Choosing a basic design

If you are a new or small company, the simplest way to organize is to put a trusted person at the top — the founder if a start-up, an owner or talented manager if the organization is compact — and have everybody else do whatever needs to get done. The “lean” start-up has become a cliché by now. Efficiency and effectiveness are rolled into one due to size. If there’s a need to discuss a problem or report on some new data, no problem. All hands on deck; just call everyone together and start talking. So what then are the trade-offs of tiny-ness? Here are the pros and cons:

• Advantages: You can usually get someone to do a job whenever it needs to be done. Because everyone is together most of the time, and face-to-face communication is relatively easy, all of the staff quickly coalesces around priorities. The design is cost-effective.

• Disadvantages: The basic design works best only if your company has a few people. If your company is any larger, the person at the top finds it more difficult to keep track of everybody. It’s harder to do an all-hands-on-deck when the staff starts to get spread over multiple sites, even with the use of online conferencing tools.

  The basic design isn’t always efficient. More voices can lead to personal conflicts and clashes of communication style. When the small firm begins to expand is when danger signals usually arise. Whether or not folks realize it, they are, in fact, creating the cultural norms that will identify the firm in the future. Tread carefully.

Focusing on a functional model

Business success typically results in organizational growth, including in head count and the variety of tasks that need to be done. This growth tends to happen more with firms making tangible products than with digital enterprises; the personnel-to-revenue ratio of the latter is typically much less as scaling is built into platform software. Yet, for both kinds of firms, product or service providers, the effectiveness versus efficiency trade-off becomes more apparent. Let’s investigate.

If you organize your company around business functions, you divide people into groups that center on what activity they do. You take all the engineers and put them together in one area, lump the marketing geniuses in another, and so on. You still need to make sure that some sort of general manager coordinates the various activities of the functional groups, of course. Here’s how this method stacks up:

• Advantages: A functional organization works well if your business involves only one type of product or service and if the business outlook is stable for the foreseeable future. The organization is efficient, because people excel at their particular tasks, and they perform each function in only one place, creating opportunities for scale benefits. Also, every employee knows exactly what they are responsible for and the metrics by which their performance is evaluated.

• Disadvantages: Unfortunately, a functional organization can easily turn into a bunch of separate silos standing side by side. The silos, each housing a different functional area, can be difficult to connect together. Operations, for example, wants to make the same single product over and over again, whereas Marketing wants to sell different products to different customers. Each function may be efficient by itself, but the functions taken together aren’t terribly flexible or effective.

  This is particularly true when markets shift and changes are necessary: Each different functional area fights to isolate itself, casting blame on others and resisting outside intervention. Your general managers have to shoulder the responsibility of keeping communication open. Not easy.

Divvying up duties with a divisional form

If your company is big enough to be in more than one business, the best approach may be to organize by divisions based on a variable other than functional activity, such as a particular product, or a market, or a geographic area. If your company is huge and diversified, your divisions may cover strategic business units, or SBUs, which are specific product-market combinations. (Refer to Chapter 15 for additional information on SBUs.) Here are the pros and cons:

• Advantages: An organization made up of divisions that you base on products, markets, or SBUs encourages you to focus all your energy and resources on the real businesses you’re in. Managers inside the divisions can concentrate on their own customers, competitors, and problems, and each can respond more quickly to market signals. This leads to better effectiveness.

  Top-level managers at HQ can oversee how the divisions work together and maintain basic coordination from there. HQ also can transfer promising divisional staff to other divisions, creating opportunities for lower and mid-level staff to develop and expand their managerial skills and competencies. This allows for in-house promotional ladders rather than having to recruit external candidates for higher-level responsibilities — and depressing current staffers who feel passed over.

• Disadvantages: Because the separate divisions within your company often represent entire businesses, they sometimes compete with one another, fighting over scarce resources from HQ, and sometimes even over the same customers. In the worst case, the company risks becoming little more than a loose federation of parts rather than a singular and focused enterprise.

  Also, separate divisions usually mean replication of overhead costs, because each division invariably has its own set of overlapping management layers and business functions (research, operations, marketing, service, sales, and finance). As a result, your company becomes less efficient.

Sharing talents with the matrix format

The functional and the divisional forms of organizational structure are based on effectiveness (the scope of your operations) versus efficiency variables (that is, their scale). For many organizations, especially ones competing in international markets, a matrix format is a superior way to structure. In a matrix organization, everybody works under two centers of authority and basically wears two hats. One hat may be functional: A person may be in field sales, reporting to the regional manager responsible for all functions in the area. But another hat is divisional: The product division managers at company HQ have control of their products wherever they may be sold, so that the field sales guy also has to report to them on some issues. At least the theory says this is the best way to structure the firm when its activities are so diffuse. Let’s see the pros and cons:

• Advantages: The logic of the matrix format is that separating responsibilities by function creates focused effectiveness; doing so by division generates scaled efficiency; and bringing them together in a matrix structure gives you the best of both worlds.
• Disadvantages: A matrix organization can be tricky to manage — and sometimes even disastrous. The format violates an important management rule: Don’t give people two bosses at one time. Tension is bound to occur between the manager responsible for a given product or service, and the functional manager who oversees a given task. Each of these people might have their own incentives. The production manager at division HQ might want the field salesperson to sell, sell, sell — and thus drive up volume and generate scale savings in production. The area sales manager, on the other hand, might want that field salesperson to sell anything to a local customer, as overall sales volume is what gets them a bonus. The poor guy in the field is caught between two competing forces, and it’s sometimes easy for the wrong one to triumph.

Dealing with too many chefs in the kitchen

After you decide how to organize your company — functional, divisional, or matrix — you have to decide how much you want to divide it up. Ask yourself a simple question: If the people at the bottom of the org chart have suggestions to make, how many people do you want the suggestion to pass through before it gets to the top for consideration? In other words, how many management levels should you have?

The number of tiers in the management cake depends a great deal on how big your company is and how you organize it. In the earlier section “Choosing a basic design,” we explain the benefits of smallness in an organization — the ability to communicate to everyone at once and rapidly mobilize all resources toward goal achievement. But as the firm begins to grow, managers can handle only so many people directly if they want to do a good job.

One way to deal with this is through technology: robotics and AI (artificial intelligence programs that set standards and make decisions). Although still in its infancy, this trend has the potential to radically alter the role of the middle manager — if not absolutely obliterate it. And don’t forget another trend: remote work (WFH, work-from-home). This, too, will present challenges for firms as they grow.

Some organizations have grown without installing layers of managerial oversight — because the nature of the work is one in which individual creativity is critical. In work environments like universities, research labs, and the creative industries, personnel desire autonomy above any other benefit, including salary. In these cases, an increase in company size might not necessitate more managers: The span of the control number is already high (that is, number of workers to managers), and close supervision doesn’t appear to effect results that much. In fact, it may be counterproductive.

Being lean and mean can be good for some firms but problematic for others. Do your homework before choosing the structure and allocating “decision rights” to lower staff levels. Whatever your specific company situation, keep in mind these general rules: The more management levels you have in place,

• The more control is given to lower levels of company management
• The longer it takes and the harder it is for information to reach top management
• The less flexible your organization is in the face of change

Finding what’s right for you

Why do small companies that initially get a toehold in the market end up stumbling soon after? Believe it or not, the biggest reason is that they have trouble handling their own success. A recent study found that the steeper the revenue growth curve at the start of a firm’s life, the greater the probability the firm would fail. A major stumbling block turns out to be an unwillingness or inability of the founding leaders to change the organization or their behavior as their small company grows bigger.

This is a classic pathology of entrepreneurs, by the way. The personality traits that drive success — single-mindedness, ambition, persistence — can get in the way after a corner has been turned. Close attention to detail can become control freakishness; strong self-confidence can become an unwillingness to let go and allow others to decide. Similar problems often impact family business firms. The founder may want to create a legacy for the children, which is both understandable and good. But family dynamics can be brutal if they aren’t acknowledged and managed before they interrupt sound business planning and decision-making.

Be sure to explore all your options as you go about creating or re-creating your organizational structure. Try to come up with a design for your company that makes sense to you and the market realities in which you compete. The structure should also make sense to your major stakeholders, including the investors and lenders who have a financial interest in your business — or family members if they are involved. (If you need a refresher on stakeholders, refer to Chapter 2.) Only then can you put together an organization that allows your company a chance at long-term success and makes it easier for the company to fulfill its business plan. The business boneyard is full of once promising little firms that unnecessarily died in childhood. You don’t want your company’s name on one of those sad tombstones.