Managing big companies is no easy thing, especially in a very fast-paced business like the internet. Size offers economies of scale and market power, but it also brings bureaucracy, lethargy and devilish organisational conundrums. The internet pioneer Yahoo! is suddenly trying to deal with all of those things in a most public fashion.

In a document known as the Peanut Butter Manifesto that became public late last week, a senior executive named Brad Garlinghouse has called for a radical overhaul of the company, and his analysis is a veritable handbook of the kinds of problems that arise eventually at most successful companies.

Yahoo! has had a tough year: Google is killing it in search advertising, upstarts like YouTube and MySpace have occupied territory that should rightly be its own, and its stock is down accordingly. Just as damaging, it has begun to be viewed by many of its partners and customers as slow-moving and ineffectual; at New West, we've tried hard to work with Yahoo!, but even though the company has a lot of great people and seemingly the best of intentions, the experience thus far has not been very satisfying.

Garlinghouse's critique, in a nutshell, is that Yahoo! is trying to be all things to all people, and in the course of doing that has built a very inefficient organisation that thwarts crisp decision-making, undermines accountability, and wastes a lot of money. (What this means in practice is that lots of smart people spend all day in meetings and never get anything done). A "matrix" management structure is identified as a key culprit, and a "general manager" structure is proposed as the solution.

The trick, of course, is that matrix management structures exist for very good reasons. If you are an engineer working on a Yahoo! service – say, Yahoo! News – do you report up a chain to the head of Yahoo! News, or do you report up a chain to the head of engineering, who will ultimately have something to say about engineering things that the news people might want to do? The answer, sometimes, is both, and thus a matrix.

The same structural question applies to almost every business competency. Should every Yahoo! product have its own marketing department? If so, how do the product-marketing units relate to corporate marketing? And if not, and you have one marketing organization serving many product groups, than how can you hold the product groups accountable if they don't control their own marketing?

These are basic business problems which are without definitive solution, and that's why big companies reorganise all the time. You do things one way, and after a while the inevitable negatives of that approach accumulate and you reorganise and do it another way for a while. It's also why bigness in itself, sometimes, is just problematic. Though he doesn't put it exactly this way, Garlington also recommends that Yahoo! gets smaller, by selling off non-core businesses and laying off 15 to 20 per cent of its staff.

Terry Semel, Yahoo!’s chief executive, did a tremendous job in turning the company around after he took over in 2001, but the current problems may be a truer test of his mettle. Back then, his first big step was to – you guessed it – reorganise, and simplify the company's structure. Then the wind came back into the sails of the online ad business and Yahoo! was in a perfect position to take advantage.

This time around, the industry is in great shape, but all the heat is with Google on the one hand and hundreds of new start-ups on the other. Personally I hope Yahoo! pulls it together – not because I am a fan of bigness, but because I think it will be to the advantage of small publishers if there is competition among the big guys.

Jonathan Weber is the founder and editor in chief of NewWest.Net, a new type of regional news and information service focused on the Rocky Mountain West in the United States. He was previously the co-founder and editor in chief of the Industry Standard

Explore Tech & Web

• Personal Tech

• The Web

• Gadgets & Gaming