Learn It 9.3.2: Organizing

Types of Organizational Structures

Organizations can be structured in various ways, with each structure determining the manner in which the organization operates and performs. An organization’s structure is typically represented by an organizational chart (often called simply an “org chart”)—a diagram showing the interrelationships of its positions. This chart highlights the chain of command, or the authority relationships among people working at different levels. It also shows the number of layers between the top and lowest managerial levels. Organizational structure also dictates the span of control or the number of subordinates a supervisor has. An organization with few layers has a wide span of control, with each manager overseeing a large number of subordinates; with a narrow span of control, only a limited number of subordinates reports to each manager. The structure of an organization determines how the organization will operate and perform.

Typically, organizations base their frameworks on traditional, contemporary, or team-based approaches. Traditional structures are more rigid and group employees by function, products, processes, customers, or regions. Contemporary structures are more flexible and assemble employees to respond quickly to dynamic business environments. Regardless of the structural framework a company chooses to implement, all managers must first consider what kind of work needs to be done within the firm.

Traditional Structures

After a company divides the work it needs to do into specific jobs, managers then group the jobs together so that similar or associated tasks and activities can be coordinated. This grouping of people, tasks, and resources into organizational units is called departmentalization. It facilitates the planning, leading, and control processes. The figure below shows five basic types of departmentalization are commonly used in organizations.

Functional departmentalization shows a president at the top level above legal, human resources, manufacturing, engineering, marketing, and finance functions.
Figure 1. Functional departmentalization organizes by what each department does.

Functional departmentalization is based on the primary functions performed within an organizational unit (marketing, finance, production, sales, and so on). Ethan Allen Interiors, a vertically integrated home furnishings manufacturer, continues its successful departmentalization by function, including retail, manufacturing and sourcing, product design, logistics, and operations, which includes tight financial controls. Communication happens within each function but it is up to the heads of each department to share information across functions. This means that there is the potential for lack of cross-functional communication which could result in poor coordination and decision-making.

Product departmentalization shows an administrator and C E O at the top level, with the head of outpatient slash emergency treatment, head of pediatrics, head of cardiology, head of orthopedics, and head of obstetrics slash gynecology below.
Figure 2. Product departmentalization organizes by the type of product produced or sold by the department or unit.

Product departmentalization is based on the goods or services produced or sold by the organizational unit (such as outpatient/emergency services, pediatrics, cardiology, and orthopedics). For example, ITT is a diversified leading manufacturer of highly engineered components and customized technology solutions for the transportation, industrial, and oil and gas markets. The company is organized into four product divisions: Industrial Process (pumps, valves, and wastewater treatment equipment), Control Technologies (motion control and vibration isolation products), Motion Technologies (shock absorbers, brake pads, and friction materials), and Interconnect Solutions (connectors for a variety of markets).

Process departmentalization shows a plant superintendent at the top level with lumber cutting and treatment, furniture assembly, furniture finishing, and shipping below.
Figure 3. Process departmentalization organizes by the kind of production process used by the unit or department.

Process departmentalization is based on the production process used by the organizational unit (such as lumber cutting and treatment, furniture finishing, and shipping). For example, Pixar, the animated-movie company now part of Disney, is divided into three parallel yet interactive process-based groups: technology development, which delivers computer-graphics tools; creative development, which creates stories and characters and animates them; and production, which coordinates the film-making process.

Customer departmentalization shows the vice president of marketing on the top level with the marketing manager for railroad customers, marketing manager for aircraft customers; marketing manager for automotive customers, and marketing manager for military customers on the level below.
Figure 4. Customer departmentalization organizes based on the type of customer served by the department or unit.

Customer departmentalization is based on the primary type of customer served by the organizational unit (such as wholesale or retail purchasers). The PNC Financial Services Group offers a wide range of services for all of its customers and is structured by the type of consumer it serves: retail banking for consumers; the asset management group, with specific focus on individuals as well as corporations, unions, municipalities, and others; and corporate and institutional banking for middle-market companies nationwide.

Geographic departmentalization shows the vice president of marketing on the top level with the director of U S and Canadian marketing, the director for European marketing, and the director for Latin American marketing below.
Figure 5. Geographic departmentalization is based on location.

Geographic departmentalization is based on the geographic segmentation of organizational units (such as U.S. and Canadian marketing, European marketing, and Latin American marketing).

People are assigned to a particular organizational unit because they perform similar or related tasks, or because they are jointly responsible for a product, client, or market. Decisions about how to departmentalize affect the way management assigns authority, distributes resources, rewards performance, and sets up lines of communication. Many large organizations use several types of departmentalization.

Proctor & Gamble Worldwide

Procter & Gamble (P&G), the multibillion-dollar consumer-products company, integrates four different types of departmentalization, which the company refers to as “four pillars.”

  1. The Global Business Units (GBU) divide the company according to products (baby, feminine, and family care; beauty; fabric and home care; and health and grooming).
  2. P&G also uses a geographical approach, creating business units to market its products around the world. There are Selling and Market Operations (SMO) groups for North America; Latin America; Europe; Asia Pacific; Greater China; and India, the Middle East, and Africa.
  3. P&G’s third pillar is Global Business Services division (GBS), which also uses geographic departmentalization. GBS provides technology processes and standard data tools to enable the GBUs and SMOs to better understand the business and to serve consumers and customers better. It supports P&G business units in functional areas such as accounting and financial reporting, information technology, purchases, payroll and benefits administration, and facilities management.
  4. Finally, the divisions of the Corporate Functions pillar provide a safety net to all the other pillars. These divisions are comprised of functional specialties such as customer business development; external relations; human resources; legal, marketing, consumer, and market knowledge; research and development; and workplace services.[1]

 

  1. “Corporate Structure,” https://us.pg.com/structure-and-governance/corporate-structure/, accessed December 30, 2022. ↵