Which org structure came first…functions or product lines?

Which org structure came first...functions or product lines?What do we mean when we talk about an organizational (“org”) structure? We mean the way a company is organized, in terms of who reports to whom. For large companies, where different teams are working on different tasks simultaneously, it’s essential that we know the flow of information and responsibility.

As you’d imagine, org structures are fluid. No two companies have identical structures. People are continuously entering and leaving the organization. While the specifics of each org structure are constantly changing, the highest levels are stable.

Quick background on org structures

You’ll see the top two levels of two different organizations below. The first one (blue) shows a Chief Executive Officer (CEO) at the top, to whom the heads of four different functions report. (Functions are tasks like marketing, supply chain, operations, finance, et cetera.) The second one (green) shows the CEO at the top, but this time the heads of four different product lines report in.

Two sample org structures, one with function leads, the other with product line leads

 

You’ll note I called out Vice Presidents (VPs) at the top of each function or product line. Different companies will have different titles for those roles. They might be Presidents. In the case of functions, they might be Chief “Function” Officer (e.g. Chief Financial Officer, Chief Marketing Officer, Chief Human Resources Officer, et cetera).

These two org structures show, at the highest level, how large companies tend to organize themselves. Either they organize by function, or they organize by product line. Ben Thompson published a post at Stratechery about this topic. He focused on Apple, and how they’re a unique example of a function-centered company. Most large companies are product line-centered.

Which structure emerged first?

It helps to think about how large companies might have evolved. Fortunately Alfred D. Chandler, Jr., covered a lot of this ground over fifty years ago, in his book Strategy and Structure. (I wrote a bit last week about Chandler’s description of what an executive actually does.)

Imagine you’re running a steel-making business. The core of your business is manufacturing steel. What happens next? How do you grow your business?

If you’re an industrialist like Andrew Carnegie, you try to get into the iron ore mining business. You’re motivated initially by defense. You want to make sure someone else doesn’t control the mines and make you pay through the nose for your raw materials. When you start your business, you’re focused on the steel. But quickly you realize that you have to look upstream and protect your supply chain.

You might also want to look downstream. In the beginning, you could just hand your steel over to agents, and trust that they’d find customers. They would then take a commission from each sale as their compensation. The problem was, these agents would sell steel from any producer. They didn’t care if it was from you or your competitor. They just wanted to close sales, so they could capture their commission.

At that point, you’d want to stand up your own sales organization. Your own sales folks would only sell your steel. You didn’t have to worry about competing loyalties, or misaligned interests. But your focus had to expand. Paying attention to the steel-making alone wasn’t sufficient.

Now you’re seeing how large companies evolved…functionally. They mastered the manufacture of a particular product. Then they expanded through the different functions to ensure their processes remained economic, and their access to raw materials and customers remained stable. Here’s Chandler’s conclusion:

So, at the close of World War I, most large industrial companies whose executives paid any attention to organizational matters were administered through much the same type of organization—the centralized, functionally departmentalized structure.

Why companies moved away from a focus on functions

We see that large companies initially were built around functions. They had a department that focused on manufacturing. One focused on marketing. One focused on transportation.

So why, then, did many large companies eventually move to a product line focus? Because the marketing, transportation, sales, and other functions didn’t work the same way across multiple products.

Let’s look at an example of a large company organized this way today: 3M. You’ll see that 3M has Vice Presidents for each of the following departments:

  • Electronics & Energy Business Group
  • Consumer Business Group
  • Graphics Business Group
  • Industrial Business Group
  • Healthcare Business Group

Why? Presumably because each of these groups has different customers facing different pain points. The products in each group might have different manufacturing processes, with different supply chain challenges. The products might be marketed differently, in different channels.

If you’re exclusively organized around functions, you risk treating different products and services as one-size-fits-all. You’re asking all of your functional leads to understand all of the nuances of all of your products and services. The alternative is to have one executive that is responsible for each product/service family. Then you can take advantage of the efficiency of specialized knowledge, where not every person in the company has to be an expert on every offering.

But almost all real org structures are hybrids

Still, you’ll see it’s not black and white. In addition to the Vice Presidents of the above departments, you also see that 3M has Vice Presidents for the following functions:

  • Information Technology
  • Legal
  • Finance
  • Supply Chain
  • Research & Development
  • Business Development and Marketing-Sales
  • Human Resources

The point is clear. Most large companies do have executives responsible for different parts of the product/service portfolio. These executives have oversight of all the functions that feed into the delivery of their product and/or service.

Still, the org structure is a hybrid. You also have executives in charge of core functions like Finance, Legal, and Human Resources. In these cases, the CEO wants a single voice that understands the needs of the whole company.

Here is our three point takeaway, in terms of the history of the evolution of org charts:

  1. Most large businesses in the late 1800s and early 1900s initially expanded from manufacturing into other functions. That means their org structures were built around functions.
  2. As these large businesses evolved, they started to offer different products and services. In many cases, different products required different support from different functions. Large companies then mostly moved to product line-focused structures, with functions in supporting roles.
  3. As large businesses continued to grow, and reporting and compliance obligations became more important, hybrid org structures emerged. Some executives focused on product lines. Other executives focused on functions.

Tracing the history of org structures, we can see how muddy the waters are. There isn’t really such a thing as a textbook org chart. Everything is a constantly changing hybrid.

We can see how closely today’s large companies are related to the large companies of a century or more ago. In several cases, it’s the same company (see General Electric, or Johnson & Johnson, or 3M). History tells us why many large companies look the way they do. That’s good information to have, before we blindly try to reinvent the wheel and make up new org structures willy nilly.

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