In this chapter we present a model of organization aimed to understand the effect of formal and informal structures on the organization’s performance. The model considers the interplay between the formal hierarchical structure and the social network connecting informally the agents emerging while the organization performs a task-set. The social network creation and evolution is endogenous, as it doesn’t include any function supposed to optimize performance. After a review of the literature, we propose a definition of performance based on the efficiency in allocating the task of a simulated organization that can be considered as a network-based problem-solving system. We analyze how the emergence of a stable process in decomposing tasks under different market conditions can alleviate the rigidity and the inefficiencies of a hierarchical structure and we compare the performance of different hierarchical structures under variable environment conditions.
The relation between the organizational architecture and performance has long been of concern to economists (Sah & Stiglitz, 1986; Bolton & Dewatripont, 1994). Their emphasis has been on efficiency, defined as being optimal when interactions are minimized. Traditional economics sees interactions in organizations from an economizing on coordination, transaction or information costs perspective. Interactions are considered as distracting valuable resources (time, attention, energy, equipment, etc.) from productive use itself (Williamson, 1985) and therefore interaction mechanisms are to be minimized. Interactions are seen as “allocative” and are used to coordinate events, functions, businesses, etc. such that these fit together and fit with predefined rules while minimizing the resources consumed to ensure the fit. They are determined by the mode in which the hierarchy and the division of labor are structured and they form an unbroken line from the top managers to the operative employees. As a result, the economics literature on organizations has mostly focused on hierarchies: by connecting N nodes together with the minimum required number of N - 1 links and creating a chain of command that is only L ~ logN links in depth, hierarchies are almost as efficient as possible. Hierarchies require each node to interact directly with, on average, b other nodes where b << N and is generally called the “span of control” (Dodds et al., 2003). Numerous studies studied the optimality of hierarchical organizational networks for exerting control, performing decentralized tasks, making decisions, and accumulating knowledge (Van Zandt, 1998; Hart & Moore, 1999; Garicano, 2000; Visser, 2000).
This traditional economics view on organizational interactions holds true in product manufacturing-oriented organizations, in which the transaction costs are low compared to the production costs, strict hierarchical decomposition of tasks into independent units being possible. But in today’s knowledge intensive organizations, of highly transactional nature (North & Wallis, 1994), strict decomposition is not anymore possible and allocative interactions are not sufficient for explaining organizational performance. In such organizations, in addition to formal interaction of allocative nature, informal relations are important. These informal interactions can be categorized of being “generative” to the extent that they help individuals in organizations to generate new capabilities, gain new knowledge and insight in a way that allow individuals to handle complex situations (Morieux et al., 2005).
In the last decade, a growing attention has been devoted to informal interactions taking place in organizations. Empirical evidence (Nohria, 1992; Johanson, 1999; Cumming, 2004) has shown that in many organizations, informal interactions are even the primary means by which employees find information, solve complex problems and learn how to do their work. Moreover, informal networks existing in an organization and participating actively in the handling of practices can influence the formal, hierarchical design of the organization, leading to a co-evolution between formal and informal organizational networks (Volberda & Lewin, 2003).
Theoretical studies (Zander & Kogut, 1995; Garicano, 2000) have been also devoted to the role played by the informal interactions and network-related mechanisms in the behavior and capabilities of organizations. Most of them are based on the knowledge-based theory of the firm, where organizations are viewed as social communities specializing in efficient knowledge creation and transfer (Zander & Kogut, 1995). In this view, informal interpersonal networks emerge as a major component of the knowledge transfer process. Other studies, such as Uzzi (1997) focus on the association between informal network structure and organizational performance.
Key Terms in this Chapter
Sensing Task: A task that generates useful information when successfully completed. The generated information can be used in a decision task.
Organizational Structure: The set of relationships among organizational members constraining their possible actions. In this chapter we consider communication structures that restrict with whom an organization member can communicate. We consider hierarchical, tree-based structures as well as horizontal structures, namely rings and random structures.
Actor: The human members of the organization. The actors are the entities that are actually executing tasks and are explicitly represented in our model. The actors may be assisted by software personal assistants, which relieve various cognitive and communication constraints.
Decision Task: A task that requires information generated by successfully executing sensing tasks. A decision task cannot be executed until all requisite information has been acquired.
Software Personal aSsistant (SPA): An agent that supports a human user by automating routine individual tasks and facilitating coordination with other members of the organization. The effect of a software personal assistant on its user is to relax various cognitive and communication constraints. To be fully effective, software personal assistants must be aware of the organization in which they are situated.
Primary Task: A task that is not a contingency of any other task. Executing a primary task is the preferred way to achieve an organizational goal, while contingencies are less preferred but allow the organization to cope with failure.
Cognitive Load: The amount of an actor’s cognitive facilities that is required to perform a task or set of tasks. People are inherently limited in the amount of cognitive load they can bear, and thus relieving cognitive load is one of the major goals for a successful software personal assistant design.
Communication Overload: A person’s inability to engage in an excessive number of simultaneous communication acts. Communication overload arises because people have bounded capacities for processing communicated information. This is primarily a problem with synchronous communication.
Task Contingency: A task to be executed in the event another task cannot be successfully completed. Each task has at most one, unique and specific contingency that is known in advance. A contingency may in turn have its own contingency to be executed in event of failure. Contingencies represent pre-planned backup or alternative ways to achieve an organizational goal.
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