Nicolaj Siggelkow

Balancing Search and Stability: Interdependencies Among Elements of Organizational Design

We examine how and why elements of organizational design depend on one another. An agent-based simulation allows us to model three design elements and two contextual variables that have rarely been analyzed jointly: a vertical hierarchy that reviews proposals from subordinates, an incentive system that rewards subordinates for departmental or firm-wide performance, the decomposition of an organizations many decisions into departments, the underlying pattern of interactions among decisions, and limits on the ability of managers to process information. Interdependencies arise among these features because of a basic, general tension. To be successful, an organization must broadly search for good sets of decisions, but it must also stabilize around good decisions once discovered. An effective organization balances search and stability. We identify sets of design elements that encourage broad search and others that promote stability. The adoption of elements that encourage broad search typically raises the marginal benefit of other elements that provide offsetting stability. Hence, the need to balance search and stability generates interdependencies among the design elements. We pay special attention to interdependencies that involve the vertical hierarchy. Our findings confirm many aspects of conventional wisdom about vertical hierarchies, but challenge or put boundary conditions on others. We place limits, for instance, on the received wisdom that firm-wide incentives and capable subordinates make top-level oversight less valuable. We also identify circumstances in which vertical hierarchies can lead to inferior long-term performance.

Speed and Search: Designing Organizations for Turbulence and Complexity

We use an innovative technique to examine an enduring but recently neglected question: How do environmental turbulence and complexity affect the appropriate formal design of organizations? We construct an agent-based simulation in which multidepartment firms with different designs face environments whose turbulence and complexity we control. The models results produce two sets of testable hypotheses. One set pinpoints formal designs that cope well with three different environments: turbulent settings, in which firms must improve their performance speedily; complex environments, in which firms must search broadly; and settings with both turbulence and complexity, in which firms must balance speed and search. The results shed new light on longstanding notions such as equifinality. The other set of hypotheses argues that the impact of individual design elements on speed and search often depends delicately on specific powers granted to department heads, creating effects that run contrary to conventional wisdom and intuition. Ample processing power at the bottom of a firm, for instance, can slow down the improvement and narrow the search of the firm as a whole. Differences arise between our results and conventional wisdom when conventional thinking fails to account for the powers of department heads--powers to withhold information about departmental options, to control decision-making agendas, to veto firmwide alternatives, and to take unilateral action. Our results suggest how future empirical studies of organizational design might be fruitfully coupled with rigorous agent-based modeling efforts.

Change in the Presence of Fit: the Rise, the Fall, and the Renaissance of Liz Claiborne

A new framework that addresses how tight fit among a firms activities affects the firms ability to react to environmental changes is presented. As part of the framework, a new classification sche...

Patterned Interactions in Complex Systems: Implications for Exploration

Scholars who view organizational, social, and technological systems as sets of interdependent decisions have increasingly used simulation models from the biological and physical sciences to examine system behavior. These models shed light on an enduring managerial question: How much exploration is necessary to discover a good configuration of decisions? The models suggest that, as interactions across decisions intensify and local optima proliferate, broader exploration is required. The models typically assume, however, that the interactions among decisions are distributed randomly. Contrary to this assumption, recent empirical studies of real organizational, social, and technological systems show that interactions among decisions are highly patterned. Patterns such as centralization, small-world connections, power-law distributions, hierarchy, and preferential attachment are common. We embed such patterns into an NK simulation model and obtain dramatic results: Holding fixed the total number of interactions among decisions, a shift in the pattern of interaction can alter the number of local optima by more than an order of magnitude. Thus, the long-run value of broader exploration is significantly greater in the face of some interaction patterns than in the face of others. We develop simple, intuitive rules of thumb that allow a decision maker to examine two interaction patterns and determine which warrants greater investment in broad exploration. We also find that, holding fixed the interaction pattern, an increase in the number of interactions raises the number of local optima regardless of the pattern. This validates prior comparative static results with respect to the number of interactions, but highlights an important implicit assumption in earlier work---that the underlying interaction pattern remains constant as interactions become more numerous.

When Exploration Backfires: Unintended Consequences of Multilevel Organizational Search

An enduring belief is that unleashing low-level members of an organization to explore extensively will broaden the exploration conducted by the entire organization. Using an agent-based simulation ...

Misperceiving Interactions Among Complements and Substitutes: Organizational Consequences

Systems composed of activity choices that interact in nonsimple ways can allow firms to create and sustain a competitive advantage. However, in complex systems, decision makers may not always have a precise understanding of the exact strength of the interaction between activities. Likewise, incentive and accounting systems may lead decision makers to ignore or misperceive interactions. This paper studies formally the consequences of misperceiving interaction effects between activity choices. Our results suggest that misperceptions with respect to complements are more costly than with respect to substitutes. As a result, firms should optimally invest more to gather information about interactions among complementary activities--e.g., concerning network effects--than about interactions among substitute activities. Similarly, the use of division-based incentive schemes appears to be more advisable for divisions whose products are substitutes than for divisions that produce complements. It is further shown that system fragility is not necessarily positively correlated with the strength ofthe interaction between choices. While systems of complements become increasingly fragile as the strength of interaction increases, systems of substitutes can become increasingly stable.

Contextuality Within Activity Systems and Sustainability of Competitive Advantage

Executive Overview Research on the interactions among activities in firms and the extent to which these interactions help create and sustain competitive advantage has rapidly expanded in recent years. In this research, the two most common approaches have been the complementarity framework, as developed by Milgrom and Roberts (1990), and the NK-model (Kaufman, 1993) for simulation studies. This paper provides an introduction to these approaches, summarizes key results, and points to an aspect of interactions that has not found much attention because neither of the two approaches is well-suited to address it: contextual interactions, i.e., interactions that are influenced by other activity choices made by a firm. We provide a number of examples of contextual interactions drawn from in-depth studies of individual firms and outline suggestions for future research.

Escaping real (non-benign) competency traps: linking the dynamics of organizational structure to the dynamics of search

Focusing on the effect that organizational structure exerts on organizational search, we show under which conditions a change in structure increases performance even in stable environments. We model five different organizational structures (centralized, decentralized, ambidextrous, hybrid and team-based) and study with the help of an agent-based simulation whether transitions among these structures are beneficial. We find that sequences of structures can achieve higher performance than fixed structures. Alternative structures differ in their competency traps or sets of sticking points, that is the sets of points at which a search process in a given structure will terminate. As a result, a shift in structure may dislodge an organization from its current configuration of choices and provoke further search. Changes in organizational structure effectively differentiate between settings in which remaining at a competency trap is in fact a trap and settings in which remaining at a competency trap indicates competence. In particular, a shift in organizational structure differentially sorts among more or less favorable sticking points, as sticking points that are common to two structures tend to be higher-performing. Thus, behavior that remains inert when structures change will tend to be associated with particularly high-performing sticking points. Moreover, behavior should be dislodged from the prior sticking point, this provides a favorable starting point for subsequent search. Consequently, a shift in organizational structure need not be a response to new environmental contingency, but a mechanism to overcome the challenge of competency traps as well.

Why Focus? A Study of Intra-Industry Focus Effects

In an intra-industry setting, firm-focus is found to be positively correlated with the ability of firms to produce high-value products, while the overall effect of focus on firm performance is negative due to missed demand externalities generated by a broad product offering. In particular, it is shown that U.S. mutual funds that belong to more focused fund providers outperform similar funds offered by more diversified providers. An explanation based on alignment among a providers activities is consistent with this result. Cash inflows into fund providers-a measure related to fund provider profitability-is, however, negatively correlated with focus in fund offerings. Copyright Blackwell Publishing Ltd. 2003.

How Much to Copy? Determinants of Effective Imitation Breadth

It is a common and frequently implicit assumption in the literature on knowledge transfer and organizational learning that imitating practices from high-performing firms has a positive impact on the imitating firm. Although a large body of research has identified obstacles to successful imitation, not much is known about what breadth of imitation is most effective. In this paper, we use a simulation model to explore how context and firm similarity, interdependence among practices, context and firm similarity, and time horizon interact in nontrivial ways to determine the payoffs that arise from different breadths of imitation. The results of the model allow us to qualify and refine predictions of the extant literature on imitation. In particular, the results shed light on the conditions under which increases in imitation breadth, and hence investments that facilitate the faithful copying of more practices, are valuable. In addition, the results of the model highlight that imitation can serve two different functions---mimicking high performers, and generating search by dislodging a firm from its current set of practices---each requiring different organizational routines for its successful implementation.