Org Physics - Explained (BetaCodex11)

Make it real!ORGPHYSICS -EXPLAINEDHow structures work, how they interact, what thismeans for organizational effectiveness and changeBetaCodex Network AssociatesNiels Pflaeging & Silke HermannBetaCodex Network White Paper No. 11, Jan 2011, renamed February 2013This paper was previously entitled “The 3 Structures of an Organization”

“It is probable that one day we shall begin to draw organization charts as a series of linked groups rather than as a hierarchical structure of individual “reporting" relationships” Douglas McGregor, The Human Side of the Enterprise, 1960White paper – Org Physics - Explained 2 © BetaCodex Network – All rights reserved

Ask someone to take a piece of paper, and a pen.And to draw the structure of his or her organization.That person will usually come up with a single design.One that resembles the “org chart” type design shown onthe right.That, to be sure, happens anywhere in the world (we triedit). Those perceived structures actually look surprisinglysimilar anywhere – depending on industry a bit, ofcourse, and give or take a few details and variations.Todays professionals around the world perceive theirorganizations as a set of “boxes”, populated by “teams”that are each topped by “bosses”, and that areinterconnected through “reporting” or “line”relationships. Horizontally, organizations are alwaysdivided in a “functional” way, to some degree, but therenormally are additional divisional criteria, such asproducts or divisions, regions, etc.The trouble with this kind of structure is that it is just anillusion. One that actually hinders success and results,work flow, and the well-being of the people in it. Itrepresents a hopelessly limiting line of thinking aboutorganizations and about what they should be.White paper – Org Physics - Explained 3 © BetaCodex Network – All rights reserved

Organizations today are grossly ineffective. Because most of ushave flawed ideas about what actually makes them tickOrganizations work through structures. And every organization The average organizationhas three of those. Not one. The problem: Hardly anyone in Share of value-creatingbusiness is aware of that - and thats why so much investment into energyeffectiveness and change simply misses the point. Lets considerwhy this is urgent. 20%Most of todays organizations are phenomenally ineffective. Whenasked what share of their organization’s total energy is applied toexternal value creation (instead of into bureaucracy, administration, 80%politicking, in-fighting and waste), then the percentage given by Share of energy that does not createmanagers, company owners and employees alike is usually around external value20%. The typical organization today thus is likely to dedicate onlyabout a fifth of its energy and resources to value creation for externalmarkets. Little wonder then that work often underwhelms us. The best organizationsAt the same time, most of us acknowledge that the most effectiveorganizations are able to dedicate a far higher share of their energiesto relevant value creation – typically, the estimate is 70 or 80%.Some exceptional companies thus make dramatically better use oftheir capabilities. But what is it that makes the difference? 30%Our answer: Those vastly more effective firms understand structure. 70%In this paper, we will firstly introduce you to the little-known realworld of organizational structure – and we will secondly discuss theconsequences and the options for change.White paper – Org Physics - Explained 4 © BetaCodex Network – All rights reserved

The first structure: Informal StructureThe first structure of an organization isInformal Structure. Every organizationhas it. Informal power and influencestructures, group norms and interactionpatterns arise wherever human beingscome together. They evolve in any socialstructure, and in any human interaction.White paper – Org Physics - Explained 5 © BetaCodex Network – All rights reserved

More about Informal StructureEven though Informal Structure is a natural resultof social interaction, and creates the gluebetween human beings in any group, it is rarelygiven profound thought to by both smaller andlarger organizations.Informal Structure by itself is neither good,nor bad. It does, however, in many waysinfluence organizational and individual well-beingand effectiveness: Informal Structure can, forinstance, unleash decisive action in crisis andturmoil. But it can also, under certain conditions,be the sources of mobbing, or total complacency.Most organizations dedicate little energy to their Informal Structure, systematically, althoughthey invariably “tick” through them and much energy is employed into them in various ways. Manymanagers have a tendency to disdain Informal Structure, considering it suspicious and undesirablyemotive, or feeling insecure about how to deal with it. As a consequence, these structures aremore often then not neither considered, nor consciously influenced.Informal Structure has become more popularly known since the rise of social networks.It can be mapped as “clouds” of interconnected individuals, with varying numbers of links to others– placing individuals either in central or more peripheral positions in the cloud.White paper – Org Physics - Explained 6 © BetaCodex Network – All rights reserved

The second structure: Value Creation StructureThe second structure of an organization isValue Creation Structure. Like InformalStructure, any organization has it: Becauseorganizations of any kind have to create valuefor its outside market, and any organizationthat didnt have one would cease to exist. It isthrough the Value Creation Structure thatvalue flows from the inside to the outside,towards the external market.White paper – Org Physics - Explained 7 © BetaCodex Network – All rights reserved

More about Value Creation StructureIt is through this, and only this structure, thatperformance and market success can be produced.Value-generating work by nature only happens here.Interestingly, though, Value Creation Structure is notwidely understood in firms, it is rarely systematicallydesigned, and most of the time not being invested Insystematically – with a few notable exceptions. Onecompany that has developed true mastery inempowering and leading its Value Creation Structure, byturning it into its dominant structure, is Toyota.Value Creation Structures – aligned with systemstheory - can be mapped as networks of cells, whichcontain functionally integrated teams, and which areinterrelated by value flow, pay, and communicationrelationships. In the structure, any cells either createsvalue for other network cells or for the outside market.Cells, or teams, respond to market pull, not hierarchy.Value Creation Structure and flows are, in many organizations, being hinderedand crippled by another type of structure – the third structure of an organization.White paper – Org Physics - Explained 8 © BetaCodex Network – All rights reserved

The third structure: Formal StructureThe third structure of an organization isFormal Structure. Formal Structure canproduce compliance, but it can neverproduce value. It is most frequently mappedas a pyramid of departmental boxes,interconnected by power or “reporting“relationships (the “org chart”). This conceptof structure stems from the industrial-agethought leaders such as Frederick Taylor,and from Isaac Newtons “machineorganization” thinking.White paper – Org Physics - Explained 9 © BetaCodex Network – All rights reserved

More about Formal StructureFormal Structure should be judged by only one ✗ ✓measure: effectiveness. Does it contribute to marketsuccess - or does it serve internal purposes only?The problem: When outside-in market forces arehindered by hierarchical top-down relationshipswithin an organization, that is called bureaucracy.Formal pyramid structures, as most organizationsemploy them, tend to focus on powerrelationships alone, and people within themeasily lose sight of outside markets and customers, serving instead the hierarchy and “bosses”. Theresult is command and control. Not competitive success. Also, managers mistakenly believe that “work”is done through Formal Structure somehow – though, systemically, this is impossible.Centralized top-down organization is never aligned with market, customer, or shareholderinterests - even though it Is commonplace to mistake shareholder interests with the necessity to createinternal hierarchy. Power structures are in fact never induced at all by external stakeholders, but insteadby (wasteful) internal centralization of influence and power. External compliance and internal discipline,however, can also easily be produced within a decentralized network structure.If value creation for the external market is not to be hindered, then minimal organizational energy shouldgo into Formal Structure. Formal Structure, as it can solely serve the trivial purpose of externalcompliance, should be subdued to or coherent with Value Creation Structure, in which the work isdone and where organizational periphery is in charge, not bosses. Organizational reality today mostly isvery different from that: Formal Structure receives a lot of attention. That in turn leads to waste, fiddlingwith tools and processes, pointless restructuring, and to breeding the illusion of control at the top.White paper – Org Physics - Explained 10 © BetaCodex Network – All rights reserved

Putting it all together. Three structures and their interrelationThe three structures ofan organization stronglyinfluence each other. 1. Informal StructureRemember: Valuecreation only occurs inthe 2nd structure,whereas the 1st is anatural collateral of social Inter-interaction and bonding, relationswhile the 3rd serves onlyexternal compliance, but 2. Value Creation Structurecan easily get in the wayof value creation, throughdisempowerment of anorganizations people. 3. Formal Structure ✗ ✓White paper – Org Physics - Explained 11 © BetaCodex Network – All rights reserved

Impacts: How to organize ineffectivelyLets imagine an organization with a traditional,command and control-type Formal Structure: A part of ineffectiveits organizational energy and resources, lets say 30% 1. Informal 30%of it, go into the Informal Structure, as a side effect ofthe social interaction in the firm. This organization alsoinvests a good deal of energy and resources, lets say50% of the total, into Formal Structure – processes,planning, centralized coordination, hierarchical 2. Value Creation 20%control, top-down decision-making. Into what isusually referred to as “managing”.The remaining of the total organizational energy, or 3. Formal 50%20%, go into generation of value, and create realperformance. In other words: into the structure wherethe real work is done.Here, autocracy and top-down management force more of peoples energy than would be strictlynecessary into the Informal Structure: Like in a dictatorship, or in a soviet state, command and controlprovokes fear, defense mechanisms, internal politicking and infighting. In this kind of organization,people have to defend themselves against the top, and against others who might blame or harassthem. Informal Structures here turn predominantly negative, due to mistrust.Most organizations today are just like this. It is a rather ineffective way of running an organization. Fartoo little organizational energy goes into value creation, too much is wasted. This is an “alpha” firm.White paper – Org Physics - Explained 12 © BetaCodex Network – All rights reserved

Impacts: How to organize effectively effectiveNow imagine a rather different organization: One thatdoesnt believe in Formal Structure, One that considersall management and centralization of power toxic and 1. Informal 20%harmful, and refuses to put energy into Formal Structure,except when needed for external compliance. One thatbelieves so strongly in its people that it wont let getanything between them and the external market. 2. Value Creation 70%This kind of organization systematically empowers teamsto improve work and value flow - always. It loathes wasteand puts everyone In charge to fight it. Here, the peripheryis in charge - bosses keep their hands to themselves, 3. Formal 10%refraining from micro-management. Control is nothierarchical, but social. As little as 10% of organizationalenergy here might go into Formal Structure.Here, leaders battle against bureaucracy and work hard on maintaining the sense of urgency high. Asthe firm does not put pressure on formal top-down structures, less or its peoples energy has to go intothe Informal Structure: Instead of allowing for command and control to provoke fear and internalinfighting, people find the time to dedicate their passion and abilities to innovation and continuousimprovement – which both, ultimately, serve value creation. Thus, only 20% or total organizationalenergy In this firm go into the Informal Structure. The remaining 70% can be applied to Value Creation.This is probably as effective as an organization can be. You want a name for it? You might call it Google,or Southwest Airlines, or W.L.Gore, or dm-drogerie markt, or Toyota. This is a “beta” kind of firm.White paper – Org Physics - Explained 13 © BetaCodex Network – All rights reserved

Effective or ineffective organization: There is a choiceMaybe your are asking yourself now: Who in his right mind ineffectivewould support an organizational structure that is so ineffective 1. Informal 30%that it dramatically fails to serve the organizations purpose -which is creating value for society? (see structure on top)The fact is: Today, far too many organizations dedicate far too 2. Value Creation 20%little of their energy and resources systematically to structures 1and 2. Far too much energy and resources go intostructure 3 - creating no value and actually stifling performance 3. Formal 50%through hierarchy, bureaucracy, and the command-and-controlculture that top-down management breeds. effectiveTheories abound about why organizations have so far notsystematically and broadly moved away from command andcontrol management and structure. On is that managers at the 1. Informal 20%top are simply addicted to power. We do not believe in thattheory. We are convinced, instead, that broad understanding ofthe alternative to management and hierarchy is missing, 2. Value Creation 70%and that we urgently need to develop it, in order to stop themassive waste of resources that management thinking inflicts.We do not need different, or better people. We need different, 3. Formal 10%and better organizational thinking, design, and effective action.White paper – Org Physics - Explained 14 © BetaCodex Network – All rights reserved

What “organizational transformation” is. And what it means.Organizational transformation intended to producehigher organizational and individual success,effectiveness, and happiness, should consequently 1. Informalfocus on the following guiding principles: Invest for positive resonance1.  Eliminate Formal Structure, as much as possible, by fully aligning it with value creation 2. Value Creation and by allowing it only for external compliance. Turn it everyones Make the work independent of formal structure. center of attention2.  Focus all organizational energy (e.g. with regards to learning and mastery) on the 3. Formal first two structures - not on formal structure, Reduce/eliminate which is trivial. Approach Informal and Value it; align with value creation Creation Structures with a systemic mind-set.3.  Support the positive effects of Informal Structure through high levels of transparency, investment in self-awareness of teams, radical decentralization of decision-making towards the periphery, and also through bonding rituals, and strong, shared values and principles.It is worth noting that the radically decentralized network, or “beta” organization, is a reality in allorganizations already, in that all have their own Value Creation Structures in place. The problem is thatthis structure is so often subdued to a hindering Formal Structure.Value Creation Structure, in this sense, is far more real then the type of Formal Structure that is shownin the typical org chart. In organizational practice, artifacts of the Value Creation Structure often go bythe names of project teams, task forces, customer or product teams. It is this structure that remains tobe empowered, to create full-fledge BetaCodex firms, and to fulfill the potential of our organizations.White paper – Org Physics - Explained 15 © BetaCodex Network – All rights reserved

Acknowledgement and further recommended readingThe concept outlined in this paper is inspired by a book byGerman author Uwe Renald Mueller, published in themid-90´s and entitled Machtwechsel im Management(Haufe). Somewhat hidden in the book, Mueller showed anillustration entitled “Companies always have threeorganizational levels” (pictured on the right). Muellerdistinguished between three structures: Virtual Structures(the Value Creation Structure), Formal Organization andInterlinked Forums (similar to Informal Structure). He arguedthat Virtual structures were “much more real in real-worldorganizations” than what managers use to draw up in theircommand-and-control org charts. The concept inspired usto think afresh about the theory of organizational “levels”,and to align it with scientific insights not available to Muellerat the time – from social sciences, systems theory, and the like. The result presented here is an update,a review and a substantial extension of Muellers level concept from the 90s, not a complete reinvention.For further information on Value Creation Structure and about why it should follow the laws of theBetaCodex, read our 2-part white paper “Turn Your Company Outside-In!”, Part 1 -www.betacodex.org/node/389. Part 2 - www.betacodex.org/node/390. For the human natureunderpinnings of the structures and the BetaCodex, read Douglas McGregors book The Human Side ofthe Enterprise, especially the annotated edition from 2008 (McGraw Hill).White paper – Org Physics - Explained 16 © BetaCodex Network – All rights reserved

Special Edi+on Special Edi+on Find all BetaCodex Network white papers on www.betacodex.org/papers and on Slideshare.White paper – The 3 Structures of an Organization 17 © BetaCodex Network – All rights reserved

Make it real!www.betacodex.org Silke Hermann Niels Pflaeging Lars Vollmer silke.hermann@ niels@betacodex.org vollmer@v-und-s.de insights-group.de nielspflaeging.com www.lars-vollmer.com Wiesbaden–Berlin-New York New York-Wiesbaden Hannover-StuttgartGet in touch with us formore information aboutleading transformation withthe BetaCodex, and ask usfor a keynote or a workshop Walter Larralde Valérya Carvalho Chris Catto wlarralde@ valeria@betacodex.org christopher.catto@proposal. on-strategy.com.mx Betaleadership.com putneybreeze.com.au Mexico City São Paulo Melbourne

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Org Physics - Explained (BetaCodex11)

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