Departmentalisation by function and by product; merits and demerits of functional departmentalisation

Departmentalisation

Departmentalisation is the process of grouping related activities and jobs into units (departments) so that they can be managed effectively. Common bases are function, product, territory, customer and process. (The paper note explains how the opening words of this part are read.)

• By function: activities are grouped according to the main functions of the business, production, marketing, finance, human resources, research, each under a functional head.
• By product: activities are grouped according to products or product lines; each product division has its own production, marketing and other functions under a product manager.

Differences between departmentalisation by function and by product

(The comparison follows the lines drawn in the standard texts.)

Merits of departmentalisation by function

1. Simple and logical: it follows the natural division of business activities.
2. Clear career paths within a function.
3. Easier training and supervision of specialists in their own field.
4. Easy control by top management, which keeps the important decisions.
5. No duplication: facilities and staff serve every product, which saves cost.
6. Expertise: each department concentrates on one function, raising efficiency.

Demerits of departmentalisation by function

1. Unsuitable for diversified firms with many unrelated products.
2. Slow decisions in a growing or changing environment.
3. Responsibility for profit cannot be fixed below top management.
4. Few all-round managers: each head knows one function only, so the firm has few people ready to run the whole business.
5. Friction between departments: coordination is hard and conflicts are pushed up to top management.
6. Departmental tunnel vision: departments pursue their own goals and may lose sight of the organisation's.

Example. A single-product biscuit maker organised into production, marketing, finance and HR departments benefits from specialisation, but when it adds snacks and beverages it may move to product divisions.

Choosing between them

Functional departmentalisation suits a firm whose products are few and similar, whose environment is stable and whose main need is efficiency. Product departmentalisation suits a firm whose products differ in technology, customers or markets and which needs quick, product-focused decisions. Many large firms combine the two, product divisions at the top, functional departments within each division, or move to a matrix when both needs are equally strong.