The organization is divided into segments based on the functions when managing. This allows the organization to enhance the efficiencies of these functional groups. Every organization has specialized functions and they constitute as separate units of the organization. The entire activities that are connected with such functions are placed in the same unit. The increase in volume of activity results in addition of number of persons under each manager at various levels. It also results in the increase of sub-units that are created at lower levels in each unit. It finally results in the inter-related positions taking the shape of a pyramid. Its major significance is that there is functional specialization in each unit. It leads to operational efficiency of the persons engaged in the organization. The organization also gets the benefit of specialized operations.
This type of arrangement is well suited for small and medium size organization. It becomes incompetent while handling problems of an organization as it grows in size and complexity. When there are diverse trends of activities performed in large number of sub-units, it become difficult to manage. In such type of arrangements, the probability of lack of communication and coordination and control arises that leads to problems in the organization. In this case, organization may find it difficult to achieve some organizational objectives at the end.
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