Organizational design is the internal structure of an organization, or the arrangement of positions in the organization into work units or departments and the interrelationships among them. Formal authority is illustrated in the formal structure of an organization (org) chart.

An organization chart is a graphic illustration of the organization’s management hierarchy and departments and their working relationships. Each box represents a position within the organization, and each line indicates the reporting relationships. Departmentalization is the grouping of related activities into units. Traditional departmentalization tends to have a simple structure. Departments may have either an internal or an external focus, as discussed here.

Functional departmentalization capitalizes on functional expertise, as it involves organizing departments around essential internal input activities, such as making/selling and financing products and services. Product (service) departmentalization involves organizing departments around goods (or services). Companies with multiple products commonly use product departmentalization.

Customer departmentalization involves organizing departments around the needs of different types of customers. The product or service may be the same or slightly different, but the needs of the customer warrant different marketing approaches. Territory departmentalization involves establishing units in each area.