Choice Interaction and Organizational Structure

36 Pages Posted: 10 Sep 2001

See all articles by Jan W. Rivkin

Jan W. Rivkin

Harvard Business School, Strategy Unit

Nicolaj Siggelkow

University of Pennsylvania - Management Department

Date Written: July 3, 2001

Abstract

We examine how a firm's formal 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.

Keywords: Organizational Structure, Interdependent Decisions, Coordinating Mechanisms, Exploration and Stability

JEL Classification: D23, D83

Suggested Citation

Rivkin, Jan and Siggelkow, Nicolaj, Choice Interaction and Organizational Structure (July 3, 2001). Strategy Unit Working Paper No. 02-05. Available at SSRN: https://ssrn.com/abstract=282641 or http://dx.doi.org/10.2139/ssrn.282641

Jan Rivkin

Harvard Business School, Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617-495-6690 (Phone)
617-495-0355 (Fax)

Nicolaj Siggelkow (Contact Author)

University of Pennsylvania - Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States
215-573-7137 (Phone)
215-898-0401 (Fax)

HOME PAGE: http://www-management.wharton.upenn.edu/siggelkow/

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