There appear to be forces that act on any organization, causing it to be more dysfunctional and less effective over time, with the only (temporary) fix being big outside jolts that shake things up and reset it back to an earlier state of function. Organizational entropy, in other words.
The first question is the initial state, in many cases this is the original founders and their approach. I think this is why many angel investors and VCs feel so strongly about the core management team and what kind of corporate culture they will create, not just to make sure that they know what they're doing and are capable of building a business, but they fundamentally steer both what level of entropy the company starts with and how quickly it will grow.
What are the attributes of the ideal case (assume a frictionless spherical company of radius R...) ?
- The management team is focused on the needs of customers/market, and are otherwise ego-less.
- There is transparency: each employee knows what is expected of them, what everyone else is doing, and how it all fits together to meet the needs of customers/market.
- They are ideal managers, maximizing their employee's productivity, career growth, and happiness.
- Every decision is made by perfectly weighing long vs. short term goals with full knowledge of alternatives, trade-offs, and probabilities of outcomes.
- New members are perfectly screened for skills and culture compatibility, are able to be found and hired when needed, and can come up to speed as quickly as required.
The Second Law of Bozodynamics
Deviations from the ideal have different effects at different speeds. I'll give an illustrative example I've been mulling over, and how it grows the organizational dysfunction over time.
Take a manager at some level in the org who is not perfectly focused on customers/market needs. When he divides up the rewards (be it prestige, promotion, or cash) he's doing so by some other measure ('delta clue', maybe?) than the ideal. Now the people in the org will be rewarded against this other measure, and not what they do directly for the business.
The most damaging aspect of this deviation from the ideal is that those who exemplify the non-ideal behavior will tend to be the promoted themselves, and constitute the next layer and next generation of management and decision makers for the company. This propagates the dysfunction and increases the overall entropy.
This does not build purely on an individual basis, there are also team dynamics in effect. The most successful people in many organizations are the ones that 'manage up', or exhibit the traits valued by the managers above them (which may or may not have any relationship with what traits would help make the business itself most successful).
Importantly, they also find others in their organization that they work well with in this context. They may not like them or working with them, but they know they are more rewarded working with them than when they are not. They move through the company as a group, getting promoted generally at the same time, bringing the others with them if they move to a new group (or even new company). They know from experience they are more rewarded as a unit than on their own.
As they are successful, once again they propagate and often amplify the dysfunction below them in the organization, rewarding people for the behaviors they value and causing new clumps of further entropy.
As the entropic personnel are promoted to significant decision making positions, their 'delta clue' between what they should be doing to maximize business results and what they actually do from years of rewards for doing something that diverges from that ideal will show. This may be disguised for a significant time if they inherit very successful and self-sustaining businesses, but eventually it will become clear that their results are not what they should be.
By the time this shows the damage will have happened throughout the organization while these decision makers were working their way up, increasing the entropy below them as they went.
We've seen a few examples of this where the first obvious sign that something bad is happening is a chain reaction of bad decision making that explodes into a huge problem. Usually this is blamed on "group think", but as you can guess by now I don't think the issue is with a single example of a bunch of people drinking the kool aid or suspending their disbelief for a set of bad ideas.
The organization entropy hit critical mass.
Exercises Left For The Reader
- If the management team is focused on the needs of Wall Street (for their stock price) instead of the customers/market, how does that effect the starting state of company entropy?
- What is the entropy multiplier when someone is is promoted to management due to their ability in their field rather than their ability to manage?
- In what ways can hiring someone from outside the company increase or decrease organizational entropy?
- What are symptoms of increasing entropy within a part of a company that could be used to identify and address them before it causes damage more widely?
- Are there any ways to shock and reset entropy for entire organizations or sub organizations?