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The Hidden Force that Controls How Businesses Run

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How to unveil and deal with informal organizations that control a business.

If you thought you knew how your organization functions, think again. Many executives and managers think that by having an organizational structure with reporting relationships, they have it all figured out. But it’s not that simple. You see, organizations are run by humans, and humans are complex beings. Thus, running an organization is a complex task that requires a different approach.

The Complexity of an Organization

Consider groups of people in any setting: whether social, sports, or business. It’s in our nature to find ourselves developing chains of command, acceptable codes of behavior, and unique language that support and sustain our beliefs and attitudes. This behavior is observed among individuals who find themselves together for the first time and for a brief period as little as a few hours. You can notice it in large social gatherings or during corporate team-building exercises. The kind of dominant behavior that emerges out of such settings simply takes shape by itself and gravitates toward a certain archetype and what we call informal organization structures. These structures control how organizations operate.

This is particularly true among organizations that grow over time. For example, a startup in a garage is highly informal where everyone rolls up their sleeves and does what it takes to get the job done. But as startups grow, they evolve differently and become more formal. Still, relationships that worked in the informal organization, would continue indefinitely or change as new people are recruited.

The Difference Between a Formal and an Informal Organization

formal organizational structure is when a business has divided the internal management into several categories and is normally outlined in writing. Most businesses come in the shape of a hierarchical pyramid, with the president and CEO at the top, the executive officers and leaders next, then, depending on the pyramid levels or layers in the organization, you could have middle managers, team leaders, and staff or employees at the lowest level of the pyramid. There are other businesses that are more agile and do not follow the traditional pyramid structure. However, regardless of what business you’re in, there will always be some form of hierarchy (just some that are a little flatter than others). But someone has to be calling the shots at the end of the day.

On the other hand, an informal organization is when interpersonal relationships form inside an organization through daily conversations and relationships between employees of all ranks. As people inside an organization connect with one another, existing ties develop, and the organization itself changes over time as these relationships continuously change. Within the informal organization, there is an unspoken code of values, personal interests, and a variety of assumptions that are brought into the equation and formed between the different relationships of the members. Many of the employees will, in turn, form alliances, friendships, enemies, sources of verified information, and a variety of preferences on how exactly employees should complete the tasks and projects at hand.

The informal structure is emergent, complex, and extremely difficult to manage. It plays a significant role in the fate of the organization. The informal structure of an organization can either support or undermine its overall success. In other words, a formal organizational structure describes how an organization should operate, while an informal organizational structure describes how the organization really operates. For example, every time you hire people and assign them to various positions, the informal organization changes from when and how individuals interact and collaborate.

All in all, the patterns of influence, management, and leadership that may emerge inside an “organizational system” are shaped by both the formal and informal structures.

Functions of an Informal Organization

One way to think of this is to view informal organizations as the central nervous system and formal organizations as the skeleton of a company. When unexpected problems arise that the formal organizations struggle to deal with, this is where an informal organization can step in to take charge. Informal organizations play a few key roles within a business:

  • They act as a source of friendship and allow employees to feel more connected and better informed about the organization’s current affairs.
  • They provide people with a sense of status and a certain sense of control over the environment they work in.
  • They provide recognition that formal organizations are incapable of providing for their employees on an overall basis.
  • They attract new employees, allowing them to feel welcomed in a different environment and get to know new people.
  • They give employees a better idea through “the grapevine” about how well the business is doing and in which direction it is currently heading.
  • They shape the culture within the business. Whenever someone enters a new work environment, they are quite often bombarded by the work culture that is expected and put in place by the formal organization.

The Network Effect: How Do Informal Organizations Form?

Network science is one more concept in system thinking that applies to organizations in two ways. The first is how organizations are structured, which can be viewed as a network of interconnected nodes. That’s the number of elements within a system and the more elements — in our case, employees — the more complex the organization will be. The second is how the growth of employees and their interconnectivity leads to exponential growth in an organization’s level of complexity, which can give rise to power-law distributions. As such, the complexity of organizations depends on the degree of connectivity between and among employees. The more interconnected and interdependent they are, the more complex organizations become.

In a simple organization (e.g., less than five employees), there are few connections between employees, and they are relatively easy to understand through the direct cause and effect relationship. We can draw a direct line between a single cause and a single effect; thus, we call these simple organizations, linear systems. But when we increase the number of employees, the connectivity will exponentially grow in complexity, and with it, the cause-and-effect relations in an organization will become difficult to establish.

This exponential growth in complexity as you add employees is what’s called nonlinearity (i.e., as opposed to the simple linear system). We call this complexity, nonlinear systems, and nonlinearity is another key property of complex systems. These nonlinear links in a network are the working relationship between two individuals interacting in an organization. In modern organizations, these links are not up and down the reporting lines. Instead, they can go in all directions across the organization. These relationships and interactions shape the organization’s culture and drive the success or failure of an organization.

Organizational culture in such a nonlinear network depends on the level of autonomy the employees have in that network. The more autonomy you have in a network, the more robust it becomes and the more self-organizing it becomes. The trade-off between robustness and autonomy on one end is contrasted with control and vulnerability on the other.

Take the example of a social network where people value their autonomy highly. No one is in control of networks that spawned out of Facebook, Instagram, LinkedIn, or Twitter. They are self-organizing systems created from their users’ actions and interactions; thus, they will likely be less orderly. Consider this trade-off as you think of today’s many of the most innovative, dynamic, and fast-growing businesses and services that harness this by creating platforms for technologies and people to interact, adapt and self-organize.

That said, the level of autonomy in organizations is barely controllable, especially in the fast-growing environment of a successful organization. In fact, interfering with the autonomy of such a system could be detrimental. It may hamper organization growth by disrupting the ecosystem, the reason why they were successful in the first place. This is why it’s almost inevitable that organization growth will lead to a complex network that develops into decentralized self-organized entities, driven by informal organization networks within formal organizations whenever you start to have ten or more employees. These informal relationships and the flow of information are at the heart of what interferes with the implementation of transformation programs, making it so difficult to succeed in achieving the desired outcome.

The Self-Organization Principle:

One more important factor to consider in organization structure is the degree of employee diversity. When all the employees within the organization are very similar or homogeneous, they’re much easier to manage than in a heterogeneous organization composed of individuals, each with their own unique set of values and functions (e.g., the board of directors, and executive committees). If you recall earlier, we mentioned that when we have a very low level of autonomy, the organization can be controlled centrally in a top-down fashion. But as we increase the employees’ autonomy, this becomes no longer possible as control becomes distributed, and it is increasingly driven by interactions on the unit level of the organization and in informal homogeneous pockets.

So, combining this into a two-dimensional framework of the level of autonomy with high vs. none on the x-axis and the level of homogeneity with homogeneous vs. heterogeneous on the y-axis.

This gives rise to another important feature of complex systems: self-organization. When elements have the autonomy to adapt locally, they can self-organize to form global patterns; the process through which this takes place is called emergence. Thus, unlike simple linear systems where order typically comes from top-down, centralized coordination, patterns of order within complex systems emerge from the bottom up.

Image by Sam Schreim from

Complexity aside, if you’ve managed or led a group of people of any kind at some point in your life, whether socially or at work, you will agree that the organization that sets in with time will define how the team interacts, behaves, and takes decisions in the future. While these “emergent” group properties may slowly evolve with time (especially if the group count grows in size), changing these properties will become increasingly harder to alter by an outsider or even an insider such as the group leader.

It turns out that even a simple set of rules can define very complex characteristics, and changing one simple rule can lead to chaos and may send the group into disarray until a new emergent property sets in, which I’ll illustrate in the example of ant colonies below.

It may surprise most people that the emergence that stems from the synergies in ant colonies is the result of simple rules leading to such a complex system with such fascinating synergies. Ants exhibit self-organizing behavior that was extensively studied by Deborah Gordon, a biologist at Stanford University who conducted extensive research on the behaviors of ant colonies. In particular, we’re going to talk about task allocation, which is the process that adjusts the number of workers engaged in each task in a way appropriate to the current situation among Harvester Ants.

Contrary to your intuition, task allocation within ant colonies operates without central or hierarchical control. It’s a self-organizing activity where a colony’s harvester ants divide tasks–including nest maintenance, nest cleanup, and nest supervision–amongst themselves. The question is, how do ants decide on their tasks at any given time? Interestingly enough, tasks are carried out according to what needs to be done. Any task that needs immediate attention, or more attention than another task, will be taken on by the ants. For example, if an ant’s nest has been tampered with, collective attention will go towards nest maintenance and repair, rather than nest cleanup or food search. Gordon carried out an experiment where she surrounded a nest with toothpicks and, as expected, the ants were attempting to remove the toothpicks and repair the nest.

How Do You Deal with These Challenges?

To start with, you need to aim to draw (or may already have) a comprehensive picture of the organization, starting with identifying both the formal and informal lines of reporting. Because most often than not, what’s on paper as organizational structure, does not reflect reality, and what usually appears as a formal line of reporting and organizational hierarchy is not what influences your organization. As the first step, it would be more effective to identify the non-formal organization lines and redraw the organization structures by highlighting influencers in the organization. Similarly, a social network works before deciding how to administer the quiz.

Power mapping refers to the mapping processes that help us analyze power relationships to develop a nudge strategy for creating change. It’s important as it aids in understanding who makes key decisions and who contributes to them. This is important when creating change, implementing, and adopting strategies. Power mapping provides a visual to identify the best individuals to target to promote the desired change, and it reveals available leverage points of influence and the connections between these influences. The power mapping process is the visualization process required to conceptualize the sphere of a person or group’s influence. It should be done almost similarly to crime investigation boards. We need to be able to visualize the link when it comes to decision-making, and we need to pinpoint who are the primary targets that make the primary decisions and who are the secondary targets that influence decisions.

It is important to remember that within any given system, there will be both formal and informal structures of influence and power; the formal dimension is not the only one.

If you enjoyed reading this article and want to learn more about the business world, check out my other articles:

The One Strategy I Learned by Working with over 400 Organizations on How to Dominate Niches

The Right Way to Spot and Reduce Business Complexity

Why Businesses Lack Purpose without Having a Vision or Mission Statements in Place and How to Craft one Quickly


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