Bounded Rationality and the Search for Organizational Architecture: An Evolutionary Perspective on the Design of Organizations and Their Evolvability

58 Pages Posted: 15 Oct 2004

See all articles by Sendil K. Ethiraj

Sendil K. Ethiraj

University of Michigan - Stephen M. Ross School of Business

Daniel Levinthal

University of Pennsylvania - Management Department

Abstract

The problem of designing, managing, and coordinating the efforts of different parts of complex organizations is central to the management and organizations literature. A central element, in turn, of Simon's (1962) argument, which provides a foundation for understanding complex organizations, is that the fundamental properties of complex systems are hierarchy and near-decomposability. These dual properties are argued to enhance the evolvability of such systems. A critical question, however, is whether boundedly rational managers will be able to identify and uncover some true, latent structure of hierarchy and decomposability. This question is intimately related to broader issues of concern to organization theory including the usefulness and value of design efforts and the implications of organizational change processes. In an effort to unite Simon's ideas about complexity with mainstream organization theory, we address three research questions: (1) how does the architecture or structure of complexity affect the feasibility and usefulness of boundedly rational design efforts; (2) do efforts to adapt in the space of organizational forms complicate or complement the effectiveness of first-order change efforts; (3) to what extent does the rate of environmental change nullify the usefulness of design efforts. We employ a computational model of organizational adaptation to examine these questions. Our results, in identifying the boundary conditions around successful design efforts, suggest that the underlying architecture of complexity of organizations, particularly the presence of hierarchy, is a critical determinant of the feasibility and effectiveness of design efforts. We also find that design efforts are generally complementary to efforts at local performance improvement and identify specific contingencies that determine that extent of complementarity. We discuss the implications of our findings for organization theory and design and also the burgeoning literature on modularity in products and organizations.

Keywords: Complex systems, Organization design, Modularity

JEL Classification: D21, D23, L20

Suggested Citation

Ethiraj, Sendil K. and Levinthal, Daniel A., Bounded Rationality and the Search for Organizational Architecture: An Evolutionary Perspective on the Design of Organizations and Their Evolvability. Available at SSRN: https://ssrn.com/abstract=604123

Sendil K. Ethiraj (Contact Author)

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan Street
R4442
Ann Arbor, MI 48109
United States
734-764-1230 (Phone)

Daniel A. Levinthal

University of Pennsylvania - Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States
215-898-6826 (Phone)
215-898-0401 (Fax)

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