Harvard Business Review: The change Steve Jobs made to turn Apple into an innovation giant

Apple founder Steve Jobs in 1984. Photo / Getty Images

Apple is well known for its innovations in hardware, software and services. Thanks to them, it grew from some 8,000 employees and US$7 billion in revenue in 1997, the year Steve Jobs returned, to 137,000 employees and US$260 billion in revenue in 2019. Much less well known are the organisational design and the associated leadership model that have played a crucial role in the company's innovation success.

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 profit and loss responsibilities.

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 organisation.

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The adoption of a functional structure may have been unsurprising for a company of Apple's size at the time. What is surprising — in fact, remarkable — is that Apple retains it today, even though the company is nearly 40 times as large in terms of revenue and far more complex than it was in 1998.

Apple's commitment to a functional organisation 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 organisational model, which may be useful for individuals and companies wanting to better understand how to succeed in rapidly changing environments.

WHY A FUNCTIONAL ORGANISATION?

Apple's main purpose is to create products that enrich people's daily lives. To create innovations, Apple relies on a structure that centres 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.

Steve Jobs pictured in 1982. Photo / Getty Images

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 research and development executives are based on companywide performance numbers, rather than the costs of or revenue from particular products.

THREE LEADERSHIP CHARACTERISTICS

Ever since Steve Jobs implemented the functional organisation, Apple's managers at every level, from senior vice president on down, have been expected to possess three key leadership characteristics: 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.

— DEEP EXPERTISE: Apple is not a company where general managers oversee managers; rather, it is a company where experts lead experts. The assumption is that it's easier to train an expert to manage well than to train a manager to be an expert. At Apple, hardware experts manage hardware, software experts software and so on. (Deviations from this principle are rare.) This approach cascades down all levels of the organisation through areas of ever-increasing specialisation. Apple's leaders believe that world-class talent wants to work for and with other world-class talent in a specialty. It's like joining a sports team where you get to learn from and play with the best.

Steve Jobs holds the new iPhone 4 after he delivered the opening keynote address in 2010. Photo / Getty Images

— IMMERSION IN THE DETAILS: One principle that permeates Apple is "Leaders should know the details of their organisation three levels down," because that is essential for speedy and effective cross-functional decision-making at the highest levels. If managers attend a decision-making meeting without the details at their disposal, the decision must either be made without the details or postponed. Managers tell war stories about making presentations to senior leaders who drill down into cells on a spreadsheet, lines of code or a test result on a product.

— WILLINGNESS TO COLLABORATIVELY DEBATE: Apple has hundreds of specialist teams across the company, dozens of which may be needed for even one key component of a new product offering. Because no function is responsible for a product or a service on its own, cross-functional collaboration is crucial. Apple's collaborative debate involves people from various functions who disagree, push back, promote or reject ideas and build on one another's ideas to come up with the best solutions. It requires open-mindedness from senior leaders.

LEADERSHIP AT SCALE

Apple's way of organizing has led to tremendous innovation and success over the past two decades. Yet it has not been without challenges, especially with revenues and headcount having exploded since 2008.

As the company has grown, entering new markets and moving into new technologies, its functional structure and leadership model have had to evolve. Deciding how to organize areas of expertise to best enable collaboration and rapid decision-making has been an important responsibility of the CEO. 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.

Another challenge posed by organisational growth is the pressure it imposes on the several hundred vice presidents and directors below the executive team. If Apple were to cap the size or scope of a senior leader's organisation to limit the number and breadth of details that the leader is expected to own, the company would need to hugely expand the number of senior leaders, making the kind of collaboration that has worked so well impossible to preserve.

In response, many Apple managers over the past five years or so have been evolving the leadership approach described above: experts leading experts, immersion in the details and collaborative debate. We have codified these adaptations in what we call the discretionary leadership model, which we have incorporated into a new educational program for Apple's vice presidents and directors.

Why do companies so often cling to having general managers in charge of business units? One reason, we believe, is that making the change is difficult. It entails overcoming inertia, reallocating power among managers, changing an individual-oriented incentive system and learning new ways of collaborating. But Apple's track record proves that the rewards may justify the risks. Its approach can produce extraordinary results.

- Harvard Business Review