Modular organization and informal structure: Modularity, performance, and the alignment of organizational networks

Modularizing a system, a product, or a process can have positive effects on performance in many instances. That it may have adverse consequences has also been discussed, although on balance the literature seems inclined to consider that modularity is desirable in most cases. In this paper, we put forward a feature of modular systems that extant research has not considered in spite of its strong performance-hindering potential. Starting from the premise that organizations are essentially patterns of formal and informal interactions, and modules within organizations are places where these interactions accumulate and reinforce, we argue that modularity can exacerbate issues related to (low-)performance spillovers from one organizational actor to another. With psychosocial affect as the channel connecting the formal and the informal spheres, we develop a simple model that combines elements of psychology research, network science, and organization theory to study how formal and informal elements jointly determine organizational performance under different modularity configurations. We find that organizational performance is lower when the alignment of formal and informal is stronger: informal interaction augments local accumulation of stress caused by formal aspects of firm organization. However, this result depends heavily on the modularity of formal organization: feedbacks between formal and informal elements cause much harsher performance degradation in modular systems. This suggests the exercise of caution when considering the possibility to modularize a production system.