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Organizing around products/services works well for long-standing value streams as you are avoiding the "waste" of forming/storming/norming.
This does require sufficient staff to "go around" to fill all the teams...
Functional organizations, projectized organizations, and weak, strong, or balanced matrix organizations all have their places.
I think you have already answered your question and I agree with this opinion:
"Con – possibly get less done faster (in view of the overall company).
So dividing the engineers into smaller groups would slow down the organization overall because the human resources (engineers) are not going to be used in an efficient manner.
Think about having a very experienced senior engineer capable of providing very important input to many projects. If you lock him to a single project team then the other projects would struggle.
Also many times some project team members may not have too much work for a while on a project. You could use them on other projects instead of letting them do nothing on a project.
Also strong functional departments enable replacing team members easier on a project.
PMs may hate functional organizations but in the majority of situations they are the best solutions for most projects. By functional organizations I also include forms of matrix organizations where PMs have no authority over the project team members.
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