the facility remains under-utilized.

iii. Unwieldy supervision – Top management finds it difficult to exercise control over various divisions and activities.

iv. Empire building tendencies – Each product manager tends to create his own empire at the cost of overall interest of the organization.

v. More manpower – This requires more manpower with general managerial abilities.

Basis # 3. Territory Based Departmentation:

Where activities are widely dispersed, departmentation is based on geographical area. All the activities relating to a given area/territory are grouped and assigned to the executive in charge of each area. Under this type, division is done in terms of region, zone, branch, etc. In short, where similar operations are undertaken in different geographical locations, departmentation is done in terms of territory. For example, banks, insurance, postal service, courier, transport companies, etc., follow this type of departmentation.


i. Catering to diverse needs of customer in multiple locations – It enables the enterprise to cater to the needs of customers in different locations across the nation/globe.

ii. Prompt action – The heads of each territory can initiate prompt action in response to issues peculiar to a given region.

iii. Contact with locals easier – Managers can employ local people who can relate with the locals with relative case. As a result, business of the enterprise may grow substantially.

iv. Cost saving – It results in saving freight, rentals and labour costs. Therefore economies of localized operations accrue to it.

v. Better coordination – Better coordination of activities can be achieved through setting up of regional divisions. It facilitates effective span of control.

vi. Direct contact – Face to face communication with the local customers boosts the image of the company and its goodwill.

vii. Goods training for manager – It provides a good training ground for general managers.


i. High cost of operation – It involves high cost of operation and the enterprise has to duplicate/replicate the activities in different locations.

ii. Shortage of executive – It requires more executives with general managerial abilities which may not be available in required number.

iii. Friction among managers in multiple locations – There may arise friction among the territorial managers.

iv. Co-ordination and control of officers in diverse locations is challenging for top management.

v. Communication gap – There may also arise communication gap between central office and regional centres.

Basis # 4. Departmentation by Customers:

Where the attention to types of customers become paramount, departments may be established in terms of customers. This type of departmentation is applied in banks, insurance, retailing, departmental store and so on.


i. Special attention – Special attention is given to distinct tastes and preference of each class of customer. This enhances customer satisfaction and boosts the image of the enterprise.

ii. Benefits of specialization – The benefits of the specialization can be achieved.

iii. Gathering market intelligence – The enterprise is able to collect minute information about the different classes of customers and tailor make their production programmes.


i. Underutilization of resources – When there is a fall in demand in a particular department, resources remain unutilized or underutilized.

ii. Excessive overheads – Duplication of activities adds to excessive overheads.

iii. Problem of coordination – There may arise the problem of coordinating the activities of diverse departments and there may also arise communication gap between central office and departments.

iv. Craving for special treatment – Each manager may bring in pressure for special treatment, privileges, facilities and benefits. Provision of any special treatment to any particular department may breed ill will among the rest of the departments.

Basis # 5. Departmentation Based on Process:

Under this classification, activities are grouped in terms of the stages a product goes through in the production process. For example, textile mill may have department like spinning, ginning, weaving, bleaching, dying and weaving; printing press may have composing, editing, printing, binding and proofreading departments.


i. Clear Cut Division Of Work – There is a clear cut division of work. This ensures specialization and facilitates training of entry level personnel.

ii. Specialist services – It is possible to appoint specialists for each process and derive the benefit of specialization.

iii. Saving in repair and maintenance cost – Location of machines of similar type result in saving repair and maintenance cost.


i. Coordination challenges – There may be difficulty in coordinating the different processes.

ii. Conflict among managers – Conflict among the process managers may erupt.

iii. Unsuitability – It is not suited to non-composite type of plants.

Basis # 6. Departmentation by Time:

Where activities are grouped as per the time of performance, it is called departmentation by time. For instance, factory working 24×7 can have day shift, night shift and general shift. Hospitals and public utility companies are working under shift system. Separate departments are created. Even in educational institutions like Arts colleges, in certain states in India there are two separate departments for morning shift and evening shift. MNCs pursue this type of departmentation.


i. 24×7 services – Services are made available around the clock e.g., fire service, electricity, hospital, transport, gas supply, etc.

ii. Full utilization of resources – Equipments are fully utilized. There is no question of underutilization of capacities.

iii. Work option – Employees get the option to work in convenient shifts.

iv. Avenues of opportunities – It creates a lot of employment opportunities.


i. Supervision difficulties – Supervision of night shift workers may pose a problem.

ii. Overstressing machines – Machines and equipments are overstressed thereby increasing maintenance costs.

iii. Adverse effect on the health of employees – Working at odd hours affects the health of employees.

Basis # 7. Departmentation by Number:

This type of departmentation is pursued in police and defence sectors. For example, soldiers in army are grouped into squads, battalions, companies, brigades and regiments. A specific number of persons who perform the same duties are isolated and brought under the supervision of a manager. This type of departmentation is practised where the work is repetitive and there is no single basis for grouping the activities.

Basis # 8. Composite Departmentation:

In practice no organization follows a single pattern of departmentation. Each type/base of departmentation has its own advantages and disadvantages. Big enterprises apply more than one method of departmentation. For example, functional classification may be followed at the top while activities at the middle and lower level may be organized in terms of product and territorial base.

Basis of Departmentation – With Advantages and Disadvantages

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 by Customer

5. Departmentation by Process or Equipments

6. Departmentation by Time and Numbers

1. Departmentation by Functions:

It refers to grouping the activities of an enterprise on the basis of functions such as production, sales, purchase, finance, personnel, etc. The actual numbers of departments in which an enterprise can be divided depends upon the size of establishment and its nature. To being with, we may- have three of four main departments. With the growth in the size of the business, mare departments and sub-departments may be created.


The important advantages of functional classification include the following:

(a) It provides the benefits of occupational specialization in full.

(b) It ensures an effective utilization of manpower in all depart­ments.

(c) It results in an economy of operation because of simple organizational design.

(d) It reaps the facility of intra-departmental co-ordination among the activities of each department.

(e) It leads to the adoption of a logical and comprehensible structure.

(f) It gives a greater emphasis on basic activities rather than on service activities.

(g) It helps in the training of specialist managers rather than generalist managers.


Departmentation by enterprise functions has the following demerits:

(i) The functional classification has a proneness to greater centralization.

(ii) It involves delay in decision-making, thereby reducing efficiency.

(iii) It is responsible for poor inter-departmental co-ordination in respect of operations between two departments.

(iv) It exercises ineffective control over work performance in the absence of any rigid standards of performance.

(v) For excessive specialization, it destroys teamwork and employee motivation.

(vi) Succession to the position of the chief executive is a serious problem in functionalization.

(vii) The greatest disadvantage lies in the unsatisfactory handling of diversified product lines.

2. Departmentation by Products:

In product or service Departmentation, every major product is organized as a separate department. Each department looks after the production, sales and finance of one product. It is useful when product expansion and diversification, manufacturing and marketing characteristics of the product are of primary significance.


i. This facilitates the use of specialized equipment, promotes co-ordination and allows maximum utilization of personal skills and specialized knowledge.

ii. This facilitates the growth and diversity of products and services offered by the organization.

iii. The performance of each product line can be compared and analyzed.

iv. This allows the organization to come up with additional product lines without dislocating the existing product lines.

v. This provides an excellent training growth for management control.

vi. This enables top managers to measure and analysis the contribution of each product line to total profit.

vii. The co-ordination of various activities related to a particular product line is taken care by the head of the department.


There have certain disadvantages:

i. Product division requires people with general management abilities.

ii. This is expensive.

iii. This creates a problem of control at the top management level.

iv. This method of grouping poses certain problems in co­ordination, decision-making and control.

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

3. Departmentation by Territory, Geographic Departmentation:

Geography divisions are division designed to save different geographic areas. Under this method, territory or location is taken as the basis for organizing. This is common in organizations that operate over wide geographic areas, banking insurance and transportation firms.


These are the advantages which accrue to an organization having geographic divisions:

i. Geographic divisions allow a manager to pay special attention to the needs and problems of the local markets.

ii. Geographic divisions provide opportunities for local talent to the utilized.

iii. Organization can follow a Geographic or territorial basis for setting-up manufacturing facilities at specific locations in a country.

iv. This improves an organization relationship with customer and the organization can avoid delays in sorting out customer problems.

v. This provides a good training ground for developing general managers as they take an integrated view of the organization and look after all the operations of the unit.

vi. It facilitates the expansion of business to various regions.


The following are the disadvantages:

i. This requires more people with managerial capabilities.

ii. This creates communication problems due to geographical distance.

iii. In this form costs of operations are high because of duplication of activities in different geographic regions.

iv. The top managers at the headquarters may find it difficult to control and supervise the activities at the departmental levels.

v. It creates the problems of co-ordination and communication.

Thus, Geographic division becomes necessary at some stage in large organizations that operate in a wide geographic area.

4. Departmentation by Customer:

A business house may be divided into a number of departments on the basis of customers it serves, viz., larger and small customers, industrial and ultimate buyers, Government and other customers, male and female customers old and other young customers, wholesale, retail or hire purchase customers etc.


The following are the advantages:

i. Special attention can be given to the particular tastes and preference of each class of customers.

ii. The benefit of specialization can be derived.

iii. The enterprises gains intimate knowledge of the needs of each category of customers.


The following are the main disadvantages:

i. It may lead to duplication of activities and heavy overloads.

ii. There will be lack of co-ordination.

iii. There may be under utilization of facilities and manpower, particularly during period of low demand.

iv. Managers of customer departments may put pressure for special facilities and benefits.

Thus, this is very much useful when the organizations primary interest is to meet the needs of different customer groups.

5. Departmentation by Process or Equipment:

In manufacturing organizations the activities are often grouped on the basis of processes of equipment. This form of Departmentation brings together people and material to carry out a particular operation. It permits intensive and economical usage of costly equipment. Such as Departmentation can be found in paint or electroplating process grouping. It can also be seen in the old and textile industry or in the arrangement of one plant area of automatic screw machines or punch presses.

Advantages of Departmentation by Process of Equipment:

i. Process Departmentation enables an organization to get the benefits of specialization and make optimum use of the resources and equipment.

ii. This Departmentation is beneficial when the equipment or machinery requires special operating skills.

iii. The basic purpose of the Departmentation is to get economic benefits. Machinery or equipment related to a particular activity may be installed in one department and arranged in such a way that makes the series of operations feasible and economic.

Disadvantages of Departmentation by Process or Equipment:

i. Process Departmentation hinders the co-ordination of various functions due to the limitations that arise from specialization.

ii. This form of Departmentation results in conflicts between different managers at different levels on matters such as allocation of funds, providing facilities to different processes etc.

6. Departmentation by Time and Numbers:

(a) Departmentation by Simple Numbers:

In this method certain numbers of persons who are to perform the same duties are kept in one department under the supervision of one person, irrespective of what they do, where they do and what they work with. This form of Departmentation is based only on the number of people involved in it. The usefulness of this form of Departmentation has diminished with each passing century for three reasons.

First, technology has become more sophisticated and demands for more specialized and diverse skills have increased. Second, the groups comprising of specialized personnel are generally much more efficient than those groups which has been form on the basis of numbers. Finally the most prominent cause for decline the Departmentation by simple numbers is that it is useful only at the lowest level of the organization structure.

(b) Departmentation by Time:

Departmentation by time is also one of the order forms of Departmentation and generally used at lower levels of the organization. In some organizations that work round-the-clock (for example, public utilities like railways, post and telegraph offices, hospital etc.) Departmentation is based on time. The use of shifts is common in such organization as they may be affected by economic, technological of other factors. For such organizations, a normal eight hour work day may not be sufficient.

Advantages of Departmentation by Time:

i. The basic advantage of time-based Departmentation is that it helps in efficient utilization of manpower and other resources.

ii. An organization can render its services to its services to its customer for a period greater than the normal 8-hour working day. Thus, an organization can make its services available to those who need it at any hour.

iii. This forms of Departmentation facilities the use of processes requiring a continuous cycle without interruption.

iv. Expensive capital can be efficiently utilized as employees working in shifts make use of the same machinery for a greater period of time.

v. This form of Departmentation is convenient for some people as they can work at night, for example, students may find it convenient to work at night, as they have classes to attend during the day.

Disadvantages of Departmentation by Time:

i. There may be a lack of supervision in the night shifts.

ii. Most of the employees find it difficult to adjust to switches from one shift to another. For example, an individual may find it difficult to shift form a night shift to a day shift and vice-versa.

iii. When organization operates with several shift system, co­ordination and communication may become a problem. For example, employees working in the night shifts may not clean up and grease the machinery to be used by the day-shift people. This can be resolved through the establishment of regular practice.

iv. Employees may postpone their work in order to get paid for overtime work. Thus, will put up the costs of production and affect the final price of the product or service.

v. Workers may concentrate on narrow and specified technical aspects of the organization rather than on the total system of composite/combined Departmentation- The relative advantages and limitations of various types of Departmentation should be analyzed in the light of the needs and circumstances of the particular enterprise. That basis of the Departmentation is the best which facilitates the achievements of organizational objectives most economically and efficiently. In practice, no single pattern is ideal to suit all situations. Therefore, no single basis is followed for grouping activities. Most of big enterprises follow a composite of combined bases.

Choosing a Basis for Departmentation (Criteria for Grouping Activities):

Every basis of Departmentation has its own advantages and disadvantages. No single basis is the ideal for all organizations. Management must be very careful in choosing the basis of Departmentation because one 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. Specialization:

The activities of an organization should be grouped in such a way that it leads to the specialization of work. Specialization helps to improve efficiency and economy of operation.

2. Co-Ordination:

All activities are designed to achieve the organizational objectives. Co-ordination in the performance of different activities is necessary so that they contributes maximum towards the organizational goals.

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 organizational goals efficiently and economically.

4. Cost:

Creation of a 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 utilization of physical Facilities and Personnel.

5. Special Attention:

The various activities should be given adequate attention so that each necessary activity is performed and there is no unnecessary duplication of activities.

6. Local Conditions:

Local factors should be adequately considered in a scheme of decentralization.

7. Human Consideration:

Departmentation should not follow only technical aspects but human aspects of the organization too.

The existence of informal groups, cultural patterns value system, attitudes of personnel, etc., should be given due to consideration.

Basis of Departmentation – Departmentalization by Numbers, Time, Function, Product, Territory, Customer and Process (With Factors for Basis for Departmentalization)

Departmentalization divides the people and function into identifiable units to achieve organizational goals. It must be emphasized that there is no other best way of departmentalizing that is applicable to all organizations or to all situations. The pattern depends upon given situations on what managers believe yield the best results for them in a situation they face.

There are many patterns of departmentalization:

1. Departmentalization by Numbers,

2. Departmentalization by Time,

3. Departmentalization by Function,

4. Departmentalization by Product,

5. Departmentalization by Territory,

6. Departmentalization by Customer, and

7. Departmentalization by Process.

The details of the types of departmentalization are:

Basis # 1. Departmentalization by Numbers:

Departmentalization by simple numbers has been an important method in organisation of tribes and armies. It involves placing specific number of undifferentiated persons at the direction of an executive or a manager.

The simple number method of departmentalizing is achieved by tolling off persons who are to perform the same duties and putting them under the supervision of a manager. The success of such departments depends upon the quality of manpower. Although, it is not used these days, it still may have certain applications in modern society. It is not feasible today to divide the entire manpower into different units.

Usefulness has declined due to the following reasons:

(i) Technological advancement and demanding more specialized and different skills.

(ii) Groups composed of specialized personnel are frequently more efficient than those based merely on numbers.

(iii) Departmentalization by numbers is useful only at the lowest level of the organisation structure,

(iv) This departmentalization fails to utilize the manpower properly, and so it fails to produce good results.

Basis # 2. Departmentalization by Time:

This is also the oldest form of departmentalization, generally used at lower levels of the organisation, which groups the activities on the basis of time. The use of shift is common. When the work is divided into shifts and time, this is called departmentalisation by time.

Thus, when an organisation operates on three shifts, three different departments may exist – one department for each shift, though they all are alike in terms of objectives and activities. The basic idea is to get the advantages of people specialized to work in a particular shift. Examples of this kind of departmentalisation can be found in hospitals, where round the clock patient care is essential.

There are a few advantages of this form of departmentalisation. First, services can be rendered that go beyond the typical 8-hour workday. Secondly, it is also possible to use processes that cannot be interrupted, those that require a continuing cycle. Lastly, capital equipment can be used properly which are used in shifts.

Inspite of these advantages, departmentalisation by time has disadvantages. First, supervision may be lacking, secondly, there are fatigue factor. Thirdly, having several shifts may cause problems in coordination and communication. Despite this problem, this form of departmentalisation is still in use.

Basis # 3. Departmentalization by Function:

Functional departmentalization refers to grouping of activities in accordance with the function of an enterprise; this embodies what enterprises typically do. In simple terms, the departments are created or formed on the basis of specified functions to be performed.

Activities related to a function are grouped in a single unit with a view to give a well-defined direction of the whole group. Since all enterprises undertake the creation of basic unit, the basic enterprise functions are production, financing, selling, purchasing and material, technical, marketing, personnel, etc.

These are the basic functions of an enterprise. Ralph C. Davis called it ‘Organic Function’, because their performance is vital and essential to the survival of the organisation. However, there is no generally accepted sequence of departmentalization. This depends upon the nature of enterprise and requirement of the organisation.

Often, these particular functional designations appear or do not appear in the organisation chart. A manufacturing unit employs different terminology, while a wholesale concern employs mostly i.e., selling, ‘buying’ and Finance; and technical enterprise employs different terminology; this is because of the nature of enterprise and functioning.

Functional departmentalization is the most widely employed basis for organizing activities and present in almost every enterprise at some level in the organisation structure. The characteristics of the production, selling and finance functions of an enterprise are widely recognized and thoroughly understood.

Coordination of activities may be achieved through rules and procedures, planning organisational hierarchy, personal contacts, and sometimes liaison departments. Such a department may be used between engineering and manufacturing to handle design or charge problems.


The following are the main advantages of functional departmentalization:

(i) Follows principle of occupational specialization,

(ii) Logical, time proven and natural form,

(iii) Maintains power and prestige of major functions,

(iv) Simplifies work and training, and

(v) Facilitate control.

This is the most logical and time-proven method. It ensures the performance of all activities necessary for achieving organizational objectives. It is also the best way of making certain that the power and prestige of the basic activities will be defended by the top managers. Functional departmentalization follows the principle of occupational specialization and thereby facilitates efficiency in the utilization of people.


In spite of advantages, functional departmentalization has certain limitations:

(i) De-emphasis of overall company objectives,

(ii) Over specializes and narrows viewpoints of key personnel,

(iii) Reduces coordination between functions,

(iv) Responsibility for profits is at the top level only, and

(v) Limited development of general managers.

Functional departmentalization may tend to de-emphasize overall enterprise objectives. Next, drawback is too much emphasis on specialization, and sometimes, functional departments grow in size to justify their costs.

Basis # 4. Departmentalization by Product:

The grouping of activities on the basis of products or product lines is called departmentalization by products. It is preferred when product expansion and diversification, manufacturing and the marketing features of the products are of primary concern. Generally, where the company is making or producing diversified product, then for the convenience of controlling, departmentalization is be to done on the basis of product.

This structure permits top management to delegate to a division executive extensive authority over the manufacturing, sales, service, and engineering functions that relate to a given product or product line and to exact a considerable degree of profit responsibility from each of these managers.

Departmentalization by product or service occurs when employees who work on a particular product or service are members of the same department regardless of their business function or process in which they are engaged. In this way, IBM reorganized its operation into five autonomous business units – Personal computers, Medium-size office systems. Mainframes, Communication equipments, and components.

For example, a big enterprise with a diversified product line may have four divisions- A, B, C and D. Each division may be subdivided into Finance, Production, Sales and Personnel activities.


Product departmentalization is useful where production lines are diversified and the volume of production is large.

(i) Product departmentalization can reduce the coordination problem at higher levels, because of the integration of various functions to a particular line of product.

(ii) It facilitates the use of specialized capital, promotes a certain type of coordination, and permits the maximum use of personnel skills and specialized knowledge.

(iii) Product departmentalization facilitates the measurement of managerial and operative results.

(iv) It facilitates the evaluation and comparison of the performance of various product divisions.

(v) If follows individual attention on each product line which makes easier product expansion and diversification.


In spite of these advantages, product departmentalization has the following limitations:

(i) Production department encounters certain difficulties in coordination which may lead to instability in organisation structure.

(ii) Product manager centralizes all related activities; and because of these the benefits of specialization cannot be taken in respect of these.

(iii) There is a problem of oversimplification. Product line-managers may be saddled with heavy overhead costs, etc. Product managers resent being charged with costs over which they have no control.

(iv) There is a duplication of physical facilities and functions. It is suitable for only large scale business and multi-product enterprises which have the capacity to produce and sell at a larger scale.

Basis # 5. Departmentalization by Territory:

It means that groups are organized according to a region of the country or world. Sales or marketing groups are arranged by geographic region. Territorial Departmentalization operates over wide geographical areas. In this case, all the activities in a given area or territory are grouped together and assigned to a manager. Here, all the activities in a given area of operation are divided into zones, divisions, sections and branches.

This is especially attractive to large-scale firms or other enterprises whose activities are physically or geographically dispersed, such as banking, insurance, transportation and distribution network throughout a territory, etc. The territorial departmentalization is of Indian Railways; which is divided into northern Railways, Western Railways, Southern Railways, Eastern Railways and Central Railways.

Territorial Departmentalization offers a numbers of advantages:

(i) It places responsibility to a lower level, encourages logical participation in a decision making, and improves coordination of activities in a region,

(ii) It helps in achieving the benefits of local operations. Knowledge of local environment is an important factor in effective management action,

(iii) It facilitates the expansion of business in various regions,

(iv) It improves coordination in a region,

(v) It takes the advantages of economies of local operation, and

(vi) It furnishes measurable training ground for general managers.

Territorial departmentation suffers from the following limitations:

(i) This creates the problem of coordination among various regional units.

(ii) It increases problems of top management to exercise effective control; because management is not conversant with the problems of different areas.

(iii) It increases the cost of operation. It tends to make maintenance of economical central services difficult and may require services such as personnel or purchasing at region level.

(iv) There is problem of communication due to geographical distance.

(v) It requires more skilled managers which may not always be available.

(vi) Sometimes implementation of the policy matter fails. Proper implementation of policies is not possible.

Basis # 6. Departmentalization by Customer:

In customer departmentalization, activities are grouped according to customer. The management groups the activities to cater to the requirements of different customer groups. Customers are the key to grouping. Many educational institutions usually follow this type of departmentalization, where they offer different types of courses to meet the requirement of different types of students. Business owner and managers also frequently arrange activities on this basis to cater to the requirements of clearly defined customer groups. The main objective of this type is to provide specialized services to different classes of customers.

This basis of departmentalization follows the division and sub­division of activities of marketing to give attention to various customers. Management in action reports how Proctor and Gamble made several changes in its brand manager system to establish a customer-based structure.

The benefits of customer departmentalization are as follows:

(i) Customer departmentalization focuses on the customer needs. It can address the special and widely varied needs of customers.

(ii) It develops expertise in customer area. The benefits of specialization can be derived.

(iii) It leads to greater satisfaction of customers. It gives customers a feeling that they have an understanding supplier.

This practice has certain limitations:

(i) As such, this basis is applied on marketing function generally; coordination becomes difficult between marketing and other functions.

(ii) There is possibility of underemployment of facilities and manpower specialized for certain consumer groups, especially in case of recession.

(iii) It requires managers and staff specialists get familiar with the customer situation: which is very difficult.

(iv) Customer may not always be clearly defined/or differentiation among the various customer groups might be difficult. With customer form, there is usually less process specialization, because employees must remain flexible to do whatever is necessary to enhance the relationships with customers.

Basis # 7. Departmentalization by Process:

In this method, activities are grouped on the basis of production processes or equipment involved. Manufacturing process is taken as basis for dividing the activities. The manpower and materials are brought together in order to carry out a particular operation. This is generally used in a manufacturing enterprise and at lower levels of organisation.

This is mostly employed in textile, oil and other similar industries. As such, production department of a textile mill may be operated on the basis of process, like spinning, weaving, dyeing, bleaching, designing and calendaring.

The main objective is to achieve the efficiency and economy of operation. The basic objective is to achieve economic advantages.

1. It provides for effective utilization of specialized equipments and skills.

2. This ensures specialization and facilitates training of junior level employees.

3. This facilitates coordination by grouping production facilities needed for the completion of each distinct phase of work.

4. It puts full responsibility for the completion of each stage of production.

5. Greater emphasis on quality of work.

This method, however, proves to have some limitations:

(i) There may be difficulty in the coordination of the departments based on different processes.

(ii) Inefficiency in operation of one process department may adversely affect other process departments.

(iii) There is also duplication of general purpose equipment in various departments.

(iv) It is suitable only for specific or composite types of plants.

(v) There may be conflicts among managers of different processes.

Choosing a Basis for Departmentalisation:

As from the above discussion of each form of departmentalization, managers have to see the consequences of every form, because the process of selection requires a lot of insight; but overall it should be directed to promote the attainment of organisational goals.

Departmentalization is the basis only to achieve organisational goals; so the basic consideration will be given to perform organisation activities efficiently and effectively. In actual practice, no single basis is followed is grouping the activities throughout the organisation. A combination of two or more basis is used at different levels in the organisation.

Management must take into consideration all the peculiar circumstances in the selection of the basis of departmentalization and the following factors should be kept in mind. They are:

1. Specialization- Departmentalisation is of such type that should take the advantage of specialization to maximum extent. Specialization helps in raising efficiency and it tends to aid performance contributing to enterprise objectives. Management must take the basis of such departmentalization which facilitates specialization.

2. Economy- The basis of departmentalisation selected must be influenced by cost consideration. Creation of departments increases extra cost on the part of the organisation. This increases costs in several ways. Therefore, the pattern and number of departments should be so decided that maximum possible economy is achieved in the utilization of physical facilities and personnel.

3. Control- The departmentalization should be such which makes it easier for management to measure performance and to hold people accountable for results. The departmentalisation should not create problems for managerial control.

4. Co-Ordination- All the activities grouped in various forms have the same objective to achieve organisational goals, though they are not similar in nature and their performance may require different skills. Thus, coordination is required at every step. Thus, going through the process of departmentalisation, management will ensure proper coordination at the departmental level as well as at organisation level.

5. Emphasis on Key Areas – The various activities of the organisation should be given adequate attention so that each activity is performed and there is no unnecessary duplication in the performance of these activities. Divisions should emphasize on key areas on which the enterprise depends.

6. Human Consideration – Divisions should also take into consideration human aspects of organisation. Availability of personnel, the existence of informal groups, culture, traditions, value system and attitudes of personnel towards various forms or organisations go a long way in deciding the effectiveness and efficiency of the organisation.

Whatever may be the basis, departmentalization means to achieve organisational objective. The basis of departmentalisation is the best which facilitates of organisational objectively most economically and efficiently. In practice, it is not feasible to follow a particular basis of departmentalisation; rather, big organisations follow a composite or combination of several bases.

Functional departmentalization is used at the top level; while sales department may be grouped on product or territorial basis which may be grouped further on customer basis. As usual, production department may be grouped on the basis of product or equipment employed. Thus, there is no ideal pattern to suit all occasions and situations.