Organisational Analysis

Transcription

1 Organisational Analysis Final exam 13/01/2017 Nina Meiniche - CPR: Word count: 3461 STU-count: Page count: 9.9 standard pages BSc. International Business and Politics Copenhagen Business School, ) 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) Uzzi (1997) focuses on the how question, e.g. how certain structural arrangements both generate benefits and opportunities, but also puts an organization at risk, rather than the who question, e.g. which position in the network has a privileged access to resources. Analyze and assess the case on the New York fashion industry presented by Uzzi as well as the contribution he makes to organizational theory. 1

2 Introduction The paper is divided into two sections: In the first part, the paper will assess and discuss four concepts, namely rationality, information 1, transactions and networks. In order to do so, the paper will compare and contrast various perspectives and theories from organisational theory (OT). In the second part, the case on the New York fashion industry presented by Uzzi as well as his contribution to OT will be evaluated. In OT, concepts are largely interrelated and numerous views and texts can be taken into account as they speak to each other. However, in order to delimit itself and provide relevant and accurate accounts, the paper will assess a limited number of authors and competing perspectives per concept. PART 1 Rationality Weber (1978) distinguishes three types of authority: legal, traditional and charismatic. Whereas traditional and charismatic authority claim legitimacy on traditional and charismatic grounds respectively, legal authority claims legitimacy on rational grounds as it is based on rules and expertise. Weber is in favour of the most rational and efficient form, legal authority (and in turn bureaucracy as it is the purest type) since it is from a purely technical point of view, capable of attaining the highest degree of efficiency and is in this sense formally the most rational known means of exercising authority over human beings (Weber, 1978, p. 223). Also, Weber (1978, p. 225) puts forward that bureaucratic administration means fundamentally domination through knowledge. This is the feature of it which makes it specifically rational. Thus, Weber also defines rationality in terms of knowledge, which can be reached in bureaucratic organisations. Simon (1997), however, focuses on individual participants and criticises the notion of objective rationality, as it is impossible for the behaviour of a single, isolated individual to reach any high degree of rationality (Simon, 1997, p. 92). Emphasising the processes of decision-making, Simon views rationality as the capability to process all information in order to make informed decisions. He establishes that in order to 1 In this paper, the terms information and knowledge will be used interchangeably. 2

3 be rational, one must know all alternative choices. In reality, only few of these possible alternatives ever come to mind (Simon, 1997, p. 94). Rationality is bounded by 1) information available, 2) capacity of thought, and 3) time available to make decisions. Simon (1997, p. 109) instead calls for planned behavior as the proper means for ensuring rationality at a high level. Essentially, in order to make sufficiently rational decisions we need to integrate behaviour in organisations, as they are fundamental ( ) to the achievements of human rationality in any broad sense. The rational individual is, and must be, and organised and institutionalised individual (Simon, 1997, p. 111). Norms and rules set up by organizations are essential for rational behaviour among individuals. At this point it is relevant to introduce Simon s distinction between the Economic and Administrative man. Whereas the Economic man, assumed in Weber and much economic theory, rests on the notion that human beings are able to make rationally based decisions, Simon (1997, p. 120) points toward the Administrator who is described as a satisficing decision-maker. As human knowledge is limited, people satisfice (that is, they choose between alternatives based on relatively simple rules of thumb ) rather than maximise when making decisions resulting in plausibility rather than accuracy. Thus, according to Simon, we cannot maximise rationality. However, we may be able to satisfy rationality if we organise and integrate behaviour. Thus, Weber and Simon agree that organisations can increase rationality, but Simon suggests a modification to Weber s ideal type. To review the previous paragraphs, Weber, focusing on the formal and structural level, asserts that rationality is the basis of legal authority and domination through knowledge. For Simon, focusing on the individual, rationality is bounded as it is limited by the degree of information available. Thus, the concept of rationality strongly relates to the concept presented in the following, namely information. Information The first conception of information that will be included is that of Taylor (1916). Like Simon, Taylor focuses on individual participants in his work. However, rather than a constraint, Taylor sees information as a source of efficiency through what he denotes scientific management, which involves four principles: 1) gathering knowledge of work processes through time and motions studies, 2) selecting the workmen on a 3

4 scientific basis and focus on their development, 3) bringing together the science and the workmen, and 4) dividing of work in a cooperative manner in which management instructs the workmen (Taylor, 1916). Thus, the key to scientific management is the creation of knowledge as the basis for efficiency and improvement of work processes. Moreover, the model is seen as efficient as it makes everyone better off, and prevents soldiering (in which workers purposely restrict output as they fear unemployment) since workmen will realize that efficiency will satisfy their material interests. Whereas Taylor s conception of knowledge solely involves the formal organisation, Blau (1955) points toward the importance of informal organisation in the development and exchange of information. In his work Consultation Among Colleagues in a Federal Agency, Blau presents an informal pattern of consultation reflecting the result of shortcomings in the formal organisation 2. In the case of the federal agency, a rule that forbid consultation among colleagues hindered generation and exchange of knowledge as agents felt anxious and questioned their competencies making them postpone decisions and submission of cases to their supervisor (Blau, 1955) 3. This resulted in an informal pattern of consultation and a social status hierarchy based on frequency of consultation and competence (Ibid). However, as the informal consultations made agents more confident and knowledgeable, the effect was improved decision-making and better performance for the department. Also, the case demonstrated that material interests are not the only factor that matters to individuals as Taylor and advocates of scientific management would argue. Rather, what really counted was the nature of their work as well as their social status, which was greatly influenced by information in the informal organisation. To sum up, Taylor sees the creation of information in the formal organisation as a source of efficiency as evident in his model of scientific management. Blau, in turn, views the informal organisation as a medium of information generation and exchange. As already mentioned, the concepts of rationality and information are indeed interrelated. Information is in turn closely linked to transactions (the cost thereof in particular) and networks as will be elaborated in the subsequent paragraphs. 2 This can be seen in contrast to Weber s view of bureaucratic (formal) organisation as the most rational and efficient form of organisation. 3 This illustrates Simon s notion of bounded rationality. The inability of the agent s to grasp the future consequences of their decisions lead to hesitation rather than action, demonstrating that individuals are not completely rational. 4

5 Transactions Coase (1937) was a pioneer in employing economic concepts in the study of organisations. As such, Coase tries to answer why organisations exist by looking at transactions and their associated costs. How come firms exist when the market is said to work itself by automatic processes? According to Coase, the operation of a market costs something and by forming an organisation and allowing some authority (an entrepreneur ) to direct the resources, certain marketing costs are saved (Coase, 1937, p. 392). All forms of organisation involve transactions, which in turn involve costs that can be mitigated by organising. Organisations exist because they can do a more cost-efficient job than the market mechanism in mediating economic transactions (albeit to a certain extent). Williamson (1975), building on Coase and his focus on transaction costs, propose under what conditions economic functions and transactions are internalised within the boundaries of organisations rather than performed by market processes cutting across these boundaries. Like Simon, Williamson sees information as a constraint as it results in enforcement costs, and he furthermore build on Simon s concept of bounded rationality (as explained earlier), but includes that people behave opportunistically as man is self-interest seeking with guile (Williamson in Granovetter, 1985, p. 487). In order to mitigate this, transactions that involve uncertain outcomes, occur frequently and with high complexity (in that they place high demands on information) are internalised within firms in what is denoted the Multidivisional Form (M-form). As opposed to the Unitary Form (U-form) in which complicated operations become inefficient, the M-form of organisation serve both to economize on bounded rationality and attenuate opportunism for large and complex organisations characterised by the said transactions (Williamson, 1975, p. 137). In this view, the M- form involving divisionalization of the firm s operations into quasi-autonomous units and separation of operating divisions from the general management is the best form in terms of transaction cost efficiency (Williamson, 1975). Not all agree with this picture of transactions in the economy as will be evident when assessing the concept of networks. Nonetheless, transactions and networks are strongly related as social relations can both support and disrupt the reduction of costs associated with making transactions. This point will be clarified below. 5

6 Networks The concept of networks developed by Granovetter (1985) is focused on embeddedness, which denotes that economic behaviour is embedded in social relations. Granovetter underline an analytical split in the social sciences between an over-socialized account of human nature (in which people s actions are completely regulated by internalised norms and values) and an under-socialized account (in which people behave rationally and self-seeking and are minimally affected by social relations). One might see these views as opposites, but Granovetter states that the two extreme accounts coincide with one another as they both ignore social relations. He argues that 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 particular intersection of social categories that they happen to occupy. Their attempts at purposive action are instead embedded in concrete, ongoing systems of social relations (Granovetter, 1985, p. 487). As such, ones we take social relationships (or embeddedness) into account, we get another picture of the economy and behaviour. The established social relations are advantageous as they provide access to valuable information. The information generated by social relationships is superior because: 1) it is cheaper, 2) it is more accurate and fruitful, 3) there is a reciprocal economic incentive to provide trustworthy information, and 4) economic relations increase with social content (Granovetter, 1985). According to Granovetter trust is a way to reduce the enforcement costs that result from incomplete information in market activities. Trust does not automatically follow from social network, and trust can increase cheating behaviour and make actors more vulnerable, but Granovetter (1985) asserts that more trust can be gained by having a network than not in turn indicating that social network is a way of reducing transaction costs. Granovetter s views can be contrasted with those of Williamson, who understands behaviour as resulting from more or less atomized, rational and self-seeking individuals (Granovetter, 1985). Following Williamson's argument, transactions would have to be internalised within the boundaries of firms as transactions grow in complexity in order to reduce transaction costs. However, this would only hold true if people where strangers to one another without social relations. According to Granovetter (1985, p. 502) even with complex transactions, a high level of order can 6

7 be found in the market that is across firm boundaries and a correspondingly high level of disorder within the firm. Whether these occur ( ) depends on the nature of personal relations and networks of relations between and within firms. When looking at concrete patterns of social relations in economic markets, Granovetter found that even small independent firms where carrying on very complicated transactions with one another outside the boundaries of organisations. Such small firms are able to do this because of social networks connecting them. Thus, in relation to transactions, Granovetter emphasises that transactions occur through social relations, rather than through autonomous market structures. Drawing on Granovetter, Burt (1992) asserts that social networks, and particularly individual s positions in these networks, matter in economic activity. Burt observed actors with higher levels of social capital enjoy competitive advantages over other actors with the same levels of financial and human capital (Burt, 1992). Social capital, in turn, is most valuable for the individual in terms of competitive advantage if he or she has a network with many loose, non-redundant contacts and structural holes, which denotes the gaps between non-redundant contacts that give access to new rather than over-lapping information. As Burt (1992, p. 49) notes, players with contact networks 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. The concept of networks is inherently linked to transactions (as exemplified above by the discussion of the views in Williamson and Granovetter) as well as information. For example, Blau s work on the informal pattern of consultation among colleagues draws resemblance with network theory as it reveals the importance of social relations when it comes to the exchange and generation of knowledge. Moreover, the link between networks and information is evident in Burt s work as he points out that access to information in networks as well as the timing and transfer of it play a vital role in determining opportunities and outcomes for individuals (Burt, 1992). The network links to other concepts are numerous as will become apparent in the succeeding section. 7

8 PART 2 In this section, the case on the New York fashion industry presented by Uzzi will be evaluated. First, the case will be described. Second, as the two parts of the paper are thematically related, concepts and theories presented in the previous section will be employed in practise to assess the contribution Uzzi makes to OT. The case presented by Uzzi (1997) is a field study of 23 firms in the apparel industry in New York, seeking to advance network analysis by looking at networks in the context of organisations and their external environment. The study was conducted in a competitive market with low start-up costs and barriers to entry and thus presented an industrial setting in which social ties according to economic theory should play a minimal role in economic performance (Uzzi, 1997, p. 38). However, what Uzzi found was quite on the contrary. Indeed, social ties and the embeddedness did matter. Emphasising how and when embeddedness works (and when it does not), Uzzi distinguishes between arm s length ties and embedded ties. Arm s length ties are characterised by formal, legal relationships with lack of reciprocity and focus on narrow economic matters. As one interviewee put it: a deal in which costs are everything (Uzzi, 1997, p. 45). Embedded ties, on the other hand, are characterised by trust, collaboration and what Uzzi refers to as fine-grained information transfer (Ibid). Trust replaces monitoring devices and calculation of risk, collaboration replaces the price system in favour of joint-problem-solving arrangements (which is seen as a more effective way of coordinating transactions as they provide mutually beneficial exchanges), and lastly, fine-grained information transfer, which involves exchange of proprietary, non-price, and tacit information between two contacts who know each other well, replaces mere price and quantity data exchanged in arm s length ties (Ibid) 4. By and large, the study revealed that embeddedness offers clear advantages for firms as it promotes economies of time, integrative agreements, Pareto improvements in allocative efficiency, and complex adaptation (Uzzi, 1997, p. 35). However, the case 4 Embedded ties have effects on the search processes of the firm as well, which can be related to Simon s notion of the satisficing decision maker, who is limited in capacity of thought. However, Uzzi includes that search processes also depend on the type of social ties maintained by the actor (Uzzi, 1997, p. 50). 8

9 also demonstrated that there is a paradox of embeddedness. Embedded networks solely lead to positive outcomes to a certain extent as too high levels of embeddedness can derail economic performance by making firms vulnerable to exogenous shocks or insulating them from information that exists beyond their network (Ibid). Embeddedness can turn out disadvantageous in three situations: 1) if a central network player exits, 2) if markets are rationalised by institutional forces, or 3) if the network is over-embedded. According to Uzzi (1997), the key is to find the middle way; the organisation should link to its network by a mix of embedded ties and arm s length ties as the two types provide different benefits. While arm s length ties serve to avoid total isolation from new opportunities and market demands, the embedded ties serve to strengthen the network benefits. The case of the New York fashion industry presented by Uzzi contributes to the preceding part of the paper and OT in general - in various ways. Whereas Taylor focused on information in terms of individual s who generate internal efficiency through scientific management, Uzzi treats information as both organisational and social. As already touched upon, Uzzi differentiates between embedded ties and arm s length ties. When an economic transaction is characterised by arm s length ties, information is limited to price and quantity data. However, when embedded ties characterize the exchange, the advantages of fine-grained information transfer come to the fore. For example, a manufacturer in the study stated that he passes on critical information about hot-selling items to his embedded ties before the other firms in the market know about it, giving his close ties an advantage in meeting the future demand (Uzzi, 1997, p. 46). Thus, by using Uzzi s framework, a different conception of knowledge appears, namely one in which knowledge is more than a source of efficiency within the firm, but also generates competitive advantages for companies with embedded inter-firm relations. The network benefits of information revealed in Uzzi can further be seen as a contribution to the work of other network theorists, which in turn also reveals that networks can be assed from different levels of analysis. Where Burt (1992) outline which individual position in the network has a competitive advantage (the position of brokerage ), the focus in this case is rather on structural network analysis, that is how particular structures of organisation networks can both be positive and negative 9

10 for the organisation. Thus, Burt s assertion that there are opportunities everywhere, new jobs, openings, interested buyers. The information benefits of a network define who knows about these opportunities, when they know, and who gets to participate in them (1992, p. 13) can be developed by taking it to the structural level implying the importance of quality ties within as well as in the overall network structure. In turn, this is also evident in Granovetter (1985) as he, like Uzzi, disproves the neglect of social ties in economic theory, where transactions is said to happen as a result of rational calculations of individual gain, and emphasises that transactions indeed occur through social networks in turn generating valuable information benefits. However, Uzzi extents this with his more structural and concrete account of how these transactions take place in inter-firm networks. Uzzi reveals that in order to grasp what shapes organisations and their economic transactions it is important to include social relations. In the case of the New York apparel industry, Uzzi disclosed that the ideal structure of the network is a middle way between embedded and arm s length ties. One of the main contributions Uzzi and network theory in general make to OT is the connection of market allocation processes and social mechanisms. In a world where the economy is largely institutionalized, this is of pivotal importance. Conclusion This paper has addressed core concepts, models and theories of OT and how they can be put into practise. To do so, the concepts of rationality, information, transactions and networks have been assessed and discussed by drawing on competing organisational models and theories and lastly applied to the case of the New York fashion industry presented by Uzzi. As evident throughout the paper, the concepts touched upon are interrelated and thus cut across the different models and theories of OT. First of all, rationality can be defined in terms of knowledge (or lack thereof) as shown by Weber and Simon. Secondly, as put forward by Williamson, the concept of information is in turn closely linked to transactions. Lastly, transactions can be seen in relation to networks as social relations can both benefit and derail the quest of minimizing the costs associated with making transactions. 10

11 Taking implications of network theory further, one could wonder what the drawbacks of getting too dependent on social relations are at the very aggregated level. If very embedded networks at the top dominate a country, those in the elite enjoy exclusive advantages and are hardly replaced because of their strong social ties. This, in turn, can result in very limited sources and make it difficult to integrate people from outside the superior social network. Do embedded ties generate social closure? 11

12 References Blau, Peter (1955). Consultation Among Colleagues, Ch. 9 in Dynamics of Bureaucracy, University of Chicago Press, pp Burt, Ron (1992). Structural Holes, Harvard University Press, Ch. 1, The Social Structure of competition, pp Coase, R. (1937). The Nature of the Firm, Econometrica, pp Granovetter, Mark (1985). Economic action and social structure: The problem of embeddedness, American Journal of Sociology 91: Simon, Herbert (1997). Administrative Behavior, 4th edition. 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. ASQ, pp Weber, Max (1978). The types of legitimate domination in Economy & Society: An Outline of Interpretive Sociology, vol.1. University California Press, pp Williamson, Oliver E. (1975). Markets and Hierarchies. Free Press, pp