How to find the optimal organizational structure for a business

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One of the ongoing debates about business organization is whether companies should adopt unit or functional structures.

Apple is the classic functional organization, with staff grouped by their function reporting to a head for that function, such as hardware engineers reporting to a senior vice president of hardware engineering. Warren Buffett’s Berkshire Hathaway is the classic unit structure, where there’s a manager for each business and all of the staff for that business, whatever their function, report up to her.

Both approaches have advantages. In a functional organization, employees are often managed by people with deep knowledge of their specialized skills, who can support their development and hold them accountable—and that can make it easier to attract and retain top talent. The managers in a unit organization can have clearer accountability for business outcomes, and flexibility to deploy resources however best to achieve them, without having to spend time negotiating with other managers. (Steven Sinofsky, a former Microsoft executive and Andreessen Horowitz board partner, has published a thorough rundown of the approaches here.)

The truth is that most businesses seem to yo-yo between unit and functional organizations, and often deploy a mix of the two. We recently spoke with Box CEO Aaron Levie, who in the video above discusses how his tech company is structured. Box follows a functional structure, but creates small “virtual teams” of people drawn from different functions to tackle specific business problems. These teams generally have a single person who’s driving the initiative, such as a product, sales, or marketing manager. 

But Levie acknowledges that it’s harder to hold such leaders accountable if the people on the virtual teams ultimately report to other managers of their functions. Asked how Box does that, he says, “Shit, if I know. This is what we’re working on.”

He thinks it’s natural that businesses shift between functional and unit approaches:

“Nobody has figured out the perfect model, and almost 100% of everybody changes every three years because you swing to one side of things, you realize you’ve gone too functional. And so then you go back to more units, you swing too much toward units, and then you realize you’re getting no leverage across the functions. And so I think business is sort of this pendulum that you’re always trying to find what is the optimal fit for where you are as an organization and where the business is and where the business problem is relative to the market.”

Eric Ries, the author of The Lean Startup and CEO of the Long-Term Stock Exchange, argues that the benefit of such organizational shifts from one structure to another is that they allow companies to cancel bad projects. “There’s so much waste in most companies, the way they’re organized, that just to reorganize them from anything to anything causes you to reevaluate all the crap that you’re doing,” he says.

Ries argues for a hybrid model, where functionally structured businesses use the unit approach for new activities they are just starting up. “We don’t need that for everything,” he says in a recent interview. “But then you have other situations where the engineering team, the product teams are trying to get an approval from finance to do a thing, and can’t get it done.”

Ries describes his recommended approach as having a “corporate function for entrepreneurship.” He says it’s a more stable model, though acknowledges that it gets complicated to implement a hybrid approach.