The design of an organisation is highly crucial for a firm in today’s world in order for it to achieve and sustain its competitive advantage that will place the firm in a stronger position than its rivals. The firm can manipulate the components of organisation design, fit these elements with one another and with the strategy, to impact the firm’s performance. Hence, the goal for the organisation is to have a good fit between the firm’s design and its competitive advantage in order for the firm to be strategically aligned with the strategy.
Any effective design will have to address 2 general problems: the coordination and incentive problems and must do so in a way that supports the organisation’s strategy.
The firm can make use of the Architecture, Routines and Culture (ARC) framework to grapple these problems. This essay will firstly describe how the ARC framework can be implemented accordingly. An effective design will depend on the 3 elements working together and so, these interactions will be analysed.
In addition, the implications of the framework will be examined too. To start, we need to define each component of the ARC framework. Firstly, the architecture refers to the dividing of the firm into subunits and establishing linkages among these groups. Secondly, routines are the formal and informal procedures while carrying out tasks developed from repetition. They embody established interfaces which pertains certain expectations about what will flow across them and a protocol for accomplishing the transfer.
Lastly, culture is the commonly held values and beliefs of individuals within the organisation and once deeply embedded, is the evaluative criteria for behaviour and decision making in the firm.
The 2 main challenges of organisation design are the coordination and incentive problems. As they are interrelated, their effects are intertwined and addressing one could impact the other.
The coordination problem refers to the challenge of establishing an organisation design that achieves an efficient deployment of assets within the firm so that it can achieve its objectives as efficiently as possible. There are several crux of the coordination problem: balancing the gains from specialisation and the gains from integration; and how the decision making process is designed with the need for access to information flows. The incentive problem refers to eliciting the right amount and type of effort in the presence of hidden information and hidden action. It arises from the divergence of interests and objectives of the manager and the shareholders and is most commonly linked to the Principal-Agent problem.
Having explained the key concepts, the coordination and incentive problems will be addressed with the ARC framework. In order to construct an organisation structure, the firm is broken down into subunits and such delineation impacts information and resource flows within the firm. To tackle this, one has to match an architecture structure which minimises coordination problem. An argument from the Strategic Management would be whether functional or divisional structures would be better to deal with it. A functional organisation is one which groups individuals according to the tasks they perform. The different functional groups (R&D, marketing, finance et.cetra) are clustered together to be overseen by a superior. Such a classification of groupings reaps the benefits of specialisation as information sharing and learning is facilitated.
There is an efficient spread of knowledge and incubation of ideas among the specialists such as in the R&D sector where creative ideas can be built upon other’s ideas to attain innovation. Functional division allows better problem solving process as having similar specialists such as engineers in a group can lead to early detection of a manufacturing glitch and faster solving speed. In addition, there is a clear hierarchy with well-defined positions established within each function. The role of advancement is clear and hence employees are motivated to specialise and invest heavily in human capital to advance.
On the other hand, divisional structure differs as the primary subunits are classified based on business divisions and under each of them are functional sub divisions. This allows for better facilitation of coordination across functions especially as the firm increases in scale and scope. If a retail firm divisions according to the different customer group it serves: Women and Children, both sub-divisions are served by functional groups. The design team could learn quickly about the change in taste of its customer group from the sales team of which will not be possible if the teams did not operate under the same subunit. This supports Alfred Chandler’s claim that divisional structure enhances accountability and communication.
Hierarchy too, is an important factor to consider when structuring a firm to address coordination problem. Since the communication among managers together with the dissemination of information and shared resources to the groups coordinates the actions of the subunits, the level and nature of hierarchy affects the effectiveness of the communication process. Passing information through each level consumes resources, causes delays and degrades the information by introducing noise and distortion. This justifies the allocation of decision-making rights to those who have the most immediate access to the relevant information. However, decision makers may not know how their decisions will affect the other subunits.
Away to address this is to create a formal linking mechanism that coordinates the decision across subunits or to centralise authority for only decisions which require more coordination. Horizontal linkages can also be established across units to achieve coordination. Its mechanisms facilitate information and resource flows without affecting the organisation of the subunits and this allows cooperation across units without sacrificing the gains from specialisation and decentralisation. There are several forms ranging from informal to formal procedures which include personal network, liaison, task forces and integrators. The selection among these options depends on the interdependence among subunits. More interdependent subunits will require a more tightly coupled design.
Horizontal linkages benefits are 2 fold: they promote information flows and they get the firm away from rigidity. An apt example would be the strategy of the Japanese auto mobile firms located in the United Kingdom. The managers and workers share common facilities and by doing so, horizontal linkages are built in the firm on a less formal setting with a flatter structure. Managers dine with the workers and this provides the platform for the quick dissemination of information and decision making.
Under the ARC analysis, routines also solves coordination problem as the established interfaces bring about large coordination gains. With each worker clear of his roles and the procedures, gains from specialisation is reaped. More importantly, huge informational efficiencies are gained as when tasks proceed from one unit to another, minimal amounts of information is needed to be communicated between units as each unit only needs to know the information to carry out its part.
Decision making routine also facilitates the decision making process as it is applied every time a decision is made, thereby excluding biased and inefficiency from disagreements among decision makers. Lastly, a routine way for one division to access the resources in another division enables the firm to coordinate in ways that would be difficult if the firm has to make a new resource sharing decision each time.
ulture too, induces cooperation. With a common set of beliefs, members of the firm will not approve of actions that violate the culture of the firm. The workers are naturally coordinated in actions and appropriate behaviour. With a well developed norm of reciprocity, resource and information sharing can be achieved between and across subunits and this enhances cooperation.
Also, culture helps employees focus on tasks that are important for the competitive advantage of the firm. The ARC framework can be implemented to deal with the incentive problems as follows. Compensation and reward schemes can be designed to induce desirable behaviour. Financial incentives are a strong motivation for workers to act in profit-maximising behaviour. However, this can lead to the substantial variation compensation over time and it is difficult to ascertain the profit impact of the units’ activities.
To reward more accurately, compensation can be tied to a combination of imperfect indicators of unit performance according to the 4 rules of thumb. However, these indicators are subjective and the cost of collecting and analysing the data could be too great. Architecture structure should also be considered to minimise the incentive problem by affecting the importance of cooperation across units. If decisions cut across 2 separate organisation units, the identities and performances of them are intertwined and this brings a self-interest reason to assist the other and cooperate. However, not fully owning the consequence of performance will dilute incentives for individual performance. Architecture has its limitations in dealing with the incentive problem and the other elements are important to better solve it.
Routines improve the incentive problem, but also not to a great extent. They do create opportunities to get better indicators of performance of which can be incorporated with the architecture compensation scheme of combining incentives from other indicators of performance. Routines can also automate activities for which it is otherwise difficult to provide incentives for. Lastly, culture plays a stronger rule in addressing the incentive problem as it targets the foundation of the issue of aligning interests. With a strong culture, it is possible to have the firm and subunits share similar goals thereby evoking that particular behaviour from individuals without pecuniary rewards.
Suppose a consultancy firm’s competitive advantage lies in providing effective solutions to their clients’ problem, it can spread this belief to its employees. If the employees attain considerable satisfaction from delivering results, they will behave in ways aligned with the company’s competitive advantage without the need of the firm to offer financial incentives for this behaviour. However, the difficulty in reinforcing culture has to be accounted for as it could meet resistance in a change in mindset among the employees. Yet once established, culture leads to an effective organisation design. Within the ARC framework, the elements of the organisation design interact with each other to solve the challenges posed.
An example could be how the culture could influence the routines of the firm as the standardised interfaces could be derived from the culture. With the norm of reciprocity in the firm, resource sharing routine will be established in such a way that subunits are more willing to share resources in order to solve the effective deployment of resources from the coordination problem. Another perspective of the ARC interaction could be how culture affects architecture. If a firm has an open-minded culture, it could direct the style of structure to a flatter hierarchy with more interaction between subordinates and superiors. This encourages improved flow of information asset in the firm. Using the ARC framework suggests many implications for the organisation. Given the complexity and intricate relationships between the elements of the firm’s ARC and the organisation design problems, designing the organisation is not as straight forward a task for the managers.
The managers will require a deep understanding and strong execution of the elements of the firm’s ARC or more problems could arise. A possible solution proposed by Saloner, Shepard and Podolny is to have a systematic approach to collecting information on the design challenge facing the firm and design elements. There are 2 parts to carrying it out of which the first is to ask and analyse problems that would be addressed if the organisation is restructured. The second part poses questions to gather a good description of the firm’s current ARC. The managers are to identify any inconsistencies among the elements that are making the organisation less effective as it could be.
Although this approach allows more accurate identifying of the weak areas of the ARC, managers will still have to learn by doing and tweak their policies over time for the optimal design. A second implication would be the need for the framework to be dynamic so as to achieve organisation agility. As an organisation is designed to obtain a competitive advantage for the firm, it is pertinent that the nature of its
competitive advantage is considered. The organisation design has to be flexible and change in tandem with the changing needs of the competitive advantage. Hence, there is no one best design to accommodate all considerations. Firstly, firms must continually develop and deepen its current competitive advantage to meet the challenges of competition (exploiting).
Secondly, the firm may want to alter its strategy to pursue another form of competitive advantage (explorer). A retail firm in an economy recession will need to change its competitive advantage to producing lower priced goods to garner market shares and can do this by flexibly changing its incentives to reward the manufacturing department based on sales volume, thereby producing at lower cost. Firms can meet this challenge by possessing elements of both exploration and exploitation to profit. Lastly, does the ARC framework act solely to design an organisation to achieve the firm’s competitive advantage? It could work better if complemented with other processes such as innovation. Innovation could be connected with organisation design to ensure a more sustainable competitive advantage.
A firm could incentivise its employees based on how good they are in coming up with cutting edge technologies to promote innovation in the firm. In conclusion, the ARC framework has given a reasonable approach to design an organisation. Most of the arguments, however, assume according to Alfred Chandler’s view that “structure follows strategy”. Does this relationship need to follow as such so that the company structure runs parallel to the strategy? I beg to differ as the strategy and structure relates reciprocally and hence, the ARC framework could be at times used at the deciding factor of the company’s strategic planning too.