something vital gets lost in a shift to business units: the alignment of decision rights with expertise
Interestingly, Apple has kept the same centralized business structure to this day that Jobs put in place the day he arrived back at the company in 1997:
When Jobs arrived back at Apple, it had a conventional structure for a company of its size and scope. It was divided into business units, each with its own P&L responsibilities. General managers ran the Macintosh products group, the information appliances division, and the server products division, among others. As is often the case with decentralized business units, managers were inclined to fight with one another, over transfer prices in particular. Believing that conventional management had stifled innovation, Jobs, in his first year returning as CEO, laid off the general managers of all the business units (in a single day), put the entire company under one P&L, and combined the disparate functional departments of the business units into one functional organization.
Podolny and Hansen highlight that even though most large companies have adopted decentralized or multidivisional structures, Apple is proof that it’s not the only way, and in fact that its functional structure could be an advantage in a fast-paced business landscape.
They go on to clarify that Apple keeping its centralized, functional structure for more than two decades doesn’t mean there hasn’t been change.
Apple’s commitment to a functional organization does not mean that its structure has remained static. As the importance of artificial intelligence and other new areas has increased, that structure has changed. Here we discuss the innovation benefits and leadership challenges of Apple’s distinctive and ever-evolving organizational model, which may be useful for individuals and companies wanting to better understand how to succeed in rapidly changing environments.
So why does Apple see this approach as the best fit?
Apple’s main purpose is to create products that enrich people’s daily lives. That involves not only developing entirely new product categories such as the iPhone and the Apple Watch, but also continually innovating within those categories.
To create such innovations, Apple relies on a structure that centers on functional expertise. Its fundamental belief is that those with the most expertise and experience in a domain should have decision rights for that domain.
This is based on two views:
First, Apple competes in markets where the rates of technological change and disruption are high, so it must rely on the judgment and intuition of people with deep knowledge of the technologies responsible for disruption. Long before it can get market feedback and solid market forecasts, the company must make bets about which technologies and designs are likely to succeed in smartphones, computers, and so on. Relying on technical experts rather than general managers increases the odds that those bets will pay off.
Second, Apple’s commitment to offer the best possible products would be undercut if short-term profit and cost targets were the overriding criteria for judging investments and leaders. Significantly, the bonuses of senior R&D executives are based on companywide performance numbers rather than the costs of or revenue from particular products. Thus product decisions are somewhat insulated from short-term financial pressures. The finance team is not involved in the product road map meetings of engineering teams, and engineering teams are not involved in pricing decisions.
The article goes on to detail the 3 main leadership characteristics that Apple looks for:
deep expertise that allows them to meaningfully engage in all the work being done within their individual functions;
immersion in the details of those functions; and
a willingness to collaboratively debate other functions during collective decision-making.
One principle that permeates Apple is “Leaders should know the details of their organization three levels down,” because that is essential for speedy and effective cross-functional decision-making at the highest levels.
The many horizontal dependencies mean that ineffective peer relationships at the VP and director levels have the potential to undermine not only particular projects but the entire company. Consequently, for people to attain and remain in a leadership position within a function, they must be highly effective collaborators.
Podolny and Hansen also discuss how leadership has scaled as Apple has grown:
The adjustments Tim Cook has implemented in recent years include dividing the hardware function into hardware engineering and hardware technologies; adding artificial intelligence and machine learning as a functional area; and moving human interface out of software to merge it with industrial design, creating an integrated design function.
In 2006, the year before the iPhone’s launch, the company had some 17,000 employees; by 2019 that number had grown more than eightfold, to 137,000. Meanwhile, the number of VPs approximately doubled, from 50 to 96. The inevitable result is that senior leaders head larger and more diverse teams of experts, meaning more details to oversee and new areas of responsibility that fall outside their core expertise.
…We have codified these adaptions in what we call the discretionary leadership model, which we have incorporated into a new educational program for Apple’s VPs and directors. Its purpose is to address the challenge of getting this leadership approach to drive innovation in all areas of the company, not just product development, at an ever-greater scale.