Organizational Analysis Final - IBP Union · 13/1/2017 · ORGANIZATIONAL ANALYSIS FINAL 1. ......
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ORGANIZATIONAL
ANALYSIS FINAL
1. 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.
2. Analyze and assess the case on the New York fashion industry presented by Uzzi as well as the contribution he makes to organizational theory.
Christoffer Cirillo Copenhagen Business School
211294-2273 International Business and Politics
STU: 22.734 Organizational Analysis Final 2017
Standard pages: 9,9 13/01/2017
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Introduction
This paper will take on a two-fold structure. First, it will describe and explain the concepts of
rationality, information, transactions and networks, comparing the employment of each in relevant
theories. Each will be treated separately, but due the closely intertwined implications of each
concept I will seek to continuously bind them together, before briefly concluding on their role in
organizational analysis. Second, the paper will analyze and asses the case on the New York fashion
industry by Uzzi (1997) and how it is builds on and contributes to organizational theory.
Part I – Central Concepts and Theories
Rationality
The concept of rationality is central in the study of organizations. It is sensible to start off any
consideration of rationality with Weber (1911), where after I will consider the complementary work
of Taylor (1916) and the revisions of Simon (1997). Weber’s work is mostly on the structural level
and outlines bureaucracy, which he considers the naturally developed shape of modern, efficient
organizations. It is characterized by professionalism, rules, hierarchy, legal authority, from which
it drives its rational character (Weber, 1911, p. 196). As Weber states, ‘Bureaucracy has a ‘rational’
character: rules, means, ends, and matter-of-factness dominate its bearing… bureaucracy has
destroyed structures of domination which had no rational character’ (Ibid., p. 244). His work
assumes the “economic man”, also found in neoclassical economics, whose decisions and actions
are founded on a full or instrumental rationality. This allows actors to make sound and logical
decisions based on full, panoramic knowledge, which allows for maximization, whether of utility or
profit. Weberian bureaucracy was considered the future of society and the pinnacle of rational
behavior.
A complementary perspective on rationality can be seen in Taylor’s The Principals of Scientific
Management (1916), which mostly deals with the individual level. In his study the worker has a
separate rationality from the foreman, for example engaging in the practice of “soldiering”,
deliberately slowing down ones work to avoid consequences such as a lower piece-rate (Taylor, 1916,
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p. 66). The new rationality of the management which Taylor describes is based on a scientific
approach, whereby the quest for efficiency are gained through information collection, division of
work and standardization. Taylor theorizes that scientific management eliminates the practice of
soldiering and mends the gap in rationality between workers and managers, as “…the surplus is
made so great both sides will stop their fighting…that there is no occasion to quarrel (Ibid., p. 68).
Weber and Taylor have similar dispositions towards the notion of rationality and “economic man”
and both believed that the “one best way” of organizing which they proposed would supplant all
other types of organization. They both highlight division of labor, supervision, standardization and
hierarchy to achieve efficiency in a rational manner. Per Scott (1987), they can be categorized as
closed rational systems, in which: i) Organizations are independent of their environments, ii) actors
share the goals of the organization, and, perhaps most importantly, iii) actors are considered fully
rational in their actions.
The concept of rationality is augmented by Simon in his work on decision-making, where he argues
as his central thesis that ‘it is impossible for an individual to reach any high degree of rationality
(Simon, 1997, p. 183). Simon instead introduces the concept of bounded rationality, where the
rationality attainable for an actor or organization is constrained by three overarching factors, i)
incomplete knowledge, ii) imperfect anticipation of the future and iii) a lack of choice among all
alternative behaviors (Ibid., p. 93). As Simon states, ‘the number of alternatives he must explore is
so great, the information he would to evaluate them so vast, that even an approximation to objective
rationality is hard to conceive (Ibid., p. 92). Simon thus rejects the previous model of a maximizing
“economic man” and introduces the “administrative man”, who satisfices, or makes due, through
approximations. However, Simon agrees that we can achieve higher rationality, albeit still bounded,
through organization. This is due to organizations assisting in directing attention and planning
behavior. As Simon states, ‘Organizations are fundamental, then, to the achievement of human
rationality in any broad sense.” (Ibid., p. 111). Another key point is that intuitive behavior is not
necessarily irrational, but can be based on a huge catalogue of expert knowledge and is equally
rational with slower decisions, quite like a chess player being able to play many games at once with
only minimal decrease in ability (Ibid.). Ultimately, rationality is considered bounded, both
individually and in organizations, which is closely connected to information.
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Information
The second concept considered is information, which is closely related to knowledge. First, I think
it is prudent to draw a somewhat subtle distinction between the two. The paper will consider
knowledge as a step further than information, which is to say that information is a prerequisite. As
such, access to information gives us the opportunity to develop knowledge and can be considered
a broader term. Having drawn this subtle distinction, I will start by considering how information is
employed in different theories of organizational analysis. In Taylor (1916), as mentioned,
information is the basis for creating a more efficient organization through the scientific method
and in Weber (1911) as the basis for a professionalized hierarchy. The informational requirement in
both can be said to be based on rules and routines and they assume high levels of information.
Simon (1997), on the other hand, considers limited information as a constraining factor, leading to
his notion of bounded rationality, as explored above. These theorists largely consider information
in a symmetric sense, but the notion of asymmetric information is more concretely set forward by
Robert Michel.
Information is of the utmost importance in organizational analysis partly because it carries with
implications of knowledge and power. Robert Michel, described in Lipset (2009), highlights how
any bureaucracy or large organization is subject to the ‘iron law of oligarchy’, whereby the few at
the top will dominate the organization with their own corrupted goals and status quo bias. The
insurmountable advantage of the leaders stems in part from an asymmetric distribution of
information: ‘They are privy to much information which can be used to secure assent to their
programme’ (Lipset, 2009, p. 16). As such, ‘large scale organizations give their officers a near
monopoly on power” (Ibid, p. 16). Thus, if we accept the broad definition of rational organizations
from Scott (1992), where the purpose is the pursuit of relatively specified goals, asymmetric
information is crucial, as it can mean a complete derailment of the stated purpose of the
organization. This highlights how information is central in understanding organizations.
Another significant take on information can be found in Peter Blau (1995), who researches how we
use informal structures to by-pass the potentially information flow-constraining formal rules of
organizations. Blau, and the human relations strand of the field, emphasizes social aspects and
informal organizations more than earlier theorists, signifying a move to natural rather than simply
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rational systems. In his study of a federal agency, Blau observes how the agents by-pass the rule
stating they must consult only their supervisor for help by requesting information from their
colleagues to avoid admitting ignorance. Blau observed that the informal consultations and
exchanges of information between agents ‘greatly contributed to the effective operations” (Ibid, p.
115). This highlights how the Weberian bureaucracy can be stifling in its rigidity and formulization,
which is why informal organization is always present and can aid the effective distribution of
information. Blau is also closely related to the concept of transactions, as the consultations in the
federal agency can be considered “an exchange of values; both participants gain something, and both
have to pay a price”, which leads us to the next section.
Transactions
The third central concept of organizational analysis to be considered is transactions. Transactions
is a broad concept, but a good place to begin is Coase (1937), who introduces transaction costs and
the economic approach to organizational analysis. Coase seeks to explain why firms arise, on the
organizational level, even though we already have the market to conduct transactions. The answer
lies in the costs associated with the market and using the price mechanism, such as searching,
negotiating, and enforcement costs (Ibid.). The point where it becomes useful to create a firm is
when the market fails to be the most efficient way of conducting transactions, as Coase states: ‘The
operation of a markets costs something and by forming an organization and allowing some authority
to direct the resources, certain marketing costs are saved’ (Ibid, p. 392). However, as Coase argues,
this does not mean we will eventually have a single enormous firm, there are ‘decreasing returns to
the entrepreneur function’ which limits the expansion of firms (Ibid., 394). As such, a firm will
expand until the costs of organizing an extra transaction equals the cost of the market or another
firm (Ibid., p. 404).
Oliver Williamson (1975) builds upon Coase’s theory and the economic approach with a formal
development of transaction-costs economics (TCE), which draws on bounded rationality,
uncertainty, small-numbers bargaining and opportunism (Perrow, 1986, p. 237). These factors
together can lead to market failures due to opportunistic behavior, which is why Williamson argues
that a reduction of transaction costs can be achieved by vertically integrating, i.e. buying out a
supplier who may be creating hold up problems, which in turn explains growing firms (Williamson
1975; Perrow 1986). Another way Williamson theorizes lowering of transaction costs is the move
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from U-forms, separate division under the same CEO, to M-forms in internal organization, which
disperse responsibilities to quasi-autonomous operating divisions in large firms (Williamson 1975).
This allows firms to ‘economize on bounded rationality and attenuate opportunism’, thus lowering
TC’s. This is also the shape we see in large firms today. TCE signifies a move to open rational
systems, per Scott (1998), following the closed systems discussed earlier.
Ouchi (1980) clarifies the transaction cost based approach. In fact, Ouchi defines organizations as
‘any stable pattern of transactions between individuals or aggregations of individuals’ (Ibid., p. 140),
ascribing a central role to transactions, both on the individual, organizational and inter-
organizational level. Ouchi theorizes that three different organizational structures, i) markets, ii)
bureaucracies and iii) clans, are best suited for completing transactions based on different
normative and informational requirements (Ibid.). As Coase and Williamson before him, this
highlights how markets and bureaucracies are the most efficient structure for transactions
depending on the situation. The new addition here is the clan structure, which can minimize
transaction costs through a reduction in opportunism and information asymmetry, achieved
through a high degree of socialization and thus shared norms and values (Ibid.). Ouchi’s point can
be summarized as the notion that ‘Bureaucracy, market and clan organizations exist because each
of them, under certain conditions, offer the lowest transactions cost’ (Ibid., p. 140). The clan structure
allows for more trust due the shared norms and values which reduce transaction costs, a concept
which can carry us to the next central concept.
Networks
The last concept of organizational theory described and explained is networks. Network theory is a
relatively new branch and part of the shift towards open systems, and can be used to study both
individuals, organizations and fields of organizations. A good place to begin an account is the work
of Granovetter (1985), who breaks with what he considers under- and oversocialized views on
organizations and economic life. The undersocialized view is expounded by economic theorists
such as Williamson, and assumes everyone is a stranger in the complex and Hobbesian economy.
Granovetter critiques this notion, which fails to consider social networks that allow even small firms
to carry out very complicated transactions and places too much emphasis on organizational form.
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Granovetter (1985) thus considers the impersonal market a myth and highlights the importance of
trust. On the other hand, we have the oversocialized view, which holds the mechanical, structuralist
view that once we know an individual’s class or some other trait the behavior is assumed to be
virtually ‘automatic’ (Ibid, p. 486). However, these two extremes are not opposites, rather, they have
the key commonality of ignoring social relations – what Granovetter calls embeddedness. In
Granovetter’s theory (1985, p. 487),
‘Actors do not behave or decide as atoms outside a social context, nor do they adhere slavishly to a
script written for them by the intersection of social categories … they are instead embedded in
concrete, ongoing systems of social relations’
These social relations, a person’s network, provides optimal information and produces trust, which,
however, also leaves actors vulnerable (Ibid, p. 492). This will be expanded upon in the second
section of the paper.
Granovetter (1973) gives another crucial concept of network theory in The Strength of Weak Ties,
which I will explain in tandem with Burt’s (1992) Structural Holes. The concept of weak ties
describes the ties connecting separated clusters of dense networks, which have strong ties in them.
Granovetter’s point is that these weak ties are actually quite powerful, in that they empirically offer
you the most new info and opportunities (Ellersgaard 2016). This point is picked up and elaborated
on by Burt (1992), who emphasizes the importance of having many weak ties, and therefore social
capital. He introduces structural holes, which are powerful positions of brokerage between
networks. Having many structural holes in your network means that you avoid too many redundant
contacts, who provide the same information, instead branching out and accessing new information.
Burt concludes that ‘…players with optimized for structural holes enjoy higher rates of return on their
investments because they know about, have a hand in, and exercise control over, more rewarding
opportunities (Ibid, p. 49). This highlights information again, and also how closely tied to bounded
rationality it is – well-designed networks can expand rationality through more information. The
dangers of embeddedness and new contributions to network theory will be explored in the second
part of this paper on Uzzi (1997).
The first part of this paper has defined and explained the central concepts of rationality,
information, transactions and networks and contrasted their employment in various theories of
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organization. It is apparent that the concepts are closely intertwined and that they traverse the
progression in the field of organizational study. Rationality and decision-making is very much
contingent on information, which in turn is a central aspect of theories on transactions. The second
half of this paper will deal with similar themes by analyzing and assessing the case presented by
Uzzi (1997).
Part II – The case of Uzzi (1997)
Brian Uzzi’s (1997) study on the New York fashion industry provides an account of the nature of
transactions between the 23 firms studied and their structural networks. I will start by analyzing
and assessing his findings on the opportunities and risks associated with embeddedness and then
discuss how these build upon and add to key concepts and central theorists from the first section
of the paper.
Uzzi’s findings show what he deems to be a ‘paradox of embeddedness’ – the fact that ‘the positive
effects rise to a threshold … after which embeddedness can derail economic activity’, as they become
vulnerable to certain shocks (Uzzi, 1997, p. 35). This is a direct addition to the network theories
covered before. First, I will consider these positive effects, or assets, of embedded ties in
transactions, which are close, trusting, and cooperative relationships, contrasted with the other
distinct type of relationship called ‘arm’s length ties’, which are cold and more in line with atomized
market relationships as seen in Coase and Williamson (Ibid., p. 41). The assets provided by
embedded ties over arm’s length ties are plentiful,: i) Trust enriches the firm’s opportunities,
resources and flexibility, ii) The ties provide quick, exclusive, fine-grained and holistic information,
which is often more useful than price-info, and iii) joint problem-solving helps firms work through
problems, rather than simple exit-responses, which promotes learning and innovation while
reducing errors (Ibid., pp. 45-47). Second, the negative aspects - embedded ties do not exclusively
provide assets, certain paradoxical liabilities can be identified where embedded firms are more
vulnerable than market-oriented firms; e.g. when: i) A core network player unexpectedly leaves the
network, ii) Some institutional force rationalizes markets, such as when a conglomerate bought the
NY retailers, and iii) An echo-chamber of information develops in overly embedded, redundant
networks, sequestering them from external information (Ibid., pp. 57-58). Thus, to achieve the best
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of both worlds, the fashion firms would be wise to “mix and match” the two types of ties. ‘Network
structures that integrate arm’s length and embedded ties optimize an organizations performance
potential’, whereas having solely one of the two increases the rate failure and increases vulnerability
(Ibid., pp. 59-60).
Uzzi’s findings build and expand upon the central concepts of organizational theory covered in the
first half of the paper and contributes new findings as well. In terms of rationality, Uzzi employs
terms from Simon (1997), such as satisficing, highlighting bounded rationality. The notion that
‘Actors follow heuristic and qualitative decision rules rather than intensively calculative ones‘ is very
much in sync with Simon’s description of intuitive decision-making (Uzzi, 1997, p. 61). However,
Uzzi also contributes a new type of ‘expert’ rationality to fit his embedded network theory, which
is ‘Neither purely rational or boundedly rational, but expert’, which fits the unique logic of the
embedded model (Uzzi, 1997, p. 63). Thus, Uzzi can be shown to build directly on and modify the
concept of full rationality from Weber and Taylor and the bounded rationality of Simon. The
concepts of information and transactions are also crucial aspects of Uzzi’s work. His account of
information is more nuanced than the early theorists such as Weber and Taylor, who look at
efficiency, and Michels, who looks at power, and can be most aptly compared to the account given
by Blau (1955). Blau works on a different level of analysis though, where he considers early, intra-
organizational, informal “networks” and transactions of information between them, conversely,
network theory can consider the inter-organizational level of transactions and ties. Both observe
and describe the efficiency and benefits attained by informal information exchanges, one by-
passing stifling, rigid formal structure and the other by-passing the noisy price information of
atomized markets.
Precisely transactions are central in Uzzi’s work, as he deals with exchanges in economic life and
highlights his differences from Williamson (1978), quite like network theorists before him. TCE and
other economic approaches are characterized as insufficient (Uzzi 1997). The subjects interviewed
all heavily emphasize trust in transactions with embedded ties, differing from the cost-based, self-
seeking market account of Coase and Williamson, where monitoring and contracts play major
parts. TCE is critiqued for its focus on dyadic relations while ignoring of social relations and for
having ‘bias towards opportunistic rather than cooperative relations’ (Ibid., p. 37). Market
enforcements are made redundant in embedded ties through mutual trust as the ‘primary
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governance structure’, although the terms are still applicable in the arm’s length ties. Uzzi also
builds on Ouchi (1980) whose account of highly-socialized and trust-based clan structures share
these similarities with the Uzzi’s concept of embedded ties, albeit on the intra-organizational level.
Ouchi’s clan model is also considered most efficient for exploratory firms due its unique socialized
character, while Uzzi states that NY fashion industry with its specific characteristics such as time
sensitivity may have proven especially conducive to embedded ties (Ouchi, 1980; Uzzi, 1997, p. 64).
Uzzi explicitly states that if ‘the trend towards smaller, flatter, more connected organizations
continues, networks could become an important way of organizing, which is a structure very similar
to clans, networks could become a more important way of organizing, suggesting a synergetic effect
(Ibid., p. 64). Uzzi can then be said to offer contributions to the concepts of rationality, information
and transactions.
Of course, Uzzi also shares theoretical ground with and explicitly builds on the works of
Granovetter (1973; 1985) and Burt (1992). Uzzi agrees on the importance of social capital, as
mentioned in Burt (1992), and he picks up on Granovetter’s work of embeddedness, but Uzzi
himself states that he ‘adds complexity’ to both these views (Uzzi, 1997, p. 63). Firstly, Burt’s theory,
which assigns tremendous value to the existence of structural holes, is made more nuanced by the
explicit differentiation between embedded and arm’s length ties, which helps further
understanding of networks by emphasizing the importance of quality and management of each
relationship to access opportunities(Ibid.). Both Uzzi and Burt can be said to deal with the ‘how
question’ of network theory, as opposed to ‘who’, but where Burt emphasizes calculating rates of
return based on the sheer number of structural holes, Uzzi details how different configurations of
embedded and arm’s length ties provide opportunities and risks. Secondly, Uzzi agrees with
Granovetter (1985) that much of economic life is embedded in social relations, but he also nuances
Granovetter’s work. Uzzi reaches somewhat of a more moderate conclusion than Granovetter, as
Uzzi highlights the existence and importance of atomistic transactions as well, even though he
assigns the most importance to socially embedded transaction, “siding” with Granovetter over
neoclassical approaches. Uzzi (1997), then, offers contributions of nuanced value to network theory.
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Where the first part of this paper explicitly defined and explained the central concepts of rationality,
information, transactions and networks and their employment, the second part analyzes and
assesses the case of the NY fashion industry by Uzzi (1997). I highlight how he builds on the central
concepts as they are employed in both earlier and contemporary theories, and how he contributes
to both network theory in particular and organizational study as a whole through his findings. This
further underlines the natural progression in the field of organizational study and the intertwined
nature and progression of the central concepts.
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multidivisional structure