Choice Interaction and Organizational Structure
Jan Rivkin
jrivkin@hbs.edu
(joint work with Nicolaj Siggelkow)
We examine how a firm‚s organizational structure
affects its ability to cope with interdependent decisions. An agent-based
simulation, in which firms struggle to discover good sets of decisions, allows
us to examine four coordinating mechanisms that have rarely been analyzed
jointly: the grouping of related decisions under a single subordinate, a
vertical hierarchy that reviews proposals from subordinates, firm-level incentives,
and managers who are able to process more information. We find that
organizational structure affects long-term performance by influencing the
number and nature of „sticking points‰configurations of choices the organization
will not change. We identify each of the four coordinating mechanisms
as a force that either encourages firms to explore a broad set of alternatives
or stabilizes firms around existing choices. Successful firms strike
a balance between exploration and stability. The need to balance exploration
and stability generates interdependencies among the coordinating mechanisms.
As a result, firms sometimes benefit from seemingly harmful features: avoidable
decision interdependence between departments, a passive CEO, or subordinates
of limited ability. We further examine how appropriate organizational
design depends on the underlying pattern of interaction among decisions.
When interactions are pervasive, successful organizations employ coordinating
mechanisms that promote broad exploration.