ORGANIZATIONAL ANALYSIS FINAL

Transcription

1 ORGANIZATIONAL ANALYSIS FINAL 1. Describe and explain the concepts of rationality, information, transactions and networks as well as the ways in which these concepts are employed in different organizational theories. 2. Analyze and assess the case on the New York fashion industry presented by Uzzi as well as the contribution he makes to organizational theory. Christoffer Cirillo Copenhagen Business School International Business and Politics STU: Organizational Analysis Final 2017 Standard pages: 9,9 13/01/2017

2 Introduction This paper will take on a two-fold structure. First, it will describe and explain the concepts of rationality, information, transactions and networks, comparing the employment of each in relevant theories. Each will be treated separately, but due the closely intertwined implications of each concept I will seek to continuously bind them together, before briefly concluding on their role in organizational analysis. Second, the paper will analyze and asses the case on the New York fashion industry by Uzzi (1997) and how it is builds on and contributes to organizational theory. Part I Central Concepts and Theories Rationality The concept of rationality is central in the study of organizations. It is sensible to start off any consideration of rationality with Weber (1911), where after I will consider the complementary work of Taylor (1916) and the revisions of Simon (1997). Weber s work is mostly on the structural level and outlines bureaucracy, which he considers the naturally developed shape of modern, efficient organizations. It is characterized by professionalism, rules, hierarchy, legal authority, from which it drives its rational character (Weber, 1911, p. 196). As Weber states, Bureaucracy has a rational character: rules, means, ends, and matter-of-factness dominate its bearing bureaucracy has destroyed structures of domination which had no rational character (Ibid., p. 244). His work assumes the economic man, also found in neoclassical economics, whose decisions and actions are founded on a full or instrumental rationality. This allows actors to make sound and logical decisions based on full, panoramic knowledge, which allows for maximization, whether of utility or profit. Weberian bureaucracy was considered the future of society and the pinnacle of rational behavior. A complementary perspective on rationality can be seen in Taylor s The Principals of Scientific Management (1916), which mostly deals with the individual level. In his study the worker has a separate rationality from the foreman, for example engaging in the practice of soldiering, deliberately slowing down ones work to avoid consequences such as a lower piece-rate (Taylor, 1916, 1

3 p. 66). The new rationality of the management which Taylor describes is based on a scientific approach, whereby the quest for efficiency are gained through information collection, division of work and standardization. Taylor theorizes that scientific management eliminates the practice of soldiering and mends the gap in rationality between workers and managers, as the surplus is made so great both sides will stop their fighting that there is no occasion to quarrel (Ibid., p. 68). Weber and Taylor have similar dispositions towards the notion of rationality and economic man and both believed that the one best way of organizing which they proposed would supplant all other types of organization. They both highlight division of labor, supervision, standardization and hierarchy to achieve efficiency in a rational manner. Per Scott (1987), they can be categorized as closed rational systems, in which: i) Organizations are independent of their environments, ii) actors share the goals of the organization, and, perhaps most importantly, iii) actors are considered fully rational in their actions. The concept of rationality is augmented by Simon in his work on decision-making, where he argues as his central thesis that it is impossible for an individual to reach any high degree of rationality (Simon, 1997, p. 183). Simon instead introduces the concept of bounded rationality, where the rationality attainable for an actor or organization is constrained by three overarching factors, i) incomplete knowledge, ii) imperfect anticipation of the future and iii) a lack of choice among all alternative behaviors (Ibid., p. 93). As Simon states, the number of alternatives he must explore is so great, the information he would to evaluate them so vast, that even an approximation to objective rationality is hard to conceive (Ibid., p. 92). Simon thus rejects the previous model of a maximizing economic man and introduces the administrative man, who satisfices, or makes due, through approximations. However, Simon agrees that we can achieve higher rationality, albeit still bounded, through organization. This is due to organizations assisting in directing attention and planning behavior. As Simon states, Organizations are fundamental, then, to the achievement of human rationality in any broad sense. (Ibid., p. 111). Another key point is that intuitive behavior is not necessarily irrational, but can be based on a huge catalogue of expert knowledge and is equally rational with slower decisions, quite like a chess player being able to play many games at once with only minimal decrease in ability (Ibid.). Ultimately, rationality is considered bounded, both individually and in organizations, which is closely connected to information. 2

4 Information The second concept considered is information, which is closely related to knowledge. First, I think it is prudent to draw a somewhat subtle distinction between the two. The paper will consider knowledge as a step further than information, which is to say that information is a prerequisite. As such, access to information gives us the opportunity to develop knowledge and can be considered a broader term. Having drawn this subtle distinction, I will start by considering how information is employed in different theories of organizational analysis. In Taylor (1916), as mentioned, information is the basis for creating a more efficient organization through the scientific method and in Weber (1911) as the basis for a professionalized hierarchy. The informational requirement in both can be said to be based on rules and routines and they assume high levels of information. Simon (1997), on the other hand, considers limited information as a constraining factor, leading to his notion of bounded rationality, as explored above. These theorists largely consider information in a symmetric sense, but the notion of asymmetric information is more concretely set forward by Robert Michel. Information is of the utmost importance in organizational analysis partly because it carries with implications of knowledge and power. Robert Michel, described in Lipset (2009), highlights how any bureaucracy or large organization is subject to the iron law of oligarchy, whereby the few at the top will dominate the organization with their own corrupted goals and status quo bias. The insurmountable advantage of the leaders stems in part from an asymmetric distribution of information: They are privy to much information which can be used to secure assent to their programme (Lipset, 2009, p. 16). As such, large scale organizations give their officers a near monopoly on power (Ibid, p. 16). Thus, if we accept the broad definition of rational organizations from Scott (1992), where the purpose is the pursuit of relatively specified goals, asymmetric information is crucial, as it can mean a complete derailment of the stated purpose of the organization. This highlights how information is central in understanding organizations. Another significant take on information can be found in Peter Blau (1995), who researches how we use informal structures to by-pass the potentially information flow-constraining formal rules of organizations. Blau, and the human relations strand of the field, emphasizes social aspects and informal organizations more than earlier theorists, signifying a move to natural rather than simply 3

5 rational systems. In his study of a federal agency, Blau observes how the agents by-pass the rule stating they must consult only their supervisor for help by requesting information from their colleagues to avoid admitting ignorance. Blau observed that the informal consultations and exchanges of information between agents greatly contributed to the effective operations (Ibid, p. 115). This highlights how the Weberian bureaucracy can be stifling in its rigidity and formulization, which is why informal organization is always present and can aid the effective distribution of information. Blau is also closely related to the concept of transactions, as the consultations in the federal agency can be considered an exchange of values; both participants gain something, and both have to pay a price, which leads us to the next section. Transactions The third central concept of organizational analysis to be considered is transactions. Transactions is a broad concept, but a good place to begin is Coase (1937), who introduces transaction costs and the economic approach to organizational analysis. Coase seeks to explain why firms arise, on the organizational level, even though we already have the market to conduct transactions. The answer lies in the costs associated with the market and using the price mechanism, such as searching, negotiating, and enforcement costs (Ibid.). The point where it becomes useful to create a firm is when the market fails to be the most efficient way of conducting transactions, as Coase states: The operation of a markets costs something and by forming an organization and allowing some authority to direct the resources, certain marketing costs are saved (Ibid, p. 392). However, as Coase argues, this does not mean we will eventually have a single enormous firm, there are decreasing returns to the entrepreneur function which limits the expansion of firms (Ibid., 394). As such, a firm will expand until the costs of organizing an extra transaction equals the cost of the market or another firm (Ibid., p. 404). Oliver Williamson (1975) builds upon Coase s theory and the economic approach with a formal development of transaction-costs economics (TCE), which draws on bounded rationality, uncertainty, small-numbers bargaining and opportunism (Perrow, 1986, p. 237). These factors together can lead to market failures due to opportunistic behavior, which is why Williamson argues that a reduction of transaction costs can be achieved by vertically integrating, i.e. buying out a supplier who may be creating hold up problems, which in turn explains growing firms (Williamson 1975; Perrow 1986). Another way Williamson theorizes lowering of transaction costs is the move 4

6 from U-forms, separate division under the same CEO, to M-forms in internal organization, which disperse responsibilities to quasi-autonomous operating divisions in large firms (Williamson 1975). This allows firms to economize on bounded rationality and attenuate opportunism, thus lowering TC s. This is also the shape we see in large firms today. TCE signifies a move to open rational systems, per Scott (1998), following the closed systems discussed earlier. Ouchi (1980) clarifies the transaction cost based approach. In fact, Ouchi defines organizations as any stable pattern of transactions between individuals or aggregations of individuals (Ibid., p. 140), ascribing a central role to transactions, both on the individual, organizational and interorganizational level. Ouchi theorizes that three different organizational structures, i) markets, ii) bureaucracies and iii) clans, are best suited for completing transactions based on different normative and informational requirements (Ibid.). As Coase and Williamson before him, this highlights how markets and bureaucracies are the most efficient structure for transactions depending on the situation. The new addition here is the clan structure, which can minimize transaction costs through a reduction in opportunism and information asymmetry, achieved through a high degree of socialization and thus shared norms and values (Ibid.). Ouchi s point can be summarized as the notion that Bureaucracy, market and clan organizations exist because each of them, under certain conditions, offer the lowest transactions cost (Ibid., p. 140). The clan structure allows for more trust due the shared norms and values which reduce transaction costs, a concept which can carry us to the next central concept. Networks The last concept of organizational theory described and explained is networks. Network theory is a relatively new branch and part of the shift towards open systems, and can be used to study both individuals, organizations and fields of organizations. A good place to begin an account is the work of Granovetter (1985), who breaks with what he considers under- and oversocialized views on organizations and economic life. The undersocialized view is expounded by economic theorists such as Williamson, and assumes everyone is a stranger in the complex and Hobbesian economy. Granovetter critiques this notion, which fails to consider social networks that allow even small firms to carry out very complicated transactions and places too much emphasis on organizational form. 5

7 Granovetter (1985) thus considers the impersonal market a myth and highlights the importance of trust. On the other hand, we have the oversocialized view, which holds the mechanical, structuralist view that once we know an individual s class or some other trait the behavior is assumed to be virtually automatic (Ibid, p. 486). However, these two extremes are not opposites, rather, they have the key commonality of ignoring social relations what Granovetter calls embeddedness. In Granovetter s theory (1985, p. 487), Actors do not behave or decide as atoms outside a social context, nor do they adhere slavishly to a script written for them by the intersection of social categories they are instead embedded in concrete, ongoing systems of social relations These social relations, a person s network, provides optimal information and produces trust, which, however, also leaves actors vulnerable (Ibid, p. 492). This will be expanded upon in the second section of the paper. Granovetter (1973) gives another crucial concept of network theory in The Strength of Weak Ties, which I will explain in tandem with Burt s (1992) Structural Holes. The concept of weak ties describes the ties connecting separated clusters of dense networks, which have strong ties in them. Granovetter s point is that these weak ties are actually quite powerful, in that they empirically offer you the most new info and opportunities (Ellersgaard 2016). This point is picked up and elaborated on by Burt (1992), who emphasizes the importance of having many weak ties, and therefore social capital. He introduces structural holes, which are powerful positions of brokerage between networks. Having many structural holes in your network means that you avoid too many redundant contacts, who provide the same information, instead branching out and accessing new information. Burt concludes that players with optimized for structural holes enjoy higher rates of return on their investments because they know about, have a hand in, and exercise control over, more rewarding opportunities (Ibid, p. 49). This highlights information again, and also how closely tied to bounded rationality it is well-designed networks can expand rationality through more information. The dangers of embeddedness and new contributions to network theory will be explored in the second part of this paper on Uzzi (1997). The first part of this paper has defined and explained the central concepts of rationality, information, transactions and networks and contrasted their employment in various theories of 6

8 organization. It is apparent that the concepts are closely intertwined and that they traverse the progression in the field of organizational study. Rationality and decision-making is very much contingent on information, which in turn is a central aspect of theories on transactions. The second half of this paper will deal with similar themes by analyzing and assessing the case presented by Uzzi (1997). Part II The case of Uzzi (1997) Brian Uzzi s (1997) study on the New York fashion industry provides an account of the nature of transactions between the 23 firms studied and their structural networks. I will start by analyzing and assessing his findings on the opportunities and risks associated with embeddedness and then discuss how these build upon and add to key concepts and central theorists from the first section of the paper. Uzzi s findings show what he deems to be a paradox of embeddedness the fact that the positive effects rise to a threshold after which embeddedness can derail economic activity, as they become vulnerable to certain shocks (Uzzi, 1997, p. 35). This is a direct addition to the network theories covered before. First, I will consider these positive effects, or assets, of embedded ties in transactions, which are close, trusting, and cooperative relationships, contrasted with the other distinct type of relationship called arm s length ties, which are cold and more in line with atomized market relationships as seen in Coase and Williamson (Ibid., p. 41). The assets provided by embedded ties over arm s length ties are plentiful,: i) Trust enriches the firm s opportunities, resources and flexibility, ii) The ties provide quick, exclusive, fine-grained and holistic information, which is often more useful than price-info, and iii) joint problem-solving helps firms work through problems, rather than simple exit-responses, which promotes learning and innovation while reducing errors (Ibid., pp ). Second, the negative aspects - embedded ties do not exclusively provide assets, certain paradoxical liabilities can be identified where embedded firms are more vulnerable than market-oriented firms; e.g. when: i) A core network player unexpectedly leaves the network, ii) Some institutional force rationalizes markets, such as when a conglomerate bought the NY retailers, and iii) An echo-chamber of information develops in overly embedded, redundant networks, sequestering them from external information (Ibid., pp ). Thus, to achieve the best 7

9 of both worlds, the fashion firms would be wise to mix and match the two types of ties. Network structures that integrate arm s length and embedded ties optimize an organizations performance potential, whereas having solely one of the two increases the rate failure and increases vulnerability (Ibid., pp ). Uzzi s findings build and expand upon the central concepts of organizational theory covered in the first half of the paper and contributes new findings as well. In terms of rationality, Uzzi employs terms from Simon (1997), such as satisficing, highlighting bounded rationality. The notion that Actors follow heuristic and qualitative decision rules rather than intensively calculative ones is very much in sync with Simon s description of intuitive decision-making (Uzzi, 1997, p. 61). However, Uzzi also contributes a new type of expert rationality to fit his embedded network theory, which is Neither purely rational or boundedly rational, but expert, which fits the unique logic of the embedded model (Uzzi, 1997, p. 63). Thus, Uzzi can be shown to build directly on and modify the concept of full rationality from Weber and Taylor and the bounded rationality of Simon. The concepts of information and transactions are also crucial aspects of Uzzi s work. His account of information is more nuanced than the early theorists such as Weber and Taylor, who look at efficiency, and Michels, who looks at power, and can be most aptly compared to the account given by Blau (1955). Blau works on a different level of analysis though, where he considers early, intraorganizational, informal networks and transactions of information between them, conversely, network theory can consider the inter-organizational level of transactions and ties. Both observe and describe the efficiency and benefits attained by informal information exchanges, one bypassing stifling, rigid formal structure and the other by-passing the noisy price information of atomized markets. Precisely transactions are central in Uzzi s work, as he deals with exchanges in economic life and highlights his differences from Williamson (1978), quite like network theorists before him. TCE and other economic approaches are characterized as insufficient (Uzzi 1997). The subjects interviewed all heavily emphasize trust in transactions with embedded ties, differing from the cost-based, selfseeking market account of Coase and Williamson, where monitoring and contracts play major parts. TCE is critiqued for its focus on dyadic relations while ignoring of social relations and for having bias towards opportunistic rather than cooperative relations (Ibid., p. 37). Market enforcements are made redundant in embedded ties through mutual trust as the primary 8

10 governance structure, although the terms are still applicable in the arm s length ties. Uzzi also builds on Ouchi (1980) whose account of highly-socialized and trust-based clan structures share these similarities with the Uzzi s concept of embedded ties, albeit on the intra-organizational level. Ouchi s clan model is also considered most efficient for exploratory firms due its unique socialized character, while Uzzi states that NY fashion industry with its specific characteristics such as time sensitivity may have proven especially conducive to embedded ties (Ouchi, 1980; Uzzi, 1997, p. 64). Uzzi explicitly states that if the trend towards smaller, flatter, more connected organizations continues, networks could become an important way of organizing, which is a structure very similar to clans, networks could become a more important way of organizing, suggesting a synergetic effect (Ibid., p. 64). Uzzi can then be said to offer contributions to the concepts of rationality, information and transactions. Of course, Uzzi also shares theoretical ground with and explicitly builds on the works of Granovetter (1973; 1985) and Burt (1992). Uzzi agrees on the importance of social capital, as mentioned in Burt (1992), and he picks up on Granovetter s work of embeddedness, but Uzzi himself states that he adds complexity to both these views (Uzzi, 1997, p. 63). Firstly, Burt s theory, which assigns tremendous value to the existence of structural holes, is made more nuanced by the explicit differentiation between embedded and arm s length ties, which helps further understanding of networks by emphasizing the importance of quality and management of each relationship to access opportunities(ibid.). Both Uzzi and Burt can be said to deal with the how question of network theory, as opposed to who, but where Burt emphasizes calculating rates of return based on the sheer number of structural holes, Uzzi details how different configurations of embedded and arm s length ties provide opportunities and risks. Secondly, Uzzi agrees with Granovetter (1985) that much of economic life is embedded in social relations, but he also nuances Granovetter s work. Uzzi reaches somewhat of a more moderate conclusion than Granovetter, as Uzzi highlights the existence and importance of atomistic transactions as well, even though he assigns the most importance to socially embedded transaction, siding with Granovetter over neoclassical approaches. Uzzi (1997), then, offers contributions of nuanced value to network theory. 9

11 Where the first part of this paper explicitly defined and explained the central concepts of rationality, information, transactions and networks and their employment, the second part analyzes and assesses the case of the NY fashion industry by Uzzi (1997). I highlight how he builds on the central concepts as they are employed in both earlier and contemporary theories, and how he contributes to both network theory in particular and organizational study as a whole through his findings. This further underlines the natural progression in the field of organizational study and the intertwined nature and progression of the central concepts. 10

12 Bibliography Blau, Peter (1955): Consultation Among Colleagues, Ch.9 in Dynamics of Bureaucracy, Chicago: University of Chicago Press, pp Burt, Ron (1992): Structural Holes, Cambridge & New York: Harvard University Press. Ch 1, The Social Structure of competition, pp Coase, R. (1937): 'The Nature of the Firm', Econometrica, pp Ellersgaard, C. (2016). Network Theory. Granovetter, Mark (1985): Economic action and social structure: The problem of embeddedness, American Journal of Sociology 91: Lipset, Seymour Martin (2009): Introduction to Robert Michels Political Parties, in Robert Michels (2009) [1915]. Political Parties. New Jersey: Transaction Publishers Ouchi, William (1980), Markets, Bureaucracies and Clans, Administrative Science Quarterly 25: Pp Scott, W. Richard (1998), Combining the Perspectives in Organizations: Rational, Natural and Open Systems, 4th Edition, Englewood Cliffs, NJ: Prentice-Hall. Pp Simon, Herbert (1997): Administrative Behavior, 4th edition. New York: Free Press. Ch.5, pp Taylor, Frederick Winslow (1916): 'The Principles of Scientific Management', Bulletin of the Taylor Society, pp Uzzi, Brian (1997): Social Structure and Competition in Interfirm Networks: The Paradox of Embeddedness. In ASQ, pp Weber, M. (2009[1911]) Bureaucracy in H.H. Geertz and C. W. Mills (eds) 2009: Essays in Sociology. NY: Routledge pp

13 Weber, M. (1978): The types of legitimate domination' in Economy & Society: An Outline of Interpretive Sociology, vol.1. Oakland: University California Press, pp Williamson, Oliver E. (1975) Markets and Hierarchies. New York: Free Press, pp on the multidivisional structure 12