Business function and product or service output are two of the common ways in which companies establish organizational departments. Functional departmentalization is one of the more common and familiar types as it means establishing departments for each common business function, such as manufacturing, purchasing, marketing and sales. Production departmentalization means departments are established based on the product or service on which employees work.
A key difference between functional and product departmentalization is the basic ways in how departments are set. Some companies incorporate both functional and product departments. Functional departmentalization is commonly used to divide employees based on the common work process in which they engage. Product departmentalization often occurs in companies that divide manufacturing, marketing, sales or other processes into certain categories, giving each an important focus on core operations. Thus, employees within a broader functional area may also be divided into product categories, or departments.
Another significant difference between functional and product departments is the type of organizations that typically use them. Smaller organizations, assembly-line producers and well-established professional organizations such as colleges and hospitals usually have functional departments, partly due to tradition. Larger organizations, multinational companies and companies that have operations spread out across many locations may employ product departments to allow employees in certain locations to focus on the production or output of a key product.
Functional and product departmentalization approaches each have distinct strengths. Functional departments are often more economical because each core function has one group of employees focused entirely on that work process or function. Product departmentalization is used, in part, to break up a larger organization into smaller, product-specific work units. This allows for more teamwork and better communication among a smaller group of employees focused specifically on one product.
A main criticism of functional departmentalization is that it inherently causes division by function. Employees are more likely to separate their work processes from others, making it difficult to achieve alignment with corporate objectives and strategies. A major drawback of the product departmentalization approach is that it can lead to duplication of effort since employees in each product category often perform similar functions. For instance, each product might have its own marketing and sales team that operates independently of other marketing and sales groups within the company.