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3 minute read / Dec 10, 2015 /

Building the Machine - Organizational Design in Startups

As a startup scales and surpasses its first organizational breaking point of 8 employees, it’s time to start thinking about organizational design. The strategy a startup chooses in their market should determine their organizational design.

In the First Round Review profile of Paul Arnold , the Head of Operations at AppDirect, Paul shares the challenges the initial organizational structure created as the company grew 5x in less than a year.

We started building our teams with a simple functional structure: product managers working as a product team, account managers working as an account team, and so forth for engineering, sales, marketing, customer support, QA, and partnerships. But we hit a wall quickly…

Companies can be organized in many different ways that cluster into three themes determined by reporting structure. In functional organizations, product managers report to product management directors, who report to product managment VPs and then to the CEO. Apple is functionally organized. Product or Division based organizations appoint a leader of a particular product and everyone who works on that product, regardless of team, reports to the general manager. GE and Cisco are organized this way to manage their vast product portfolios. Last, matrixed organizations ask employees to report to both a functional manager and a product general manager. Google is a good example.

Most startups begin as functional organizations, grouped by engineering, product, marketing and sales. As the startup grows, it might move into either a product organization because the company would like the scale the number of products or into a matrixed organization. There are benefits and drawbacks to both to consider when thinking about your startup’s org chart.

But organizational design doesn’t stop at structure.

In the 1980s, Jay Galbraith developed the Galbraith Star, and simultaneously, McKinsey published the 7S Framework. Both frameworks outline the components, in addition to structure, necessary to create vibrant companies.

Galbraith’s Star enumerates five components: structure, strategy, people, reward systems, and internal network design. McKinsey’s 7S adds style and company goals to the mix. All of these ideas influence the other. A change in strategy requires new talent, new reward systems and new company goals.

People spans recruiting, training and development. The company must decide the skills and the values of the people they need to be successful. Reward Systems involve compensation structures like bonus and option programs, in addition to recognition like the Google Founder’s Award. Internal network design involves designing the way people in the company will collaborate, communicate and make decisions. How does data flow through an organization? Whose decision is required to start or stop a project?

There isn’t anything prescriptive in these frameworks. Rather, these frameworks ensure teams consider all the different components of organizational design when deciding to restructure their companies as they grow. Remember to consider these other important factors as you evolve your startup’s organizational design.

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