Product Organization Design and Decision-Making Processes

The structure of a product organization evolves based on the product's characteristics, its development phase, and the competitive landscape. So, how should we view and design the organization as a product? In this article, we will review the product organization for each phase, and try to resolve this issue around its impact on decision making.

Impact of Centralized vs. Autonomous Decentralized on Product Organization

Broadly speaking, there are two primary approaches to authority and decision-making structures in organizations: centralized and decentralized autonomous.

The centralized structure refers to a structure in which decision-making and authority are concentrated in the hands of management or a central administrator. Along with authority, information sharing is also designed by hierarchy, and certain procedures are required by escalation rules up to decision-making, so a sense of totality can be maintained, but on the other hand, a sense of speed is difficult to achieve.

On the other hand, the autonomous decentralized structure refers to a structure in which decision-making and authority are decentralized, and each department or team makes decisions and promotes them independently. Information is shared along with authority, but in many cases it is shared widely because it cannot withstand operation if designed in detail. As a result, decisions can be made and implemented in a timely manner everywhere, but considerable coordination costs are required for overall control and company-wide efforts.

This explanation alone might lead one to believe that the autonomous decentralized type of product organization is better, but of course there are advantages and disadvantages to both. First, if a centralized structure is adopted, the management team is responsible for confirming and making decisions regarding the product vision, roadmap, and resource allocation. To prepare for this, the product manager digests the product vision and drafts the roadmap. Once the product is successfully endorsed by management, we proceed with the creation of the PRD, development direction, and effectiveness verification.

This structure frees the product manager from decision-making at a high level of abstraction. This allows room to hire and train junior members. Rather than building an organization that relies on mid-career hires, expanding product manager training programs and building a foundation that encourages growth will be a differentiating factor in the organization.

Second, in the case of an independent and decentralized structure, the management team will stop at formulating the company's overall mission, vision, and values (MVV), and the CPO and VPoP will put together a product vision based on the output from the product managers. The CPO and VPoP will take the initiative in formulating the product vision and roadmap for their area of responsibility based on the MVVs proposed by the management team.

Since each product manager is responsible for decision-making in his/her area of responsibility, he/she must be able to look at the company's overall situation and make decisions in his/her area of responsibility from a company-wide perspective. Raising one's perspective to avoid individual optimization involves more difficulty than one might imagine and raises the hiring requirements considerably. And since not everyone will be able to do this once the requirements have been raised to this level, the company will focus on mid-career hiring and building the organization rather than training.

In this way, centralization will limit some of your authority as a product manager, but will broaden your options for building an organization. On the other hand, if it is decentralized, the authority is broad, and it is easier to appeal to the satisfaction of being a product manager, but this limits the scope of hiring.

In addition, it is not an issue that can be decided only by the product organization, so it is necessary to determine which structure is more appropriate for the company as a whole. Depending on the background of the management team and other factors, some themes are relatively centralized in terms of their specialty, while others seem to have guaranteed autonomy. Since organizational design is a point that greatly affects authority and decision-making, you should carefully discern what you are being asked to do, think about what you are being asked to do, and output.

Product Organization Structure by Phase

Depending on the phase of the product or business progress, there are three types of product organization structures: flat organization, functional organization, and business unit organization. After confirming their characteristics, we will discuss in detail how decisions are made.

1. Flat Organization

A flat organization is often seen in startups and early stages of new business development. It has only two levels of management and employees, simplifying reporting lines and eliminating hierarchical coordination. It is used to focus on productivity and concentrate on product launches and PMFs.

This organizational structure takes the principles of decentralized autonomy to the extreme, requiring a high degree of self-governance. It can only be established with top-tier personnel in terms of both mindset and skills. It is said that this organization can only sustain up to 20-30 people, and as the number of people comprising the organization increases, the cost of management coordination rises exponentially. Therefore, it is important to consider in advance when to transition to a functional organization, as explained next, and to do so without delay.

Functional Organization

Product evolution requires collaboration beyond just the product manager, necessitating partnerships with engineers and designers. A functional organization is one that focuses on these functions and designs the organization accordingly. The functionality, such as skills and expertise, is recognized as a department, and a person in charge of each department, such as CPO/VPoP, CTO/VPoE, CDO/VP of Product design, etc., is appointed to be in charge of each department.

When this organization is adopted, the range of authority will be gradated depending on whether it is centralized or decentralized. In other words, if the organization is centralized, the product policy is directly related to the business, so the CEO and the rest of the management team will have decision-making authority over the product vision and roadmap. Conversely, in an autonomous decentralized model, each product manager has authority over his or her own area of responsibility, with MVV in mind. As a middle ground, the CPO/VPoP responsible for the product may have the authority to make decisions on their own initiative. The more centralized the decision-making, the higher the coordination costs and the longer it takes to reach a decision, but this has the advantage of giving the CPO/VPoP a bird's eye view of the entire picture and allowing him or her to make larger decisions. Also, the more authority is decentralized, the higher the hiring requirements and the more difficult it becomes to scale as an organization.

As you get to the rater stage, it becomes more and more difficult to hire senior product managers who are aware of their own discretion, so it becomes necessary to somehow distribute authority and ensure the hiring of junior-level employees.

Divisional Organization

A divisional organization refers to an organization that has established self-contained business units within the company. It is designed so that each business unit can complete its authority and responsibilities. In today's IT companies, a divisional organization may be partially introduced at a very early stage, for example, when new product development begins immediately after the PMF of the core product, or when a subsidiary is established to conduct finance-related business such as Fintech.

To effectively implement a divisional organization with multiple independently operating units, a minimum workforce of 200-300 employees is typically required. It is sensible, but it seems to me that more and more companies will make a firm transition only when they reach a size of around 500-1000 employees. Furthermore, there are different types of business division systems, depending on the axis along which the divisions are divided. Specifically, divisions will be organized by product/function, user segment, KPI, etc.

A. By Product/Function

As the name suggests, business units are organized by product or function. Therefore, one or more product managers are assigned to each product or function, and are in charge of user research, data analysis, and function planning. They will then work with the business side to achieve and promote the goals.

This organizational design is often employed when there is a broad product lineup and development sites in various locations. By organizing on an independent product or function basis, it is easier to reduce cannibalization with other business units.

However, since the organization is organized independently from other business units and there is less need for collaboration, the same issues may be tackled at different times, and there is no need to share information across business units at all. It is also important for product managers from different business units to communicate with each other in order to discuss issues common to the entire product.

B. By User Segment

Organizing business units by user segment allows the development of products and functions that are of interest to specific user segments, and leads to a deeper satisfaction of specific customer needs. In companies with this organizational design, all work done by product managers, including understanding needs and pain points, development priorities, and planning of measures, will naturally focus on user-centered value creation.

Because of the focus on the users of the product, it becomes necessary to coordinate across business units when making enhancements that affect multiple user segments. This organizational design will always start with a plan to design a stand-alone UI for that segment. Once this plan is released, it is essentially an irreversible decision and must be considered with considerable care, as the UI maintenance costs continue to more than double.

C. By KPI

Finally, there is a design in which the principal KPI is the team's goal, and business units are organized to improve it. This design is effective in cases where the most detailed KPI is directly related to a specific user activity. Specifically, it works well with B2C products such as social games. However, as a business unit, it is essential to have KPIs with a certain degree of stability, so even for B2C products, KPIs will be adopted after the product type has been determined.

Conversely, in the case of SaaS, where functions are bundled and provided to users, it is difficult to link business impact and user activity, so the adoption of organizational design by KPI must be partial. For example, it is often the case that only those parts of a measure that are directly linked to business impact, such as sign-up and billing lead optimization, are cut out and adopted.

Although we have reviewed the axes for organizational design one by one, it is often the case that the organizational structure is not completely based on any one axis, but rather a combination of partial product, user segment, and KPI designs. For example, when a newly acquired startup has not yet undergone PMI (Post Merger Integration), it must be designed by product, and new businesses also tend to be designed by segmentation. Sometimes, only the characteristic user segments that should be worked on across products are cut out, and KPIs are sometimes organized by KPI only for those that have been established. In fact, it may be more rare to have a neatly designed organization centered on any one thing.

In terms of decision-making, these business units are expected to operate as independent business units, and therefore have authority over budgets and hiring. the management team, led by the CEO, is responsible for reviewing business performance and coordinating resources across business units and all business units. The focus will be on more abstract tasks, such as developing a product vision across all business units.

Summary

While reviewing the evolution of the product organization in each phase, we have looked at the characteristics of decision making in each phase in turn. The optimal form of a product organization changes continuously, depending on the phase and the characteristics of the product. The answer may be to keep scrapping and building while always considering the optimal organizational design.