Paragraph on Complexity Theory
This study explores the fundamental tension between too little and too much structure. Observed in multiple streams of research, this tension is associated with the tradeoff between flexibility and efficiency that is central in dynamic markets. Using the strengths of simulation to confirm internal validity and to elaborate theory through virtual experiments, we examine the relationship between the amount of structure and performance in dynamic environments. We have several findings.
First, we confirm that an inverted U-shaped relationship exists between performance and the amount of structure. Yet, this relationship is unexpectedly asymmetric – i. e. , it is better to err on the side of too much structure than too little. Second, we describe how market dynamism moderates the relationship between structure and performance. In particular, increasing unpredictability is associated with less optimal structure. Moreover, when environments are very unpredictable, there is a very narrow range of optimal structure and a precarious “edge of chaos.
” Third, other environmental dimensions have their own unique effects – i. e. , increasing velocity raises performance while increasing complexity lowers it. Surprisingly, increasing ambiguity diminishes the value of skill. Broadly, we contribute to strategy by confirming the internal validity of strategy as simple rules, and clarify the boundary conditions of positioning and opportunity strategic logics. We contribute to organizational theory by providing an optimistic view of adaptation with clarity regarding its challenges for new v. established firms.
Overall, we sketch an emerging theory for how organizations adapt that builds on the insights of complexity science. A longstanding question in strategy and organizational theory is how the amount of organizational structure shapes performance in dynamic environments. Research exploring this question often highlights a fundamental tension between possessing too little and too much structure (Burns and Stalker, 1961; Henderson and Clark, 1990; Uzzi, 1997).
Organizations using too little structure lack enough guidance to efficiently generate appropriate behaviors (Sine, Mitsuhashi, and Kirsch, 2005), while organizations using too much structure are too constrained and lack flexibility (Miller and Friesen, 1980; Siggelkow, 2001; Rivkin and Siggelkow, 2003). This fundamental tension results in a dilemma for organizations competing in dynamic environments as success in these settings demands both efficiency and flexibility.
Studies show that high performing organizations resolve this tension by using a moderate amount of structure to improvise a variety of innovative solutions (Brown and Eisenhardt, 1997). Overall, this is suggestive of an inverted U-shaped relationship between the amount of structure and performance, a relationship often observed when tensions are at work. This tension is observed in diverse streams of research. For example, Weick’s (1976) loose coupling ideas focus on the benefits of moderate intra-organizational connectivity.
Loosely coupled units are responsive enough to remain coordinated, but possess enough separateness to act independently as well (Orton and Weick, 1990; Schilling and Steensma, 2001; Gilbert, 2005). Other research also emphasizes moderate connectivity among parts of an organization (Hansen, 1999; Galunic and Eisenhardt, 1996, 2001; Rivkin, 2000). For example, in his study of U. S. restaurant chains, Bradach (1997) noted that chains with a mix of tightly linked company stores and loosely linked franchises were more innovative and high performing than those comprised of either type alone.
Similarly, in their study of multi-business firm innovation in Taiwan, Chi-Nien and colleagues (2005) found that the most innovative groups were those with semi-linked operating and director relationships that permitted shared access to financial resources among affiliates. Moderate amounts of external connectivity are also beneficial (Hargadon and Sutton, 1997; Owen-Smith and Powell, 2003). For example, in his ethnographic study of garment manufacturer alliance networks, Uzzi (1997) found that organizations which combined more and less structured partnerships were more effective performers.
Specifically, these semi-structured alliance networks helped garment firms enjoy efficient exchanges, as well as direct access to information sources vital for being flexible in the industry. Other studies find that the spillovers produced by “leaky” networks of varied institutions within the Boston-area biotechnology community are associated with innovation (Owen-Smith and Powell, 2003) while a moderate amount of interaction between publicly-owned and privately-owned Hungarian enterprises improves adaptation to changes in the Eastern European marketplace (Stark, 1996).
The tension between too little and too much structure is also observed in research on improvisation, which is concerned with how partial structure guides behavior in real-time (Weick, 1998; Miner, Bassoff, and Moorman, 2001). This research points to the use of previously existing simple rule strategies that act as the ‘guiding melody’ within which improvisation occurs. As Weick (1998) notes, “The important point is that improvisation does not materialize out of thin air.
Instead, it materializes around a simple melody that provides the pretext for real time composing”(p. 546). Miner and colleagues (2001) further clarify how simple heuristics guide improvisation in the product development context. Similarly, Brown and Eisenhardt (1997) find that too many or overly complex rules inhibits product development by constraining the improvisation of innovative solutions, while too few or overly simple rules engenders too much chaos to be effective.
In contrast, a few simple rules possess the “semi-structure” necessary for effective improvisation. This tension is particularly pertinent for strategy in dynamic markets where change is not only common, but also critical for performance (Teece, Pisano, and Shuen, 1997). For instance, Mintzberg and McHugh (1985) note how a balance between more structured “deliberate strategy” and less structured “emergent strategy” enable innovative and yet ultimately coherent performance in turbulent eras. Similarly, Rindova and Kotha (2001) find that the ability of Yahoo!
to change successfully and repeatedly within its dynamic environment is partially due to its simple, rule-based capabilities for guiding acquisitions, alliances, and the introduction of new services. Indeed, loosely coupled structures and “simple rules” capabilities are observed among high-performing firms in a variety of dynamic industries (Galunic and Eisenhardt, 1996, 2001; Burgelman, 1996; Katila and Ahuja, 2002; Williams and Mitchell, 2004; Gilbert, 2005) which is consistent with Eisenhardt and Martin’s (2000) hypothesis that as markets become increasingly dynamic, the most effective strategies will be increasingly simple.
Taken together, these studies indicate that the inverted U-shaped relationship between the amount of structure and firm performance is a robust finding that is widely relevant across multiple literatures. Yet, despite wide recognition of the tension between too much and too little structure, a number of issues remain. For instance, it is unclear whether it is advantageous to err on the side of too little structure vs. too much. In other words, does one fail more gradually than the other?
Likewise, it is also unclear whether there is a wide range of optimal structures, suggesting that balancing the tension between too much and too little is easy to achieve, or conversely, whether the optimal structure is very tightly constrained, indicating significant challenge in finding and maintaining the balance. Similarly, while greater environmental dynamism seems to be associated with less structure, it is unclear how this tension is affected by different attributes of market dynamism such as velocity, ambiguity, and unpredictability.
Broadly, we ask: what is the underlying theoretical logic that links the tension between too much and too little structure, environment, and performance? The purpose of this paper is to explore the theoretical logic that underlies the tension between too much and too little structure, the environmental contingencies that influence the balance within this tension, and the effects of too little versus too much structure on the performance of strategies and organizations in dynamic markets.
Consistent with prior literature (Lawrence and Lorsch, 1967; Galbraith, 1974; Scott, 2003), we define structure as any specific and regular pattern of organization (e. g. , roles, linkages, and rules). In particular, we focus on structure as rules because of their importance in dynamic markets (Brown and Eisenhardt, 1997; Rindova and Kotha, 2001) and because of their relevance to both the organization (Cyert and March, 1963) and strategy (Nelson and Winter, 1982; Teece et al. , 1997) literatures. We conduct this research using simulation methods.
We chose simulation because it is a particularly effective method for research such as ours where the basic outline of the theory is understood, but its underlying theoretical logic is limited (Davis, Bingham, and Eisenhardt, 2006). In this situation, there is enough theory to develop a simulation model. Yet, the theory is also sufficiently incomplete that it warrants examination of its internal validity (i. e. , correctness of its theoretical logic) and elaboration of its propositions through experimentation, both strengths of simulation (Sastry, 1997; Zott, 2003).
Simulation is also a particularly useful method for research such as ours when the focal phenomenon is non-linear (Carroll and Burton, 2000; Rudolph and Repenning, 2002). While statistical and inductive methods may indicate the presence of non-linearities, they are less precise in their identification, particularly of complicated ones such as tipping points. Simulation is also a particularly useful method when empirical data are challenging to obtain (Davis, et al, 2006).
For example, simulation enabled us to unpack the distinct effects of environmental dimensions that are difficult to disentangle in actual environments. Finally, simulation is especially effective for research such as ours that involves longitudinal and process phenomena because such phenomena can be studied over extended time periods that would be difficult to observe with empirical data (March, 1991; Zott, 2003). We have several key results. First, while we confirm an inverted U-shaped relationship between structure and performance, we unexpectedly find that this relationship is asymmetric.
That is, too little structure leads to a catastrophic performance decline while too much structure leads to only a gradual decay. It is, thus, better to err on the side of too much structure. Second, we point to unpredictability as the key dimension of market dynamism underlying the tension between too much and too little structure. Moreover, the range of optimal structures intriguingly varies inversely with unpredictability. For example, in unpredictable environments, there is only a very narrow range of optimal structures with catastrophic drops on either side that are likely to be punishing to manage.
Finally, other dimensions of market dynamism (i. e. velocity, complexity, and ambiguity) unexpectedly have their own unique effects on performance. Collectively, our study validates the underlying theoretical logic of the tension between too much and too little structure, reveals the asymmetry and tipping points of this tension with even minor perturbations, and highlights the unexpected effects of alternative environments and organizations. Broadly, we contribute to an adaptive view of organizations and strategies.
While much theory focuses on inertia and path dependence, we point to the interplay of moderate structure with improvised action to capture fleeting opportunities as central to adaptation, and to the underlying structural basis of the well-known liabilities of newness and age. We also uncover new insights into how to organize in specific environments and types of organizations. Most significant, we highlight the importance of complexity theory reasoning in explaining adaptation in the context of the trade-off between flexibility and efficiency in dynamic environments.
BACKGROUND: UNEXPECTED COMMONALITY OF INVERTED U-SHAPED CURVES To better understand the fundamental tension between too little and too much structure, we analyzed prior research that focused on the impact of structure on performance. In reading this research, we were struck by the commonality of a basic phenomenon across distinct literatures including organization studies, network sociology, and strategy. In each, there is evidence for an inverted U-shaped relationship between the amount of structure and organizational performance.
Organization Studies The fundamental tension between too much and too little structure emerges in several areas of organizational studies including work on creativity (Amabile, 1996), group problem solving (Bigley and Roberts, 2001; Okhuysen and Eisenhardt, 2002), venture formation (Sine, Mitsuhashi, and Kirsch, 2005), organizational transformation (Tripsas, 1997; Galunic and Eisenhardt, 2001; Rivkin and Siggelkow, 2003), and organizational learning (Bradach, 1997). Weick’s (1976) research on loose coupling illustrates.
Research in this stream describes how elements of an organization are loosely coupled when they are responsive to each other, but maintain some degree of uniqueness or logical separateness. For example, if the structure is designed so that the behaviors of a leader only sometimes affect the activities of a subordinate, then they can be described as loosely coupled (Orton and Weick, 1990). Loose coupling is beneficial because it enables organizational entities to remain independent, but also somewhat coherent.
Business units, for example, can autonomously experiment and adapt to their environment (Tripsas, 1997; Schilling and Steensma, 2001; Gilbert, 2005) and isolate their subordinates from the turbulence experienced in other units (Cameron, Kim, and Whetten, 1987; Krackhardt, 1992; Tushman and O’Reilly, 1996). Loose coupling also promotes enough self-determination from the daily demands of top management teams to accomplish sub-unit goals (Weick, 1976). But while loose coupling promotes independence, the linkages that exist continue to tie the organization to its core mission, lines of authority, and identity (Orton and Weick, 1990).
Collectively, this research demonstrates the usefulness of a moderate amount of connectedness. Research on organizational improvisation also illustrates how structure shapes organizational outcomes (Weick, 1993; Eisenhardt and Tabrizi, 1995; Hatch, 1998; Weick, 1998; Miner, et al. , 2001). This research suggests that successful improvisation builds on past experience to help organize the production of novelty that is improvisation’s goal (Moorman and Miner, 1998).
Typically, some of this past experience is embedded in a few simple rules or routines that act as the “guiding melody” around which real-time composing can occur (Weick, 1998: 546), which, themselves, may emerge from prior improvisations (Miner, et al. , 2001). As one example, Miner and colleagues (2001) find that the successful production of novel outcomes depends critically on having some, but not too much problem solving structure beyond the medium and materials that appear in the moment.
They also discover that starting with too much structure overly routinizes processes to such an extent that producing innovative outcomes is nearly impossible. Conversely, the problem of possessing too little organizing structure is hauntingly illustrated by Weick’s (1993) reanalysis of the Mann-Gulch disaster. As he recounts, the firefighters who parachuted into Mann-Gulch expected to contain a small fire, yet nothing in their past experience seemed helpful in dealing with the large, quickly moving fire they encountered (Weick, 1993).
Without some structure to organize their responses to this unexpected situation, most of the firefighters became confused, silent, and fearful until panic overtook them and they perished by attempting to outrun the fire. If the account were to end here, then the role of too little structure in producing the Mann-Gulch disaster would be confined to a failure of individual problem solving and sense-making. What makes the story poignant is that their leader, Dodge, quickly solved the problem and survived.
As Weick (1993) explains, Dodge recognized that the fire was consuming quickly burning flammable material (brush and grass), could not be outrun, and then used this information to improvise a solution (i. e. , light a small backfire to consume surrounding fuel sources) using a few Forest Service heuristics. Yet in spite of Dodge’s bringing structure to the problem, he was unable to organize a unified response. Instead, the group abandoned their previous organizing structures (e.
g. authority relations, specialized roles, fire safety rules) and ignored Dodge’s plea to lie down in the area the backfire had burned (Weick, 1993: 636-7). The result was a failure to utilize the best knowledge of the group to meet their collective goals. The presence of a few simple rules of authority (e. g. , “If danger is imminent, then follow the foreman’s suggestions”) might have changed the outcome significantly. Instead, the firefighters lost their structure.