Departmentalization (or departmentalisation) refers to the process of "grouping the organizational activities and structure into departments". Division of labour creates specialists who need coordination 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.

In modern times, Gulick and Urwick were the first to introduce a theory of different departmentalization strategies, which were referred to as departmentalization by purpose and departmentalization by process.

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".

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.”

Departmentalization by purpose

Advantages: