The 2 Types of Organizational Structure
At its most fundamental level, organizational design is a process for optimizing how companies drive progress on their strategy. The output of an org design is the organizational structure.
Good org design helps teams achieve impact. It can be a tailwind, setting dream teams up to make decisions quickly and achieve valuable product outcomes.
Bad org design, on the other hand, makes it harder to drive progress on strategy. It's usually a headwind, hindering the ability of teams to reach their OKRs, decreasing the efficiency of communication, increasing the complexity of decision-making, and — ultimately — making it much more difficult to deliver business impact.
In this lesson from Reforge’s Product Leadership program, we’ll cover two common types of organizational structure, then shine some light on the way great product leaders think about their org design. If you’re interested in learning about effective organizational structure and leadership across other functions of the business, check out Reforge’s Marketing Leadership or Engineering Management programs.
2 Types of Organizational Structure
At the highest level, the "org" refers to the entire company. But there are also several orgs within the company, which may be organized by function, department, or business unit.
1. Functional Org Structure
Most tech companies today are organized by function, with orgs for major functions like product, engineering, design, marketing, and others.
2. Business Unit Org Structure
Some large tech companies, like Facebook, have business units for major products like Facebook.com, Messenger, Instagram, and WhatsApp. But within those business units, there are orgs for major functions like product and engineering.
Why is Organizational Structure Important?
At every level where an org exists — whether at the company level, functional level, or even teams within a function — there must also be an organizational structure. The org structure determines who reports to whom and who works on what.
Org design has a unique influence on any team’s ability to generate impact. In fact, Reforge expert Ravi Mehta argues that the org structure is the most important strategic document for the product org.
Why? To understand this, let's think about what it takes to be a successful PM.
In order to achieve great product outcomes that drive value for the business, PMs have to use their influence to lead a cross-functional set of stakeholders to drive progress on a shared goal. In other words, they need to get the cross-functional group to be accountable to a shared goal while also driving effective collaboration toward that shared goal.
Org design can either help align organizations in a way that enables accountability and collaboration, or it can hinder the team's work by blurring lines of accountability and making communication difficult.
Good org design enables accountability by making clear what the team needs to work towards. It aligns incentives so that everyone on the team feels accountable and bought into that shared goal.
Similarly, good org design makes clear how the cross-functional team needs to collaborate to drive progress on the strategy. It optimizes the flow of communication across functions, enabling the cross-functional collaboration that is crucial to effective and efficient product development.
It's worth noting that the importance of org design is not limited to senior Product Leaders. Org design can of course refer to decisions made at the CPO level, regarding what teams are defined to work on, who owns what, and who reports to whom. But org design is also applicable to less senior roles.
There are two key reasons why.
First, any time that you decide how to divide work among your direct reports, you are making an org design decision.
For example, say that you’re a GPM with 3 PMs reporting to you. How you divide work between those three PMs is a question of org design. Do they all report directly to you? What work do they own? Perhaps you want to promote one so that PM 1 now reports to PM 2, while PM 3 still reports directly to you. Each of those decisions is about org design.
Second, even when you are not in a position to make org design decisions, org design is likely to impact the success of your work. For this reason, PMs and Product leaders at all levels need to be aware of how org design can affect them—so that they can more effectively diagnose and address the underlying cause of issues.
Let's look at an example to understand this. Ravi recalls managing a new PM who had a negative reputation at the company. In their first one-on-one, Ravi inquired about the PM's track record of low performance. The PM responded that he had done everything he could to deliver value for the business, but his product area was low priority.
He explained that although he was working on his product area's most important initiatives, those initiatives were simply not that important to the company. In other words, he identified an org design issue—his org was defined to do something that was not strategically important.
This allowed Ravi to work with the PM to re-organize his product area and transfer him to a new team. He quickly rose to become one of the highest performers on a team of more than 40 PMs.
How Great Product Leaders Think About Organizational Structure
The Product Leader's number one role is to drive business impact. But when Product Leaders don't realize how org design can hinder their teams' ability to achieve strong results, they’re likely to see their own ability to generate impact suffer.
Great Product Leaders, on the other hand, know that optimizing org design is a crucial lever for driving business impact, whether that means overhauling it or working within what exists to optimize your team's outcomes.
To drive accountability and collaboration, there are two key org design decisions that Product Leaders must make:
Accountability: Should teams be organized by product feature or business outcome?
Collaboration: Should PMs be single-threaded owners or cross-functional facilitators?
We can visualize these decisions with the Product Organization Matrix, a 2x2 matrix with the accountability question of features vs. outcomes on the y-axis and the collaboration question of PM as Facilitator vs. PM as Owner on the x-axis.
Outcome Owner: The PM is responsible for driving the outcome the team is defined to achieve and is singularly held accountable for that outcome.
Outcome Facilitator: The PM helps conduct the actions of the cross-functional team to achieve the outcome the team is accountable for driving. This model values the collective wisdom of a team of cross-functional equals.
Feature Owner: The PM owns a particular area of the product—a feature area—and is responsible for making decisions on that area of the product, including the right way to drive business impact with that feature. The PM is also held accountable for those decisions. This means that the cross-functional leads typically defer to the PM's decisions on what to work on.
Feature Facilitator: The PM functions as a coordinator that works with the cross-functional team to define, develop, and deliver features. Similar to the Outcome Facilitator approach, this model values the collective wisdom of equals, but focuses that wisdom on the craft of building product rather than pushing towards business outcomes.
To optimize the org structure, Product Leaders need to determine where they fall on the Product Organization Matrix so that they can work to close the gaps to perform that role well.
At the end of the day, there's no perfect org design decision. The best Product Leaders choose the model that is most closely aligned with their company's goals and culture, and they actively support PMs to help them understand and succeed within that model.