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Org Physics - Explained (BetaCodex11)

11th paper from the BetaCodex Network, on organizational structures and how they interact. This paper was previously entitled "The 3 Structures of an Organization". It was renamed February 2013.

NielsPflaeging
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Org Physics - Explained (BetaCodex11)

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  1. Make it real! ORG PHYSICS- EXPLAINED Howstructureswork,howtheyinteract,whatthis meansfororganizationaleffectivenessandchange 11 BetaCodexNetworkAssociates NielsPflaeging&SilkeHermann BetaCodexNetworkWhitePaperNo.11,Jan2011

  2. “Itisprobablethatonedayweshallbeginto draworganizationchartsasaseriesoflinked groupsratherthanasahierarchicalstructure ofindividual“reporting"relationships” Douglas McGregor, The Human Side of the Enterprise, 1960 Thispaperwaspreviouslyentitled“The3StructuresofanOrganization”,andrenamedinFeb2013. 2 Whitepaper–OrgPhysics-Explained

  3. Asksomeonetotakeapieceofpaper,andapen. Andtodrawthestructureofhisorherorganization. Thatpersonwillusuallycomeupwitha singledesign.Onethatresemblesthe“org chart”typedesignshownontheright. That,tobesure,happensanywhereintheworld (wetriedit).Thoseperceivedstructuresactually looksurprisinglysimilaranywhere–depending onindustryabit,ofcourse,andgiveortakea fewdetailsandvariations. 3 Whitepaper–OrgPhysics-Explained

  4. Today'sprofessionalsaroundtheworldperceivetheir organizationsasasetof“boxes”,populatedby “teams”thatareeachtoppedby“bosses”,andthatare interconnectedthrough“reporting”or“line” relationships.Horizontally,organizationsarealways dividedina“functional”way,tosomedegree,butthere normallyareadditionaldivisionalcriteria,suchas productsordivisions,regions,etc. Thetroublewiththiskindofstructureisthatitisjust anillusion.Onethatactuallyhinderssuccessand results,workflow,andthewell-beingofthepeopleinit.It representsahopelesslylimitinglineofthinkingabout organizationsandaboutwhattheyshouldbe. 4 Whitepaper–OrgPhysics-Explained

  5. Organizationstodayaregrosslyineffective.Becausemostofus haveflawedideasaboutwhatactuallymakesthemtick Theaverageorganization Thebestorganizations Shareof value-creating energy Shareof value-creating energy 20% 30% 70% 80% Shareofenergy thatdoesnotcreate externalvalue Shareofenergy thatdoesnotcreate externalvalue Organizationsworkthroughstructures.Andeveryorganizationhas threeofthose.Notone.Theproblem:Hardlyanyoneinbusinessisaware ofthat-andthat'swhysomuchinvestmentintoeffectivenessandchange simplymissesthepoint.Let'sconsiderwhythisisurgent. 5 Whitepaper–OrgPhysics-Explained

  6. Mostoftoday'sorganizationsarephenomenallyineffective.WhenaskedMostoftoday'sorganizationsarephenomenallyineffective.Whenasked whatshareoftheirorganization’stotalenergyisappliedtoexternalvalue creation (insteadofintobureaucracy,administration,politicking,in-fighting andwaste),thenthepercentagegivenbymanagers,companyownersand employeesalikeisusuallyaround20%.Thetypicalorganizationtodaythusis likelytodedicateonlyaboutafifthofitsenergyandresourcestovalue creationforexternalmarkets.Littlewonderthenthatworkoftenunderwhelms us. Atthesametime,mostofusacknowledgethatthemosteffective organizationsareabletodedicateafarhighershareoftheirenergiesto relevantvaluecreation–typically,theestimateis70or80%.Some exceptionalcompaniesthusmakedramaticallybetteruseoftheir capabilities.Butwhatisitthatmakesthedifference? Ouranswer:Thosevastlymoreeffectivefirmsunderstandstructure. Inthispaper,wewillfirstlyintroduceyoutothelittle-knownrealworldof organizationalstructure–andwewillsecondlydiscusstheconsequencesand theoptionsforchange. 6 Whitepaper–OrgPhysics-Explained

  7. Thefirststructure:InformalStructure Thefirststructureofanorganization isInformalStructure. Everyorganizationhasit.Informal powerandinfluencestructures,group normsandinteractionpatternsarise whereverhumanbeingscometogether. Theyevolveinanysocialstructure,and inanyhumaninteraction. 7 Whitepaper–OrgPhysics-Explained

  8. EventhoughInformalStructureisanaturalresult ofsocialinteraction,andcreatestheglue betweenhumanbeingsinanygroup,itisrarely givenprofoundthoughttobybothsmallerand largerorganizations. InformalStructurebyitselfisneithergood, norbad.Itdoes,however,inmanyways influenceorganizationalandindividualwell-being andeffectiveness:InformalStructurecan,for instance,unleashdecisiveactionincrisisand turmoil.Butitcanalso,undercertainconditions, bethesourcesofmobbing,ortotalcomplacency. MostorganizationsdedicatelittleenergytotheirInformalStructure,systematically,although theyinvariably“tick”throughthemandmuchenergyisemployedintotheminvariousways.Many managershaveatendencytodisdainInformalStructure,consideringitsuspiciousandundesirably emotive,orfeelinginsecureabouthowtodealwithit.Asaconsequence,thesestructuresare moreoftenthennotneitherconsidered,norconsciouslyinfluenced. InformalStructurehasbecomemorepopularlyknownsincetheriseofsocialnetworks. Itcanbemappedas“clouds”ofinterconnectedindividuals,withvaryingnumbersoflinkstoothers –placingindividualseitherincentralormoreperipheralpositionsinthecloud. 8 Whitepaper–OrgPhysics-Explained

  9. Thesecondstructure:ValueCreationStructure Thesecondstructureofanorganization isValueCreationStructure. LikeInformalStructure,anyorganization hasit:Becauseorganizationsofanykind havetocreatevalueforitsoutsidemarket, andanyorganizationthatdidn'thaveone wouldceasetoexist.ItisthroughtheValue CreationStructurethatvalueflowsfromthe insidetotheoutside,fromCenterto Periphery,towardstheexternalmarket. Itisthroughthis,andonlythisstructure, thatperformanceandmarketsuccesscan beproduced.Value-generatingworkby natureonlyhappenshere. 9 Whitepaper–OrgPhysics-Explained

  10. Innovation,ortheprocessingofIdeasintoexternal value-creationalsohappenswithinthisstructure:Itisa roleperformedbytheCenter.Whenmembersofan organization“innovate”,theyputa“centerhat”on. Interestingly,though,ValueCreationStructureisnotwidely understoodinfirms,itisrarelysystematicallydesigned, andmostofthetimenotbeinginvestedInsystematically– withafewnotableexceptions.Onecompanythathas developedtruemasteryinempoweringandleadingitsValue CreationStructure,byturningitintoitsdominantstructure, isToyota. ValueCreationStructures–alignedwithsystemstheory -canbemappedasnetworksofcells,whichcontain functionallyintegratedteams,andwhichareinterrelatedby valueflow,pay,andcommunicationrelationships.Inthe structure,anycellseithercreatesvalueforothernetwork cellsorfortheoutsidemarket.Cells,orteams,respondto marketpull,nothierarchy. ValueCreationStructureandflowsare,inmanyorganizations,beinghindered andcrippledbyanothertypeofstructure–thethirdstructureofanorganization. 10 Whitepaper–OrgPhysics-Explained

  11. Thethirdstructure:FormalStructure Thethirdstructureofanorganizationis FormalStructure. FormalStructurecanproducecompliance, butitcanneverproducevalue.Itismost frequentlymappedasapyramidof departmentalboxes,interconnectedby poweror“reporting“relationships (the“org chart”).Thisconceptofstructurestems fromtheindustrial-agethoughtleaderssuch asFrederickTaylor,andfromIsaacNewton's “systems-as-machines”thinking. 11 Whitepaper–OrgPhysics-Explained

  12. ✗ ✓ FormalStructureshouldbejudgedby onlyonemeasure:effectiveness.Doesit contributetomarketsuccess-ordoesit serveinternalpurposesonly? Theproblem:Whenoutside-inmarket forcesarehinderedbyhierarchicaltop- downrelationshipswithinan organization,thatiscalledbureaucracy. Formalpyramidstructures,asmost organizationsemploythem,tendtofocus onpowerrelationshipsalone,and peoplewithinthemeasilylosesightof outsidemarketsandcustomers,servinginsteadthehierarchyand “bosses”.Theresultiscommandandcontrol.Notcompetitivesuccess. Also,managersmistakenlybelievethat“work”isdonethroughFormal Structuresomehow–though,systemically,thisisimpossible. 12 Whitepaper–OrgPhysics-Explained

  13. Centralizedtop-downorganizationisneveralignedwithmarket, customer,orshareholderinterests-eventhoughitiscommonplaceto mistakeshareholderinterestswiththenecessitytocreateinternalhierarchy. Powerstructuresareinfactneverinducedatallbyexternalstakeholders,but insteadby (wasteful) internalcentralizationofinfluenceandpower.External complianceandinternaldiscipline,however,canalsoeasilybeproduced withinadecentralizednetworkstructure. Ifvaluecreationfortheexternalmarketisnottobehindered,thenminimal organizationalenergyshouldgointoFormalStructure.FormalStructure,as itcansolelyservethetrivialpurposeofexternalcompliance,shouldbe subduedtoorcoherentwithValueCreationStructure,inwhichthework isdoneandwhereorganizationalperipheryisincharge,notbosses. Organizationalrealitytodaymostlyisverydifferentfromthat:Formal Structurereceivesalotofattention.Thatinturnleadstowaste,fiddlingwith toolsandprocesses,pointlessrestructuring,andtobreedingtheillusionof controlatthetop. 13 Whitepaper–OrgPhysics-Explained

  14. Puttingitalltogether. Thethreestructuresandtheirinterrelation Thethreestructuresofan organizationstrongly influenceeachother. Remember: Valuecreationonlyoccurs throughthe2ndstructure, whereasthe1stisanatural collateralofsocial interactionandbonding. The3rdservesonlyfor externalcompliance,whileit caneasilygetinthewayof valuecreation,dueto disempowermentofan organization'speople. 1.  Informal Structure Inter- relations 2.  ValueCreation Structure ✗ ✓ 3.  Formal Structure 14 Whitepaper–OrgPhysics-Explained

  15. Impacts:Howtoorganizeineffectively. Thisishowyoudoit. ineffective Let'simagineanorganizationwitha traditional,commandandcontrol-type FormalStructure:Apartofits organizationalenergyandresources, let'ssay30%ofit,gointotheInformal Structure,asasideeffectofthesocial interactioninthefirm.This organizationalsoinvestsagooddeal ofenergyandresources,let'ssay 50%ofthetotal,intoFormalStructure –processes,planning,centralized coordination,hierarchicalcontrol,top- downdecision-making.Intowhatis usuallyreferredtoas“managing”. 1.Informal 30% 2.ValueCreation 20% 3.Formal 50% Theremainingofthetotal organizationalenergy,or20%,gointo generationofvalue,andcreatereal performance.Inotherwords:intothe structurewheretherealworkisdone. 15 Whitepaper–OrgPhysics-Explained

  16. Here,autocracyandtop-downmanagementforcemoreof people'senergythanwouldbestrictlynecessaryintotheInformal Structure:Likeinadictatorship,orinasovietstate,command andcontrolprovokesfear,defensemechanisms,internal politickingandinfighting.Inthiskindoforganization,peoplehave todefendthemselvesagainstthetop,andagainstotherswho mightblameorharassthem.InformalStructureshereturn predominantlynegative,duetomistrust. Mostorganizationstodayarejustlikethis.Itisarather ineffectivewayofrunninganorganization.Fartoolittle organizationalenergygoesintovaluecreation,toomuchis wasted. Thisisan“alpha”kindoforganization. 16 Whitepaper–OrgPhysics-Explained

  17. Impacts:Howtoorganizefarmoreeffectively effective Nowimaginearatherdifferent organization:Onethatdoesn'tbelievein FormalStructure,Onethatconsiders allmanagementandcentralizationof powertoxicandharmful,andrefusesto putenergyintoFormalStructure,except whenneededforexternalcompliance. Onethatbelievessostronglyinits peoplethatitwon'tletgetanything betweenthemandtheexternalmarket. 1.Informal 20% 2.ValueCreation 70% Thiskindoforganizationsystematically empowersteamstoimproveworkand valueflow-always.Itloatheswasteand putseveryoneInchargetofightit.Here, theperipheryisincharge-bosseskeep theirhandstothemselves,refraining frommicro-management.Controlisnot hierarchical,butsocial.Aslittleas10% oforganizationalenergyheremightgo intoFormalStructure. 3.Formal 10% 17 Whitepaper–OrgPhysics-Explained

  18. Here,leadersbattleagainstbureaucracyandworkhardon maintainingthesenseofurgencyhigh.Asthefirmdoesnotput pressureonformaltop-downstructures,lessoritspeople'senergy hastogointotheInformalStructure:Insteadofallowingfor commandandcontroltoprovokefearandinternalinfighting, peoplefindthetimetodedicatetheirpassionandabilitiesto innovationandcontinuousimprovement–whichboth,ultimately, servevaluecreation.Thus,only20%ortotalorganizationalenergy InthisfirmgointotheInformalStructure.Theremaining70%can beappliedtoValueCreation. Thisisprobablyaseffectiveasanorganizationcanbe.You wantanameforit?YoumightcallitGoogle,orSouthwestAirlines, orW.L.Gore,ordm-drogeriemarkt,orToyota. Thisisa“beta”kindoforganization. 18 Whitepaper–OrgPhysics-Explained

  19. Effectiveorineffectiveorganization: Thereisachoice Maybeyourareaskingyourselfnow:Whoinhisrightmindwouldsupportan organizationalstructurethatissoineffectivethatitdramaticallyfailstoservethe organizationspurpose-whichiscreatingvalueforsociety? (seestructureonleft) ineffective effective 1.Informal 20% 1.Informal 30% 2.ValueCreation 70% 2.ValueCreation 20% 3.Formal 10% 3.Formal 50% 19 Whitepaper–OrgPhysics-Explained

  20. Thefactis:Today,fartoomanyorganizationsdedicatefartoolittleoftheirThefactis:Today,fartoomanyorganizationsdedicatefartoolittleoftheir energyandresourcessystematicallytostructures1and2.Fartoomuch energyandresourcesgointostructure3-creatingnovalueand actuallystiflingperformancethroughhierarchy,bureaucracy,andthe command-and-controlculturethattop-downmanagementbreeds. Theoriesaboundaboutwhyorganizationshavesofarnotsystematically andbroadlymovedawayfromcommandandcontrolmanagementand structure.Onisthatmanagersatthetoparesimplyaddictedtopower.We donotbelieveinthattheory.Weareconvinced,instead,thatbroad understandingofthealternativetomanagementandhierarchyis missing,andthatweurgentlyneedtodevelopit,inordertostopthe massivewasteofresourcesthatmanagementthinkinginflicts. Wedonotneeddifferent,orbetterpeople.Weneeddifferent,andbetter organizationalthinking,design,andeffectiveaction. 20 Whitepaper–OrgPhysics-Explained

  21. What“organizationaltransformation”is.Andwhatitmeans. Organizationaltransformationintended toproducehigherorganizationaland individualsuccess,effectiveness,and happiness,shouldconsequentlyfocus onthefollowingguidingprinciples: 1.  EliminateFormalStructure,as muchaspossible,byfullyaligning itwithvaluecreationandby allowingitonlyforexternal compliance.Makethework independentofformalstructure. 2.  Focusallorganizationalenergy (e.g.withregardstolearning andmastery) onthefirsttwo structures-not onformalstruc- ture,whichistrivial.Approach InformalandValueCreationStruc- tureswithasystemicmindset. 3.  SupportthepositiveeffectsofInformalStructurethroughhighlevelsof transparency,investmentinself-awarenessofteams,radicaldecentralization ofdecision-makingtowardstheperiphery,andalsothroughbondingrituals, andstrong,sharedvaluesandprinciples. 1.Informal Investfor positiveresonance 2.ValueCreation Turniteveryone's centerofattention 3.Formal Reduce/eliminate it;alignwith valuecreation 21 Whitepaper–OrgPhysics-Explained

  22. Itisworthnotingthattheradicallydecentralizednetwork,or“beta”Itisworthnotingthattheradicallydecentralizednetwork,or“beta” organization,isarealityinallorganizationsalready,inthatallhave theirownValueCreationStructuresinplace.Theproblemisthatthis structureissooftensubduedtoahinderingFormalStructure. ValueCreationStructure,inthissense,isfarmorerealthenthe typeofFormalStructurethatisshowninthetypicalorgchart.In organizationalpractice,artifactsoftheValueCreationStructureoften gobythenamesofprojectteams,taskforces,customerorproduct teams.Itisthisstructurethatremainstobeempowered,inorderto createfull-fledgeBetaCodexorganizations,andtofulfillhuman potentialatwork. 22 Whitepaper–OrgPhysics-Explained

  23. Acknowledgementandfurtherrecommendedreading Theconceptoutlinedinthispaperwas inspiredbyabookfromGermanbusiness thinkerUweRenaldMueller,publishedin themid-90´sandentitledMachtwechsel im Management (Haufe).Somewhathiddenin thatbook,youcouldfindanillustrationentitled “Companiesalwayshavethreeorganizational levels” (picturedontheright). Here,Muellerdistinguishedbetweenthree structures:Virtual Structures (theValue CreationStructure),Formal Organizationand Interlinked Forums (somewhatsimilarto InformalStructure).HearguedthatVirtual Structureswere“muchmorerealinreal-world organizations”thanwhatmanagersuseto drawupintheircommand-and-controlorg charts.Theconceptinspiredustothinkafresh aboutthetheoryoforganizational“levels”,and toalignthisconceptwithscientificinsightsnot availabletoMuelleratthetime–fromsocial sciences,systemstheory,andthelike. 23 Whitepaper–OrgPhysics-Explained

  24. Theresultpresentedhereisanupdate,areviewandasubstantial extensionofMueller'slevelconceptfromthe90s,butnota completereinvention. ForfurtherinformationonValueCreationStructureandaboutwhy itshouldfollowthelawsoftheBetaCodex,readour2-partwhite paper“TurnYourCompanyOutside-In!”, Part1-www.betacodex.org/node/389. Part2-www.betacodex.org/node/390. Formoreaboutwhyorgstructuretodaymustreflectthenatureof complexmarketsandcomplexvaluecreation,readourwhite paper“OrganizeforComplexity”,www.betacodex.org/node/1316. Forthehumannatureunderpinningsofthestructuresandthe BetaCodex,readDouglasMcGregor'sbookThe Human Side of the Enterprise,especiallytheannotatededitionfrom2008 (McGrawHill). 24 Whitepaper–OrgPhysics-Explained

  25. TheBetaCodexNetworkwhitepapers-sofar Special   Edi+on   Special   Edi+on   FindallBetaCodexNetworkwhitepapersonwww.betacodex.org/papersandonSlideshare. Whitepaper–The3StructuresofanOrganization ©BetaCodexNetwork–Allrightsreserved 1

  26. The“OrganizeforComplexity”book Germanedition Portugueseedition English-paperback English-ebook Turkishedition withSelcukAlimdar www.organizeforcomplexity.com

  27. Make it real! ValéryaCarvalho mvaleriacarv@gmail.com LinkedIn SãoPaulo NielsPflaeging contact@nielspflaeging.com nielspflaeging.com NewYork,Wiesbaden SilkeHermann silke.hermann@nsights-group.de insights-group.de Wiesbaden,Berlin,NewYork LarsVollmer me@lars-vollmer.com lars-vollmer.com Hannover,Stuttgart betacodex.org GetintouchwithusformoreinformationaboutleadingBetaCodextransformation, andaskusforakeynoteoraworkshopproposal.

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