How are organizations organized?

Several weeks ago, I wrote about a few different ways to think about organizations: as responding to market incentives, following the direction of managers (rational or otherwise), or as dominated by a wider set of participants and their coalitions as well as by a distinct culture.

Again, the aim of these posts is to describe, as simply as possible, how to think about organizations. This post is about how organizations are structured. In the next post, I’ll write about what makes organizations successful.

Perhaps the most classic distinction in terms of how organizations are structured is between the functional structure and the divisional structure. In functional structures, functions like marketing, engineering, and finance are grouped together. In divisional structures, teams are divided up based on particular products or customer segments. Here’s how McKinsey Quarterly recounted the history of this division in 1979:

Up through the early 1950s, most companies were functionally organized. The postwar boom and subsequent economic growth led to mushrooming product lines and organizational complexity. During the late 1950s and 1960s, many companies sought to regain control and achieve “product-line rationality” by shedding their traditional functional organizations for a divisional structure based on the model initiated by General Motors and DuPont in the 1920s. For most the move proved successful; strategies became more coherent and divisional managers could be held broadly accountable for their operations.

For more on these two, and how they differ, check out Matt Yglesias’ piece at Vox on Apple and its functional structure.

Then there’s the matrix structure which blends functional and divisional structures together. In theory, it’s the best of both worlds; in practice, it’s hard to manage.

But these three are not the only structures to know about, as Nitin Nohria and Ethan Bernstein of Harvard Business School write in their note on organizational structure. (Disclosure: I work for Harvard Business Review, which is owned by HBS and sells the research note; Nohria is HBS’s dean.)

The question of organizational structure, they write, is about how to divide up work and decision-making while maintaining coordination between people and groups. There’s more to it than that, of course, and you can buy the note to learn more. They talk about functional, divisional, and matrix structures, but also include two other organizational structures.

First, there’s the employee-centric structure:

Drawing inspiration from less-architected yet highly productive forms of distributed network technology like the Internet, employee-centric (or user-centric) approaches to organizational structure let patterns of coordination emerge based on the organic networks formed by members of the organization as they do their work.

Holacracy falls in this category, and you can read Bernstein on employee-centric structures and their history at greater length in HBR. (He notes that teams in an employee-centric model can be based around functions or around products or segments.)

Finally, there’s the crowd-centric model:

If employee-centric organizations use structuring processes to define roles and authorities in a self-managed way, crowd-centric organizations build platforms upon which the collective can iteratively self-organize.

For more on this, Andrew McAfee and Erik Brynjolfsson’s latest book Machine, Platform, Crowd touches on it — which I wrote about here. And Yochai Benkler’s The Wealth of Networks remains the most definitive account of at least a subset of this phenomenon, which he calls peer production. And here’s HBR on platforms and strategy.

Of course, most organizations do not purely conform to one model or another. The trick is to combine these models in a way that reinforces the organization’s strategy. Strategy will be the subject of the next post in this series.