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Monday, August 18, 2008

Organizational Performance

I recently answered a question on LinkedIn that I tought would complement some of the earlier discussion in the post about Agile Manufacturing Systems.

Dumitrescu Bogdan asked: When and why do network organisations(companies) perform poorer than hierarchical ones? The structure of organizations certainly has great impact on their performances, network forms of organizations have emerged under cultural impact (see Guanxi business) or under the pressure of poor performance of hierarchies/bureaucracies; networks forms of organisation have proven their potential (see the Asian Tigers) but sometimes networks fail, when and why?

In order to answer this question you need to take a look at the pros and cons of each type of organization. A hierarchical organization is well suited in sustaining its current business model. Think of it as highly tuned and very god in dealing with its known business environment. Everybody knows their role including the politics and therefore as long as the environment is stable – not a lot of changes both internally and externally such as new products, emerging markets, etc – then it is pretty well functioning. Such an organization is less suited for example in turbulent markets, where there may be a need for a dynamic and risk prone business strategy. Flat organizational structures, i.e. networked or sometimes also referred to as Heterarchical, are better suited to this situations since they can change easily and tend to leverage people’s inherent adaptability. This type of organization, when it is well run, adheres to “Holonic” principles – a term used to describe the mechanics of a social system. The weakness of a flat structure is that it is typically not very efficient. When the business environment is relatively stable a hierarchical structure will in probably perform better. Also flat structures are typically much better in fostering innovation and creativity. People tend to feel more engaged since they share responsibility, as compared to a hierarchical organization where they are told what to do. This is an important point – the ability to motivate and inspire people (aka leadership) can make any organization excel. One of the methods to do this is to make people feel that they have an effect on the outcome, shared responsibility etc. This is probably why Toyota is so successful.