Organization Design – underlying theory
17.Sept.2010
Tallinn Technical University
MBA
Introduction
Education: BA business administration (TTÜ) MSc International Management (University of Southern
Denmark) + year in Helsinki School of Economics and Business Administration
Work: from 2005 Swedbank Estonia; Corporate banking, for last 2 years dealing with impaired loan restructuring and recovery
Interests: sports, modern dance, teaching (2006-2009 read management course for undergraduates in TUT), traveling, reading
contact: + 372 55 626 620; [email protected]
Content
Goal is to get the basic assumptions of the framwork clear and go through the main body of the Burton, Desanctis & Obel 2005
Strategy Environment Organizational design
Structure (configuration/knowledge exchange) Process (task, people, management style/organisation climate) Coordination and control / incentives
Recap Main assumptions of authors
Organizations as open systems – organizations are dependent on environmental streams of resources/information.
Volunatrism – organizations can be changed by the management
Bounded rationality i.e. information processing is costly, thus needs to be fited to the demands for information processing
Contingency view (evolutionary view) – main goal of organizations is to survive by adapting to environment. The better the fit (both external towards effectiveness and interal toward efficiency), the higher the performance (and chances of survival).
The effect on performance (survival) is more significant the more hostile the environment.
There is no single optimum design – long term survival depends on adaptation which is difficult (risky i.e. Oticon case) as organizations are inertic
New forms of organization (network firm, virtual firms, hybrids etc) can be accomodated by the old theory
Information processing view as the starting point (Tushman&Nadler 1978)
Information processing view as the starting point (Tushman&Nadler 1978)
Information processing view as the starting point (Tushman&Nadler 1978)
Information processing view as the starting point (Tushman&Nadler 1978)
Burton & Obel 1998
Strategy
Strategic management seeks to answere the question what course of actions to commit - to perform better than competitors i.e. achieve Sustainable Competive Advantage (SCA). Michael Porter – by positioning in the industry the firm achieves
SCA. (static view) A more recent views on strategy concern on dynamics i.e. how
firms systematically search for new competitive advantages (innovate/learn) and maintain these advantages. The approach taken by Burton, Desanctis&Obel is dynamic i.e.
They consider the main parameter of organizational strategy it’s innovation strategy (March 1991) Exploration Exploitation
Strategy
Exploration – learning strategy (cognitive search) of risk taking, variation, global search
Exploitation – learning strategy (experiential search) of refinement, efficiency, selection and implementation
A hint towards evolutionary theory (variation, selection, retention). Routines act as genes (retain patterns of behavior) Learning as source of variation, Market (managerial choise) as selection.
Exploration vs Exploitation
It is usually either or choice (spiral?) The more you exploit (explore), the more you
exploit (explore). Extensive exploitation leads to myopia of
learning i.e. competency traps and distinction if environment changes.
Extensive exploration leads to bankruptcy Amobidextruos organizations are able to do both
well.
StrategyExploitation
Exploration
Strategy
ExamplesReactor – Eesti Energia
Defender – Säästumarket
Prospector – Webmedia
Analyzer without innovation – Zara
Analyzer with innovation - ???
Strategy
Questions Exploration
Product innovation (frequency/nr) high? Brutomargin (P-MC/MC) high? How fast competitors imitate?
Exploitation Process innovation high? Brutomargin low? Standardization of products high? Nr of products high? Barriers to entry high?
Environment
Complexity – nr and interdependence of factors
Uncertainty – statistical variation (predictability) of factors (can basically prognose)
Quantitative aspect – equivocality (do not know what are the important factors i.e. Can not prognose) demands various interpretations
Environment
Environment
Note that information processing means also interpretation (especially when one is experiencing calm environment, things might be overlooked in environment)
As interpretation depends of cognitive schemata (i.e. We tend tonotice things already known to us), then important question becomes the variation of cognition by the members who have decision rights
In other words the landscape changes but one still tries to navigate with an old map.
Incumbents usually miss changes in the environment (market, technology etc) as they are unable to interpret information from a new angle.
Examples – IBM – PC is an old and studied case, Polaroid – digital cameras an other etc
ConfigurationFunctional specialisation
External orientation
(customer/market/
product/service)
Configuration
MatrixDual (3,4 etc dimensions) of subordination
Efficiency of functional and effectiveness of divisional structure
High costs of management and high demand on management
Configuration
Info processing capacity
Functional
Divisional
MaatriksCosts
Simple
Task design
Task design
Task design determines the coordination requirement of the work process
Tasks need to be designed (broken down) depending on the strategy and structure and goal of efficiency/effectiveness Function Client typeMarket Etc
Task design
Orderly – highly divisible/high repetive (Corporate/Private loans in a bank)
Can also make divisible by managerial decision (make buffers i.e. No coordination needed)
Complicated – not divisible/highly repetitive (Assembly line, fast food rest)
Precise coordination needed, fast, efficient
Fragmented – highly divisible/low repetetive (sofware development) If there are demands on coordination (by customers, technology etc),
then knotty design is better Knotty – low divisible/low repetitive (New product development in
high tech industry, fast moving consumer goods)
Management style
Management style
Manager – X theory
Leader – Y theory
Maestro – entrepreneur, crisis management
Producer – a farely new category as people who have high uncertainty avoidance (do not want to take risks) tend not to delegate much and want to control people.
Coordination / Control
Coordination / control
Should be taken as general principles or continous variable (not discrete)
How much decision rights to distribute (where is sufficient knowledge to make decisions)?
How much to formalise? Formal rules/procedures and feedback systems Informal rules Strenght of socialisation
Formalisation is also a question of variability (potential to innovate) kept in the organization
Information systemsQuantity of info
Tacitness of info
Information systems
Are the means to move information to desicion makers – these should be designed as a function of information Tacitness Quantity
To transfer tacit information, you need interaction i.e. Face to face communication
To transfer codifiable info, IT systems can do this.
Information systems
Event driven – information meetings, directives etc
Data driven – databases
People driven – Face to face communication. Customized consultation firms, research laboratories are example of people driven model
Relationship driven – use both data driven (quantity) and face to face communication
Incentive systems
Incentives support the infrastructure of the organization Incentives can be different depending on what motivates people recruited
and socialised to the organisation Incentives affect behavior through rewards (positive sanction) Control perspective
Can not observe behavior – reward results Do not know what behavior is proper – reward results
Agency theory Share risk – reward results to align behavior Do not share risk – reward behavior
Skill level People have the knowledge to make decision, the more decision rights they
should have, more risk can be shared (thus also rewards) – a relationship between delegation – incentive system.
Incentive systemsGroup based
ResultsBehavior
Implementation
Top down analysis Organization Relevant level of analysis Analyse Enviroment Analyse Strategy Analyse Structure (Structure follows strategy) Analyse Process and People (task, people,
management style, org climate) Analyse Coordination/Control menchanisms and
Incentives
Implementation
First intra step reconciliation 1) Strategy-Environment 2) Structure (configuration-complexity-geography-knowledge sharing) 3) Process and People (task-people-leadership style-climate) 4) Coordination/Control - Incentives
Second inter step reconciliation
Usually changing one parameter creates further misfits, so gradually many dimensions need changing (think of the change in environment andorganizational effort to change the quadrant!)
The approach needs to be more holistic the more tougher is the selection environment as small misfits affect survival chances more intensely.
Sources of misfits can be either external (environment) or internal (new product innovation, new management hired, mergers/acquisitions, change in strategy, major expansion)
Tänan!
References
Marko Rillo 1.loengu materjalid Burton R.M. & Obel B. (1998) Strategic organizational
diagnosis and design. Kluwer Publisher. Burton R.M., Desanctis G., Obel B. (2005) Orgnizational
Design Canbridge University Press Tushman and Nadler (1978) Information processing as
an integrating concept in organizational design, The Academy of Management Review, Vol 3., No 3., 613-624