Networks: Emergence of Organizational Structure

In765 Knowledge Networks

Nov. 17, 2004

Judith Molka-DanielsenReference: Notes are based on: Watts, Duncan J., ”Six Degrees”, Random House, 2003, pp.260 – 289.

Industrial Organization• Adam Smith: The Wealth of Nations: division of

labor: workers produce more if given specialized sub-tasks. (pins)

• Learning by doing – more frequently we do something, the better we get at it.

• Returns to specialization – benefits that each worker derives from learning to do one task efficiently. (more specialized = more benefits). Characteristic of civilized societies. Family does not have to do all to survive.

• Tasks are accomplished more effectively by breaking them down in a hierarchical fashion with specialized sub-components.

Industrial Organization

• Ronald Coase: introduces the economic theory of the Firm. Based on transaction costs. Cost less to do things internally than on the open market.

• Inside the firm, a hierarchical authority structure exists. Internally there are agency (coordination) costs. Firms grow vertically, when one firms hierarchy gets absorbed into another firms hierarchy.

Transaction Cost Theory – Ronald H. Coase, in ``The Nature of the Firm´´(1937)

It says that firms exist to reduce the transaction costs of individuals acting in the market.

Transaction costs will decide if a firm should produce something themselves or let someone else do it, not only market price.

Transaction costs today are lower because of alliances and networks. Coase was not specific in his description of what transaction costs

were, but they include for example,

• Search Costs

• Information Costs

• Distribution Costs

• Order Processing Costs

• Contract enforcement Costs

• Advertising Costs

Agency Theory • Agency Theory states that the organization is a

nexus of contracts among self interested individuals.

• Agency Costs are the sum of • monitoring costs (gathering information for

reports) • bonding costs (developing reports) and • residual costs (the costs the principal incurs by

deviation of the agent, despite the monitoring activities).

• Agency Costs rise as the decision moves away from the local source of information (the customer) and as decision making moves up to the top management level.

• E-Market Place and NSC let decisions be more decentralized.

Industrial Divides : The First

• Charles F. Sabel and Michael Piore: The Second Industrial Divide: vertical hierarchies is not the only structure of industrial organization.

• Vertical hierarchies – came about because of economic, social, political and historical reasons. (divides – then the winning solution gets locked in.)

• The first industrial divide – was the industrial revolution. (big factories, specialized production lines, generalized unskilled workers, take advantage of economies of scale.)

Industrial Divides : The Second• 1970s – domestic markets slow, encourages

globalization in trade, fixed currency system (Brenton Woods agreement 1944) breaks down, oil crisis, Iran revolution (1979), high unemployment in US and Europe.

• The second industrial divide – flexible specialization. US steel industry goes to mini-mills. Exploits economies of scope. (general purpose machinery, skilled workers, to produce a wide range of products in small batches).

• Uncertainty, ambiguity and rapid change favor flexibility and adaptability

Industrial Divides : The problem with Ambiguity• Flexible specialization addresses task ambiguity. Do not

sink capital into specialized productions, instead use flexible teams of skilled workers to rapidly recombine skills + produce a wide range of goods. (flexible production)

• But, when a firm starts a new project, the people involved do not know how they are going to do it. (problem solving)

• Environmental changes require changes in the production process and in the design itself (product).

• Environmental ambiguity – when low, task ambiguity is not a problem, design/learning and production phases can be done separately, hierarchically. But, when high, - recombining resources is not enough. Must search for and discover where the resources are to solve problems. (Honda is able to follow complicated causal chains to identify the cause of a paint defect.)

Industrial Divides : The Third Way• “In firms, just as in social networks, individuals

make decisions about whom to connect with, and although these decisions are based on the individual’s local perceptions of the network, they can have global consequences” (Watts, p271)

• Incomplete information (ambiguity) requires communication between individual independent tasks.

• The organization must be designed as a network of information processors, where the network should handle large amounts of information without overloading the individual processors.

Organizational structures

• Hierarchies are bad at dealing with ambiguity, but good at exerting control.

• Hierarchies are good at distribution, bad at redistribution.• Span of control – people are limited in the number of

relations that they can maintain, more relationships can lead to less production. So, hierarchies have been used to limit the number of immediate contacts. (The manager is the coordinator, not the producer.)

• A Robust information processing network – maximizes the volume of info that can be processed without breakdowns.

• In a hierarchy the burden of information processing is unevenly distributed.

Organizational structure: Inserting random links – insignificant reductions

Organizational structure: (B). Connect 2 nodes that relay the most info. Effect: reduce overall congestion w/o increasing individual burden

Organzational structue – that develops from local problem solving is team building.

Organzational structure – where problem solving involves nodes in different divisions: 2 tiers develop: a core and a periphery.

Info exchange

Production

Organzational structure: multiscale networks

• Watts indicates that when organizations need to handle info on many distance scales at once, the net architecture must also.

• The likelihood that 2 nodes have info relevant to each other’s productivity decreases with their separation in the hierarchy, the number of possible dependencies increases.

• Bypass links are needed across levels. Unlike local teams, the org must have teams at different scales. (meta teams – distributed groups).

• Everyone at all levels of the organization is in some way processing information. All are problem-solving and producing. No one has fixed exactly what they should be doing.

Multiscale network

Business drivers for eMarket Place Systems

• Globalized Markets: reduce profit margins for firms

• Information Intensity: in products raise participation costs

• Mergers, acquisitions, consolidations: in traditional industries create scale economies, and intensify competition between remaining players.

• Business Process Redesign: changes the process structure in the firms, new enterprise wide systems are needed to support the new structure.

• Information needed for products: shortens product cycle times, ie. less time to get a product to market and less time to realize positive returns

Business drivers for eMarket Place Systems

• Integrated processes within the firm: not distinct processes

• Integrated processes within an industry: requires cooperation within an industry to strengthen potential industry profits

• Information architecture investments: lead to new knowledge - lead to something that can be sold.

Technology Drivers for eMarket Place Systems

Availability of: • Relational databases

• Reduced storage costs

• Expanded use of public networks (ie. Internet) and standards that support its use (ie. XML, HTTP, TCP/IP).

• Client-Server architectures and technologies available.

• Desk-top and portable user environments variety available (ie. phones, palmtops, portables).

• Enterprise network software - management and integration tools, middleware, ubiquitous computing technology.

Organizational Structure and Robustness• Recovering from Disasters – internal and

external- (fires, people fired, computers crash). Hierarchies are vulnerable to congestion, too centralized.

• Multiscale networks – have not critical nodes, whose loss would disable the network. They are decentralized at the local team level and at larger scales. They minimize the probability of failure, and the effects of failure by distributing load.

• Innovation, error correction, and disaster recovery are all versions of response to ambiguity.

• Multiscale networks support decentralized search.