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Renewal Through Reorganization: The Value of Inconsistencies between Formal and Informal Organization

Organization Science, Forthcoming

53 Pages Posted: 28 Nov 2007  

Ranjay Gulati

Harvard Business School - Organizational Behavior

Phanish Puranam

INSEAD

Abstract

We develop a theoretical perspective on how inconsistencies between formal and informal organization arising from reorganization can help create ambidextrous organizations. We argue that under some conditions, the informal organization can compensate for the formal organization by motivating a distinct but valuable form of employee behavior that the formal organization does not emphasize, and vice versa an effect we label compensatory fit. We illustrate the concept of compensatory fit by drawing upon qualitative data from a re-organization at Cisco Systems. We also derive formal boundary conditions for compensatory fit using a simple game theoretic representation. We show that compensatory fit can only work when there is a powerful informal organization already in existence, and when the gains from ambidexterity are substantial. Further, depending on the strength of the informal organization, breakdown in the conditions necessary for compensatory fit may lead to performance declines and further re-organizations.

Keywords: Organization structure, formal and informal organization, inter-unit coordination

JEL Classification: L22, D23

Suggested Citation

Gulati, Ranjay and Puranam, Phanish, Renewal Through Reorganization: The Value of Inconsistencies between Formal and Informal Organization. Organization Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1032007

Ranjay Gulati

Harvard Business School - Organizational Behavior ( email )

Soldiers Field Road
Morgan 317
Boston, MA 02163
United States
617-495-8554 (Phone)
617-496-6568 (Fax)

HOME PAGE: http://www.hbs.edu

Phanish Puranam (Contact Author)

INSEAD ( email )

1 Ayer Rajah Avenue
Singapore, 138676
Singapore

HOME PAGE: http://www.insead.edu/facultyresearch/faculty/profiles/ppuranam/

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