1. How does a company grow and develop into the different structures? (Include advantages, disadvantages of the different structures in terms of comparing)
2. What are the basic internal problems/challenges that different companies face while growing?
Functional–Also commonly called a bureaucratic organizational structure, the functional structure divides the company based on specialty. This is your traditional business with a sales department, marketing department, customer service department, etc.
The advantage of a functional structure is that individuals are dedicated to a single function. These clearly defined roles and expectations limit confusion. The downside is that it’s challenging to facilitate strong communication between different departments.
Divisional–The divisional structure refers to companies that structure leadership according to different products or projects. Gap Inc. is a perfect example of this. While Gap is the company, there are three different retailers underneath the heading: Gap, Old Navy, and Banana Republic. Each operates as an individual company, but they are all ultimately underneath the Gap Inc. brand.
Another good example is GE, which owns dozens of different companies, brands, and assets across many industries. GE is the larger brand, but each division functions as its own company. While somewhat dated and abbreviated, this image gives you an idea of what GE’s basic organizational structure looks like.
Matrix–The matrix structure is a bit more confusing, but pulls advantages from a couple of different formats. Under this structure, employees have multiple bosses and reporting lines. Not only do they report to a divisional manager, but they also typically have project managers for specific projects.
While matrix structures come with a lot of flexibility and balanced decision-making, this model is also prone to confusion and complications when employees are asked to fulfill conflicting responsibilities.
Flatarchy–While large businesses have traditionally followed tall structure, it’s becoming increasingly common to see flatarchies in smaller businesses and new startups.
“Unlike the traditional hierarchy which typically sees one-way communication and everyone at the top with all the information and power, a ‘flatter’ structure seeks to open up the lines of communication and collaboration while removing layers within the organization,” writes author Jacob Morgan.
This flatarchy structure essentially removes unnecessary levels and spreads power across multiple positions. This leads to better decision-making, but can also be confusing and cumbersome when everyone doesn’t agree. In other words, it comes with pros and cons just like the other structures.
Well-defined organizational structures establish the roles and norms that enable large companies to get things done. Therefore, when growth plans call for doing things that are entirely new—say, expanding into new geographies or adding products—it’s well worth the leadership’s time to examine existing organizational structures to see if they’re flexible enough to support the new initiatives. Sometimes they won’t be.
A European retailer, for example, decided to expand beyond its base of small-format stores in urban areas by including a number of large-format stores in suburban ones. To serve suburban customers, the new stores would require a new mix of products, including adult clothing, larger housewares (such as furniture), and additional electrical appliances. The new stores would also offer lower prices than the old ones. All this meant that the new stores would have special supply chain requirements and that the stores’ managers would need to focus more intently on price and cost than had been customary for the retailer.
As the company’s senior executives planned the new stores, they began questioning whether to operate them as part of the existing organizational structure or at arm’s length. Although launching them within the existing structure would be simpler, the executives concluded that doing so would deny the new stores the unique resources needed to become a meaningful growth platform. The executives were concerned, for example, that the company’s existing team of store designers would have difficulty making the new format’s essential trade-offs, such as working with unfamiliar, lower-cost flooring and lighting products. Likewise, the executives were concerned that the existing supply chain would not cope easily with larger products, items with a short shelf life (such as adult fashion clothing), or the demands of new suppliers.
So the company launched the large-format stores as a separate business unit, with its leader reporting to the CEO. The new stores’ management team was independent of the parent company and included mostly newcomers who would not seek to replicate its culture or processes. Still, the retailer also set the goal of bringing the new business unit back into the original structure once the first six new stores were up and running and the new retail concept was firmly established.
The new stores’ managers developed their own local distribution centers and store designs, at a significantly lower cost per square meter than the company’s other stores had achieved. They also found new suppliers; modified some existing systems, such as IT; and created a different overall customer experience that was more focused on lower costs. The stores therefore had fewer floor employees per square meter, for example, and larger shelves that needed to be refilled less frequently.
Keeping the new stores separate helped get them up and running quickly but also made some processes at the corporate level more complex than they might have been. The IT systems supporting the new stores, for example, handled a number of processes differently, including store-level profit-and-loss statements. It was therefore difficult to consolidate sales figures, cost of goods sold, or wages across both types of stores.
Nonetheless, in just two years, six of the new-format stores were firmly established and meeting their financial targets. At this point, as planned, the parent company integrated all of the stores—large and small—into a single business unit. Because the new stores were past the start-up phase, executives determined that the benefits of using common systems and processes outweighed those of maintaining an entrepreneurial subculture. Therefore, many of the larger stores’ modified processes, such as the amended financial and supply chain systems, were replaced by those the parent company used. The only remaining operational difference was the local distribution centers because the company’s overall product mix was easier to handle through them even in the longer term.
In our experience, such separated approaches work best when a company can develop a convincing business case that existing structures and processes will make it very difficult to launch a new undertaking. This can be true when, for example, the new model is inconsistent with the old one (as with the European retailer) or could cannibalize it—say, if a high-tech firm introduces a new generation of technology. Companies need to decide how much, and when, local customization should trump global standards and the benefits of scale, taking into consideration factors such as the product or service being created, market conditions, internal culture, and the skills of the managers involved. In some cases, the necessary customization can be as minor as enabling people to work in a local language; in others, as large as creating a whole new business unit with different suppliers and customers.1
Deliberately making these approaches temporary, as the European retailer did, is critical. In our experience, two to three years is usually enough time for new operations to gain sufficient maturity to hold their own within the organization. It is also crucial for companies to reintegrate these innovative pockets before they reach substantial scale, or they will simply create an additional layer of complexity that makes the company as a whole harder to manage and could inhibit its next growth spurt.