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From Hero to Zero – The Effect of Organizational Change on Longstanding Employees

From Hero to Zero – The Effect of Organizational Change on Longstanding Employees

Jon Rennie

Organizations need to evolve to survive. This was the case for ABB Ltd. (ABB), a Swedish-Swiss multinational corporation headquartered in Zurich, Switzerland. Their first CEO, Percy Barnevik, established a revolutionary structure and culture that resulted in ABB becoming a fast-moving global organization admired for its speed and agility. He embraced a natural systems perspective and trusted in the tacit knowledge of his local leaders in 150 countries. Barnevik did not believe in having a large corporate staff, and he gave unprecedented autonomy to his local leaders. While this structure allowed ABB to be responsive to local needs, the lack of coordination led to overlaps in processes, products, and people. These inefficiencies and extra costs associated with a lack of coordination eventually led to poor financial results.

Barnevik trusted in the tacit knowledge of his local leaders Click To Tweet

The CEOs that followed Barnevik addressed this issue by embracing a rational perspective for the organization. They built up the corporate office to increase coordination and eliminate overlaps. They moved authority from local leaders to the corporate staff. Local leaders were stripped of autonomy, and compliance replaced speed as a company value. This rational, top-down approach frustrated many long-standing, experienced employees, many of whom left the company to work for competitors. Company leaders took their rational efforts too far and alienated key employees who should have been an asset to help the company.

This paper reviews the organizational evolution of ABB from a natural to a rational perspective to review what company leaders could have done differently to embrace both the speed of the original structure and the coordination of the current structure. This examination also examines the problem of employees who go from being an asset to a liability when companies evolve. This hero-to-zero problem is as old as time, as demonstrated by the Old Testament story of Elijah in the time of King Ahab.

The Evolution of ABB

ABB was founded in 1988 when ASEA, a leading Swedish heavy industrial company based in Västerås, merged with their Swiss competitor Brown, Boveri & Company (BBC). Percy Barnevik, the Swedish businessman who orchestrated the merger, became the CEO of the combined companies. It was the largest merger in industrial history (Barham & Heimer, 1998). Barnevik was a legendary, hard-charging CEO. He had a bias towards action and hated bureaucracy. He was decisive, action-orientated and expected the same from his employees. The company culture after the merger reflected his personality, there was a high level of local autonomy, a bias toward action, and decisions were pushed to the lowest level. During this time, Barnevik described what he expected from his employees. He said, “The best thing you can do in my organization is to make the right decision. The next best thing is to make the wrong decision. What gets you fired is to make no decision” (Barnevik, 2014, p. 71).

The company culture after the merger reflected his personality, there was a high level of local autonomy, a bias toward action, and decisions were pushed to the lowest level. Click To Tweet

Barnevik built a unique organizational structure in the years after the merger. He believed ABB’s corporate office should be small and the company should not be heavily bureaucratic. During this time, ABB had 200,000 employees globally and less than 100 in the head office (Barnevik, 2014). Barnevik felt corporate leaders should focus primarily on strategy and coordination rather than directing day-to-day operations. Barnevik wanted the role of the headquarters staff to be focused on the overall direction of the company, the establishment of goals and objectives, and a source of guidance and support to local business units (Barham & Heimer, 1998). Scott and Davis (2007) describe ABB’s structure during this time as a “federation of 1,300 local companies linked into a global matrix, seeking to be both ‘small’ and ‘large’ at the same time” (p. 295).

Barnevik created this distributed organizational structure to allow ABB to be a global company focused on local market needs. Leaders in local business units had significant autonomy to make rapid decisions to respond to customer and market demands. This structure resulted in a fast-moving organization admired for its speed and agility. In the 1990s, ABB was often called the “dancing giant” (Barham & Heimer, 1998).

This structure resulted in a fast-moving organization admired for its speed and agility. Click To Tweet

The author was a local business leader during this time and loved being a part of Barnevik’s fast-moving, highly distributed organization. Local leaders were responsible for profitably growing their businesses and had the freedom to decide how to accomplish that goal. Each of the 1,300 local business leaders felt like an entrepreneur backed by a large global company. Barnevik valued leadership and accountability during this time because of the light touch coming out of the corporate office. It was a period when ABB corporate bosses respected their local leaders and trusted them to make the best decisions for their local markets. One local business leader from Finland described ABB’s approach to managing local businesses during this period as an “action recipe” emphasizing “time consciousness and a small business approach” (Barham & Heimer, 1998, p. 111).

While this structure was innovative and led to ABB becoming a fast-moving and agile organization, there was a fundamental problem. Giving local leaders full autonomy meant that each business unit made independent decisions with little coordination with other units. This lack of coordination eventually resulted in overlapping systems, products, processes, personnel, and ultimately inefficiencies and extra costs. The light touch from corporate increased speed but created inefficiencies over time. By 2001, operating earnings at ABB were down 21 percent, and in July of that year, ABB announced a plan to cut 12,000 employees over 18 months (Olson, 2001). In this environment, Barnevik unexpectedly announced his resignation in November 2001 (Swissinfo.Ch., 2001).

Subsequent CEOs of ABB knew they needed to address the problems associated with a lack of coordination within the company. Over time, they changed the company’s organizational structure to more centrally controlled to capture global efficiencies better and increase coordination between local business units. This change led to a significant buildup of the corporate headquarters, a rapid rise in rules and policies, and increased bureaucracy throughout the company, which slowed organizational decision-making. During this time, the culture of the company completely changed.

Local business leaders were no longer valued for their leadership and decision-making abilities. Managers replaced leaders in key positions and were valued for their ability to follow the rules and implement corporate policy. Click To Tweet

Local business leaders were no longer valued for their leadership and decision-making abilities. Managers replaced leaders in key positions and were valued for their ability to follow the rules and implement corporate policy. The author was a local business leader during this time and saw his authority stripped away over the years to the point where there were very few things he had the authority to do without corporate permission. ABB’s structure today looks like most centrally-controlled multinational corporations but is far from the company that Percy Barnevik envisioned. The company culture of speed, agility, and entrepreneurship was replaced with policies, rules, and compliance.

What Scholars Say About Organizational Change

The open system perspective of organizational theory says that the environment shapes, supports, and infiltrates the organization (Scott & Davis, 2007). For organizations to survive, they must adapt their structures and behaviors to respond to environmental elements (Őnday, 2018). Davis and DeWitt (2021) define open systems as organizations that “are congeries of interdependent flows and activities linking shifting coalitions of participants embedded in wider material-resource and institutional environments” (p. 32). ABB management was forced to adapt its structure, behaviors, and culture in response to environmental conditions and pressures placed on it by financial markets.

ABB needed to evolve to survive. Organizational evolution is an essential part of the ecological perspective of organizational theory—competition for scarce resources in the environment force organizations to make changes to remain viable. The ecological perspective traces its roots to the biological natural selection theories of Charles Darwin (Scott & Davis, 2007). According to the ecological perspective, competition is the primary interaction between organizations. Organizations that operate in the same niche compete for a common pool of resources needed for survival. Organizational ecologists are interested in how organizations are born and evolve as they fight to survive.

Scott & Davis (2007) say that “the ability to perpetuate one’s form is the hallmark of successful adaptation” (p. 248). In this case, the evolution of ABB’s structure and culture was necessary for its survival. It could be argued, however, that they took the evolutionary process too far. The CEOs after Percy Barnevik sacrificed the speed and agility of the original organizational structure for the assurance of global efficiencies and increased coordination between local business units. They also shifted from a natural to a rational perspective in managing the company.

The evolution of ABB’s structure and culture was necessary for its survival. Click To Tweet

Natural systems emphasize goal complexity and an informal structure (Őnday, 2018). According to Scott & Davis (2007), participants are motivated by their self-interests and look to impose these on the organization. The social cement that connects and regulates interactions among members in these natural systems is the behavioral structure, which focuses more on the consistency of behaviors and less on the prescriptions of that behavior (Őnday, 2018). Davis and DeWitt (2021) define natural systems as organizations that “are collectives whose participants are pursuing multiple interests, both disparate and common, but who recognize the value of perpetuating the organization as an important resource” (p. 30). In the case of ABB, under Percy Barnevik, leadership behaviors, decisiveness, and accountability were valued. Local business leaders had the autonomy to make decisions in their local self-interest that would perpetuate the overall organization.

Natural systems have a unique perspective of employees as well. Since the Hawthorne Studies of the 1920s, volumes of related studies regarding leadership, morale, and motivation have been conducted (Scott & Davis, 2007). One of the offshoots of the Hawthorne Studies was the work of Douglas McGregor, who proposed two different perspectives of how organizations view employee motivation. McGregor identified the rational perspective of employee motivation as Theory X. This is the view that employees must be controlled to achieve organizational objectives. The natural system perspective of employee motivation is called Theory Y. This view assumes people want to work and are self-motivated (Omodan et al., 2020). Percy Barnevik subscribed to the Theory Y perspective of employee motivation. He trusted his local business leaders to make the best decisions for their local markets. Subsequent CEOs took a rational approach and seemed to subscribe to the Theory X perspective. They took the position that employees needed to be tightly controlled to achieve organizational objectives.

Barnevik trusted his local business leaders to make the best decisions for their local markets. Click To Tweet

Natural systems also acknowledge the importance of the tacit knowledge of employees. While rational systems emphasize the significance of detailed work requirements developed by corporate staff to deal with work requirements, natural perspective proponents point more toward the ingenuity of employees as they gain knowledge through experimental learning. Scott and Davis (2007) say that “much of the knowledge on which the organization relies is contained in the skills and tacit knowledge of its workforce” (p. 146). The natural perspective acknowledges the value and importance of the tacit knowledge of employees developed over time through work experience. Mohiya (2022) says tapping into employees’ tacit knowledge is essential to create a performance-driven culture.

Percy Barnevik understood this. He believed and trusted in the tacit knowledge of his local business leaders. He understood those employees were the most experienced resources to make local business decisions and lead local business units. The CEOs that followed Barnevik did not share his views. Those CEOs expected local managers to follow detailed work requirements developed by corporate staff experts in office buildings far from the local business. These CEOs did not want local managers to make decisions inconsistent with these global rules and requirements. As a result, ABB lost much of its performance-driven culture.

ABB lost much of its performance-driven culture. Click To Tweet

In order to survive, ABB management adapted the company structure and culture to control the decisions of local leaders more precisely. They evolved the company from a natural system to a rational system perspective where the trust was now placed in the hands of corporate experts, carefully crafted rules, and detailed work processes. The company no longer put its faith in the tacit knowledge and experience of local leaders. This change increased global coordination and minimized inefficiencies and extra costs. It allowed the company to improve profitability and survive. However, the changes went too far. Corporate leaders failed to consider how this shift affected those employees who were critical to the former structure and culture.

Corporate leaders failed to consider how this shift affected those employees who were critical to the former structure and culture. Click To Tweet

Omodan et al. (2020) say that Theory Y views employees as not just a “component in the company wheel” (p. 3). They explain that companies that embrace a Theory Y view of employees will see significant performance improvement by supporting and listening to their workforce. Scott and Davis (2007) say that the Hawthorne Studies and others carried out by the Harvard group show that “individual workers do not behave as ‘rational’ economic actors but as complex beings with multiple motives and values; they are driven as much by feelings and sentiments as by facts and interests” (p. 65). The Theory Y concept says that employees are active stakeholders who want to see the company succeed. This motivation means they can offer a rich and diverse source of ideas to help solve the most challenging company problems. By moving to an entirely rational perspective and embracing a Theory X view of employees, ABB frustrated and alienated long-standing, experienced employees. This frustration ultimately increased turnover and caused the loss of many key employees after the transition.

ABB frustrated and alienated long-standing, experienced employees. Click To Tweet

Personal Perspective on the Changes at ABB

The experience and tacit knowledge of 1,300 local leaders in 150 countries helped Percy Barnevik build the newly-formed ABB into the most admired company in Europe. In his 17 years as CEO, eight with ASEA and nine with ABB, Barnevik led the company to increase its stock value 87 times, an average of 30% per year, and became a leading global player (Barham & Heimer, 1998). However, those same local leaders became victims of their success when ABB changed its structure and culture to embrace a more traditional rational perspective. Strong local leaders who were once prized for their experience and leadership skills were now seen as a threat to the new way of doing business. Almost overnight, these leaders went from being heroes to becoming an enemy. In the Old Testament, Elijah faced this same type of challenge.

Merida et al. (2015) remind readers of the classic Old Testament story of a hero who became an enemy. During King Ahab’s reign in Israel, a massive drought came to the country as punishment for Ahab and his wife Jezebel’s sin of pagan idolatry. Ahab had ignored the commands of Deuteronomy 11:16-17 which directly led to the punishment (Merida et al., 2015). Elijah, a Tishbite prophet, confronted the powerful king. Through God, Elijah had the wisdom to advise Ahab on how to end the drought. Elijah directed Ahad to submit to God and worship Yahweh alone.

Ahab initially blamed Elijah for the three-and-a-half-year drought, which had devastating consequences throughout Israel (Merida et al., 2015). But Elijah powerfully demonstrated to Ahab that he alone was responsible because he had “abandoned the Lord’s commands and [had] followed the Baals” (New International Version, 1978/2011, 1 Kings 18:18). After a decisive confrontation on Mount Carmel where God demonstrated His awesome power, Ahab realized his sin and turned away from the foreign gods. That single action brought rain back to Israel. Ahab had a challenging organizational problem, and he relied on the wisdom of one of his followers to restore health to Israel. For a moment, Elijah was a hero for the king and the nation.

The king and the prophet could have worked together in a great reformation movement to return Israel to God (Merida et al., 2015). But, instead of a national revival, Ahab changed course when his wife Jezebel learned about the events on Mount Carmel. Even as the rain fell in Israel, Ahab submitted to his wife’s authority and set out to kill Elijah. The hero who helped end the drought in Israel was now pursued as an enemy of the state. Inside ABB, the same thing happened. Throughout the company, experienced local leaders were replaced with compliant managers. The CEOs that followed Barnevik could have worked with these local leaders to bring about the needed changes in the company, but they chose to eliminate those who wouldn’t get on board the new structure and culture. Those leaders who remained in the company were frustrated that their experience and skill sets, which were once valued, were now seen as a threat to the organization.

They failed to appreciate and tap into a significant company asset, the deep tacit knowledge of experienced employees. Click To Tweet

It could be argued that the evolution of the structure and culture was necessary for ABB to realize its full potential as a multinational corporation and survive in a competitive environment. However, company leaders went too far in pursuing a rational, top-down approach to the new structure and culture. They failed to appreciate and tap into a significant company asset, the deep tacit knowledge of experienced employees. As a result, many talented leaders left the company and either went to work for the competition or started their own businesses.

References

Barham, K., & Heimer, C. (1998). ABB: The Dancing Giant : Creating the Globally Connected Corporation. Financial Times/Prentice Hall.

Barnevik, P. (2014). Percy Barnevik on Leadership: 200 Lessons from 50 Years’ Experience. Sanoma Utbildning.

Davis, G. F., & DeWitt, T. (2021). Organization theory and the resource-based view of the firm: The great divide. Journal of Management, 47(7), 1684-1697. doi:10.1177/0149206320982650

Mohiya, M. (2022). Unleashing employees’ tacit knowledge toward performance-driven culture in a Saudi Arabian organization. Journal of Knowledge Management, doi:10.1108/JKM-04-2022-0263

Merida, T., Platt, D., & Akin, D. L. (2015). Exalting Jesus in 1 & 2 Kings. Nashville, Tennessee: B & H Publishing Group.

New International Bible. (2011). The NIV Bible. https://www.thenivbible.com (Original work published 1978)

Olson, E. (2001, July 25). ABB, Reporting Lower Profit, Will Cut 12,000 Jobs. The New York Times. https://www.nytimes.com/2001/07/25/business/abb-reporting-lower-profit-will-cut-12000-jobs.html

Omodan, B. I., Tsotetsi, C. T., & Dube, B. (2020). Analysis of human relations theory of management: A quest to re-enact people’s management towards peace in university system. South African Journal of Human Resource Management, 18(1), 1–10. https://doi.org/10.4102/sajhrm.v18i0.1184

Őnday, Ő. (2018). The relationship between concepts of rational, natural and open systems: Managing organizations today. International Journal of Information, Business and Management, 10(1), 245-258

Scott, W. R., & Davis, G. F. (2007). Organizations and Organizing: Rational, Natural, and Open System Perspectives. Routledge.

Swissinfo.Ch. (2001, November 21). Barnevik steps down as ABB chairman. SWI swissinfo.ch. https://www.swissinfo.ch/eng/barnevik-steps-down-as-abb-chairman/2382920

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Technology, Innovation, and Globalization’s Effect on Organizational Structures

Technology, Innovation, and Globalization’s Effect on Organizational Structures

Jon Rennie

Technology Structures and Social Boundaries Applied to the Natural, Rational, and Open Perspectives

From an organizational theory perspective, technology refers to the nature of work being carried out in an organization and the effects that technology has on the organizational structure. These ideas emerged after the development of the open systems approach to organizations. Several theories emerged in the 1960s that focused on the interdependence of organizational structures and the specific technical environment in which they operated. These theories were built on the contingency perspective, which assumes that the organizational structure depends on the nature of the environment in which it operates (Scott & Davis, 2007).

Technology refers to the work performed by a particular organization. It includes equipment, workers’ skills and knowledge, and the object on which the work is performed. It is the physical, intellectual, and knowledge processes through which material inputs are converted to outputs (Scott & Davis, 2007). Orlikowski’s theoretical model of technology shows that technology has three different effects on organizations: the intended and unintended effects, the direct and indirect effects, and the reconstitution in use effects. Reconstitution in use refers to when organizational participants reconstitute the technology in new ways. (Stroud & Weinel, 2020).

How technology affects structure can be viewed from rational and natural systems perspectives. In the rational approach, the organizational structure is designed specifically to deal with uncertainty, complexity, and interdependent tasks. In general, the organization is designed to buffer the technical core, adjust to the level of uncertainty and complexity, and coordinate the technical interdependence (Scott & Davis, 2007). Organizational theorist Jay Galbraith stated that the “structural mechanisms for coordination must provide the means to handle the amount and richness of information processing required by the uncertainty and equivocality of an organization/team’s task and environment” (Tenkasi, 2018, p. 69). As such, the rational approach provides a number of prescribed organizational structures to deal with the variety of information processing demands. These structures include simple structure, bureaucracy, functional, multidivisional, matrix, adhocracy, or networks (Scott & Davis, 2007).

From a natural system perspective, technology affects structure in a far less prescriptive and formal way (Őnday, 2018). Three major themes relate to the technological effects on natural system structures. They include the social and cultural factors shaping the relation between technology and structure, the substitution of informal for formal structure, and the importance of tacit knowledge under the control of participants versus the prescriptive performance programs designed by management (Scott & Davis, 2007). Natural systems help explain how similar technologies applied in various cultures have radically different effects on the structure of the organization. For example, German firms have a higher level of worker expertise, flexibility, and autonomy than French firms (Scott & Davis, 2007).

The natural system perspective also helps explain technology’s impact on organizational structure with the concept of strategic choice. In natural systems, strategic choice means that every new technology will create various adaptive strategies and responses by participants. Actors inside and outside the organization will create divergent perspectives and interests as a result of strategic choice (Scott & Davis, 2007). In the 1990s, for example, the use of increasingly powerful information technology in companies caused significant structural changes as participants made strategic choices to exploit new opportunities (vom Brocke et al., 2021).

Natural system theorists further acknowledge the importance of the tacit knowledge of workers in the organization. While rational system theorists emphasize the importance of detailed work requirements developed by engineers and technical staff to deal with technology, natural proponents point more towards the ingenuity of workers as they gain knowledge through experimental learning. Scott and Davis (2007) say that “much of the knowledge on which the organization relies is contained in the skills and tacit knowledge of its workforce” (p. 146). This skill base is the true DNA of the organization.

Scott and Davis (2007) provide an important reminder that organizations are not just technical systems, they are human and social systems, and social boundaries exist. These boundaries represent the edge of the organization, and organizational theorists concern themselves with the criteria organizations use to determine whom they will admit or reject based on specific characteristics. Jæger and Pedersen (2020) say that “social boundaries bind actors together in mutual relationships” (p. 4). Social boundaries exist in open systems, acting more like sieves than shells. Understanding social boundaries provides a foundation for understanding recruitment criteria and the division of labor within the organization.

From a rational perspective, boundaries contribute to organizational rationality when it comes to recruitment. Weber referred to it as the rational-legal systems that isolate an organization from its social context. He felt that, once recruited, participants should consider their role in the organization as their primary occupation (Scott & Davis, 2007). On the other hand, natural systems analysts recognize that organizational participation is just one of the many roles a participant plays. They acknowledge that some of the participant’s skills and abilities come from outside the organization. These skills are essentially imported in. They also recognize that a participant’s extra-organizational relationships can create value for the organization (Scott & Davis, 2007).

The concept of division of labor traces its roots to Adam Smith. This rational approach to labor relies on the concept of dividing work into a number of highly specified work steps as a means to gain productivity. Scott and Davis (2007) say that “division of labor supports the application of technology and rationalized procedures to work, increases the scale of work organizations and their markets, and gives rise to managerial hierarchy” (p. 160). The challenge is that this rational approach to labor creates significant issues for participants.

Technology Structures and Organizational Boundary Areas that Create Issues for Participants

Technology structures can provide issues for participants, especially as the levels of uncertainty, complexity, and the need for interdependent tasks continue to rise. In the past, for example, professionals like doctors, lawyers, teachers, accountants, and scientists worked independently and had their own separate practices. Today, with the increase in complexity and the need for interdependent tasks, most professionals are employees in larger organizations. There is also a rise in heteronomous organizational structures where professional employees are subordinated to an administrative framework, and their autonomy is relatively small (Scott & Davis, 2007).

The digital revolution has also affected participants in unprecedented ways. The falling cost of digital information storage, processing, and communication has increased the scale, scope, and complexity of opportunities organizations can exploit (Baum & Haveman, 2020). Davis and DeWitt (2022) say that this has changed how companies “raise capital, engage labor, acquire inputs, distribute to customers, and organize their internal processes” (p. 861). Companies today look entirely different from just thirty years ago. Many do not even have physical locations with employees doing observable tasks, and most have eliminated, automated, or outsourced manual processes (Davis & DeWitt, 2022). In general, organizations have fewer participants and are more physically dispersed and digitally connected than ever before.

From an organizational boundary perspective, the three types of issues for participants include alienation, inequity, and insecurity. Alienation is something Marx addressed. Arenas (2022) says that “Marx refers to the process in which the exchange of labor power and products occurs as something “alien and objective” to the workers, involving their subordination to relations that exist independently of them” (p. 393). Participants in a rational division of labor system are alienated from both the product of their labor and the process of production. This alienation comes in six varieties, powerlessness, meaninglessness, normlessness, cultural estrangement, self-estrangement, and social isolation (Scott & Davis, 2007).

The division of labor also creates inequity in organizations over time. For example, the earnings gap between lower and higher ranks of employees has steadily increased since 1970. According to Uygur (2019), CEOs earned 30 times their workers’ compensation in 1978, and that ratio had increased to more than 300 as of 2014. The rise in compensation has not resulted in a corresponding rise in company performance either. In recent years, there have also been significant reductions in regular, normally-secure positions at companies, with many of those jobs replaced by part-time, temporary, or low-wage employees. The result leaves participants feeling disillusioned by the promise of more efficient and effective organizations (Scott & Davis, 2007).

Participants also have high levels of insecurity because of the apparent termination of the “implicit contract” over the past several decades. More and more employees feel they can no longer expect long-term employment from companies. Downsizing has become increasingly common, and positions that formerly carried the greatest safeguards are being eliminated. Additionally, companies have been moving more towards vertical disintegration by outsourcing many of their processes to outside companies, some of which are in low-cost countries (Scott & Davis, 2007). Companies in Western industrial nations now focus more on design and marketing. They are increasingly reducing their employee base and outsourcing their production, customer service, and even R&D to low-cost countries (Baum & Haveman, 2020).

Personal Perspectives

Technological and social boundary changes over the past decade have created the most significant impact on organizational structures since the development of organizational theory. Today’s companies look nothing like their predecessors. They are something new entirely. God told the Israelites through the prophet Isaiah that they would also see something new. In Isaiah 43:18-19, He says, “Forget the former things; do not dwell on the past. See, I am doing a new thing! Now it springs up; do you not perceive it? I am making a way in the wilderness and streams in the wasteland” (New International Version, 1978/2011). Isaiah was providing “messianic” prophecies to the Israelites about the coming Savior, Jesus, who would fulfill the law.

In many ways, organizational scholars will need to forget the former things as well when developing new organizational theories. Organizational theorist Jay Galbraith says that “innovations often happen in organizations first, then the scholar comes in and gives it theoretical meaning.” (Tenkasi, 2018, p. 69). Innovations have clearly been leading new theory development with the organizational shifts that are happening now in businesses. Roth (2021) says that the world is undergoing the most significant structural revolution in business and society since the end of World War II. He says there will be profound implications for organizational theory. Baum and Haveman (2020) agree and say that we are entering “a brave new world” with the emergence of organizational structures we have never seen before (p. 2020). Roth (2021) says that the “new normal” is so different that scholars need to “reassess the validity of theories that might be outdated now” (p. 539).

Technology, innovation, and globalization have permanently altered organizational structures in the past decade. These trends have given rise to new terms like financialization, nikefication, uberization, amazonification (Davis & DeWitt, 2021), and pop-up stores (Betta, 2019). A decade ago, the top ten companies in the United States would top the list of revenues, number of employees, and market capitalization. In 2021, only Walmart and Amazon appeared on all three lists (Davis & DeWitt, 2022). Today’s companies look nothing like their predecessors. For example, there has been a rise in companies that do not produce products or services. Their model connects private sellers and buyers like Airbnb, Turo, Etsy, Udemy, Gumroad, and eBay. Similarly, there is a rise in media companies that produce no content. Their model is to connect private content creators and consumers like YouTube, Vimeo, Twitter, and Instagram.

There is also an intense drive for innovation that Betta (2019) says has created a phenomenon called “neocharisma.” This concept is where every individual thinks of themselves as creative and innovative. In the past, large corporations were the center of innovation and creativity. Now with technology, any individual can be an innovator. Technology has removed the gatekeepers. Anyone with a computer, cellphone, and microphone can be an author with self-publishing on KDP, a radio personality with podcasting on Spotify, a musician with Soundcloud, a television star on YouTube, a distributor with drop-shipping on Amazon, or a celebrity with TikTok. One person with technology today can make more impact in the world than entire companies in the 1950s. This trend will likely accelerate with the introduction of artificial intelligence (AI) over the past two years. It is undoubtedly “a brave new world.” The emergence of new, unique, and compelling organizational structures as a result of technology shifts will keep organizational theorists busy for the foreseeable future.

References

Arenas, N. (2022). Karl Marx’s writings on alienation: Marcello Musto, ed. Socialism and Democracy, 35(2-3), 392-395. doi:10.1080/08854300.2021.2000827

Baum, J. A. C., & Haveman, H. A. (2020). Editors’ comments: The future of organizational theory. The Academy of Management Review, 45(2), 268-272. doi:10.5465/amr.2020.0030

Betta, M. (2019). Business, organization theory, and the current challenge of neocharisma. Business and Society Review (1974), 124(2), 261-281. doi:10.1111/basr.12171

Davis, G. F., & DeWitt, T. (2021). Organization theory and the resource-based view of the firm: The great divide. Journal of Management, 47(7), 1684-1697. doi:10.1177/0149206320982650

Davis, G. F., & DeWitt, T. (2022). Seeing business like a state: Firms and industries after the digital revolution. Strategic Organization, 20(4), 860-871. doi:10.1177/14761270221122404

Jæger, K., & Pedersen, A. M. L. (2020). Understanding organizational boundaries. Globe: A Journal of Language, Culture and Communication, 9, 1–14. doi:10.5278/ojs.globe.v9i.4286

New International Bible. (2011). The NIV Bible. https://www.thenivbible.com (Original work published 1978)

Őnday, Ő. (2018). The relationship between concepts of rational, natural and open systems: Managing organizations today. International Journal of Information, Business and Management, 10(1), 245-258

Roth, S. (2021). The great reset of management and organization theory. A European perspective. European Management Journal, 39(5), 538-544. doi:10.1016/j.emj.2021.05.005

Scott, W. R., & Davis, G. F. (2007). Organizations and Organizing: Rational, Natural, and Open System Perspectives. Routledge.

Stroud, D., & Weinel, M. (2020). A safer, faster, leaner workplace? Technical‐maintenance worker perspectives on digital drone technology ‘effects’ in the European steel industry. New Technology, Work, and Employment, 35(3), 297-313. doi:10.1111/ntwe.12174

Tenkasi, R. (2018). Re-visiting the past to re-imagine the future of organization development and change. Organization Development Journal, 36(4), 61-75.

Uygur, O. (2019). Income inequality in S&P 500 companies. The Quarterly Review of Economics and Finance, 72, 52-64. doi:10.1016/j.qref.2018.11.007

vom Brocke, J., Schmid, A. M., Simons, A., & Safrudin, N. (2021). IT-enabled organizational transformation: A structured literature review. Business Process Management Journal, 27(1), 204-229. doi:10.1108/BPMJ-10-2019-0423

Note: This paper was written as part of my requirements for a Doctorate in Strategic Leadership at Liberty University. I’m sharing this here for those who may be interested in some of the theories of leadership. Let me know if you have any questions.

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If you want to become a better leader, order my latest book You Have the Watch: A Guided Journal to Become a Leader Worth Following.

This guided journal provides daily leadership guidance and reflection for an entire year. Each week, you will learn a new leadership skill. Each day, you will explore a new facet of that skill. As you do the work and put in the reps as a leader, this journal will be your constant companion. By the end of the year, you will master fifty of the most important leadership skills.

 

Rational, Natural, and Open Systems of Organizations in a Post-Pandemic Economy

Rational, Natural, and Open Systems of Organizations in a Post-Pandemic Economy

Jon Rennie

If the average leader were to draw a picture of an organizational model, they would likely draw some version of the classic pyramid model of an organization chart. This is because most managers think of organizations as a structure (Őnday, 2018). Most are unaware of the basic principles of organizational theory. Conversely, these same managers could likely talk a lot about strategy. Understanding both strategy and organizational theory is essential to effective leadership. Davis and DeWitt (2021) say that organizational theory explains “why firms look and act the way they do, while strategy explains what effect these have on performance” (p. 1685). They liken organizational theory to biology and strategy to medicine (Davis & DeWitt, 2021).

Understanding both strategy and organizational theory is essential to effective leadership. Click To Tweet

Organizational theory was born in the 1950s as sociologists, political scientists, psychologists, engineers, management experts, and economists attempted to explain the science of organizations (Őnday, 2018). Nearly a decade of study led to the publishing of a book called Organizations in 1958 by James March and Herbert Simon (Davis & DeWitt, 2021). In addition, a journal called the Administrative Science Quarterly was launched in 1956, focusing on the interdisciplinary aspect of this emerging field of study (Scott & Davis, 2007).

Organizational theories often start with an image to describe the organization. Consider these images – a company as a mechanism to accomplish goals, a society with a social structure, and an organism making its way through an environment. Each of these pictures helps demonstrate the unique aspects of three different organizations and the patterns of relationships inside them (Scott & Davis, 2007). These three perspectives of the organization emerged in early organizational studies. They became known as rational, natural, and open systems (Őnday, 2018). Each perspective or paradigm offers a different approach to understanding organizational structures and their interactions (Scott & Davis, 2007).

Rational organizations are oriented toward the pursuit of specific goals. Click To Tweet

The rational system is the most dominant perspective embraced by most real-world managers and practitioners. The rational system is characterized by two structural features that set it apart from other organizations. Rational organizations are oriented toward the pursuit of specific goals. Additionally, the organization of resources in rational systems is highly formalized. The combination of these two features sets them apart from other types of collectives. Davis and DeWitt (2021) define rational systems as organizations that “are collectives oriented to the pursuit of relatively specific goals and exhibiting relatively high formalized social structures” (p. 29). The social cement that holds together and regulates interactions between members in these formal groups is called the normative structure, which includes values, norms, and role expectations (Őnday, 2018).

Participants in natural systems share a common interest in the organization’s survival Click To Tweet

On the other hand, natural systems emphasize goal complexity and an informal structure (Őnday, 2018). While these types of organizations often espouse goals, they do not necessarily guide the behavior of members, nor can they be used to predict future actions. Participants are motivated by their self-interests and look to impose these on the organization (Scott & Davis, 2007). The social cement that connects and regulates interactions among members in these informal groups is called the behavioral structure, which focuses more on the consistency and constancy of behaviors and less on the prescriptions of that behavior (Őnday, 2018). Davis and DeWitt (2021) define natural systems as organizations that “are collectives whose participants are pursuing multiple interests, both disparate and common, but who recognize the value of perpetuating the organization as an important resource” (p. 30). Social consensus and social conflict are two contrasting versions of social order in natural systems. The first has individuals seeking a common objective. The second is where the order is maintained through coercion, not consensus (Scott & Davis, 2007). In all cases, participants in natural systems share a common interest in the organization’s survival (Őnday, 2018).

For organizations to survive, they must adapt their structures and behaviors to respond to environmental elements. Click To Tweet

The rational and natural system definitions view the organization as a closed system isolated from the environment and containing a stable group of participants. The open system perspective is just the opposite. Developed later than the rational and natural systems, the defining characteristic of the open system paradigm is that the environment shapes, supports, and infiltrates the organization (Scott & Davis, 2007). For organizations to survive, they must adapt their structures and behaviors to respond to environmental elements (Őnday, 2018). Davis and DeWitt (2021) define open systems as organizations that “are congeries of interdependent flows and activities linking shifting coalitions of participants embedded in wider material-resource and institutional environments” (p. 32). Another critical aspect of open systems is the importance of cultural-cognitive elements. These are the portable ideas, conceptions, models, and scripts with which open systems continuously adopt and adapt intentionally and inadvertently (Scott & Davis, 2007).

Davis and DeWitt (2021) point out that these three distinct and diverse views of organizations are described as perspectives or paradigms because they each represent a different conceptual umbrella for researchers to gather related information. They say these three perspectives are “varying approaches that bear a strong family resemblance” (p. 32). Davis and DeWitt (2021) also mention that these three paradigms “partially conflict, partially overlap, and partially complement one another” (p. 32). Researchers use these approaches to analyze organizations from three levels: the social psychological, organizational, structural, and ecological.

Scholars began to develop the rational, natural, and open systems perspectives on organizations from the beginning of the twentieth century until the early 1960s. However, the emergence of open system perspectives later in the process did not eliminate the need for rational and natural approaches. Instead, researchers combined open system approaches with the other two perspectives to create new theories and ways to understand organizations. Several examples are Lawrence and Lorsch’s Contingency Model, Thompson’s Levels Model, and Scott’s Layered Model (Scott & Davis, 2007). For example, Lawrence and Lorsch’s Contingency Model helps describe the organizational evolution in ancient Israel.

In 1967, Paul Lawrence and Jay Lorsch argued that the level of uncertainty and change in an environment would impact the development of an organization. They proposed that an organization exposed to a diverse and challenging environment would produce a more organic structure like the natural system. Exposure to a more homogenous and stable environment would lead to a more formalized structure, as the rational system explains. (Scott & Davis, 2007). This environmental impact on organizational development can be seen in the story of the Israelites as they escaped Egypt.

The first three months after the Israelites left Egypt were a challenging time for them as they worked to adjust to their new environment in the wilderness. During this time, an organic, natural structure was formed as Moses, their leader, acted as a judge for the various disputes among the people. Exodus 18:13 says, “Moses took his seat to serve as judge for the people, and they stood around him from morning till evening” (New International Version, 1978/2011). Moses’ father-in-law, Jethro, recognized that this type of organic, natural structure would only serve to wear Moses down in the months and years ahead. He knew Israel needed a formalized organization to deal with these disputes in their new, more stable environment. He tells Moses to appoint judges by selecting “capable men from all the people—men who fear God, trustworthy men who hate dishonest gain—and appoint them as officials over thousands, hundreds, fifties and tens” (New International Version, 1978/2011, Exodus 18:21). This is an example of an organization transforming from a natural to a rational system due to the stabilization of the open environment.

What is interesting to consider is how all these organizational theories will keep up with the increasingly high level of change in the business environment today. This rapid change is fueled by the rise of digital technologies (including AI), a never-ending thirst for innovation, and the globalization of finance, trade, and production. The post-pandemic world has also seen increased scrutiny and activism by employees and stakeholders to hold corporations accountable for their impact on the world. Roth (2021) says that the world is undergoing the most significant structural revolution in business and society since the end of World War II. He tells us there will be profound implications for management and organizational theory. Baum and Haveman (2020) say that we are entering “a brave new world” with the emergence of organizational forms that we have never seen before (p. 2020). Roth (2021) says that the “new normal” is so different that scholars need to “reassess the validity of theories that might be outdated now” (p. 539).

The world is undergoing the most significant structural revolution in business and society since the end of World War II. Click To Tweet

Consider first how the digital revolution has affected organizations. The falling cost of digital information storage, processing, and communication has increased the scale, scope, and complexity of challenges that organizations can address (Baum & Haveman, 2020). Davis and DeWitt (2022) say that this has changed how companies “raise capital, engage labor, acquire inputs, distribute to customers, and organize their internal processes” (p. 861). Many influential companies today do not have physical buildings full of employees doing observable tasks (Davis & DeWitt, 2022). This digital revolution has created companies that do not produce products but connect sellers and buyers like Airbnb, Turo, Etsy, Udemy, Gumroad, and eBay.

Innovation has removed the gatekeepers. Click To Tweet

There is also an intense drive for innovation affecting every aspect of society. Betta (2019) says that this thirst for innovation has created a phenomenon called “neocharisma,” where every individual thinks of themselves as creative and innovative. Where once large corporations or government entities were the center of innovation and creativity, now any individual can be an innovator. Innovation has removed the gatekeepers. Now, anyone can be an author with self-publishing on KDP, a radio personality with podcasting on Spotify, a musician with Soundcloud, a television star on YouTube, a distributor with drop-shipping on Amazon, or a celebrity with TikTok. Consider this: Joe Rogan, an independent podcaster, has over three times as many viewers as the top television show, Tucker Carlson Tonight (Sarmah, 2022). The rise of neocharisma has created both constructive and destructive innovation and directly challenges organizational theory and what it means to be an organization (Betta, 2019).

The globalization of finance, trade, and production has also created significant organizational shifts. Companies in Western industrial nations now focus more on design and marketing. They are increasingly reducing their employee base and outsourcing their production, customer service, and even R&D to low-cost countries (Baum & Haveman, 2020). Technology, innovation, and globalization in the past decade have permanently altered what it means to be an organization. These trends have given rise to new terms like financialization, nikefication, uberization, amazonification (Davis & DeWitt, 2021), and pop-up stores (Betta, 2019). A decade ago, the top ten companies in the United States would top the list of revenues, number of employees, and market capitalization. In 2021, only Walmart and Amazon appeared on all three lists (Davis & DeWitt, 2022).

Internal and external forces are challenging the entire purpose of what it means to be an organization. Click To Tweet

Finally, internal and external forces are challenging the entire purpose of what it means to be an organization. The 1980s gave rise to the idea of shareholder primacy that corporations exist primarily to create shareholder value represented by changes in their share price (Davis, 2021). Whatever noble purpose they were founded on, corporations abandoned them in favor of shareholder value. In the post-pandemic world, democracy from above and within the organization is forcing a change (Davis, 2021). Davis (2021) says there has been an “unprecedented surge of worker activism,” demanding that companies “live up to the ideals they proclaim” (p. 909). Employee protests have occurred in Amazon, Netflix, Microsoft, and Google in recent years. There have also been outside pressures from global organizations like the World Economic Forum challenging companies to live up to a purpose other than profits. The rise of the use of environmental, social, and governance (ESG) metrics to measure the performance of “stakeholder capitalism” is evidence of this significant shift (Roth, 2021).

Organizational theory was born in the 1950s in a time of relative stability. Scholars sought to understand rational and natural organizations as closed systems, relatively safe from outside forces. The emergence of open system thinking helped researchers see the organization as an organism making its way through an environment and being impacted by those outside forces. Today, those outside forces have reached levels never imagined by early scholars. Today’s organizations are rapidly changing in the face of technology, innovation, globalization, activism, environmentalism, and new governance. Environmental forces are permanently altering the structure of organizations in an unprecedented way. Scholars and researchers in the field of organizational theory will need to hurry to keep up with these changes.

References

Baum, J. A. C., & Haveman, H. A. (2020). Editors’ comments: The future of organizational theory. The Academy of Management Review, 45(2), 268-272. doi:10.5465/amr.2020.0030

Betta, M. (2019). Business, organization theory, and the current challenge of neocharisma. Business and Society Review (1974), 124(2), 261-281. doi:10.1111/basr.12171

Davis, G. F. (2021). Corporate purpose needs democracy. Journal of Management Studies, 58(3), 902-913. doi:10.1111/joms.12659

Davis, G. F., & DeWitt, T. (2021). Organization theory and the resource-based view of the firm: The great divide. Journal of Management, 47(7), 1684-1697. doi:10.1177/0149206320982650

Davis, G. F., & DeWitt, T. (2022). Seeing business like a state: Firms and industries after the digital revolution. Strategic Organization, 20(4), 860-871. doi:10.1177/14761270221122404

New International Bible. (2011). The NIV Bible. https://www.thenivbible.com (Original work published 1978)

Őnday, Ő. (2018). The relationship between concepts of rational, natural and open systems: Managing organizations today. International Journal of Information, Business and Management, 10(1), 245-258

Roth, S. (2021). The great reset of management and organization theory. A European perspective. European Management Journal, 39(5), 538-544. doi:10.1016/j.emj.2021.05.005

Sarmah, M. (2022, February 4). What are Joe Rogan’s viewership numbers? Sportskeeda. https://www.sportskeeda.com/mma/news-what-joe-rogan-s-viewership-numbers

Scott, W. R., & Davis, G. F. (2007). Organizations and Organizing: Rational, Natural, and Open System Perspectives. Routledge.

 

Note: This paper was written as part of my requirements for a Doctorate in Strategic Leadership at Liberty University. I’m sharing this here for those who may be interested in some of the theories of leadership. Let me know if you have any questions.

—————————

If you want to become a better leader, order my latest book You Have the Watch: A Guided Journal to Become a Leader Worth Following.

This guided journal provides daily leadership guidance and reflection for an entire year. Each week, you will learn a new leadership skill. Each day, you will explore a new facet of that skill. As you do the work and put in the reps as a leader, this journal will be your constant companion. By the end of the year, you will master fifty of the most important leadership skills.