Organizational Strategy - the physics of a complex system

TLDR: Because organizations are complex, working on them requires a strategy, the goal of which must be to make the organization more efficient than its competitors. The best way to do that is to maximize autonomy and alignment.

This text is about organizational strategy, which deals with how to run an organization efficiently. This is something different than a business strategy, which deals with the decision of how to position a business against competition and is usually meant when “strategy” is used as a stand-alone term. If you are interested in the latter, read on here. If you want to understand the differences between the two better, read on.

There are a lot of ways to think about what an organization is and how it operates. I don’t think that one is right and the others are wrong. What is important though is that any organizational development, any work on the organization itself, is based on an organizational strategy. Because improving an organization is a complex task and a strategy is the best way to deal with complexity. It is simply not possible to plan organizational change because you don’t control the people of which an organization consists. You can plan actions but you cannot plan the reactions. So instead, leaders must decide on an approach that they believe will have the biggest positive effect on their organizations, try it, observe, and adapt. They must decide on an organizational strategy.

In the following, I will outline my strategy to keep an organization at high efficiency and the thinking behind it. It has worked well for me. And I hope it does for you.

Let’s start by looking at organizational efficiency and why it is important:

Question: What is the purpose of a business organization?

Answer: The purpose of a business organization is to add value.

Adding value means that the organization must generate more output value than it requires in input value. In other words:  it must make more money than it uses.

But for businesses that have taken on equity investments[1] this is usually not enough. Because the expectation of an equity investor is not that the organization generates profits, but that it performs in a way that justifies a high valuation – essentially a multiple of the revenue and/or earnings the organization generates and/or will generate in the future. There are a lot of ways to calculate said multiple but if we strip away market conditions and flavors of the day what it mostly comes down to is this: an organization must perform better than its competition. And so the purpose of such an organization is to produce more output from the same input than the competition. In other words, its purpose is to be more productive or, in a more general term, more efficient than others.

What about effectiveness you ask? Isn’t it even more important to do the right things (producing the right products or services) than just doing the things right (producing them efficiently)? Yes and no. Yes because running in the totally wrong direction with great efficiency won’t see you win the race. And No, because running in the right direction but being overtaken by more efficient rivals will lead to the same result. You need to do both. And both require a strategy. But not the same one. Deciding what to focus on is the purpose of a business strategy. Deciding how to be efficient is the purpose of an organizational strategy.

To be more efficient than others, an organization has to be better at generating motivation and avoiding resistance.

Here’s why: money (in the form of funding or revenue) buys operational capability which produces products or services, which generate money.  And so, logically, the decisive factor for efficiency is operational capability. An organization is more efficient if it outperforms its competition in how it runs its operational capabilities.

Operational capabilities are mostly the product of equipment (machines, warehouses, servers, laptops & mobile phones, desks) and work (people). For a lot of internet businesses, the latter is more relevant, and also OPEX (money spent a.o. on work) is a much bigger cost position than CAPEX (money spent on long-term assets such as machinery). Heavy industrial businesses and LLM vendors have a higher exposure to CAPEX and being able to buy equipment (A100, H100, B200) plays a much bigger role in their success, but even for these types of businesses work remains a crucial factor.

So what is work? Work is energy that generates output. The amount of energy is determined by the energy produced minus the energy lost in the process. Energy is produced by talent (the more quality and quantity of talent the more energy) and motivation (again, the more the better). Energy loss is caused by friction (if it is mechanical energy) or (more appropriate here) resistance. And so work can be summarized in the formula: W = talent x motivation – resistance

In this formula, talent is a fixed value. Because talent is a function of money (this is a simplification of course, but more money does generally buy you more quantity of talent and at least makes it easier to hire more quality of talent), and money is fixed in our initial efficiency equation as an input variable (more output from the same input). Accordingly, the only variables that remain are motivation and resistance. They are what you need to focus on to improve efficiency more than anything else. 

Motivation is a condition of the individual. A great many variables have an effect on motivation, ranging from basic factors such as fair payment to idealistic aspects such as working for a good cause. But we cannot deal with individual aspects - neither here nor in real life working on an organization - and hence we need to simplify. And for this purpose, I am a huge fan of Daniel Pink’s motivation theory[2]. Pink thinks that there are three essential elements to motivation: Purpose (to contribute to something bigger than oneself), Autonomy (being in charge of one’s life), and Mastery (getting better at something that matters). I believe Pink is right. But in my experience the biggest driver of the three is autonomy. The freedom of people to make decisions, try things, and grow. I have made freedom the cornerstone of our leadership system at idealo. And it is a leadership task. Because freedom exists in a system of communicating vessels with responsibility: they always like to be in a balanced state. As a leader, you don’t want to give more decision space to an individual contributor if they don’t occupy it responsibly. And as a contributor, you certainly don’t want to take on more responsibility than you can feel you are entrusted to exercise. Accordingly, if you want that system to grow someone has to start. And that is the job of the leader. Not without reflection and not boundlessly, but it is the leader’s job to offer free spaces and develop people into the growing responsibility of filling them.

But autonomy is pointless without alignment. Without it, autonomy leads to chaos. Work without alignment meets great resistance as everybody expends energy in different directions and no progress is made. Alignment is a management responsibility. It is the result of communication, processes, and systems, starting with the business strategy. Alignment is required top-down and across the organization. It is strong when everybody understands how their own areas of responsibility relate to the strategy.

Alignment does not limit autonomy. It’s the opposite: the more aligned an organization is the more autonomy its people can have.

And there you have it. The organizational strategy that has worked for me and which I believe will work for you is to focus on alignment and autonomy. If you’ve also read my text about business strategy you will have noticed that there I do not recommend a concrete strategy to work with. Why here? Well, obviously every business is different and no single strategy can work for more than a small number of very similar businesses. But organizations, pluralities of people who share a common objective, I believe, are fundamentally similar to each other. Because we are all people. We are similar in what drives our motivation and we have developed similar ways of working together in tribes, groups, or other communities of destiny over millennia. I do not think that all organizations are the same and certainly not that all people are the same. But I believe that in most organizations you will find enough people who are similar enough in their motivational and collaborative patterns that the strategy proposed here works.

A parting word: I’ve said at the beginning of this text that it is important to have an organizational strategy (even if you disagree with mine) and I would like to emphasize this once more. You need to focus when you work with organizations. They usually have long-feedback loops which require you to keep at something for quite some time in isolation before you can assess whether it had the desired effect. But more importantly, the people in your organization need the same amount of time to draw their own conclusions. Because change requires understanding and acceptance, and I can assure you that the biggest impediment to change is not taking people seriously. But that is stuff for another blog post.

[1] This is a transaction where one side gives money to a company permanently in exchange for an ownership share (equity). Essentially the investor buys shares from the company with money. This is something different than debt, even though debt can be secured with equity. But the creditor does not expect you to outperform your competition, they merely expect to get their money back with interest.

[2] It can be found in Daniel Pink’s seminal book on motivation “Drive – The Surprising Truth About What Motivates Us”.”