In the smallest and least complex type of business, all tasks might be performed by just one or two people. In this type of business, there is little or no differentiation. Sales, accounting, shipping and customer service can all be handled by the same person in the same location without a chain of command. As a company becomes more complex, all of these aspects of the job differentiate into separate jobs.
The complexity of a company is defined by the amount and type of differentiation in its organizational chart. Spatial differentiation occurs when employees work in different locations. For instance, a small bookseller might have both a retail bookstore and a warehouse. Vertical differentiation occurs when the company develops a chain of command. Instead of a single person taking orders online and shipping them out, the company now has salespeople who answer to floor managers who answer to department heads who answer to the owner. Horizontal differentiation occurs when the company develops separate positions for separate tasks, such as hiring people to handle shipping, customer service and sales.
Horizontal differentiation begins when the company assigns specific job functions to specific people rather than having a few people performing all needed tasks. As the company continues to differentiate horizontally, it can organize by function, process, product, service, location or client. For instance, the company can have a shipping department and a sales department. It can have a department in charge of computer products and another in charge of video games. It can have a team in charge of all business for one major client and another team in charge of all smaller clients. These forms of differentiation are all horizontal, because they are all on the same level. The manager of the sales department does not outrank the shipping manager or the customer service manager.
Administrative intensity refers to the amount of supervision needed to run a company. In a very small company, three people might work for one person. A company with three departments needs at least three managers. A company with five departments and five teams per department needs at least five managers or department heads and 25 team leaders. Horizontal differentiation increases the administrative intensity of the organization. In effect, more horizontal differentiation results in more vertical differentiation over time.
Many companies combine more than one type of horizontal differentiation at the same time. For instance, a store with one location in New York City and other in New Jersey might also have separate departments for sales, customer service, shipping and accounting at each location. A company with salespeople assigned to separate geographical territories may also differentiate salespeople by product, service or client. The types of horizontal differentiation found at different companies depends on the organizational needs of that company.