The first time published on JANUARY 24, 2018, together with Kirill Derevenski
Little doubt exists that there ought to be a direct connection between the external environment in which a company (or any organisation) operates and its internal makeup. A well known contingency theory of the firm postulates that there is no single best way to organise a business or make decisions. Instead, every optimal organisation is dependent on prevailing dynamics in its external (and to some extent internal) environment.
Every optimal organisation is dependent on prevailing dynamics in its external and internal environment
Perhaps the best known proponents of the contingency theory are Tom Burns and George Stalker, who already in 1961 drew clear relationships between corporate organisational design, market dynamics and commercial success. In their monumental work aptly named The Management of Innovation, while looking at a sample of Scottish firms to see how they turn their R&D inventions into cash, the authors discovered two polar management systems – “mechanistic” and “organic”, with many organisations actually being on a continuum between the two.
At one end, a mechanistic management system is deemed appropriate to stable conditions. It is characterised by hierarchical vertical structure of control, authority and communication, focus on technical improvement of means, rather than the accomplishment of the ends of the concern, and simple transversal communication mechanisms for departments and functional areas based on centralised decision making at the top of the organisation. Each employee works individually and specialises in a certain well-defined-from-above task. When thinking of such a structure, government bureaucracy and market monopoly utilities usually spring to mind, but in reality most ‘conventional’ business and organisations have been structured in this or similar vein for decades.
At other end, the organic management system is appropriate to dynamic conditions, which give rise to fresh problems and unforeseen requirements for action which cannot be broken down or distributed efficiently, as the functional roles defined within a hierarchic structure would require. It is characterised by much faster decision-making in a decentralised yet controlled manner, more complex (e.g. matrix) communication mechanisms between departments and functional areas to best meet the needs of its internal and/or external clients, and greater lateral communication and network organisation to facilitate rapid adjustment. More emphasis is placed on team work and joint specialisation as employees work together and coordinate tasks. Examples of organic structures are such well known names as Google, Amazon and Facebook. There are others – note that most of these organic organisations are relatively new, and were actually born with the organic management system from the outset.
To cut to the chase, an organic business has two important benefits over a traditional mechanistic setup: [1] it can process and distribute relevant information and knowledge much faster, and [2] it possesses an ability to decide and execute fast, and in accordance with the available information and knowledge. It is like right hand working with left hand directly on a task set by their head, but without waiting for the head to process inputs from each separately and communicate back to both (or neither, as it often happens in the overly hierarchical environment).
Extending the original notion of organic management system to business organisation on the whole, the following five characteristics reflect the nature of an organic business today:
- Service first. Service orientation approach, whether to internal or external clients, is key in organic business. Customer centricity based on actionable market and other feedback drives commercial success and brings personal ability to the forefront. This benchmarks internal vs external competence and brings out the best it team collaboration and effectiveness – after all, teams that nobody needs do not survive long. Whether HR to Operations, Finance to IT or the whole organisation to its beneficiaries, service orientation brings true meaning to the ‘business partner’ talk so popular today.
- Flat and flexible organisation. An organic business by design has a flat and flexible organisational structure with reduced layers and increased spans of control. It is in fact a controlled simplicity aimed at balancing risks while increasing business flexibility. Clearly, management authority still exists – but it is more strategic and stratified, with much use being made of transversal management circles and leadership groups as opposed to hierarchical interactions and chains of command. The whole organisation becomes a hubs-and-spokes network of connected functional/operational modules – much like Lego bricks to make everything and anything possible.
- All for one and one for all. Emphasis on team work and shared decision making within an organic setup promotes development of shared beliefs about the values and goals of the organisation that glue people together much more powerfully than a formal hierarchy ever could. The interests of the organisation as a whole become prioritised above interests of its parts, with motivation, corporate culture and reward mechanisms based on shared objectives and KPIs. This harmony and unity of objectives across the totality of the organisation acts as a platform for proactive change management enhancing collaboration, responsibility and transparency.
- Agile realistic target forecasting. An organic business can set longer run strategy (3-5 years) once but tracks delivery against subsequent business execution context. It adjusts planning in shorter term based on the forecasts of market changes. In many instances, this means running short-term (3-6 months) rolling forecasts to measure impact of agile tactics within key strategic initiatives based on continuous market dynamics monitoring, instead of cumbersome annual budgeting exercises.
- Responsive operating model. An organic operating model combines dynamically adjusted business capabilities which reflect changes and developments taking place inside and outside of the organisation. It places emphasis on specialisation of expertise and cooperation between experts for the benefit of the organisation and its customers. It enhances communication and coordination through clear Delegations of Authority which promote organisational rationale, efficiency and effectiveness. Importantly, it prioritises re-assembly of existing capabilities over their re-development.
To summarise, Burns and Stalker’s conclusions that dynamic markets favour organic management systems are more valid than ever. As even the traditional ‘slow-moving’ markets accelerate, many companies are attempting to change their operating models to introduce elements of organic design to greater or lesser degree. Such companies as Schneider Electric, Sodexo and Mars spent great time and effort over the last few years to adjust themselves to new market dynamics. Still, mechanistic organisation is the most prevalent form of many organisations today, effectively handicapping them to achieve full commercial success of which they are capable. However, applying organic business design principles and methodologies coupled with proactive change management virtually guarantees improvement in organisational performance in dynamic market environments.
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