Tuesday, May 4, 2021

Organizations Rule! When Self-Organization Became Structured

We often overlook an interesting contrast between the workplace and our private lives. In the workplace, we have an organizational structure in which people have fixed authority, are grouped together in units, and have specified processes for regular operations and for how to handle many exceptions. In our daily life, we have none of these (unless we are the von Trapp family), but we still get things done. To the curious mind, this begs the question of what organizations are for, apart from controlling people who cannot be trusted on their own.

Felipe G.Massa and Siobhan O’Mahony have published research in Administrative Science Quarterly that gives a nice answer to that question. They examined the self-organized Anonymous movement, which started off radically different from normal organizations in structure (they had none), processes (they improvised them), and ethos (freedom of information and action is paramount). Anonymous earned a reputation as an unpredictable group of activists that could suddenly descend on targets through protests and hacker attacks, seemingly organized through little else than internet forum conversations.

The only problem with this reputation is that it is only true of early stages of the Anonymous movement. They did indeed organize through shared forums and used shared norms and jargon to define boundaries and direct action. But Anonymous attracted so many newcomers that these mechanisms were no longer enough to maintain the identity of the movement and the cohesion of their actions, resulting in chaos. Reacting to this, senior members of the movement sought to use norms both for integrating new participants and for directing the protest actions they had become famous for, which were becoming less systematic and predictable.

Norms work well, right? After all, the Catholic church has applied strong norms and has been in operations for a couple thousand years. But churches are organizations too, and they use structure and processes just like any other organization. And the time came when Anonymous started looking more and more like an organization.

Anonymous now has well-defined roles, with different levels of experience and expertise determining what role a member fills. Anonymous has a hierarchy, with decisions made centrally and communicated outwards to the peripheral members. Anonymous has training of new members, manuals for how to act, and tests that allow promotion into higher ranks. In short, Anonymous is an organization.

Is this controversial or surprising? My first guess is that the most surprised people share one of two very different beliefs. One is the belief of economists that coordination of many is a simple matter of aligning preferences through some simple device, such as a price. This belief is correct, but it turns out that prices and mass-market goods are one of the few contexts in which it holds. The other is the belief of ideologists that mass movements can be coordinated by shared beliefs and norms. That is also correct, but only for short periods of time, as Anonymous found.

My second guess is that organizational theorists are the least surprised. We should not be surprised because what we have learned time and time again is that organizations are unbeatable for coordinating the actions of many, whether they be friends, strangers, or in between. Just ask Anonymous, if you can find the right person to ask.

 Massa, F. G., & O’Mahony, S. (2021). Order from Chaos: How Networked Activists Self-Organize by Creating a Participation Architecture. Administrative Science Quarterly, forthcoming. doi: 10.1177/00018392211008880

Friday, April 30, 2021

Church or Science? Moral Authority in Stem Cell Research

Who decides what can be done in society and business? The conventional answer in Europe is that it was the church in medieval times, the state after that, and now it is a free-for-all with business having a prominent role. All parts of the conventional answer are inaccurate, and we know that the correct answer depends on the context. So, let us consider a context with very strong dividing lines: stem cell research. Stem cells are “primitive” cells that have not yet specialized into specific types, so they can be used to cure a wide range of medical conditions provided they can be coached into becoming a type of cell that needs to be replaced or repaired. They are also controversial cells because a primary source of stem cells for research and production is fetal tissue – early-stage embryos.

Church beliefs on what embryos are for and scientists’ ambitions to cure degenerative diseases like Parkinson’s and Alzheimer’s clashed, and this conflict was examined by Joelle Evans in research published in Administrative Science Quarterly. In her study, a research laboratory encountered outside pressures against the stem cell research and reacted by having internal debates and forming a response. In so doing, the scientists took on a second role as creators and marketers of a moral stance explaining why stem cell research was valuable and how it should be done.

What she documented is an unusual role for scientists. More commonly, science is thought to be a free exploration of questions for which there is no moral judgment until the time comes to use the insights. This type of scientific handoff is very common, although it has been known to create complications in some cases – such as among the scientists who developed the atom bomb, with full knowledge of the purpose of their research.

Stem cell research is not nuclear physics and has no weapons application, but the question of what kind of raw materials can be used, and how they can be used, is fraught with moral problems. These moral problems have practical implications. For example, the USA has rich access to surplus blastocysts (pre-embryos) because in vitro fertilization (IVF) procedures create more blastocysts than can be safely inserted. IVF clinics routinely destroy excess blastocysts because they are barred from turning them over for stem cell research. As of 2019, a few hundred stem cell lines had been approved for use, and these are called stem cell lines because each originates in a single blastocyst with cells that keep being reproduced.

The researchers in this study faced two debates. Externally, they faced criticism for their use of stem cells and calls to account for it morally. Internally, they differed in their views on what could and should be allowed, with the internal lines of contention being shaped by the external pressures. The need to make an external account for their work was unfamiliar for researchers and made complicated by their internal divisions.

How did they respond? Interestingly, the combination of external pressure and internal fissures helped the lead researchers formulate a set of moral values that they could justify through connecting with accepted forms of ethical reasoning and explain externally and internally.

This served two purposes. Externally, the scientists gained a role in defining the value of their work and the constraints on how it should be conducted. Internally, they unified an organization that could easily have become divided, maintaining motivation for the team members troubled by the apparent conflict of moral values. They achieved strength through unity while embracing the diversity of beliefs within their laboratory walls.

Evans J. 2011. How Professionals Construct Moral Authority: Expanding Boundaries of Expert Authority in Stem Cell Science. Administrative Science Quarterly Forthcoming.

Thursday, April 22, 2021

Do People Governed by Algorithms Improve or Quit?

Wait, what does it mean to be governed by algorithms? If you do not know that yet, you are not working for any of the gig contracting platforms (Uber, TaskRabbit) or employers using algorithms to assess employees and predict and manage training and promotion. The increase in data processing capacity and machine learning tools means that algorithms have crept into a multitude of organizations and influenced how they manage people. Importantly, in some places the use of algorithms is acknowledged, and the results are shared with the employees, but in other places it is secret. Some workplaces make the algorithm transparent to employees, and others make it opaque. Because people usually learn how to game transparent algorithms to get high scores, opaque algorithms are becoming increasingly common and are currently the most important to understand.

So, what do opaque algorithms do to people? That is the topic of research by Hatim A.Rahman published in Administrative Science Quarterly. He focused on a labor platform that matches freelance workers with clients. The platform implemented an opaque evaluation routine that produced a new type of quality score for freelancers that was visible to them and to potential clients. How do people react to such scores? We know that scores become goals, and people commonly try to improve their performance by making changes. That is exactly why transparent algorithms result in inflated scores after a period of adapting to the algorithm. But opaque algorithms do not tell people how to improve, making the scores produced by those algorithms less useful as goals.

Instead of targeted improvements, opaque algorithms can produce experiments to find out what elements of the algorithm affect the score, and how. Many freelancers tried to change how they worked with clients through simple actions such as changing the type of work, length of contract, procedure for closing the contract, and so on. But these changes were unlike the changes made when decision-makers face goals that are more easily understood. As has been documented in research on performance feedback, it is very common for people facing low performance relative to a goal to react by making changes to improve the performance. That happened with the opaque algorithm too, but it was much more selective.

First difference: Not everyone tried to make changes. Many individuals who were not highly dependent on the platform responded by quitting it. And this was true whether they had high or low performance, so even many high-performing freelancers (according to the algorithm) simply left.

Second difference: Not everyone’s likelihood of making changes was a result of the algorithm score. Low-performing individuals were experimenting with different approaches regardless of whether they had setbacks in their scores or not. That was important because in the platform, a score below 90% was considered low, so the result was continuing turmoil in how freelancers were working.

Third difference: Among those who performed best and were dependent on the platform, those who experienced setbacks made changes to how they worked. So far so good, especially if those changes actually improved how they worked. But what about those who did not experience setbacks in the score? They tried to limit their exposure, including by not working with new clients on the platform. Having a high score was valuable, and accepting new work on the platform might endanger it, so they preferred to stick with existing clients or to find new clients that would let them work outside the platform.

Clearly, the opaque algorithm produced scores that made it easier for clients to distinguish between freelancers, and it also governed the freelancers by changing how they behaved. Were these changes improvements? Normally performance feedback on a meaningful goal results in improvements, but it is far from clear that an opaque goal has the same effect. Indeed, the three differences in how these freelancers reacted suggest that the opaque algorithm was a poor governance tool. 

Rahman, Hatim A. 2021. "The Invisible Cage: Workers’ Reactivity to Opaque Algorithmic Evaluations." Administrative Science Quarterly, Forthcoming.

Tuesday, April 13, 2021

CEO Power: Who is it Good For?

The CEO of a firm is given power to control the firm. That is because the purpose of the CEO role is to create a position that has centralized control, to enable consistent formulation and execution of strategy. The CEO is in turn governed by the board of directors, who also have a say on the strategy and who assess the results of the strategy execution. So far so good, but then there is the question of how much power the CEO should have, and what happens when the CEO has too much power.

Here is a classic example of too much power: The CEO can influence how the board of others assesses the CEO by choosing the reference group of other firms and CEOs that this firm is compared against. Do some CEOs really have this power? Does it benefit them? Does it harm the firm? Research by Pino G. Audia, Horacio E.Rousseau, and Sebastien Brion published in Organization Science gives the answers: Yes, yes, and yes.

The key here is that a firm can be compared either against a standard reference group such as an industry average or a reference group that is tailor-made to suit someone in the firm. Remarkably, even though the SEC guidelines strongly warn against tailor-made reference groups, 30% of the firms in the data they analyzed had them. Interviews indicated that although this choice of reference group should be done by the Chief Financial Officer (CFO), the reality was that the CEO was often deeply involved. So yes, at least in some firms CEOs had the power to change how they were assessed.

Did they benefit from this power? The simplest and arguably most meaningful measure of benefit is how much the CEO is paid. Controlling for everything else that influences pay, CEOs of firms with tailor-made reference groups were paid more when the firm performance was lower. So, clearly the point of a tailor-made reference group was to get paid more when firm performance indicated that they did not deserve it. It was an insurance policy.

Were firms harmed? The question of harm is difficult to answer, but it is easy to discover whether others tried to penalize the firm. This they did. Securities analyst coverage and rating of a firm’s stock is very important for the firm value, and securities analysts quite systematically downgraded firms to a lower rating or even stopped following them if they had tailor-made reference groups. The firm’s owners also reacted, as they saw an increase in governance resolutions filed by shareholders at the annual meetings.

The CEO use of power to shape the assessment of the firm’s performance was consequential for the CEO and the firm, and as we might expect, in opposite directions. The CEOs used their power to benefit themselves in ways that hurt their firms. This, at least, gives one answer to the question of what it means to give a CEO too much power to control the firm.

Tuesday, March 23, 2021

How Much to Know? Entrepreneur Experience and Venture Failures

We are well aware of the advantages of knowledge, both when doing something conventional and when making innovations. People who teach entrepreneurship do it because knowledge helps the foundation of a successful venture. But is there such a thing as too much knowledge?

When I work alone, more knowledge is better – it generally gives performance at a higher level, and it gives the creativity that can yield outstanding outcomes. My earlier researchon innovations in the comic book industry is one of many research projects showing this effect. Things get more complicated when multiple people come together to do something complex like founding a new venture. The great benefit of having much knowledge and many kinds of knowledge is the potential for combinations that others cannot think of. The problem with doing this in a team is that combining knowledge requires communication, and communication gets harder when each member has different types of knowledge.

So how to resolve this dilemma? Research by Florence Honoré published in Academy of Management Journal shows a nice path.
The idea is simple: variety in knowledge is great as long as it stays within one person, but teams should also have shared knowledge that transfers directly to the problem they are solving.

This makes sense if we think of specialized knowledge as roughly equivalent to languages. People with shared experience speak the same language, while people who have different experiences need to translate. A person with many kinds of knowledge is a polyglot, and that is OK because we are all good at talking to ourselves.

So what did the research show? New ventures were at great risk of failing if their venture team had a mixture of experiences across team members, and this problem got worse the more founders had earlier been employed by multiple firms. On the other hand, more shared experience among the founders helped the firms survive, and this was especially true if the venture had multiple founders who transitioned from the same prior employer to founding a venture together.  

The implication for entrepreneurship is obvious. A team with experience in the same industry that they are forming a venture in will perform better, and they will do especially well if they make sure to also have one member with a variety of experiences. And, they should listen carefully to that person, because it is exactly the integration of knowledge from this polyglot member that can benefit the venture most. In other words, this research is another win for diversity in business.

HonorĂ©, Florence. 2021. "Joining Forces: How Can Founding Members’ Prior Experience Variety and Shared Experience Increase Startup Survival?" Academy of Management Journal forthcoming.

Friday, March 12, 2021

Who does Strategy? Organizations!

A new book will be published soon, “Strategic Management:  State of the Field and Its Future,” edited by the excellent scholars Irene Duhaime, Michael Hitt, and Marjorie Lyles. My chapter is titled “The organizational view of strategic management,” and it synthesizes how the fields of organization theory and strategic management have moved towards each other already and will probably continue to do so in the future.

Why is this, and why does it matter? Let us start with the second question. There are two widespread myths among students of strategy, including researchers, and executives also believe them. The first is about the power of the individual decision maker. This myth almost makes sense. All of us make decisions many times a day, starting with simple stuff like choosing goods to buy and moving up to life-changing decisions such as educational choices. We feel powerful when doing that. But are we independent? Maybe we think we are, but do you really think that the enormous sums spent on marketing to influence our decisions are wasted? Research says they are not. We make decisions, but not independently.

Executives making decisions feel powerful too, only more so. And why not, executives making strategic decisions can allocate and redirect enormous sums of money and hours of effort. But are the executives independent? It does not take a large organization to make the executive completely dependent on information about the internal organization and external environment that is captured, processed, and presented to the executive by others. The individual choosing a cereal is influenced by marketing. The executive making strategic decisions is a product of the organization.

The second myth is that strategic decisions are a simple matter of picking the option that maximizes the economic value of the firm. If only that were true: life would be easier and we could pay executives much less because it is not hard to line choices up by value and pick the best. But strategic decisions are about uncertainty and evolution. They reach into the future, so the alternatives cannot be lined up by value, but it is possible to understand the type and size of uncertainty, and it is also possible to make choices that alter the uncertainty. They reach into the future, so it is important to guess how the world changes, and how the organization can evolve to match the world, or even influence it.

The solution to these two myths is to view the organization as the strategist. The responsibility for being strategic does not really lie with specific executives like the CEO, it is spread throughout the organization as its divisions, functions, teams, and individuals deal with a changing world, seeking to adapt to it and communicate what they have learnt to each other. It is in this interface that the fields of organization theory and strategic management communicate with each other. Strategies are shaped by societal groups outside the organization, individuals and groups inside it, the commitment and learning resulting from past strategies, and the goals formulated to manage past strategies. All of this is organizational, and all of it is strategic.

Despite these overlaps, organization theory and strategic management do not always communicate well. Organizations do not determine strategies, but some researchers think they do. Strategies cannot be chosen independent of organizations, but some researchers think they can. The reality is that organizations are stuck in an adaptive strategic cycle. The modern synthesis of organization theory and strategy is that problem and opportunity discovery by internal decision makers directs strategic change, and this strategic change in turn modifies the organization over time. More and more researchers in organization theory and strategy do their work with this adaptive cycle in mind, and in doing so they advance both fields of research. And this research in turn improves the teaching of management, and the practice of management.

Wednesday, March 3, 2021

The Diffusion of Differences: Two Paradoxes in Management Research

Is it possible to copy what others do and still become different from them? That seems like a paradox, but it could be reality in the world of organizations. Here is how it happens: Some new practice appears that claims to solve a problem, for example a technological innovation or a management technique. Is the claim true? It might be, but it might not, and the uncertainty about the value of an innovation is a problem that management needs to solve. Often, looking at what others do and copying them is an easy and smart solution. But if that is what organizations do, they should become similar to each other, right?

Wrong. Organizations are multidimensional in their activities and the environments they face. Some organizations copying others does not mean that all organizations do; they are often trying to solve different problems. Some organization copying specific other organizations does not mean that all organizations do; they often have different peer reference groups. Some organizations copying other organizations does not mean that they fully accept what the others do as true; they often try out innovations and reject those that do not fit their needs. For each new practice all these processes occur, and organizations live in a chaotic environment with many new practices that spread and are copied. What we see is the diffusion of differences.

How do we know this? In a recent research paper published in the Academy of Management Annals, Ivana Naumovska, Vibha Gaba, and I checked the last 20 years of diffusion research – 178 research articles in total. What did we find? First, less than half the studies reported how many organizations adopted a practice at the end of the study period, but from the studies that did report, less than 20 percent adopters was the most common result. Why did organizations react so differently? Usually because they faced different environments, so they were solving different problems, though other differences such as past learning and network ties also distinguished adopters from non-adopters. Looking over the past research, the diffusion of differences is a consistent finding across the articles.

This brings me to the second paradox. Most diffusion researchers believe that diffusion leads to similarity, or in their language, “mimetic isomorphism.” Why? One reason is that the diffusion of differences is surprising conceptually. It is hard to believe until you examine the evidence and think about the process. The more important reason is that the researchers have started with a deservedly famous theory article, “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizations Field” by Paul DiMaggio and Woody Powell, and have gone on to over-interpret its conclusions. In that paper, copying other organizations was one process that could lead to similarity. Researchers these days say that copying other is a process that does lead to similarity. These are very different claims.

Our conclusion? First, obviously, theory should not get in the way of evidence. Second, the strong belief in diffusion creating similarity means that there are lots of holes in our knowledge about what diffusion processes do. Because differences among organizations have been overlooked, we simply do not know enough about their sources.

Naumovska, Ivana, Vibha Gaba, and Henrich R. Greve. 2021. "The diffusion of differences: A review and reorientation of 20 years of diffusion research." Academy of Management Annals forthcoming.