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; hannesveskimae@gmail.com

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