What truly drives organizational behavior and decision making?

The board receives its information from the management, but what happens if the management does not understand the factors truly driving organizational performance?

Even if it sounds absurd, we have observed in several cases that the management, with a good understanding of the market trends and strategy, is not actually aware of what truly drives the performance of its middle management and personnel. This weakens the management’s ability to develop the business and to implement change.

Thus, the facts that the management relays to the board about the culture, motives and performance of the organization might be based on illusions or narrow key performance indicators that do not reveal the reality. As a result, the advice that the board, in turn, provides to the management regarding, for example, change management or post-merger integration, might be reactions to the false notions of the management and not fit to the actual situation.

The reasons behind the top management’s inaccurate understanding can be many, starting from a complicated organizational structure and unclear responsibilities to an extreme pace of change. When assessing organizational performance, one also often forgets the significant role of intuition and emotions as a factor that governs human actions alongside rational thinking. Traditionally, the focus has been on the latter, and management will optimize the rational incentives of the organization, even if the middle management is aligning their own behavior in accordance with what they think feels the best. No one in the management necessarily knows how the middle management is really feeling or what affects these feelings.

Analysis brings surprising results

There are new ways of forming a clear picture of the factors that guide behavior and decision-making. Our approach is based on in-depth interviews and their detailed analysis. In practice, we examine from the point of view of the individuals what motivates their actions, what helps them in carrying out their work well, and what in turn prevents them from achieving top performance. By comparing, analyzing and combining these descriptions we can form a picture of the most essential issues affecting performance on the company level. The method is called grounded theory, and is also used by the world’s leading management researchers. Based on our experience, the analysis often provides surprising results for the management.

A company’s recently appointed managing director was planning actions to turn around his organization’s financial performance. One idea was to give local units direct profit and loss responsibility, but our analysis showed that this would have been a mistake. There was no unified organizational culture in the company and the strong local focus led to blatant suboptimization, which the management’s original idea would only have made worse. The benefits of the ‘one company’ program which the company had undergone had not been realized either. To correct the situation, the role of local performance measurement was decreased, work rotation was increased and communication was improved, so that people could form a complete picture of the whole and act as a part of it.

In another company, employee engagement surveys had led to the finding that poor engagement was due to dissatisfaction with how the organization was managed. The senior executives assumed that the cause would lie in the management system and initiated a project to improve it. The management system was examined in comprehensive detail focusing on processes conducted by finance and HR functions, from performance measurement and appraisal practices to the reward systems. However, urgent improvement needs were not discovered. Our analysis, however, revealed that the true challenge lay within the interaction between the head office functions and its various units. The centralized functions of the group were trying to launch concepts that did not work in the local, decentralized organization. The concepts would not work, because there were significant differences in the local conditions, which the management was not sufficiently familiar with. However, due to pressure from the head office, the units ended up implementing concepts that were ill-suited to their business conditions. This incurred significant additional costs and satisfaction among employees went down. With our analysis, the management discovered the reason behind poor employee engagement and could initiate corrective actions.

Experience and intuition are not enough

One of the strengths of our method is that it produces a comprehensive description of people’s experiences at different levels of the company and of the factors affecting these experiences. This means that the management no longer needs to rely on a vague description of the organization’s culture in discussions with the board. Instead it can use concrete terms, descriptions and examples of behaviors that impact organizational performance, as well as of the factors that are affecting them. This makes it possible for the board to give more specific advice, instead of very generic guidance or reiterating previous more generic learnings.

What is essential is the identification of the levers that will enable implementing the desired change and improving organizational performance. Even the most experienced board professional’s intuition is not always enough in order to identify the right decisions in new circumstances. Forming a clearer and more granular picture of the factors affecting organizational performance will quickly pay off.

Pasi Torppa
Executive Advisor
August Associates

Timo Vuori
Assistant Professor in Strategy
Aalto University