55. Explain the major ways in which organizations are divided into departments.

The process of subdividing work into departments is called departmentalization. Four frequently used forms of departmentalization: functional, territorial, product-service, and customer. The most appropriate form of departmentalization is the one that provides the best chance of achieving the organization’s objectives. The organization’s environment is an important factor in this decision. Assume that a company needs to use radically different approaches to serve different customers. It would organ­ize the firm according to the customer served. A typical arrangement of this nature sets up one department to serve commercial accounts and another department to serve the government. 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. 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 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. A bigger problem arises if top-level management experiences difficulty controlling the performance of field units.

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. 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. Departmentalization by product poses the same potential problems as territorial departmentalization. It can be expensive because of duplication of effort, and top-level management may find it difficult to control the separate units.

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.