The M-form is structured around demands in the market, where the U-form is structured around production, sales, finance, human resources, and perhaps other specializations. In the 80s, Burton and Obel did a series of simulation studies to investigate contingency theory concepts related to the M-form hypothesis with the purpose of developing a more elaborate set of design rules. Using parsimonious models, they conducted an experimental design to test performance consequences of various coordination mechanisms, including the budget versus pricing planning systems and different organizational information systems Burton and Obel a.
Then they investigated the M-form hypothesis vs. U-form for different levels of decomposable technologies Burton and Obel b , using the same experimental design. The results of the experiments confirmed the M-form hypothesis: The M-form is generally more efficient than the U-form, but with some conditions.
Comparing the M-form and the U-form, the M-form does better for both low and high interdependency tasks, but the coordination mechanism is an important factor. The M-form allocation works very well for less interdependency and an iterative price coordination mechanism, while the U-form works well for a centralized coordination mechanism. Steer and Cable found that the U-form can be more efficient when centralized control is utilized, which is more prevalent in small firms.
Size is not the main issue, but control and coordination are. For an organizational design, the choice of the structure and the coordination mechanism are not independent. The M-form design hypothesis is a contingent statement depending upon the task interdependency and the coordination mechanism, not a universal one.
The experiment included two that might be alternatives. The M-form did not perform well for a less decomposable task, and the U-form did not perform well for a highly decomposable structure. We seldom observe these designs as natural experiments in the real world, and for good reason as indicated by the experiment.
This experiment included both an examination of the M-form hypothesis, but also investigation of what might be design alternatives. Further, in the M-form, a non-optimal allocation of resources to a division does not yield large opportunity losses if these resources are used well within each division, i. In the U-form, if the coordination is not done well, e.
More than Pathological Formalization: Understanding Organizational Structure and Red Tape
A transfer pricing mechanism can yield large losses if the price is not optimal. Stated differently as implications for organizational design, good coordination is more important than good structure or resource allocation. In a later laboratory experiment, Burton and Obel included opportunism, which Williamson defines as self-interest seeking with guile In the experiment, opportunism arises when an M-form division or U-form function manager can request non-optimal quantities from the headquarters that enhance her own divisional or functional performance at the expense of other divisions or functions and the overall firm performance.
For the U-form design alternative, the experiment found incentive schemes based on functional profit to be inefficient, while the U-form worked better for an incentive scheme based on corporate profit. The M-form alternatives were, however, both slightly better than the best U-form alternative, given the particular situation.
The discussions about opportunistic behavior and different kinds of hierarchies are an ongoing debate Foss and Weber What are the implications for the M-form design hypothesis? First, individuals quickly understood that opportunism is possible, and if it was to their personal advantage to report non-optimal quantity to manipulate the prices and thus enhance their own profits at the expense of others and the firm overall.
Second, individuals understood in which direction to change the quantities in their own favor. Thirdly, would they behave opportunistically? Not all did; most did, but more cheated in the U-form than in the M-form. In short, an individual will understand the opportunity to cheat; he or she will know how to cheat; and most individuals will cheat, but not all.
Some are altruistic. Thus, the M-form design is less compromised than the U-form design when opportunism is invoked. Under opportunism, the M-form performed much better than the U-form for corporate profits Burton and Obel : The opportunity losses in the U-form were more severe than in the M-form—confirming the M-form design hypothesis.
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Again, coordination losses were more serious than loss due to structure, which confirms that good coordination is more important than good structure. Putting the various experiments together, the M-form design hypothesis is supported without opportunism, and it is strengthened when opportunism is present. First, the M-form is confirmed parsimoniously using minimal information-processing mechanisms. Second, when the manipulation of information is possible, the M-form hypothesis is strengthened. Resource allocation is less important than coordination under decentralization with opportunism and without opportunism.
Experimentation allowed a finer grained set of design rules than the rules only developed out of economic theory and empirical observations. Burton and Obel developed design rules based upon the M-form hypotheses and the experiments above:. If the task is nearly decomposable, then the divisional or M-form is superior to the unitary or functional form p.
The degree of decomposability is primary contingency for this rule. A corollary design rule is then:. If the task in not decomposable, then coordination is the main issue and can be realized with a unitary or functional form with a centralized coordination. A design rule, which emerges directly from the opportunism lab experiment is:.
If the organization has a unitary or functional form, then a unit profit scheme should not be used. In the experiment, this incentive scheme is very likely to yield cheating with very high opportunity losses. What are the risk implications, if coordination is not achieved as desired? The M-form suffers less opportunity loss than the unitary form.
That is, less risk is incurred with the M-form than the unitary form. If the designer is risk averse, then the M-form organization is preferred. A formal rule-based multi-contingency theory of organization Burton and Obel was developed based on empirical observations, the information-processing theory, and simulation and laboratory experiments.
The multi-contingency theory model was tested on an empirical basis using the survey methodology, and it was shown that misfits in the model led to significant loss in performance. Not only the main effects but also the interaction effects were shown to be important Burton et al. Further studies then investigated specific interaction effects between leadership, climate, and strategy Burton et al.
Examining business-unit adaptation through new-product introductions in the global mobile device industry, Gaba and Joseph find that business-unit responses to poor performance lead to greater new product introductions. Taken together, these results were further expanded into a diamond model of contingency fit Burton et al.
We have argued that experimentation is at the heart of the organizational design challenge. Experimentation permits us to investigate both what is and what might be—the latter being the fundamental for design. Design requires the specification of both the assignment of tasks to units and individuals and the coordination of these tasks through communications, IT, leadership, culture, incentives, and management.
Coordination is necessary, as the tasks are interdependent and uncertain, and the organization exists in an uncertain environment. At a fundamental level, this is the organizational design problem. However, each organization must be designed to meet specific situations and goals. Simulation has been used to investigate many organizational design issues in what-might-be situations.
Google 's Organizational Structure And Organizational Culture
Rivkin and Siggelkow investigated the conventional wisdom that firm-wide incentives and capable subordinates make top-level oversight less valuable. They further identified circumstances in which vertical hierarchies can lead to inferior long-term performance. If the competitive landscape shifts, then decentralize temporarily Burton and Obel , p. Levinthal et al. Lee et al. Next, we outline a few challenges where we do not have well-established design rules. These challenges can be addressed through experimentation of what might be.
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Fjeldstad et al. Since collaborative communities are rare in the business world, we have more to learn about how to design them and make them work. We suggest that the collaborative community is a very important new organizational form for which what might be simulations hold great promise. Platform and digital confederations of firms which are neither market nor hierarchy but use extensive contracts are becoming more common.
Platform firms can be very small but have enormous reach beyond their own employees and resources. They are a nexus of formal and informal contracts—going beyond the make-buy problem. At the same time, platform-based firms can be very large, such as Amazon with some , employees. These firms are going forth as natural experiments exploring what might be and making what might have been yesterday into what is today. How do we design temporary organizations that start up quickly and disband quickly? These are related to big construction projects as building a bridge, making a movie, or organizing the Rolling Stones World Tour.
Some are informal, without structure and coordination norms but with well-defined goals of success. How are the fundamentals of task assignment and coordination realized? Does opportunism enter, and if so, how? Entrepreneurial ventures and start-ups are not well understood from an organizational design point of view. Are they different from traditional firms in allocation and coordination? Can they thrive without a hierarchy Burton et al. What is fundamental; what is new? There is a call for agile organization today. What does this mean—quick response or adjustment to variation in the environment or technology?
These are old questions, but they take on new dimensions in the digital world of today. They may require organizational designs that are quite different from traditional ones, which could and did response to variations in a slower world. Is time a critical difference here? We are observing closely for insights and understanding.
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We need to go further to expand the design space and investigate the underlying mechanisms of structure and coordination through experimentation utilizing lab studies, simulations, field studies, and ethnographies, among other approaches. Without a science of organizational design, we cannot generalize and use our accumulated knowledge to be able to design effective and efficient organizations that serve their purposes well.
Each author has contributed equally to this paper. Both authors read and approved the final manuscript. Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Skip to main content Skip to sections. Advertisement Hide. Download PDF. Journal of Organization Design December , Cite as. The science of organizational design: fit between structure and coordination.
Open Access. First Online: 01 March Background The design of an organization has a significant impact on the performance of the organization Doty et al. Simon : writes: The division of labor is quite as important in organizing decision making as in organizing production. How should the big task be structured or partitioned, and what resources should be allocated to the particular task?
For example, deciding between a functional and divisional structure is choosing the basis for breaking up the big task. Then you must choose how many departments or divisions you would like to have. For the divisional structure, you can choose to allocate private customers to one division and corporate customers to another, or you can base your divisions on types of products. Concurrent with the structure, you have made a choice of how to coordinate.
Coordination mechanisms require information, communications, cooperation, decisions, rules, routines, trust, incentives, and leadership, among others. Burton and Obel developed design rules based upon the M-form hypotheses and the experiments above: If the task is nearly decomposable, then the divisional or M-form is superior to the unitary or functional form p. A corollary design rule is then: If the task in not decomposable, then coordination is the main issue and can be realized with a unitary or functional form with a centralized coordination.
A design rule, which emerges directly from the opportunism lab experiment is: If the organization has a unitary or functional form, then a unit profit scheme should not be used. There are many other design rules to state and develop. Their results can be stated as design rules, and one of which is: If the competitive landscape shifts, then decentralize temporarily Burton and Obel , p.
Funding There is no funding for this paper. Availability of data and materials Not applicable. Competing interests The authors declare that they have no competing interests. Arrow K The limits of organization. Norton, New York Google Scholar. Ashby WR An introduction to cybernetics. J Organ Des 6 1 Google Scholar. Burton RM, Obel B a The efficiency of the price, budget, and mixed approaches under varying a priori information levels for decentralized planning. North Holland, Amsterdam, p Google Scholar. Burton RM, Obel B The validity of computational models in organization science: from model realism to purpose of the model.
Burton RM, Obel B Strategic organizational diagnosis and design: developing theory for application, 2nd edn. Burton RM, Obel B Computational modeling for what-is, what-might-be, and what-should-be studies—and triangulation. In: Grandori A ed Handbook of economic organization. Chandler A Strategy and structure. Foss NJ, Weber L Moving opportunism to the back seat: bounded rationality, costly conflict, and hierarchical forms.
Gaba V, Joseph J Corporate structure and performance feedback: aspirations and adaptation in M-form firms. Galbraith JR Designing complex organizations. Galbraith JR Organization design: an information processing view. Interfaces 4 3 —37 CrossRef Google Scholar. Gulati R, Puranam P, Tushman M Meta-organization design: rethinking design in interorganizational and community contexts. Klaas P Towards a concept of dynamic fit in contingency theory.
The role of organizational structure in readiness for change: A conceptual integration
Psychology Press, Hove Google Scholar. Irwin, Homewood Google Scholar. Levinthal, D. Workiewicz, and C.
When two bosses are better than one: decomposable systems and organizational adaptation. But for larger initiatives, which require coordination across functions, it can be time-consuming and divisive to gain alignment. As your company grows, delegating authority is essential. Being deliberate in who you choose to lead various teams is more likely to succeed than hoping it organically happens. In theory, a flat organizational structure is great; the best person for a given problem steps up and addresses it and everyone supports them.
It allows more people to take on leadership roles, and always ensures you have the best person for a given problem. As Boston-based Wistia found as they grew from 2 to 30 to over 60 people, a flat structure went from an asset to a blocker. We had centralized all the decision-making, and we were relying on a secret implicit structure to make progress.
Every company has a structure. We had hoped that being flat would let us move faster and be more creative, but as we grew, we ended up with an unspoken hierarchy that actually slowed down our ability to execute. An org chart is a map of the growing organism that is your company. This is a common set of problems flat orgs face as they scale, regardless of their industry or mission. She reflected on the root of the problem when she wrote:.
Unfortunately, this organic structure lacks the authority and accountability officially designated leaders. Navigating this shadow hierarchy creates conflict and confusion, slowing your company down. Without hierarchy, eventually, any leader will be overwhelmed. While the general best practice is no more than 10 direct reports , in some cases, leaders have tried to have as many as people all reporting up to a single person. With no structure, the quantity of problems becomes a major issue. How do you address all the problems that come up when there are too many people coming to you? They either get ignored, or you never get enough of the right things done.
This is exactly what Google faced when they tried to get rid of their managers when they had about employees. And as the company grew, the founders soon realized that managers contributed in many other, important ways —for instance, by communicating strategy, helping employees prioritize projects, facilitating collaboration, supporting career development, and ensuring that processes and systems aligned with company goals.
This lesson was also learned by Treehouse. Moving to a no-manager approach caused major problems as they grew:. Projects went unfinished, Carson said, and there was no one to hold accountable. You can only focus on so many things at once. With a flat organization, there are many things that will be missed that a good manager would focus on. No matter what kind of business you have, there are a never ending flurry of challenges to tackle.
Why add an entire second set of challenges to the ones you already have selling your product or service? Call ten friends who work at great companies and crowd source the best practices. These best practices are widely understood and broadly implemented, and the differences are minimal or arguably irrelevant. Everything your business does is driven by it. When work and decisions are self-organized, many unintended consequences can strike. One of the hardest is accountability for tough decisions that must be made like discipline, firing, and promotions.
Oculus game designer Katie Chironis has a great tweet storm that captures this challenge well:. Yogi was right. In theory, flat organizations sound great. Quartz has an excellent deep dive into the problems at Zappos, which includes this particular issue:. Extra bureaucracy, and uncertainty on key decisions is costly overhead for every team member in a flat organizational structure. Do you want to leave critical decisions to chance? Are you confident a self-organized committee will arrive at the right decision? How do you hold such a group accountable?
As Robert Sutton, Stanford professor and best-selling leadership author has found in his work:. Whether researchers study people, dogs, or baboons, hierarchies are evident after just minutes of observation. So hierarchy is a necessary evil of managing complexity, but it in no way has anything to do with respect that is owed an individual.
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The best way to avoid the pitfalls of flat organizations, and ensure all your employees are respected, is to focus on your leaders. Your early employees are clearly very valuable to your company. They have experience from the beginning of the company, helped define the culture, and often receive a great deal of respect from others in your company.
They may groan, roll their eyes, and resist setting up any form of hierarchy. This is also exactly what Google did when they found how valuable managers are to their success:.
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