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How a triad of organizational structures allows to absorb complexity

Digital TransformationNetwork Organization

Since the rise of the corporation at the dawn of the industrial age, much has been said about leadership, power, and structure in organizations. Some in the field of organizational research believe that developing a robust theory of leadership is an illusive undertaking. Most practitioners, on the other side, do not seem to care much about theory at all. Consequently, two sets of beliefs tend to be constantly repeated in our field. On one hand, the tale of heroic leaders and their followers, combined with calls for hierarchical control. On the other hand, the story of the coming end of hierarchy, and future elimination of power from organizations.

Both sides are wrong.


A new, practical theory of leadership, organizational strcuture and power has emerged. It is ending one of the biggest misunderstandings in organizational science. The notion that organizations can be described through a single structure. A structure that has since the glory days of the railway corporation in the middle of the 19th century been usually depicted in the shape of org charts. While it is clear to most practitioners today that org charts cannot even remotely describe organizational complexity. And reality, theory and organization development have not advanced much from the original metaphor of organizations as top-down pyramids, line structures, silos and stand-alone functions.

Just a few years back, John Kotter started to promote a slightly advanced notion of organizational structure. That of a “dual operating system”, of two intertwined structures that could together explain organizational life. The first structure “formal”, the other one, described by Kotter in somewhat more fuzzy and generic terms, geared towards the “social” and the interaction. From the interdependence of these structures, performance would arise. The secret would be in “building” the second of those two structures.

This is also a misunderstanding. Organizations do not have two faces, but three. All of them. And naturally. What John Kotter is missing is how actual work is happening. And what the structural laws behind work and performance are. His way of describing complex social systems as having “operating systems”, as in a lifeless machine, is also entirely inappropriate in the context of living systems. The metaphor is simply under-complex.

The new, emerging theory of organizations is this: Every organization has three kinds of power, three forms of leadership and three organizational structures. This is not a menu. There is no decision to make about having all three structures, or not. None of the three structures is optional, or nice to have. They are part of organizational physics. Universal laws that apply to every organization, large or small, old or new, for profit or social.

Organizational structure No. 1: “Formal Structure” – realm of hierarchy

Formal structure

The first structure and type of organizational power to turn to is the one we are most familiar with. The most widely understood concept of power in organization is that of hierarchy, which resides within Formal Structure. As a structure, it is neither networked, nor complex, but it is necessary. Its versatility is usually over-estimated, and has been so, since the industrial age.

Formal Structure is capable of producing one important thing: Compliance with the law. No less, no more. Because Formal Structure is the domain in which compliance is produced, every organization, laimg-fluidrge or small, old or young, has one.

“Formal Structure is where you nominated a CEO, and an audit committee. Where you do the bookkeeping and the external reporting. Where you set up contracts of all kinds. This is what this structure is essentially about.”

But Formal Structure is dramatically over-emphasized in most companies. We make way too much of it. Even though we sense that too much use of formal power by managers, or too much emphasis on hierarchy, has serious downsides. As only one of three powers within any organization, hierarchy must not be over-emphasized, or the other two other structures will push back, or kick into a dysfunctional mode. The epic struggle between Formal Structure and the two other structures that make up Org Physics is one of the key sources of reduced organizational effectiveness, diminished complexity-robustness, and lack of innovation we find today in most companies.

“Formal Structure & hierarchy: Over-estimated and over-emphasized in most organizations. It is this excessive reliance on hierarchy that is the key source of suffering in the world of work today.”

Problem is: Most managers, or in fact most working people, are blinded to the two other structures of any organization that we are about to discuss.

Organizational structure No. 2: “Informal Structure” – realm of influence

Informal structure

Informal Structure became more popularly known and talked about with the rise of social networks. But it has long been a well-known phenomenon in the social sciences. This organizational structure can be thought of as “clouds” of interconnected individuals, with varying numbers of links to others. This is placing individuals either in central or more peripheral positions in the cloud. Informal Structure is networked. It is neither good, nor bad. Informal Structure is. Think of water cooler and corridor talk, gossip, conspiracy, bullying. But also of solidarity. There is power in the informal. We call this power Influence.

“Informal Structure: Very alive and dynamic. Often taboo. Very powerful. Impossible to accurately pin down or map.”

It should be mentioned here that the two structures, and the two powers we looked at so far, are interdependent. So if a CEO mentions hat he or she intends to hire a large consulting firm for a “restructuring exercise”, this CEO is intervening in both structures. Formal and informal. Both organizational structures will duly react. In Formal Structure, managers will immediately take action to secure their turfs. But part of the reaction is likely to happen within Informal Structure. Politics, coalition-building, intrigue – these are phenomena arising from Informal Structure. They can be incredibly powerful, capable of wrecking even the most well-planned restructuring effort. Especially those executed by consultants and managers whose repertoire almost exclusively covers interventions suited for Formal Structure.

One of the few large companies that developed mastery in positively acting on and engaging with its Informal Structure is Google. If you want to learn how to carefully curate the informal, learn from them. What have you done lately to irritate your organization´s Informal Structure, constructively?

Organizational structure No. 3: “Value Creation Structure” – realm of reputation

Value creation structure

This is where Org Physics gets most interesting, and most paradigm-shattering. This is the least understood of the three structures of any organization. Ironically, it is also the one structure in which actual work can get done. It is here where the key to a much-improved understanding of org effectiveness lies. The only organizational structure from which performance and success can arise. Neither success nor performance can be produced in Formal Structure or Informal Structure. Because these are just carriers of the compliance dimension, on one hand, and of the social dimensions of the organization on the other. For actual work or value creation, all organizations possess a third organizational structure: Value Creation Structure.

From this structure arises a particular third kind of power. We call this power Reputation. You have seen power of those with mastery, or Reputation, happening. It is when people who have a work problem which they cannot solve on their own, turn to someone else, asking: “Who knows about this?” or “Who is the expert on this particular matter who I can ask about it?”. They are looking for mastery, and they can find it by hooking up to the network of power that is Value Creation Structure.

“Formal Structure and Informal Structure can be enablers of value creation, and lubricants of work. But they cannot themselves produce performance, success, competitiveness, or value.”

Value Creation Structure is inevitably networked, as is Informal Structure. All value creation flows from the inside out: From center, to periphery, to market (for more on this crucial distinction read the Organize for Complexity white paper, or book). Value Creation Structures can be mapped as networks of cells, which contain functionally integrated teams. And which are interrelated by value flow, pay, and communication relationships.

In this organizational structure, any cell either creates value for other network cells (in case of the center) or for the outside market (in case of the periphery). Cells, or teams, respond to market pull – not hierarchy. It is cells, or teams who create value in their interrelations “with-each-other-for-each-other” – not individuals. Value Creation Structure and its workings make it clear that individual value creation, actually does not exist in organizations.

“While Formal Structure is the domain of positions, Value Creation Structure is the domain of work roles. Of which every member of an organization has not one, but many.”

Sadly, Value Creation Structure is rarely well-understood, or consciously curated by organizations. Most of the time it is not even being worked upon systematically – with a few notable exceptions. One large company that has developed true mastery in empowering and leading through its Value Creation Structure is Toyota. Here, you can learn a lot about intelligent curation of value creation, through empowerment of teams in the periphery. Not individuals at the top.

Every organization knows 3 kinds of leadership. Not one

Within the three structures of organizations, thee three kinds of leadership reside. All important, but dramatically out of balance in most organizations we know:

  1. Compliance Leadership – emerging from Formal Structure.
  2. Social Leadership – emerging from Informal Structure.
  3. Value Creation Leadership – emerging from Value Creation Structure.

Following this thought, there is not “leadership”. But “leaderships”. Just like the three structures they emerge from, these types of leadership are interdependent and complex, not independent or linear. In the presence of too much hierarchy, or formal power, the two other kinds of leadership are quite impossible to happen. Social density and connection will deteriorate. Members of the organization will find it harder to get the work done, while they game Formal Structure and its complicated mechanics of steering and control. Organizational energy is wasted on bureaucracy (Formal Structure), and self-defense against command-and-control from the top, carried out within Informal Structure.

“It is Value Creation Structure that should come first – not Formal Structure. Only by putting Value Creation first, organizations can find balance. Achieve great leaderships. Become aligned with Org Physics as they are.”

McGregor was right all along

This is what Douglas McGregor said about organizational structure, power and leadership, in his book The Human side of enterprise, from 1960:

“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.” 

He was right all along. We have, however, only just started with what McGregor predicted more than fifty years ago. A new, robust theory of organizational leadership of the kind McGregor theorized about can finally explain organizational complexity, and the complex phenomena of power and leadership within organizations.

A little over 100 years after Frederick W. Taylor´s pioneering and often misinterpreted work on management science, we may finally end the quackery around organizational structure, power and leadership. And turn to practical theory and insights that have long been available to us, but that have been widely ignored by the business community as much as by academics.

Every organization has three structures, not one. Ignore them at your own peril.

This article was originally published on Niels Pfläging´s LinkedIn!

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