Functional Versus Unit Organizations

The structure of a company not only affects its human talent, but also the products it creates. In theory, CEOs have a choice between a “functional” or “unit” organizational model. However, few companies exemplify either structure exclusively – and for good reason. For instance, even a company with a unit-based structure – which builds its teams around product lines – would probably have a global sales team led by a sales manager rather than a bunch of small teams.

“Purity in organizational (org) structure makes for great caricatures of orgs, but operationally rarely exists.”

The tendency to pit the unit and functional models against one another also means that, in times of crisis, leaders may feel tempted to simply switch to the other model – a move which will most likely bring as many new challenges as it does solutions. Thus, before making any kind of organizational change, CEOs should first identify what problems they aim to solve and take steps to mitigate any new issues a change in structure may create. For Microsoft’s reorganization to a function-based organizational system – structuring teams around a particular kind of expertise – for example, this meant being transparent about how that change affected people’s career prospects and opportunities.

“Every org change I ever saw that didn’t work started off not with a problem statement but with a goal of putting a certain person in charge or a boss-centric perspective of grouping some things together or separating some things.”

A functional structure works well when a company’s focus is on one main product (or suite of products). This model encourages companywide collaboration and fosters “depth of skills” in main knowledge areas rather than broad, managerial skills. However, functional structures can make holding people accountable and managing a remote workforce quite difficult. Unit structures work well when a company creates multiple products in different markets, since teams can concentrate on solving specific product-related problems. In the unit model, accountability is clear, but lack of cooperation with other teams can lead to overlapping activities. Unit structures depend on good general managers, which may deprive a company of the insights discipline-specific leaders can produce.

“There is no general answer to the question of ‘functional or unit’ absent the context of a specific set of people, at a specific company, working on a specific product plan. There are some well-understood pros and cons to each of these org structures.”

Regardless of your choice of structure, certain things will hold true. Resource allocation will always remain an issue; you will get the outcome you “optimize for”; some divisions, such as sales, will never conform to a unit structure; and, most important, aligning all business functions based on one schedule is essential one way or the other.