Wolverhampton Business School Management Research Centre __________________________________________________________________________________________________

The Informal Structure: hidden energies within the organisation

By Catherine L Wang & Pervaiz K Ahmed Working Paper Series 2002

Number ISSN Number Catherine L Wang

WP008/02 ISSN 1363-6839

Research Assistant University of Wolverhampton, UK Tel: +44 (0) 1902 321651 Email: C.Wang@wlv.ac.uk

Professor Pervaiz K Ahmed

Chair in Management University of Wolverhampton, UK Tel: +44 (0) 1902 323921 Email: pkahmed@wlv.ac.uk

University of Wolverhampton 2002 - All rights reserved

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Copyright University of Wolverhampton 2002

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The Management Research Centre is the co-ordinating centre for research activity within Wolverhampton Business School. This working paper series provides a forum for dissemination and discussion of research in progress within the School. For further information contact: Management Research Centre Wolverhampton Business School Telford, Shropshire TF2 9NT !01902 321772 Fax 01902 321777

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Abstract
The nature of organisational structure has changed over many decades and this shift has presented itself in various forms. The main trend has been from mechanistic structures, featuring hierarchies, functional specialisations and management controls, to organic structures, characterised by teamworking, empowerment and flexibility. Organisational design now reflects the systems view that considers an organisation as consisting of both hard and soft components, i.e. elements, relations between elements, and relations as a whole to constitute one unit. Therefore, mechanistic and organic structures possess distinct characteristics, namely: mechanistic structures emphasise the hard component of organisational systems with little attention paid to the soft component; while organic structures primarily develop the soft component (that is the informal structure) relating the dynamic interaction between the soft and hard components for the creation of organisational competence within a given context. This conceptual paper embraces systems thinking, elaborating on the changing emphasis of elements within different types of organisational structure. Furthermore it stresses the importance of managing the informal structure for the goal of organisational success within the knowledge economy.

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The authors
Catherine L Wang Catherine Wang is a Research Assistant at Wolverhampton Business School. Her research interests include knowledge management, organisational learning and, quality and innovation management. She has previously worked in industry and consultancy in the area of international business. Professor Pervaiz K Ahmed Professor Pervaiz K Ahmed, is Head of Japanese Management Research Unit, and the Centre for Enterprise Excellence, both at Wolverhampton Business School. He has published over 100 papers in international journals and has been a keynote speaker at a number of prestigious conferences. Pervaiz is currently editor of the European Journal of Innovation Management and was formerly editor of the Business Process Management Journal from 1996-2000. Until 2000 he co-edited the International Journal of Benchmarking, Quality Focus and Journal of Management in Medicine, and currently serves on the editorial advisory board of numerous international journals. Being active in the European Foundation for Quality Management he has served as a panel member for academic awards for four years and has worked with many blue chip companies, for example, Eida Faberge, Lever Europe, Birds Eye Walls, Van den Berg Foods, AT&T etc.

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The Informal Structure: hidden energies within the organisation

Introduction
The paradigm of management has evolved through several distinct stages. Central to this evolution has been the shift in organisational structure. Organisational structure is a primary driver of change since it provides the skeletal structure for all organisational decisions and processes. Authors have categorised the shift of organisational structure in various ways. For instance, Burnside (1990) classifies two types of organisations: mechanistic and organic structure (Burnside, 1990). Ahmed (1998) further highlights the contingency relationship in observing the shift from mechanistic structure to organic structure for effective innovation. At a broader level, numerous authors have postulated a shift along a perspective that views organisations as machines, organisms and processes (Scott, 1981; Tsoukas, 1994 etc.). Previous study on organisational structure has established a three-dimensional framework characterising different types of structure, i.e. Scheins (1988) hierarchical dimension, functional dimension, and inclusion and centrality dimension. However, the framework primarily explains formal structure in the organisation, but does not reveal the subtle energy that flows behind the organisational chart. This hidden energy is commonly referred to as informal structure and this energy plays a conspicuous role in many new forms of organisations, such as network organisation. This paper adopts a systems thinking perspective to elaborate the structural transition and the role of informal structure in creating organisational success within the knowledge economy.

Conceptualisation of organisational structure

Organisational structure has been conceptualised in various ways and reflects systems thinking, which views an organisation composed of elements, relations between elements, and relations as a whole to constitute one unit, showing properties of the whole and possessing special meaning (Checkland, 1999). This reveals that the systems view recognises both hard and soft components. Despite different emphasises on components, it is generally recognised that structure is the superior composition of relations (Bunge, 1979; Johannessen, 1996; Johannessen, Olsen & Olaisen, 1997). Elements do not make senses on their own and therefore do not capture the essence of organisations. It is the relations between elements that form organisational activities. Therefore, organisational structure not only consists hard component, such as individuals, groups, departments etc., but also soft components, such as relations between departments, between different hierarchical ranks and between individual people (Bunge, 1985a,b). The softness has been further elaborated to incorporate peoples appreciation, i.e. peoples perception and judgement of the reality, which contributes to the ideas stream, and leads to actions taken as part of the events stream (Vickers, 1965; 1968; 1970; 1973). This perspective considers previous experience, culture and norms which purport readiness to notice particular aspects of our situation or appreciate the facts (Vickers, 1970). Wang and Ahmed (2001) further enrich the softness of systems by encompassing the emotional aspect, which is closely associated to empowerment and proactive learning. Organisations of the future need to be passionate. Their enthusiasm and energy will be the inspiration of creativity and innovation. To this point, we note that organisational emotions constitute the subtle softness and are crucial in triggering creativity and enabling innovativeness. Extant literature reveals different focuses on structural relations. For example, Mintzberg (1983 p. 2) notes that every organised human activity gives rise to two fundamental and opposing requirements: the division of labour into various tasks and the coordination of these tasks to accomplish the activity. Therefore he proposes the structure of an organisation can be defined simply as the sum total of the ways in which its labour is divided into distinct tasks and then its coordination is achieved among 5 Management Research Centre 2002

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these tasks. This reflects a simple analysis of division of labour and management control, but only reveals functional relationship within the organisation. Handy (1993) extends the concept of structure, linking mechanisms between roles and coordinating structures. Harrington (1991) recognises that the interaction and perception of people plays a conspicuous role in understanding the structure. Whilst many new structural configurations have been espoused there unfortunately remains an acute dearth of studies that examine and understand the fundamental nature of the underlying dimensions that capture and predict the trajectory of structural transition and evolution. Schein (1971; 1988) is a rare exception to this in his identification of three dimensions - hierarchical dimension; functional dimension; and dimension of inclusion and centrality. Daft (1995) makes a more specific description and refers structure to such elements as work specialisation, departmentalisation, chain of command, span of control, centralisation, and formalization. Organisations differ on these dimensions, and thus have different structures. A straightforward combination of the above dimensions only depicts the formal organisational structure that is primarily reflected in the organisational chart. The fact is that there are an increasing number of organisational forms that cannot be simply illustrated by an organisational chart. The same applies to many organisational activities that are undertaken underneath the formal organisational structure. This is evidenced by the emergence of network organisations (Powell, 1990; Szeto, 2000; Jarillo, 1988), centerless corporation (Pasternack & Viscio, 1998), knowledge-based organisation (Perez-Bustamante, 1999; Quinn, 1999), democratic organisation (Ackoff, 1994), virtual (Holmqvist, 1999) or imaginary organisations (Davidow & Malone, 1992, Hale & Whitlam, 1997), etc. Central to all these new forms of organisations and organisational activities is the rise of informal structure. Formal structure refers to the organisational design illustrated in the organisational chart, such as hierarchical alignment, functional division, and management and employee roles, i.e. the hard component of organisational structure plus the formal relationship between individuals, groups and departments etc. Informal structure refers to interpersonal, cross-functional and inter-organisational interaction that is not explicitly demonstrated in the organisational chart. Therefore, the extent to which informal structure is developed reflects the richness of the soft component of organisational structure: the informal relationship between elements, peoples perception and judgement, and organisational emotions. It is widely accepted that informal relationship does not necessarily coincide with formal organisational relations (Lincoln, 1982; Tichy, Tushman & Fombrun, 1979). Accordingly, influence occurred through informal or personal relationship is not always equivalent to that based on formal relations (Stevenson & Bartunek, 1996).
Table 1. Systems thinking and organisational structure Hard component Organisational structure Individual Group Department Elements Soft component Formal relationship Hierarchical relationship Functional relationship Management control Relations between elements Informal relationship (informal structure)

Systems view of organisations

Peoples perception and judgement; and emotions

To this point, we feel the structural transition will be better exhibited if we add informal relationship as a fourth dimension to Senges structural dimensions (see Table 1). Hereafter we formulate: Organisational structure = hierarchical dimension x functional dimension x inclusion and centrality dimension x informal relationship dimension Hierarchical dimension demonstrates relative ranks in a manner similar to the organisational chart Functional dimension explains the different types of work to be done

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Inclusion and centrality dimension exhibits the degree to which any given person is nearer to or farther from the central core of the organisation Informal relationship dimension represents the degree of mobility and freedom of workforce to work beyond formal organisational structure.

Structural transition
Informal relationship cannot be neglected and in fact provides a better and richer representation of the reality of workplace structuring. The structural forms are better captured by the four dimensions that we previously define: hierarchical, functional, inclusion and centrality, and informal relationship. Let us examine the two prime types of organisations: mechanistic and organic structure, along these four dimensions. Mechanistic structure Organisations adopting mechanistic structure believe that (1) organisations are rational entities; (2) the design of organisations is a science; (3) people are economic beings (Burnes, 2000 p33). Based on this philosophy, we posit that organisations are structured on the following four dimensions (see Figure 1): Clear tiers of hierarchy: The organisation is hierarchical, consisting of top management, middle management and shop floor workers with clear distinctions. Organisational vision emanates from the top (Kanter, 1986; Kanter, Stein & Jock, 1992; Wright & McMahm, 1992). Decision is made through a long decision chain and over a prolonged process, and is communicated down to the employees (Ahmed, 1998a) Function-based and work specialisation: There is rigid departmental separation and functional specialisation (Ahmed, 1998a) Strong management control and centralisation of power: Vertical linkages are used to coordinate corporate activities between the top and bottom of the organisation. Top management controls planning, problem solving, decision making and directing (Hyden, 1994; Hankinson, 1999) The formal nature of structure: There are many bureaucratic and rigid rules and set procedures, and little individual freedom of action (Ahmed, 1998a). Communication is formalised. There is restricted flow and sharing of knowledge. Knowledge management process is primarily based on deduction from practices and personal skills into theorised and formalised knowledge.
Hierarchical Dimension Mechanistic Structure

Functional Dimension

Decentralisation and empowerment

Organic Structure Informal Relationship

Figure 1. Mechanistic versus organic structure

Organic structure It was soon realised that it is irrational to view an organisation as a machine. The rise of organic structures promotes a metaphor in which organisations are seen as complex and living entities featured by a collection of competing and interacting forces between individuals and social forces. 7 Management Research Centre 2002

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Organic structure reflects the philosophy that (1) people are emotional beings; (2) organisations are cooperative, social systems; (3) organisations are composed of informal structures, rules and norms, and formal practices and procedures (Burnes, 2000 p58). The organic structure has the following dimensional characteristics (see Figure 1): Flat, non-hierarchical: Organisations are team-based. There is a shift from vertical decision making to horizontal collaboration and cross-functional cooperation (Hedlund & Rolander, 1990; George, Freeling & Court, 1997; McCalman, 1996). Organisations are typically composed of top management, strategic groups and project teams Cross-functional: Departmental barriers are broken down to facilitate cross-functional teams and integration of specialised sources of knowledge (Cross, 2000) Employee empowerment and decentralisation of power: Employees are encouraged to participate in management and their views are considered. Managers empower employees to proactively participate in organisational management and promote a culture of openness and trust (Hankinson, 1999) The informal nature of structure: There is freedom from rules. There are more informal, face-toface communications and two loops of communications downwards and upwards (Ahmed, 1998a). Management is expanded into managing people, technology, knowledge, and in particular processes. Interaction between people, groups, and organisations is encouraged and regarded as the main mechanism to create new knowledge.

The common trends of structural transition depict a scenario in which hierarchical structure is giving away to flatter and flexible structure in the post-modern world of business (Piercy & Cravens, 1994), characterised by discontinuous activities, turbulence and uncertainty. In this era, traditional hierarchical structure is deemed to bear restrictions: rigid bureaucracy hinders flow of information across functional and hierarchical boundaries, whilst excessive specialisation of work processes deters integration of expert knowledge and speedy response to the changing environment (Cross, 2000).

Informal structure and knowledge management

Informal structure to a high degree captures essential organisational activities, but, unlike formal structure, is not visually illustrated in the organisational chart. In this sense, it is a very abstract concept. On the other hand, formal organisational structure can be deceptive, since many organisational activities, which embody real vigour, my be undertaken beyond the framework of formal organisational structure; and people of key calibre, who control the real future of the organisation, may be well hidden underneath the organisational chart. Before further exploration of the domain, let us look at the case of Novell to give a bit of concrete and factual feeling of what is informal structure like. Eric Schmidt, previously highly respected CTO at Sun Microsystems, took over Novell as CEO and Chairman, just when Novell went through its downturn. To locate the key people in the company, Eric used the algorithm method: he talked to two smart and keen engineers, and then asked them to give the names of smartest people they knew in Novell. Eric then set up a meeting with all the people being recommended and asked them to give names of the ten smartest people they knew. He eventually found out about 100 smartest people through the smart people network (Fryer, 2001). The first thing I had to do was identify them. In a company like ours that is driven by innovation, you cant just look at an org chart to find your most important employees. The key people here are our most creative engineers - theyre the smart people, the ones who control our future - and they can be very well hidden in the organization. They are not necessarily at the top of any hierarchy. (Eric Schmidt, CEO and Chairman of Novell, quoted in Fryer, 2001, p119) Stepping into the 1990s, for most organisations, knowledge is the most important strategic resource and the capability of knowledge production is critical to sustaining competitive advantage and 8 Management Research Centre 2002

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organisational success (Kogut & Zander, 1992; Nonaka & Takeuchi, 1995). This inevitably leads to a new focus on how to adopt new types of organisational forms to facilitate knowledge management. Network organisations that are based largely on informal relationship have received an increasing interest in knowledge management studies. Mayere and Vinot (1993 p.78) define a network as an organisation based on the existence of relationships independent of the possible existence of formalised structures. The knowledge economy makes new demands on organisational structuring for effective knowledge management. These are: Informal relationship blurs the boundary of organisations. Organisational structure in the knowledge economy is more of a perceptual framework than a physical boundary. Organisations are not spatially bounded any more, but by organisational identity and trust. Information technology has greatly facilitated global knowledge sharing. Resource sharing through networking and alliance has broken down the barriers between organisations. Organisational knowledge pool expands beyond the formal control structures. Employees are able to access information without hindrance from hierarchical and functional division (Harrington, 1991). Even the perceptual framework has changed; knowledge-based organisations are more bounded in peoples perception of knowledge Informal relationship smoothes knowledge-flow. Knowledge-based organisations are not a given framework, but a fluid, abstract entity based on constant-changing employee interaction and knowledge restructuring. Effective knowledge management demands a flow of knowledge, rather than a stock of it (Perez-Bustamante, 1999). Knowledge flows freely within and beyond the organisational framework. There is a proliferation of internal and external networks to facilitate knowledge flow. Organisational design allows knowledge to have a far greater impact. Knowledge determines processes in operation (Schein, 1988) Informal relationship facilitates tacit knowledge production. Tacit knowledge is nonverbalised, intuitive and unarticulated (Polanyi, 1962). It is personal knowledge embedded in individual experience and involves intangible factors such as personal belief, perspective and the value system. (Nonaka & Takeuchi, 1995), and not readily transmitted from one individual to another. Informal relationship promotes interpersonal, crossfunctional and interorganisational interaction, and is the prime method of sharing tacit knowledge as well as codifying and producing tacit knowledge Informal relationship increases organisational flexibility and responsiveness. Organisational structure is not definite, but flexible, allowing appropriate restructuring of knowledge to meet organisational needs. Organisations are a complex conglomerate of interaction that does not necessarily produce a clearly identifiable form (Schein, 1988 p.59). Schein (1988) figures an organisation as an arena where a series of different or interlocking processes are actioned and form the major input to organisational structure. Organisations are more as an identity, in which employees act as individuals or within groups, occasionally forming alliances to work things out. Organisations are not viewed as solid frameworks, but a transient entity, created and remoulded by different processed fulfilled with changing interaction. In a sense, organisations are formed in the minds of their employees through their perception of the interaction (Watson, 1986).

Informal structure is not an autonomous phenomenon in an organisation. It is enabled by factors such as culture, leadership, strategy, etc. Companies need to develop a liberating culture based on trust and generative learning to power up the creative energy, and a contingency style of leadership that involves diffusion and interchange of leadership. The synergy of empowering culture and leadership allow maximum autonomy of workers and therefore encourage overall creative contributions and the production of organisational wisdom, and eventually develop capability of self-management of individuals and project groups (Perez-Bustamante, 1999; Bierly, Kessler & Christensen, 2000). Building trust enables effective, non-barrier communications which in turn ensure ideas generated from workers to be integrated and coordinated to benefit the whole organisation (Ackoff, 1994; Van de Ven, 1986), and a clear understanding of organisational vision and strategy at all levels (Johannessen, Olsen & Olaisen, 1999). Empowering culture and leadership promotes healthy knowledge management processes espoused by the growth of informal structure. In a sense, the 9 Management Research Centre 2002

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evolution of the decentralisation dimension and the informal relationship dimension is inevitably accompanied by the deterrence of hierarchical and functional dimension in the structural transition. A few other authors have mentioned the negative side of informal relationship. For example, informal relationship may be the source of leakage of organisational core knowledge; informal structure may undermine organisational activities that should be conducted within formal structure, etc. As many other management approaches, techniques or tools, the downsides of informal relationship do exist. Managers in the real battlefield should endeavour to develop the positive side and suppress the negative side of it. The reality of the knowledge economy requires and supports development of boundary-less, fluid and flexible organisational forms.

Conclusions
Mintzberg (1979) notes that each structure has its own merits and drawbacks. Ultimately, there may be no ideal structure for a company. Nevertheless, one thing is for sure: the complexity and dynamism of organisations in the fast changing world precludes a static structure (Martinsons & Martinsons, 1994). Organisational structure is characterised by the many forces emanating from its operating environment. For a structure to deliver success, it must follow a sound strategy (Hankinson, 1999), and be compatible with internal (e.g. technological, strategic) and external (e.g. industrial, institutional) demands (Bierly, Kessler & Christensen, 2000). In the knowledge economy, an effective structure has to provide a means of producing knowledge for the organisation and transforming knowledge into organisational performance (Bierly, Kessler & Christensen, 2000). In this perspective, mechanism structure lacks vigour in meeting the demand of knowledge management. While enriched by informal relationship that carries vigorous energy, organic structure creates boundary-less, fluid and flexible channels for knowledge management. Therefore, organic structure proffers better opportunities to succeed in the knowledge economy. Further study will examine the impact of informal relationship in the knowledge management and its surrounding issues.

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