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Apple may have finally gotten too big for its unusual corporate structure

Mark Gurman reported for Bloomberg on Monday that Apple is ceasing development of its Airport line of wifi routers as well as its Time Machine wireless backup disks. That comes hot on the heels of an October public announcement that the company would no longer be making external displays, and will instead partner with LG to create a sort of Apple-blessed display manufactured and branded by the Korean company.

Apple CEO Tim Cook smiles during a product launch event on Oct. 27, 2016, in Cupertino, Calif.
Stephen Lam | Getty Images
Apple CEO Tim Cook smiles during a product launch event on Oct. 27, 2016, in Cupertino, Calif.

Less officially, the sheer amount of time that has passed since the last release of a Mac Pro desktop computer has users of high-end workstations convinced that Apple has effectively exited that market as well. Professionals in the market for muscular computers, after all, are almost by definition only going to be interested in buying machines that come with the latest and most up-to-date chips and hardware. A line of "pro" computers that isn't updated regularly simply doesn't work as a pro computer at all. Even if Apple does make a new Mac Pro at this point, buyers wary of the possibility of years-long gaps between updates will still find themselves thinking that people in the market for desktop workstations may need to look beyond the Mac.

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The state of Apple's semi-withdrawal from the professional grade computer market even has some die-hard Mac fans daydreaming about the idea of bringing back operating system licensing so that some other company can put in the time and effort needed to build Mac compatible workstations without Cupertino needing to worry about it.

Even Apple's more popular laptop products show some signs of the same kind of neglect. The latest iteration of the MacBook Pro offers a number of impressive features, but it maxes out at a relatively low level of RAM, doesn't offer many ports, and isn't equipped with truly top-of-the-line internal chips. The computer is impressive in many ways — certainly the innovative new TouchBar looks cool — but, like most of Apple's other products, it appears to be optimized for lightness and thinness rather than for true professional use.

But this all raises a more fundamental question. If GE can build jet engines, tidal energy farms, freight rail data systems, mining equipment, and medical devices, how is it that the world's most valuable company can't find the time to make a full line of personal computers and PC peripherals alongside its market-leading smartphones and tablets? The answer goes back to Apple's corporate structure, which, though fairly common for a startup, is extremely unusual for an enormous company.

Functional versus divisional structures

Any large organization needs to have an organizational structure.

There are two main ways to structure a business. You can build divisions that are built around particular lines of business or you can build functional groups that are built around particular kinds of expertise.

An extreme case of a divisional company would be Warren Buffett's Berkshire-Hathaway conglomerate. Buffett famously maintains a corporate headquarters in Omaha that only employs 25 people, who work supporting him personally and compiling paperwork from the company's various divisions to submit to government regulators.

Like Berkshire's comically inept website, the bare-bones home office is in part a philosophical statement. It shows that Buffett is in the business of making investments in companies and corporate leaders he believes in. No management is happening in Omaha. Instead, the company's various divisions — whether it's a freight railroad or a mobile home manufacturer — have their own corporate functions, including things like HR and legal.

Berkshire is extreme in this regard, but a basic divisional backbone is the main way to organize a big company. Most people work for units that are responsible for particular lines of business, while a few functional groups (maybe public relations or accounting) provide support to all the business divisions.

Apple is extremely functional

Apple isn't like that. If you look at their executive team you'll find that there's no senior vice president for iPhone who works alongside a senior vice president for Mac. Nobody is in charge of Macs or iPhones or iPads or really anything else, because Apple is almost entirely functional.

There's a chief design officer and a senior vice president of software engineering and a senior vice president of hardware technologies who is different than the senior vice president of hardware engineering. Of course there are also more traditional senior functional executives like a general counsel and a chief financial officer. But the closest thing Apple has to a divisional chief with responsibility for a specific line of business is Angela Ahrendts, the senior vice president for retail.

But Ahrendts's role actually illustrates the strength of Apple's functional model. In a traditional divisional structure, each division head would be responsible for their own profit and loss line on the corporate balance sheet. In that divisional context, Ahrendts's job would be to optimize for the profitability of Apple's retail stores. But Apple doesn't want its retail stores to be optimized for profitability. The stores do bring in money, but they are also important marketing statements whose existence, design, and operation is supposed to project the Apple brand in specific ways.

Functional structures, more broadly, allow for collaboration. Apple is able to develop features like continuity across multiple Apple devices or use a chip developed for the Apple Watch to power the new TouchBar in part because its top executives are responsible for things like "software engineering" and "hardware technologies" (i.e., chip development) rather than for specific products.

Divisional backbones make management easier

Collaboration, unity of purpose, and synergies across groups are things that every company wants. But most CEOs do not attempt to manage enormous global companies with purely functional structures, because even though it sounds good, it's extraordinarily difficult to make it work in practice.

Microsoft has an executive vice president who's in charge of Office, a different one who's in charge of Windows and Devices, and a third one who's in charge of Microsoft Cloud. There are software engineers working in all three groups, but nobody is in charge of "software engineering" — they are responsible for specific lines of business. That way if something goes wrong with a particular product, it's a specific person's fault and there are clear lines of accountability.

This is particularly useful when it comes to managing a line of business like Windows, which is in long-term structural decline but remains enormously profitable and important. It matters to Microsoft — a lot — whether the Windows business is run well even though Windows is not part of the sexy and interesting future of computing. Making sure that someone specific is in charge of running the Windows business, and that the people who work on Windows know that they are accountable to a Windows-specific executive, ensures that focus is maintained even though the world's attention has moved elsewhere.

Functional Apple struggles to walk and chew gum at the same time

Which brings us back to the poor Mac.

Apple is an enormous company with vast revenue, huge cash reserves, and a strong global brand. Objectively speaking, it should not be struggling to put out regular updates of its highly profitable Mac desktop and laptop computers. Of course, it might be hard to bring radical redesigns and breakthrough innovations to the Mac. But what existing Mac customers really want is something more basic: confidence that Apple will regularly update the Mac to incorporate new chips as they become standard in the rest of the computer industry.

Instead, Apple has a situation where they rolled out a radical redesign (including breakthrough innovations) of their desktop pro computer and then haven't updated it at all in three years. When that innovative computer was new, Phil Schiller scoffed at critics with the line, "can't innovate any more my ass," and he was right. But a well-managed line of business doesn't try to subsist on sporadic breakthroughs. It requires ongoing work.

But on any given day, the iPhone is far-and-away the most important product Apple ships. The company needs to be incredibly focused on making sure that each year's new iPhone is meaningfully better than the previous one. The iPad shares enough hardware and software DNA with the iPhone that putting in the extra work to keep it updated is a no-brainer. The Watch is supposed to be Apple's effort to break through into a growth market. Apple is trying to play catch-up with its online services to bolster the iPhone's position. The entire Mac business isn't that important. And within the Mac universe, the consumer-grade laptop is the most important product.

The upshot is that even though regularly updating desktop Macs should not be that difficult, objectively speaking, it tends not to happen in part because it's not anyone's job to make it happen. The functional organization values collaboration on top corporate priorities above all else, and that means basically everything comes ahead of desktop Macs. Admitting that they can't work at all on peripherals is, in that context, a step in the right direction.

But it does raise the question of whether persisting with functional organization is really compatible with the company's growth aspirations. After all, monitors — large objects that you connect to computers — seems like a genuinely promising market for a company that makes digital devices and is known for its strength in industrial design. The Mac's share of the PC market has steadily grown over the past few years, and it genuinely could be a growth business if it had an executive to focus on it. And Apple's strategically significant online services businesses would arguably benefit from clearer accountability.

Moving away from pure functional organization would, obviously, carry some real costs. In the past, functional structure has allowed Apple to retain much of the nimbleness of a startup. The iPod was originally launched as a Mac accessory, but Steve Jobs rapidly changed course and made it a cross-platform hit — a feat that was much easier to pull off because there was no "Mac division" to wage bureaucratic warfare against the idea. Launching new products like the iPhone and iPad without fear of cannibalizing resources or market share has helped Apple stay ahead of the curve, while the more divisional Microsoft was never able to plunge headfirst into mobile.

But Apple's market exits are a clear sign of severe growing pains inside the existing structure. Apple is already huge, but it wants to be bigger. To get there, it may need to finally start acting like a big company.