Note: This article was originally published by Booz & Company.
The prevailing functional model in most companies dates back to the 1850s. Some of the first private-sector functionaries were railroad telegraph operators who managed schedules. Soon after, food and tool companies created sales forces instead of depending on outside wholesalers as intermediaries. Then came finance departments, followed by in-house research and development labs, which took the place of R&D contractors—including the original labs of Thomas Edison and Alexander Graham Bell. By placing their specialists at headquarters, divided into corporate functional departments, large companies could make better use of their people’s expertise, give them career tracks, and harness the power of scale to build superior capabilities. During the decades that followed, as companies grew steadily, the “corporate staff” (as it was originally called) grew accordingly.
By now, the functional model has become the conceptual core of nearly all organizational structures, public and private. It is so ingrained in the daily activities of most companies that it is rarely questioned. Even when functions are seen as “shared services,” which would place them relatively low on the org chart in many companies, they are typically the most permanent parts of the enterprise. Business units come and go with the product life cycle, but finance, HR, marketing, legal, and R&D last forever. Even in matrix organizations, the functions maintain quite a bit of power, managing career tracks and a huge portion of discretionary investments.
The value of functions is undeniable; no company could do without them. But the business and organizational models that govern functions need updating. The most important business practices and collaborations no longer fall neatly into groupings designed many decades ago.
Perhaps the most obvious symptom of distress from the functional model is the widespread problem of incoherence. Most functional teams are good at many things, but great at nothing. They often struggle to meet the needs of all their constituents, juggling an endless (and sometimes conflicting) list of demands from line units; they never manage to build the type of advantage or differentiation that is required for long-term success. The underlying problem is not a lack of desire to focus, a lack of functional ability, or an inadequate budget. The functional organization simply no longer serves companies as effectively as it once did, in three important ways.
First, the expertise needed to differentiate a company and win in the marketplace is much more complex than it was in the past. If a company wants to be better than any other, at something relevant to its customers, it must be more efficient, technically proficient, and creative in its specialization than it ever was before. Walmart succeeds not because of generic supply chain expertise, but thanks to very specific logistics, inventory processes, buying standards, and labor models that it created for itself. Amazon succeeds not because its people apply broad marketing expertise, but because it excels at marketing capabilities that it developed. It has its own approach to the management of user-generated content, the in-depth tracking of consumer buying behavior, and the innovation of new features based on the resulting insights. Although these two companies compete and have even hired each other’s experts at times, they need distinctly different forms of specialized expertise.
Second, creating meaningful differentiation requires capabilities that are almost always cross-functional. For example, building a competitive global brand requires more than a marketing skill set. It requires a plethora of competencies, including managing digital media and tracking consumer insights (both of which involve IT), relationship building (which requires good customer service and interface design), ethnographic insight and employee engagement (enlisting talent and HR), highly targeted product design and development (engaging R&D), and more.