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(originally published by Booz & Company)


The Organization Is Alive

One can create major improvements in an organization’s effectiveness by aligning and moving people in ways that shift these three important roles. The more effective such channels are, the more people learn how to operate with excellence, how to advance in the company, and how to build their mutual expertise. If you want to make an organization more proficient, start by improving the network.

That doesn’t mean just putting the right people in a room together, but also ensuring they are free to talk candidly and that each understands what the others are saying. Even then, networks are not sufficient for getting actual work done. Contracts, materials, inputs, outputs, capital — the stuff of business — is beyond the purview of a network. Hence the importance of another circulatory system: the market.

The Market-governed Workflow

In the 1980s, W. Edwards Deming wrote about seeing the organization as a system. Like Russell Ackoff, Eric Trist, Eliyahu Goldratt, and many others, he recognized that no matter how many directives came through the hierarchy, and no matter how well people communicated informally, organizations could not succeed unless they kept improving their throughput: the efficiency with which money, goods, and services were exchanged on behalf of customers.

Thus, some of the most effective organizational improvement activity of the past 50 years — from the quality movement to sociotechnical systems to reengineering (when it worked) to lean production — has been in the domain of processes and workflow. People at every step of a lean process are trained to observe, regulate, and contribute to better flows of goods and services. A well-honed lean-production attitude is so ingrained that it goes almost unnoticed. Unfortunately, it is typically noticed in its absence: in the poor quality of a company’s goods and services.

One factor is particularly significant, albeit hard to spot. At every stage of an organization’s workflow, there is an implicit market. Someone (often from another part of the company) supplies a good or service; someone else (usually with a budget) pays for it. As in any other market, the buyer has an opinion on whether the service is worth the price. These opinions may be overridden by company policies, with the result that a purchase price may be set by fiat; but companies that keep the official transactions in line with the implicit opinions tend to operate more effectively. Thus, Caterpillar thrived in part by adopting more explicit internal markets in the late 1980s, and Springfield ReManufacturing Corporation prospered by opening up its financial information in a process called “the great game of business.” Many process design and quality management efforts succeed by making the realities of an assembly line or back office reflect more precisely the implicit worth of the goods and services involved, removing all the nonessential time, effort, and materials (what the Japanese call muda, or waste) clogging up the system.

As in a cardiovascular circulatory system, obstructions can build up. Continuous improvement is the organizational equivalent of a fitness regimen. But even the most effective company can’t rely on continuous improvement alone; there is always a subtle strategic priority that sets the direction of the enterprise. And that’s why it is so important to understand the clan.

The Clan and Its Core Group

If you watch a company at work, you will notice people making decisions on the basis of what they think other people want. “What would Frank think of this?” they ask themselves. “How does this fit with Sally’s plan?” They might say, “I don’t want to be the one to walk into C.J.’s office and say it’s not going to happen.”

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  1. Art Kleiner, “Karen Stephenson’s Quantum Theory of Trust,” s+b, Fourth Quarter 2002: Introduction to network theory and “hubs, gatekeepers, and pulsetakers.”
  2. Art Kleiner, “Elliott Jaques Levels with You,” s+b, First Quarter 2001: The great theorist of hierarchies explaining his requisite structures.
  3. Art Kleiner, Who Really Matters: The Core Group Theory of Power, Privilege, and Success (Doubleday, 2003): The clan system and the nature of the core group, in detail.
  4. Gary L. Neilson and Bruce A. Pasternack, “The Cat That Came Back,” s+b, Fall 2005: How Caterpillar rebuilt its organizational DNA (and its workflow and hierarchy).
  5. Gary L. Neilson, Karla L. Martin, and Elizabeth Powers, “The Secrets to Successful Strategy Execution,” Harvard Business Review, June 2008: How implementing a strategy starts with information flow and decision rights.
  6. Sherwin B. Nuland, The Wisdom of the Body (Knopf, 1997): How biochemical interactions, via our circulatory systems, explain the quintessence of Homo sapiens.
  7. Authentic Leadership in Action Institute website: Programs include weeklong courses on social innovation, collaboration, and human systems dynamics. 
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