GeneralHr Library

Functional versus Unit Organizations

Source | Learning By Shipping

Company organization structure defines both how and what a company builds. It is also one of the few decisions that a CEO can clearly make. Because organization (org) structures appear to be easily distilled down to simple graphs, it is frequently the case that when a company is doing well a given org structure serves as a model for others to follow; and when things are not going well there’s a chorus to change to some obvious alternative. Reality is far more complex, unfortunately.

A recent post by Matthew Yglesias, Apple may have finally gotten too big for its unusual corporate structure, clearly describes two main types of org structures and also explains how a new structure will address some perceived problems at Apple. Stratechery’s Ben Thompson also wrote about this topic earlier in the year, Apple’s Organizational Crossroads. I wish things were as straight forward as these posts imply. If you’re not sure what it means to organize by function or unit (sometimes called a division) then please read those two posts for background.

Reading these posts and a diagnosis of Apple brought back memories of a Microsoft executive retreat many years ago where some high-brow consultants were arguing for Microsoft to be business unit, rather than function, organized. Oddly at the time we were clearly organized by “product” and hardly by “function” so I was always confused by the advice (as were many people). But the memories of this time and my own history of working through basically every size and shape of organization over the years provided some motivation for this look at what works and does not work in the seemingly binary choice between functional and unit organizations.

This post is in four sections: some personal history, the two Golden Rules of orgs, a collection of pros/cons for each of the two ends of the pendulum known as functional versus unit organization shape, and then the universal truths of org design.

OMG this post is long! Sure it is long, but this is a really tough topic. In human-centric companies, how CEOs and leaders organize is as important as how Henry Ford innovated in factories. In doing something big at scale, the organization influences, and even determines, much of what gets built. As a CEO or big company executive, organization is one of the very few things that is entirely your doing and responsibility. So a lot of words follow.

“Going Functional”

Like any org structure in practice, one almost never sees a pure expression of the ends of the spectrum referred to as functional and divisional. The conglomerate model of running things as seen by Berkshire Hathaway or in industrial companies like GE is close to a pure expression of unit structure and strategy, but pretty rare. Likewise, almost nothing is a pure functional organization except for single-product companies. It could be that Apple is reasonably close to a pure expression of a functional org, though as with an example like GE one should have visibility to more levels of detail and operations to know for sure.

It turns out that the details and shades of grey of this spectrum matter and matter a lot. Generally, the more you dive in the more you realize that most all companies are in the broad middle of org structures. They try to have a best of all worlds approach, because they know that the pure models are fraught with unappealing trade-offs.

Read On….

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