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Agile Organization Design: Moving Beyond Size Logic

July 10, 2024

Historically, many companies adhered to the 150-person rule for organizational units, a concept based on “Dunbar’s number.” This rule suggested that 150 is the cognitive limit to maintain stable social relationships. Once a unit reached this size, it would split to maintain manageability and cohesion. However, this “size logic” or “tribe logic” has revealed two significant issues:

  1. Complexity in Management: Senior management struggled to understand all the units and allocate resources effectively for strategic execution.
  2. Fragmentation of Products: Products were often split into parts, leading to inefficiencies.

Shifting to Adaptability Logic

A more effective approach is “adaptability logic,” which focuses on maintaining the integrity of products within dedicated product groups. Each product group has profit and loss (P&L) responsibility, as well as all the necessary resources and authority to develop and sustain the product. A product group can encompass a product family, creating clear, decoupled strategic units with fewer reporting lines to executive management.

Advantages of Product Groups

  • Strategic Clarity: Fewer, more strategically aligned units with clear responsibilities.
  • Resource Allocation: Simplified reporting lines to executive management, facilitating better resource allocation.
  • Agility: Product groups can adapt quickly to market changes, driving innovation and responsiveness.

Implementation in Agile Organization Design

The prototype of an Agile Organization includes a few shared functions along with strategic management. The rest of the organization is primarily organized around semi-independent Product Groups. A Product Group is organized around a product that generates a revenue stream, such as loans in a banking context. These groups typically have separate leadership, finances, resources, and personnel, augmented by shared services such as purchasing, sales, human resources, and finance.

Product Groups as Building Blocks

By structuring around product groups, organizations create clear, decoupled strategic units responsible for the end-to-end lifecycle of their products, from development to market adaptation. Each product group acts as a strategic unit with the autonomy to make decisions, fostering a more agile and responsive organization.

In large enterprises, new questions arise:

  • Value Creation System: How to account for the entire value creation system?
  • Role of Non-Focal Functions: What is the role of organizational functions not typically the focus of agile transformation, like legal, procurement, and HR?
  • Overall Organizational Design: What should the overall organizational design for an agile company look like?

Build Your Own Operating Model

Teams in a product group are usually a mix of multifunctional and single-function teams depending on the type of work and the level of agility needed. Ideally, the teams build their own process, but initially cross-functional teams might use Scrum while single-function teams might use Kanban. The group could even use LeSS or SAFe in certain places.

Product Group Structure

Each Product Group is led by a senior manager (or Product Owner in Scrum) who is responsible for the product’s success and has control over all necessary resources. A Product Group has several key characteristics:

  • Definitive Purpose or Mission: Clear objectives that align with the organization’s goals.
  • Integrated Elements: Cross-functional teams, functions, systems, roles, and responsibilities to achieve its mission.
  • Market Focus and P&L Responsibility: Direct accountability for financial outcomes.
  • Decision-Making Autonomy: The ability to make strategic decisions independently.

Example of a Product Group

Consider a Product Group developing for example a CRM product. This group could consist of five cross-functional teams that create the core digital value proposition and share a single goal. The Product Group might also require additional organizational functions to execute the business model, such as:

  • Sales
  • Customer Support
  • Legal
  • Operations
  • Security
  • Marketing

By aligning interdependent roles within the product units and teams, coordination costs decrease, and workflow improves. Over time, members of the Product Group develop a shared culture, further enhancing collaboration.

Moving Forward

The shift from “size logic” to “adaptability logic” can address the challenges of managing large, fragmented organizations. By focusing on product groups, companies can create a more coherent, strategically aligned, and agile structure. This design reduces complexity for senior management and ensures products are managed holistically, promoting innovation and efficiency.

Find out more about the CAO approach with this 3 min overview video.

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