Decision Making

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OrganizationScience Vol. 20, No. 2, March–April 2009, pp. 422–440 issn 1047-7039 �eissn 1526-5455 �09 �2002 �0422

informs ® doi 10.1287/orsc.1090.0421

©2009 INFORMS

Renewal Through Reorganization: The Value of Inconsistencies Between Formal and

Informal Organization

Ranjay Gulati Harvard Business School, Harvard University, Boston, Massachusetts 02163, rgulati@hbs.edu

Phanish Puranam London Business School, University of London, London NW1 4SA, United Kingdom, ppuranam@london.edu

We develop a theoretical perspective on how inconsistencies between formal and informal organization arising fromreorganization can help create ambidextrous organizations. We argue that under some conditions, the informal orga- nization 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.

Key words : organization structure; formal and informal organization; interunit coordination

Reorganization is an important mechanism by which corporations can renew alignment between strategy and organization (Chandler 1962). In principle, the dissolu- tion and reformation of internal organizational bound- aries allows for improved partitioning and re-integration of activity within the firm. Yet there is little doubt that reorganizations also create significant stresses and strains within organizations (Nadler and Tushman 1998, Romanelli and Tushman 1994, Tushman and Romanelli 1985). While the formal organization—the normative social system designed by managers—can be changed relatively rapidly, the informal organization—the emer- gent pattern of social interactions within organizations— may be subject to limits and lags in its adjustment to the new formal organization (Lamont and Williams 1994, Miller and Friesen 1984, Nickerson and Zenger 2002). The resulting inconsistencies between formal and informal organization are widely viewed as unavoidable and significant costs of reorganization (Amburgey et al. 1993, Oxman and Smith 2003) that can even enhance the hazards of organizational mortality (Hannan et al. 2003a, b). A common premise underlies the negative assess-