The organization of economic activity

1
The organization of economic activity

• The information and service economy
• October 10, 2007
• Bob Glushko and Anno Saxenian

2
Network forms of organization

• Network organization typified by reciprocal
  communication and exchange, interdependent
• Market spontaneous coordination of
  self-interested individuals and firms via prices,
  
• Hierarchy administrative coordination with
  managerial authority, internal transactions
• Not points along a continuum, but a distinct and
  viable organizational model with historic
  antecedents

3
Organizational design trade-offs
complex
Hierarchy
Network
Product/ Service
Market
Firm
simple
Stable, predictable
Dynamic, uncertain
Environment
4
Information processing hierarchy
Line employees
High
Access to relevant information
Middle managers
Senior managers
Low
Strategic- Conception
Operational- Execution
Information
5
Hierarchy and network

• Hierarchical
• Closed, insular
• HQ sets goals
• Goals decomposed by managers
• Org. routines define detailed tasks to execute
  and verify execution
• A vast machine that generates rules for
  decomposing broad goal into small easy steps,
  another set of rules for checking compliance

• Networked
• Open, loosely federated
• Info flows up, down, and sideways (lower units
  can shape higher)
• Provisional general designs proposed at top
• Initial designs revised in collaboration with
  lower level units, external internal, and
  iteratively
• Routines and standards are all provisional and
  replaced as goals change

6
Network v. hierarchy

• Network organizations outperform hierarchies in
  volatile environments, where goals change so
  quickly that reducing to seamless set of task
  specs is highly risky, if even possible.
• In turbulent environment network organization
  produces more useful and resilient design for
  goods or services by canvassing more alternatives
  in less time than a hierarchy with same goals.
• Network organization achieves three goals
  simultaneously cuts development time and
  increases utility and reliability of design.

7
Fordism in US auto industry

• The big three postwar oligopoly
• closed, hierarchical, secretive.
• vertical integration of production
• arms-length relations with dependent suppliers
• standardization and cost-minimization
• forecasting, push-based planning
• 1970s 80s competition intensifies
• Inflexibility of tight technological coupling
• Liitle internal ability to innovate due to cost
  cutting
• No autonomy to suppliers to experiment, build
  capability
• Womack, Jones and Roos The Machine that Changed
  the World The Story of Lean Production (1991)

8
Japanese autos Toyota

• Toyotas lean production model
• Vertical disintegration and specialization
• Trust-based (studied not blind) relations
• Collaborative sharing of risks, costs
  information
• Mutual orientation and ownership or problems
• Benchmarking, design for manufacturability
• Concurrent, simultaneous engineering
• JIT manufacture, TQM, error correction
  detection
• Co-evolution of network members without lock-in
• Toyota System relies on pull feature for
  production scheduling (not push driven by sales
  targets)

9
Networks as fractal design

• In colloquial usage, a fractal is a shape that
  is recursively constructed or self-similar, that
  is, a shape that appears similar at all scales of
  magnification and is often referred to as
  "infinitely complex." See below, the Mandelbrot
  set.

10
Fractal link design cognitive map
SUPPLIER
SUPPLIER
CUSTOMER
supplier
customer
supplier
customer
SUPPLIER
SUPPLIER
Nishiguchi and Beaudet, 1998
11
IT and organizational transformation

• Value of IT only realized when coupled with
  complementary organizational investments such as
  business processes and work practices.
• Investments increase productivity by reducing
  costs, increasing quality, timeliness,
  convenience, and variety.
• Brynjolfsson and Hitt (2000)

12
Complementary investments cases

• Work practices, MacroMed
• Required greenfield site
• Supplier relations, Baxter ASAP
• Lower prices, more speedy, variety, convenience
  innovation
• Customer relations, Dell
• Build-to-order v. build-to-stock

13
Learning by monitoring

• Importance of ongoing measurement, monitoring,
  sharing, and learning about process improvements.
• Information exchange made possible by IT only
  valuable in partnerships based on trust, not
  price. Why?

14
Managing modularity

• Modular system units that are designed
  independently but still function as integrated
  whole.
• As solution to turbulence increases flexibility
  and innovation in building complex products.
• Requires visible design rules and hidden design
  parameters.

15
Visible v. hidden information

• Visible design rules
• Architecture modules and functions
• Interfaces interaction, communication
• Standards testing and measurement
• Hidden design parameters
• Decisions that dont affect design beyond local
  module
• Only communicated within design team

16
Modularity in practice

• Computer system design manufacturing
• Design tasks core, memory, storage,
  input/output, mfg, components software etc.
• Production tasks microprocessor, OS, DRAM, hard
  disk, video logic, monitor, keyboard, assembly
  test, box, manuals, power supply, fans, software
  development tools, applications
• Modularity is beneficial only if partition is
  precise, unambiguous, and complete.

17
Strategy as ecology

• Business ecosystems
• Loose networks of suppliers, distributors,
  outsourcing firms, makers of related products or
  services, technology providers, other
  organizations (that affect, or are affected by,
  creation and delivery of companys offerings)
• Platforms
• Services, tools or technologies that other
  members of ecosystem use to enhance own
  performance, define new niches

18
Platform v. application

• Platform
• A system that can be re-programmed and customized
  by outside developers/users hence adapted to
  countless other needs and niches
• Application
• A system that cannot be reprogrammed by outside
  developers, a closed environment, so only does
  what original developers intended
• Example
• Wang word processor v. Microsoft DOS personal
  computers

19
The ecosystem edge

• Ecosystem examples
• Wal-Mart, Microsoft
• Productivity, robustness niche creation
• Keystone creates and shares value
• EBay
• Dangers of domination
• Physical via vertical or horizontal integration
• Value extracts value (Enron v. EBay)
• Leveraging a niche
• Specialization and differentiation, innovation

20
Next class
21
(No Transcript)