Chapter 5 Navigating Change Through Formal Structures and Systems
If you’re going to sin, sin against God, not the bureaucracy; God will forgive you but the bureaucracy won’t.
—H. G. Rickover, U.S. Admiral1
We shape our buildings; thereafter they shape us.
—Winston Churchill2
Chapter Overview
• This chapter discusses the basics of how organizations structure themselves.
• It outlines how change leaders can diagnose the strengths and weaknesses of existing systems and structures.
• It examines how the formal structure and systems can foster, impair, and facilitate the acceptance of change initiatives.
• It lays out ways to manage systems and structures to gain approval for change initiatives. Formal, coalition-building, and renegade approaches are discussed.
• Finally, it reviews the ways to develop more adaptive systems and structures to increase the likelihood of continuous improvement.
Any discussion of organizational change needs to pay careful attention to the role of formal systems and structures. They influence what gets done, how it gets done, the outcomes that are achieved, and the experiences of the people who come into contact with the organization. While organizations define their systems and structures, the systems and structures shape the behavior of organizational members. Formal systems and structures play important coordination, communication, and control roles, and they influence how decisions are made about change. Sometimes systems and structures represent what needs to change.
An organization’s formal structure is defined by how tasks are formally divided, grouped, and coordinated.3 Formal structures are designed to support the strategic direction of the firm by enhancing order, efficiency, effectiveness, and accountability. They serve as guides and controls on decision-making authority, coordinate and integrate operations, provide direction to internal governance, and attempt to promote desired behavior and organizational outcomes.4 The organizational chart is the common document of organizational design.
Formal systems include planned routines and processes such as strategic planning, accounting and control systems, performance management, pay and reward systems, and the information system. Collectively, these set out how things are supposed to be done, the rules and procedures to be followed, how information is collected and disseminated, how individuals are to be compensated, and all the other formalized systems and processes that are used for coordination, integration, and control purposes. They provide the formal infrastructure that operationalizes the organizational structure.
Organizations vary in their need for complexity in their structures and systems, but all require some degree of formalization to be sustainable. These are modified over time as conditions change and they need to bring them into alignment with external conditions, strategy, and other internal factors. The corner grocer needs simple systems for accounting, staffing, and managing its suppliers, pricing, and inventory management. Walmart, on the other hand, requires sophisticated systems and structures to efficiently and profitably handle $473 billion in net sales, processed by 2 million associates in 11,000 retail units that operate in 26 countries.5 This includes $10 billion in online sales in 2014, an increase of 30% over 2013.6
One reason that Walmart dominates the consumer retail market is its logistics systems that coordinate all aspects of inventory management, from ordering through to shipping, warehousing, shelving, and final disposition. Its knowledge-management system, Retail Link, provides Walmart and its suppliers with data that allow them to identify emerging opportunities for their products. Their systems are continuously improved in order to better drive business results, and they are demonstrating their ability to effectively extend their technical reach to the world of online retailing. It is systems like this that allow Walmart to satisfy multiple stakeholders and maintain its competitive position in the industry.7
The purpose of this chapter is to describe the roles that formal systems and structures play in advancing change. It also provides guidance in identifying the gap between the existing structures and systems, and what is needed to bring about alignment after the change. Figure 5.1 outlines where this chapter fits in the change-management process. This chapter is the first of four that detail how change leaders can advance a sophisticated gap analysis and deploy it in pursuit of change. This chapter deals with formal systems and structures, and the chapters that follow will cover the informal aspects of organizations, change stakeholders and recipients, and change leaders themselves.
Figure 5.1 The Change-Management Process
Change leaders need to develop a deep understanding of how existing structures and systems are currently influencing outcomes and how they are likely to facilitate or impede the proposed changes. Once that understanding is developed, change leaders need to put that system and structural awareness to use to promote and enact change. To advance this agenda, the chapter is divided into four sections:
1 Making sense of organizational structures and systems
2 Diagnosing the strengths and weaknesses of existing systems and structures
3 Understanding how structures and systems influence the approval process of a change initiative and how they then facilitate or hinder the acceptance of change
4 Designing adaptive structures and systems to enhance future change initiatives
Making Sense of Formal Structures and Systems
The structural frame,8 to use the language of Bolman and Deal, outlines an internal blueprint for how managers assign tasks, roles, and authority to produce products or services for the external marketplace. Wrapped around this structure are all the formal systems and processes that are designed to bring the structure to life and make it possible for the organization to deliver on its strategy and value proposition.
To make sense of structures, it is useful for change leaders to understand and be able to work with core concepts in this area. Some of the more common elements used include:9
1. Differentiation: The degree to which tasks are subdivided into separate jobs or tasks. This concept deals with who does what and asks about the degree to which jobs are specialized and distinctive from one another on both the horizontal and vertical organizational axes. The differentiation of tasks is an early step in the life of an entrepreneurial adventure as it grows from one to two and then three people, with further differentiation of tasks as the number of employees increases. As organizations grow and add more people, tasks are divided and subdivided. Large organizations, as a consequence, are often characterized by highly specialized jobs, leading to silos of similar and separate tasks and job categories.
2. Integration: The coordination of the various tasks or jobs into a department or group. This is the extent to which activities are combined into processes and systems, pulling together all the disparate pieces of tasks and jobs into a coherent whole. Small organizations are typically structured in a simple and straightforward manner, organized by functions such as production, accounting/finance, sales and marketing, and human resources. As they grow and become more complex, they look for more efficient and effective ways to group tasks and activities. Departments or divisions may be organized geographically or by product category, customer segment, or some other hybrid approach such as networks that seem to offer the best way to organize activities at that point in time. Sometimes they may even be spun off as separate, stand-alone entities. In large organizations, such as Boeing, there are integrative roles with people and teams who specialize in coordinating and communicating in order to bring together the disparate parts of the enterprise.
3. Chain of command: The reporting architecture in a hierarchical organization. This concept defines how individuals and/or units within an organization report to one another up and down the organizational ladder. It reflects the formal power structure and where decision responsibilities lie within the hierarchy.
4. Span of control: The number of individuals who report to a manager. This notion questions the optimal ratio of workers to managers in an organization. Since there is no one correct way to answer this question, part of the art of organizational design is to figure this out, given the culture, strategy, and what needs to be done. An organization that gives managers too little span of control runs the risk of creating a costly and top-heavy administrative structure and encouraging its managers to micromanage too few employees. On the other hand, managers who have too many employees reporting to them run the risk of inadequate supervision, feedback, and employee development.
5. Centralization vs. decentralization: How and where decision making is distributed in an organizational structure. The more centralized the approach, the more the decision making gravitates to the top of the organization. Conversely, the more decentralized it is, the more the decision making is delegated to lower levels of employees. In general, organizations flatten their hierarchies when they adopt a more decentralized approach and vice versa.
6. Formal vs. informal: The degree to which organizational charts exist, are codified, and are followed. This is the extent to which structures and processes of the organization are set down in writing and expected to be followed.10
To practice understanding change on existing structures and systems see Toolkit Exercise 5.2.
Impact of Uncertainty and Complexity on Formal Structures and Systems
Another way of thinking about structural alignment is to begin by reflecting on the environment they operate in. Beginning with the work of Thompson in the 1960s,11 researchers have explored the impact of uncertainty and complexity on why organizations structure their systems and processes as they do and the impact these configurations have on their capacity to successfully adapt to the environment over time.12 When examining the structural dimensions, organizations have often been classified into two types: (1) those that are more formal, more differentiated, more centralized, and more standardized, and (2) those that are less formal, less differentiated, more decentralized, and less standardized. The terms that are applied to this organizational typology are mechanistic and organic. Table 5.1 outlines the characteristics of mechanistic and organic organizational forms as opposite ends of a continuum.13
Mechanistic organizations rely on formal hierarchies with centralized decision making and a clear division of labor. Rules and procedures are clearly defined and employees are expected to follow them. Work is specialized and routine. Mechanistic organizations tend to be concentrated in industries where the risk of getting it wrong is high. For example, nuclear power suppliers or pharmacy industries will be extremely mechanistic in order to manage the high risk and detailed logistics of their business.
Organic organizations are more flexible. They have fewer rules and procedures, and there is less reliance on the hierarchy of authority for centralized decision making. The structure is flexible and not as well defined. Jobs are less specialized. Communication is more informal, and lateral communications are more accepted. Many start-up companies and companies in creative fields will be more organic, allowing increased communication and flexibility in day-to-day tasks. While it may appear that one structural form is more appealing than the other, both can be effective depending upon their fit with the environment. When efficiency is critical to success and ambiguity and uncertainty are low to moderate, a more mechanistic structure will fit best. However, when an organization’s ability to respond to its environment with flexibility and adaptiveness is critical to its success, a more organic structure will make more sense.14
Source: Adapted from Daft, R.L., Organization Theory and Design, 9th ed. Ohio: South-Western, 2007, pg.152.
Formal Structures and Systems From an Information Perspective
A third way of thinking about the impact of systems and structures on how and why firms operate as they do is to look at how they formally manage information. One of the primary purposes of formal structures and systems is to place the right information in the hands of appropriate individuals in a timely fashion so that they can do what is needed. Information technology has been instrumental in allowing organizations to develop structures and systems that are more robust, dynamic, and flexible.
Supply chains, distributed manufacturing, flattened hierarchies with empowered workgroups, and networked organizations all owe their growth to improvements in this area. It has let organizations such as Dell to move from mass-production models to mass customization, with little productivity loss.15 By extension, technology has also allowed us to think differently about structures and systems when planning and managing organizational change. For example, telecommunication advances mean virtual teams distributed around the globe can be created, meet “face to face,” access and share information in real time, and move projects forward in ways that were not possible 10 years ago.
Jay Galbraith defines this as the information-processing view of organizations.16 If the organization is to perform effectively, there needs to be a fit between the organization’s information-processing requirements and its capacity to process information through its structural design choices. The better the fit between these, the more effective the organization will be. As uncertainty increases, the amount of information that must be processed between decision makers during the transformation process increases. The organization must either increase its capacity to handle that information or restructure itself to reduce the need for information handling. Figure 5.2 outlines Galbraith’s work.
As uncertainty increases, the traditional vertical information strategies for uncertainty reduction will prove increasingly less effective, and the organization will require methods that either reduce the need for information processing or increase the capacity of the organization to process information.17 Organizations can reduce their information-processing challenges by adding slack resources to act as buffers (e.g., extra people and inventory) and/or by creating self-contained tasks (e.g., divisions organized around product categories, geography, or customers). For example, extra inventory means that increased variation in demand for a product will be handled by drawing down or increasing inventory levels. Similarly, separating an organization into divisions operating as profit centers means that the divisions may not need to coordinate their activities as much. This reduces the information-processing requirements.