Hierarchies, Polyarchies and Hybrids: How Organizational Hierarchies Transform Risky Innovations into Performance -A Computer Simulation

Abstract

This paper investigates the mutual interdependencies between organizational architectures, decision making and performance. Through applying agency-based Monte-Carlo simulations, we reveal how hierarchical, polyarchical and hybrid structures aggregate innovations on the micro level into performance. By considering three different initial project portfolios, we analyze which organizational architectures may be superior regarding selecting good projects, avoiding collective myopia and overcoming organizational inertia. Results reveal that in a risky environment firms with rigid hierarchies can achieve a much higher performance than horizontally-organized firms even if the quality of the decision-making by managers is poor. Results also highlight the dangers involved in erecting a more hybrid organization because such organization might become over-challenged and unable to handle risky innovations adequately. Finally, we discuss how firms could be structured to increase performance and to minimize risks.  

Keywords: Project Decision, Innovations, Organizational Structure, Organizational Architecture, Performance, Formal Model, Monte-Carlo Simulations, Regression Analysis

JEL Classification: O32, O33, R12, R58, L53