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

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  • Ranjay Gulati

    (Harvard Business School, Harvard University, Boston, Massachusetts 02163)

  • Phanish Puranam

    (London Business School, University of London, London NW1 4SA, United Kingdom)

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 on qualitative data from a reorganization 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 reorganizations.

Suggested Citation

  • Ranjay Gulati & Phanish Puranam, 2009. "Renewal Through Reorganization: The Value of Inconsistencies Between Formal and Informal Organization," Organization Science, INFORMS, vol. 20(2), pages 422-440, April.
    • Handle: RePEc:inm:ororsc:v:20:y:2009:i:2:p:422-440
    DOI: 10.1287/orsc.1090.0421
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    References listed on IDEAS

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