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Departmentalization (ordepartmentalisation) refers to the process of "grouping the organizational activities and structure into departments".Division of labour createsspecialists who needcoordination and the coordination is facilitated by grouping specialists together in departments.
As March and Simon noted when tracing a first approach to departmentalization back to Aristotle, the problem of distributing work, authority and responsibility throughout an organization is hardly new.[2]
In modern times, Gulick and Urwick were the first to introduce a theory of different departmentalization strategies, which were referred to asdepartmentalization by purpose anddepartmentalization by process.[3]
Studying the above characterizations of the two forms of departmentalization, purpose decentralization is concerned with building work around specific products, customers, or geographic locations, while process departmentalization encompasses the efficiency of "production".[3]
March and Simon described the basic difference between the two ways of departmentalization as following:
”Process departmentalization generally takes greater advantage of the potentialities for economy of specialization than does purpose departmentalization: purpose departmentalization leads to greater self-containment and lower coordination costs than process departmentalization.[2]”
Departmentalization by purpose
Advantages:
Disadvantage:
The sense of independence may result in a drift-off from the achievement of the overall objectives of the organization.
Therefore, it is crucial for establishing control systems that serve the purpose of allowing decentralized decisions , while still aligning all sub-units to the overall goals of the organization.[4][5]
Departmentalization by process
Advantages:
It seeks to benefit from the advantages that are found in high specialization, and tends to be very efficient in some instances. A high degree of specialization leads to the development of proficiency and professional competence, as well as it enables, and implies, the development of centralized control functions.[4][5]
Disadvantage:
The problem of aligning individual and organizational goals remains. In addition, in this case, we would also need to consider departmental goals. Also, the high level of specialization is a barrier for the flexible reallocation of resources within the organization, i.e. people can not perform other tasks than those they are working with in their functional occupation.[4][5]
Applicability of Two types ofDepartmentalization
Looking at the circumstances encompassing the use of either of the departmentalization strategies, we find that departmentalization by process generally is advantageous in cases of stable environments, while departmentalization by purpose, featuring self-containment and certain amounts of independence, appears to be the appropriate strategy for handling changing or unpredictable circumstances.[2]
Alfred Chandler identified a correlation between the application of purpose departmentalization and the use of a diversification strategy:
”The dominant centralized structure had one basic weakness. A very few men were still entrusted with a great number of complex decisions. ... As long as an enterprise belonged in an industry whose market, sources of raw materials, and production processes remained relatively unchanged, few entrepreneurial decisions have to be reached. In that situation, such a weakness was not critical, but where technology, market, and sources of supplies were changed rapidly, the defect of such a structure became more obvious.”[2]
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