Organizational Analysis (OA)

Transcription

1 Organizational Analysis (OA) Final exam Anna-Sophie Hartvigsen International Business and Politics Copenhagen Business School 13 th of January, 2017 Character count: Pages: Introduction 2. Part Rationality 1.2 Information 1.3 Transactions 1.4 Networks 3. Part 2 4. References Table of Contents 0

2 Introduction This paper will be divided into two parts. The first part presents the intellectual foundation of OA by answering the following question: 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. The question will be answered by drawing upon Weber, Taylor, Simon, Michels, Blau, Coase, Granovetter, Uzzi and Burt. Due to the limited scope of this assignment, maximum 3 theorists will be used to explain each concept. It is important to note, that the four concepts complement each other and can be interrelated. Consequently, they cut across the texts. However, the theorists will only be dealt with in relation to the concept they are used to explain. The second part of this paper will analyze and assess the case on the New York fashion industry presented by Uzzi as well as the contribution he makes to organizational theory. Part Rationality This paper will start by discussing the concept of rationality at an organizational level. According to the German sociologist Max Weber, bureaucracy and rationality are correlated. He describes organizations as collectivities oriented to the pursuit of specific goals and build up by an administrative staff (Weber 1978: 213). The members of the administrative staff are bound to obedience to their superior by different motives. It is the quality of these motives as well as the type of authority claimed by the superiors that determine the type of domination (Weber 1978: 213). Weber highlights three pure types of authority that these legitimate dominations can be based on: Legal, traditional and charismatic. The validity of the claims to legitimacy is based on rational, traditional and charismatic grounds, respectively. According to Weber, the purest type of authority is legal authority because it is based on rational grounds. This authority rests on a belief in the legality of enacted rules and the right of those elevated to authority under such rules to issue 1

3 commands (Weber 1978: 220). This makes rational authority legal authority and obedience is owed to the legally established impersonal order. It extends to the person exercising the authority of office under it by virtue of the formal legality off their commands and only within the scope of authority of office (Weber 1978: ). Hence, the legal authority of an individual rests on his/her hierarchical position achieved through skill-based advancement rather than personality. According to Weber, this is what makes legal authority rational. Moving from the organizational perspective to the individual perspective of rationality, Herbert A. Simon introduced the concept of bounded rationality and the idea of administrative man. Simon emphasizes that people interpret the world in various ways and have limited capacity to absorb and process information. Simon proposes a critique of what he calls objective rationality and economic man, by arguing that people s decisions are limited by a lack of information, knowledge and time to consider alternatives (Simon 1997: 95). Consequently, it is impossible for an individual to reach any high degree of objective rationality and administrative man must make decisions with relatively simple rules of thumb that do not make impossible demands upon his capacity for thought (Simon 1997: 93). He compares administrative man to the notion of economic man used in the classical approach of decision making: Whereas economic man maximizes, selects the best alternatives from among all those available to him he wrote, his cousin administrative man, satisfices, looks for a course of action that is satisfactory or good enough (Simon 1997: 93-94). A third approach to the concept of rationality is offered by Uzzi. Uzzi discusses rationality in relation to market embeddedness and investigates how embeddedness between firms can help overcome bounded rationality. He introduces a concept of expert rationality, a third kind of rationality that lies between the objective rationality and bounded rationality as described by Simon. This is a situation where a network of two or more firms have moved from an arms-length tie (formal business relation) to a close, embedded tie of connection. This close relation enables the parties to exchange more proprietary and tacit information 2

4 than in the formal market relation (Uzzi 1997: 41-43). According to Uzzi, this was seen in the New York fashion industry where firms engaging in embedded ties were able to stay ahead of their market competitors because they cooperated on a tacit level (Uzzi 1997: 44). This created a deep understanding each others style and enabled them to process the exchanged information as composite chunks rather than sequential pieces of dissimilar data. This expert rationality creates embedded ties and allows for firms to improve their performance (Simon 1997: 45-46). In conclusion, the concept of rationality has been considered in three different ways. In Weber s text, rationality is described at an organizational level where it is used to legitimize legal authority. This legitimacy is crucial to bureaucracy where authority is connected to hierarchical position and skill-based advancement. Weber s concept of rationality is contrasted by Simon who focuses on the individual and his role as a satisficer. Due to cognitive limitations, individuals are subject to bounded rationality. This incapability of being fully rational is described as bounded rationality (Simon 1997: 118). The last perspective on rationality presented by Uzzi introduces the concept of expert rationality, lying between objective rationality and bounded rationality. Through empirical investigation, Uzzi shows how fashion firms in New York City have moved away from bounded rationality by engaging in embedded ties, which gives them an advantage in relation to their market competitors. 1.2 Information Blau conducted an empirical study of the Weberian bureaucracy in a department of a federal agency. He observed, that workers preferred consulting their colleagues rather than asking their supervisor if they needed help. Blau argued, that this sharing of information through informal channels stabilizes the formal structure of the organization and is a prerequisite for knowledge production. Also, the use of informal networks and consultations with colleagues make the gaining of information easier and more efficient. According to Blau, a consultation can be considered an exchange of values: both participants gain something, 3

5 and both have to pay a price (Blau 1955: 108). Hence, the worker seeking advice gets answers but expose weaknesses while the worker giving advise gains status but looses time. Giving advice improves a workers social standing. In this way, an employees standing depends on his ability to pass on information rather than on his hierarchical position (Blau 1955: 110). The sharing of information therefore has both social and psychological functions. According to Blau, information and the sharing of it is key to understanding the development of knowledge within an organization. The concept of information as a key driver in knowledge-creation and efficiency improvement is also present in Taylor s theory of scientific management. Scientific management seeks to apply science to the management of employees in the workplace in order to gain economic efficiency through labour productivity. This is incorporated in the basic principles of scientific management stating that the management must gather information from the workmen and use it to create rules that will increase efficiency and thus output (Taylor 1916: 69). Due to the continuous gathering of new information scientific management has been an evolution, not a theory (Taylor 1916: 67). In other words, scientific management is essentially about gathering information and bringing it to the worker. This is a plus sum game where information benefits all - workers and management alike. The mutual interest in sharing information has replaced the antagonism between worker and employer with friendship (Taylor 1916: 82). In continuation of this, Taylor argues that it is an important managerial task to teach the workers how things should be done. Based on Taylor s ideas, information is therefore a resource which is a necessary but not sufficient condition for efficiency. From another perspective, Michels theory of the iron law of oligarchy portrays information as a mean of control. According to Michels, the bureaucratic structure of formal organizations allows for information to be concentrated at the top thus creating a monopoly of power for the elite (Lipset 2009: 20). Formal organizations therefore tend to be dominated by a small elite with a lessening of influence by rank. Following to this negative view of information in a bureaucratic context, asymmetrical control of information makes 4

6 manipulation possible. Thus, according to Michels, information becomes a way for the elite to improve it s dominant position as well as a tool to secure it s interests (Lipset 2009: 32). The concepts of information described above have both differences and similarities. Firstly, there are several similarities between the role of information in Blau and Taylor. The main similarity is the belief that information improves efficiency and sparks knowledge creation. However, they differ in their view on the source and use of information. According to Taylor, information comes from scientific research carried our by the management. This source of information is key when creating laws and rules for the workers to follow.. According to Blau, information is created and dispersed through informal networks and is not necessarily connected to the formal structure. Information is used by individual workers who seek to improve their performance rather than by a management seeking to create general rules. Hence, skilled workers rather than management serve as consultants. Despite the differences in source and use, Blau and Taylor both have a positive perception of information in an organizational context. This positive view is contrasted by Michels who argues that information concentrates at the top of bureaucratic organizations thus facilitating an elitist rule of the few. This negative view of information in a bureaucratic context has been criticized for being over-deterministic. However, it is relevant to note that the challenges of organizations addressed by Michels are aimed mainly towards his comrades in the socialist movement around WW1 and thus might not be as scalable. 1.3 Transactions The term transaction cost is frequently thought to have been coined by Ronald Coase, who used it to develop a theoretical framework for predicting when certain economic tasks would be performed by firms and when they would be performed on the market (Coase 1937: 390). According to Coase, the cost of transactions in the market is high due to costs of searching, negotiating and enforcement. These transactions are necessary, because parties do not always trust each other. Also, there is significant uncertainty involved in foreseeing the future, which makes it less desirable for the purchaser. According to Coase, firms 5

7 emerge in order to decrease uncertainty and transaction costs (Coase 1937: 391). This view is supported by William Ouchi who also claims that firms emerge in order to lover transaction costs (Ouchi 1980: 135). However, as firms grow, they tend to perform different types of transactions, which decreases efficiency as more mistakes tend to be made. Also, the growth of firms is limited due to diminishing returns to scale (Coase 1937: 386). Based on the above, transactions and their cost is a decisive factor in shaping the market and the emergence of new firms. Granovetter also considers trust in relation to transactions by embedding economic action within social theory. He criticizes earlier attempts at explaining economic embeddedness, and thus transactions, as being either over- or undersocialized. From the oversocialized approach the notion of general morality is evident, whilst impersonal and institutional arrangements are key elements in the undersocialized approach. Granovetter argues, that trust in economic transactions depends on the kind of network and social relations that individuals and firms are embedded in (Granovetter 1985: 483). In his theory of embeddedness, Granovetter seeks to bridge the gap between sociology and economics by arguing that people s economic activities are embedded in their networks of social relations (Granovetter 1985: 480). Based on his theory, trust plays an important role in transactions between people and organizations. In conclusion, both Coase and Granovetter consider the importance of trust in transactions. However, they have different answers on how to achieve it. According to Coase, firms will emerge in response to the insecurity and mistrust on the market thus facilitating trust while lowering transaction costs. This atomistic view is criticised by Granovetter who claims that it is undersocialized. Instead, he emphasizes how networks of embedded relations create a stable structure for transactions due to a high degree of trust. Granovetter s critique of Coase is supported by Perrow, who points to the lack of historical evidence and strongly opposes the simplicity of the theory (Perrow 1986: 241). According to Perrow, Coase s theory disregards the complexity of people by viewing firms as bundles of bilateral contracts. 6

8 1.4 Networks When investigating the concept of networks, Granovetter s theory the strength of weak ties (SWT) is essential. Granovetter makes a basic distinction between the respective functions of strong and weak ties and points especially to the importance of the latter. He defines a tie (and its strength) as, "a combination of the amount of time, the emotional intensity, the intimacy (mutual confiding), and the reciprocal services which characterize the tie" (Granovetter 1973: 1361). He claims, that the strength of a tie between two people is positively correlated to the proportion of common friends. He continues to argue, that social relations and strong ties between people discourages malfeance. Another main point is that weak ties serve as bridges connecting otherwise distinct groups (Granovetter 1973: 1371). These bridges play an important role in spreading information from one group to another. In this way, information can be spread to populations and audiences that are not accessible via strong ties. For the individual, the maintenance of weak ties is crucial as those are usually bridges that provide access to information that one would otherwise not be able to obtain (Granovetter 1973: 1374). Granovetter argues, that for diffusion across a network, it is the weak ties that are the most valuable. Another well-known network theory is Burt s structural holes theory (SH) of social capital. The theory relies on a fundamental idea that the homogeneity of information is generally higher within a group than between groups. A structural hole is understood as a gap between two groups who have complementary sources to information. When groups are connected through a third individual (a mediator), the gap is filled, thus creating an important comparative advantage for the mediator. By serving as an exclusive tie between distinct groups, the mediator can transfer or gatekeep valuable information from one group to another. This access to non-redundant information allows the mediator to play the two groups out against each other in order to secure favourable terms for himself. In this way, social capital is what sets actors apart from one another and give them certain positional advantages and disadvantages. 7

9 When comparing SWT and SH from a meta-theoretical point of view, they share two highly characteristic features of network theory. Firstly, the idea of structure and position plays an important role in both theories. This is seen in SWT, where weak ties are portrayed as advantageous because of their structural role in bridging network clusters and not because they are inherently so. This is also seen in SH where it is the shape of the network around a person that confers advantage rather than the person s own qualities. Secondly, in both SWT and SH there is an implicit theory of network function as the distribution of information. In this way, the network functions as a social system facilitating the flow of information. Therefore, subjects far from each other in a network will, on average, receive information later than subjects who are more centrally positioned. Based on the above, it is obvious that Burt s theory is closely related to Granovetter s. However, where the theories differ is that Granovetter argues that a tie s strength determines whether it will serve as a bridge. Burt does not disagree and even provides empirical evidence that bridging ties are weaker in that they are more subject to decay (Burt 1992, 2002). However, Burt sees tie strength as a mere correlate of the underlying principle, which is non-redundancy (1992, p. 27). Thus, the difference is between preferring the distal cause (strength of ties), as Granovetter does, and the proximal cause (bridging ties), as Burt does. The first yields an appealingly ironic and counterintuitive story line, while the second captures the causal agent directly and thus provides a stronger foundation for theory (Burt 1992, p. 28). In addition, Granovetter uses getting jobs as an outcome of having non-redundant information, while Burt uses getting promoted. Despite these minor differences in ornamentation, both theories are based on the same underlying model of how networks work. Part 2 Uzzi s paper is based on an ethnographic study 23 women s better-dress firms in New York City. By analyzing the obtained data, Uzzi tested how networks of relationships can explain a range of economic actions and outcomes. He reaches the conclusion that embeddedness is 8

10 of significant importance in shaping economic and organizational outcomes (Uzzi 1997: 35). The idea of embeddedness is a theoretical construct that has interested scholars from several different disciplines the last decades. Among the earliest and most prominent contributions to this research is Granovetter s (1985) article on the problem of embeddedness. Since then, the research agenda in economic sociology has been centrally concerned with demonstrating how social relations shape the structure of competition within organizational fields. When conducting his research, Uzzi build upon Granovetter s notion of embeddedness in an attempt to advance the concept of embeddedness beyond the level of a programmatic statement by formulating a scheme that specifies how embeddedness and network structure affect economic behaviour (Uzzi 1996: ). By using empirical data to investigate how social structures facilitate or derail economic action he identified several embedded relationships and showed how structural embeddedness shapes organizational and economic outcomes. Consistent with Granovetter, he argues that atomistic relations exist in economic life, but that the most important transactions take place between embedded networks of social relationships that produce unique outcomes that cannot be obtained without close social relations (Uzzi 1997: 61). Based on his findings, Uzzi portrayed structural embeddedness as a logic of exchange that promotes economies of time, integrative agreements and allocative efficiency. Also, close ties will act altruistically to each other, thus creating Pareto improvements (Uzzi 1997: 42). Hence, he recognises the value of structural holes defined by Burt and agrees that a network structure rich in structural holes is virtually all that is needed to induce information and resources to flow through the network (Burt 1992: 41). He differentiates by adding the idea of embedded ties and arm slength ties and in the way he specifies how an actors ability to access the opportunities of a contact depends on the quality of the relationship. By focusing on the how question rather than the who question, Uzzi contradicted the social focus presented by Ferdinand Tönnies in his theory of Gemeinschaft and Gesellschaft. This social network analysis is also evident in the work of Georg Simmel and Karl Marx. However, Uzzi s strong focus on the quality of the ties is consistent with Simon s notions of chunking and expert rationality. Even though information is shared in 9

11 chunks and the full picture is not given, the information exchanged is still fully understood due to the close ties. In this way, firms in the apparel industry can compensate for bounded rationality by cooperating. As described earlier in this paper, Uzzi s findings are used to argue how the concept of embeddedness affects the competitive advantage of network organizations. In this way, Uzzi s work offers the empirical descriptions of how embeddedness affect economic behaviour that Granovetter is said to be lacking. This social embeddedness approach assumes that economic actors are embedded in social relations and cooperative networks (Uzzi 2004: 320). Both Uzzi and Granovetter build on Harrison White s structural theory of social action developed in the Harvard breakthrough. In White s theory, models of social structure are based on patterns of relations rather than the attributes and attitudes of individuals (White 1992: 54). However, Uzzi found that under specific circumstances, structural changes can change embeddedness from an asset to a liability. Hence, 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 (Uzzi 1997: 35). This paradox of embeddedness shows how structural arrangements can put an organization at risk. In conclusion, Uzzi s theory of networks and embeddedness constitutes a valuable contribution to organizational theory. By expanding on Simon s notion of bounded rationality and focusing on structural arrangements rather than social network analysis, he deviates from the social focus presented by early theorists such as Tönnies, Simmel and Marx. Instead, he takes inspiration from the structural focus in Burt s theory of structural holes and builds on the theories of Harrison White and the Harvard breakthrough. Also, his notion of embeddedness highly reflects the ideas of Granovetter. Based on the above, Uzzi s study overlaps and contributes to many of the theories considered in this paper. 10

12 References Blau, Peter (1955): Consultation Among Colleagues Ch. 9 in Dynamics of Bureaucracy, Chicage: University of Chicago Press, pp Burt, Ron (1992): Structural Holes, Cambridge & New York: Harvard University Press. Cp. 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 & New York: Harvard University Press. Ch.1, The Social Structure of Competition, pp Granovetter, Mark (1985): The Strength of Weak Ties, American Journal of Sociology & New York: Harvard University Press, pp Lipset, Seymour Martin (2009): Introduction to Robert Michaels Political Parties in Robert Michels (2009) (1915). Political Parties. New Jersey: Transaction Publishers, pp Ouchi, William (1980): Markets, Bureaucracies and Clans, Administrative Science Quarterly 25, pp Perrow, Charles (1986): Economic Theories of Organization, Ch. 7 in Complex Organizations: A Critical Essay, 3 rd Edition, New York: McGraw-Hill, pp Taylor, Frederick Winslow (1916): The Principles of Scientific Management, Bulleting of the Taylor Society, pp

13 White, Harrison (1992): Identity and Control: A Structural Theory of Social Action, Princeton University Press, pp