ORGANIZATIONAL

ANALYSIS FINAL

1. Describe and explain the concepts of rationality, information, transactions and networks as well as the ways in which these concepts are employed in different organizational theories.

2. Analyze and assess the case on the New York fashion industry presented by Uzzi as well as the contribution he makes to organizational theory.

Christoffer Cirillo Copenhagen Business School

211294-2273 International Business and Politics

STU: 22.734 Organizational Analysis Final 2017

Standard pages: 9,9 13/01/2017

1

Introduction

This paper will take on a two-fold structure. First, it will describe and explain the concepts of

rationality, information, transactions and networks, comparing the employment of each in relevant

theories. Each will be treated separately, but due the closely intertwined implications of each

concept I will seek to continuously bind them together, before briefly concluding on their role in

organizational analysis. Second, the paper will analyze and asses the case on the New York fashion

industry by Uzzi (1997) and how it is builds on and contributes to organizational theory.

Part I – Central Concepts and Theories

Rationality

The concept of rationality is central in the study of organizations. It is sensible to start off any

consideration of rationality with Weber (1911), where after I will consider the complementary work

of Taylor (1916) and the revisions of Simon (1997). Weber’s work is mostly on the structural level

and outlines bureaucracy, which he considers the naturally developed shape of modern, efficient

organizations. It is characterized by professionalism, rules, hierarchy, legal authority, from which

it drives its rational character (Weber, 1911, p. 196). As Weber states, ‘Bureaucracy has a ‘rational’

character: rules, means, ends, and matter-of-factness dominate its bearing… bureaucracy has

destroyed structures of domination which had no rational character’ (Ibid., p. 244). His work

assumes the “economic man”, also found in neoclassical economics, whose decisions and actions

are founded on a full or instrumental rationality. This allows actors to make sound and logical

decisions based on full, panoramic knowledge, which allows for maximization, whether of utility or

profit. Weberian bureaucracy was considered the future of society and the pinnacle of rational

behavior.

A complementary perspective on rationality can be seen in Taylor’s The Principals of Scientific

Management (1916), which mostly deals with the individual level. In his study the worker has a

separate rationality from the foreman, for example engaging in the practice of “soldiering”,

deliberately slowing down ones work to avoid consequences such as a lower piece-rate (Taylor, 1916,

2

p. 66). The new rationality of the management which Taylor describes is based on a scientific

approach, whereby the quest for efficiency are gained through information collection, division of

work and standardization. Taylor theorizes that scientific management eliminates the practice of

soldiering and mends the gap in rationality between workers and managers, as “…the surplus is

made so great both sides will stop their fighting…that there is no occasion to quarrel (Ibid., p. 68).

Weber and Taylor have similar dispositions towards the notion of rationality and “economic man”

and both believed that the “one best way” of organizing which they proposed would supplant all

other types of organization. They both highlight division of labor, supervision, standardization and

hierarchy to achieve efficiency in a rational manner. Per Scott (1987), they can be categorized as

closed rational systems, in which: i) Organizations are independent of their environments, ii) actors

share the goals of the organization, and, perhaps most importantly, iii) actors are considered fully

rational in their actions.

The concept of rationality is augmented by Simon in his work on decision-making, where he argues

as his central thesis that ‘it is impossible for an individual to reach any high degree of rationality

(Simon, 1997, p. 183). Simon instead introduces the concept of bounded rationality, where the

rationality attainable for an actor or organization is constrained by three overarching factors, i)

incomplete knowledge, ii) imperfect anticipation of the future and iii) a lack of choice among all

alternative behaviors (Ibid., p. 93). As Simon states, ‘the number of alternatives he must explore is

so great, the information he would to evaluate them so vast, that even an approximation to objective

rationality is hard to conceive (Ibid., p. 92). Simon thus rejects the previous model of a maximizing

“economic man” and introduces the “administrative man”, who satisfices, or makes due, through

approximations. However, Simon agrees that we can achieve higher rationality, albeit still bounded,

through organization. This is due to organizations assisting in directing attention and planning

behavior. As Simon states, ‘Organizations are fundamental, then, to the achievement of human

rationality in any broad sense.” (Ibid., p. 111). Another key point is that intuitive behavior is not

necessarily irrational, but can be based on a huge catalogue of expert knowledge and is equally

rational with slower decisions, quite like a chess player being able to play many games at once with

only minimal decrease in ability (Ibid.). Ultimately, rationality is considered bounded, both

individually and in organizations, which is closely connected to information.

3

Information

The second concept considered is information, which is closely related to knowledge. First, I think

it is prudent to draw a somewhat subtle distinction between the two. The paper will consider

knowledge as a step further than information, which is to say that information is a prerequisite. As

such, access to information gives us the opportunity to develop knowledge and can be considered

a broader term. Having drawn this subtle distinction, I will start by considering how information is

employed in different theories of organizational analysis. In Taylor (1916), as mentioned,

information is the basis for creating a more efficient organization through the scientific method

and in Weber (1911) as the basis for a professionalized hierarchy. The informational requirement in

both can be said to be based on rules and routines and they assume high levels of information.

Simon (1997), on the other hand, considers limited information as a constraining factor, leading to

his notion of bounded rationality, as explored above. These theorists largely consider information

in a symmetric sense, but the notion of asymmetric information is more concretely set forward by

Robert Michel.

Information is of the utmost importance in organizational analysis partly because it carries with

implications of knowledge and power. Robert Michel, described in Lipset (2009), highlights how

any bureaucracy or large organization is subject to the ‘iron law of oligarchy’, whereby the few at

the top will dominate the organization with their own corrupted goals and status quo bias. The

insurmountable advantage of the leaders stems in part from an asymmetric distribution of

information: ‘They are privy to much information which can be used to secure assent to their

programme’ (Lipset, 2009, p. 16). As such, ‘large scale organizations give their officers a near

monopoly on power” (Ibid, p. 16). Thus, if we accept the broad definition of rational organizations

from Scott (1992), where the purpose is the pursuit of relatively specified goals, asymmetric

information is crucial, as it can mean a complete derailment of the stated purpose of the

organization. This highlights how information is central in understanding organizations.

Another significant take on information can be found in Peter Blau (1995), who researches how we

use informal structures to by-pass the potentially information flow-constraining formal rules of

organizations. Blau, and the human relations strand of the field, emphasizes social aspects and

informal organizations more than earlier theorists, signifying a move to natural rather than simply

4

rational systems. In his study of a federal agency, Blau observes how the agents by-pass the rule

stating they must consult only their supervisor for help by requesting information from their

colleagues to avoid admitting ignorance. Blau observed that the informal consultations and

exchanges of information between agents ‘greatly contributed to the effective operations” (Ibid, p.

115). This highlights how the Weberian bureaucracy can be stifling in its rigidity and formulization,

which is why informal organization is always present and can aid the effective distribution of

information. Blau is also closely related to the concept of transactions, as the consultations in the

federal agency can be considered “an exchange of values; both participants gain something, and both

have to pay a price”, which leads us to the next section.

Transactions

The third central concept of organizational analysis to be considered is transactions. Transactions

is a broad concept, but a good place to begin is Coase (1937), who introduces transaction costs and

the economic approach to organizational analysis. Coase seeks to explain why firms arise, on the

organizational level, even though we already have the market to conduct transactions. The answer

lies in the costs associated with the market and using the price mechanism, such as searching,

negotiating, and enforcement costs (Ibid.). The point where it becomes useful to create a firm is

when the market fails to be the most efficient way of conducting transactions, as Coase states: ‘The

operation of a markets costs something and by forming an organization and allowing some authority

to direct the resources, certain marketing costs are saved’ (Ibid, p. 392). However, as Coase argues,

this does not mean we will eventually have a single enormous firm, there are ‘decreasing returns to

the entrepreneur function’ which limits the expansion of firms (Ibid., 394). As such, a firm will

expand until the costs of organizing an extra transaction equals the cost of the market or another

firm (Ibid., p. 404).

Oliver Williamson (1975) builds upon Coase’s theory and the economic approach with a formal

development of transaction-costs economics (TCE), which draws on bounded rationality,

uncertainty, small-numbers bargaining and opportunism (Perrow, 1986, p. 237). These factors

together can lead to market failures due to opportunistic behavior, which is why Williamson argues

that a reduction of transaction costs can be achieved by vertically integrating, i.e. buying out a

supplier who may be creating hold up problems, which in turn explains growing firms (Williamson

1975; Perrow 1986). Another way Williamson theorizes lowering of transaction costs is the move

5

from U-forms, separate division under the same CEO, to M-forms in internal organization, which

disperse responsibilities to quasi-autonomous operating divisions in large firms (Williamson 1975).

This allows firms to ‘economize on bounded rationality and attenuate opportunism’, thus lowering

TC’s. This is also the shape we see in large firms today. TCE signifies a move to open rational

systems, per Scott (1998), following the closed systems discussed earlier.

Ouchi (1980) clarifies the transaction cost based approach. In fact, Ouchi defines organizations as

‘any stable pattern of transactions between individuals or aggregations of individuals’ (Ibid., p. 140),

ascribing a central role to transactions, both on the individual, organizational and inter-

organizational level. Ouchi theorizes that three different organizational structures, i) markets, ii)

bureaucracies and iii) clans, are best suited for completing transactions based on different

normative and informational requirements (Ibid.). As Coase and Williamson before him, this

highlights how markets and bureaucracies are the most efficient structure for transactions

depending on the situation. The new addition here is the clan structure, which can minimize

transaction costs through a reduction in opportunism and information asymmetry, achieved

through a high degree of socialization and thus shared norms and values (Ibid.). Ouchi’s point can

be summarized as the notion that ‘Bureaucracy, market and clan organizations exist because each

of them, under certain conditions, offer the lowest transactions cost’ (Ibid., p. 140). The clan structure

allows for more trust due the shared norms and values which reduce transaction costs, a concept

which can carry us to the next central concept.

Networks

The last concept of organizational theory described and explained is networks. Network theory is a

relatively new branch and part of the shift towards open systems, and can be used to study both

individuals, organizations and fields of organizations. A good place to begin an account is the work

of Granovetter (1985), who breaks with what he considers under- and oversocialized views on

organizations and economic life. The undersocialized view is expounded by economic theorists

such as Williamson, and assumes everyone is a stranger in the complex and Hobbesian economy.

Granovetter critiques this notion, which fails to consider social networks that allow even small firms

to carry out very complicated transactions and places too much emphasis on organizational form.

6

Granovetter (1985) thus considers the impersonal market a myth and highlights the importance of

trust. On the other hand, we have the oversocialized view, which holds the mechanical, structuralist

view that once we know an individual’s class or some other trait the behavior is assumed to be

virtually ‘automatic’ (Ibid, p. 486). However, these two extremes are not opposites, rather, they have

the key commonality of ignoring social relations – what Granovetter calls embeddedness. In

Granovetter’s theory (1985, p. 487),

‘Actors do not behave or decide as atoms outside a social context, nor do they adhere slavishly to a

script written for them by the intersection of social categories … they are instead embedded in

concrete, ongoing systems of social relations’

These social relations, a person’s network, provides optimal information and produces trust, which,

however, also leaves actors vulnerable (Ibid, p. 492). This will be expanded upon in the second

section of the paper.

Granovetter (1973) gives another crucial concept of network theory in The Strength of Weak Ties,

which I will explain in tandem with Burt’s (1992) Structural Holes. The concept of weak ties

describes the ties connecting separated clusters of dense networks, which have strong ties in them.

Granovetter’s point is that these weak ties are actually quite powerful, in that they empirically offer

you the most new info and opportunities (Ellersgaard 2016). This point is picked up and elaborated

on by Burt (1992), who emphasizes the importance of having many weak ties, and therefore social

capital. He introduces structural holes, which are powerful positions of brokerage between

networks. Having many structural holes in your network means that you avoid too many redundant

contacts, who provide the same information, instead branching out and accessing new information.

Burt concludes that ‘…players with optimized for structural holes enjoy higher rates of return on their

investments because they know about, have a hand in, and exercise control over, more rewarding

opportunities (Ibid, p. 49). This highlights information again, and also how closely tied to bounded

rationality it is – well-designed networks can expand rationality through more information. The

dangers of embeddedness and new contributions to network theory will be explored in the second

part of this paper on Uzzi (1997).

The first part of this paper has defined and explained the central concepts of rationality,

information, transactions and networks and contrasted their employment in various theories of

7

organization. It is apparent that the concepts are closely intertwined and that they traverse the

progression in the field of organizational study. Rationality and decision-making is very much

contingent on information, which in turn is a central aspect of theories on transactions. The second

half of this paper will deal with similar themes by analyzing and assessing the case presented by

Uzzi (1997).

Part II – The case of Uzzi (1997)

Brian Uzzi’s (1997) study on the New York fashion industry provides an account of the nature of

transactions between the 23 firms studied and their structural networks. I will start by analyzing

and assessing his findings on the opportunities and risks associated with embeddedness and then

discuss how these build upon and add to key concepts and central theorists from the first section

of the paper.

Uzzi’s findings show what he deems to be a ‘paradox of embeddedness’ – the fact that ‘the positive

effects rise to a threshold … after which embeddedness can derail economic activity’, as they become

vulnerable to certain shocks (Uzzi, 1997, p. 35). This is a direct addition to the network theories

covered before. First, I will consider these positive effects, or assets, of embedded ties in

transactions, which are close, trusting, and cooperative relationships, contrasted with the other

distinct type of relationship called ‘arm’s length ties’, which are cold and more in line with atomized

market relationships as seen in Coase and Williamson (Ibid., p. 41). The assets provided by

embedded ties over arm’s length ties are plentiful,: i) Trust enriches the firm’s opportunities,

resources and flexibility, ii) The ties provide quick, exclusive, fine-grained and holistic information,

which is often more useful than price-info, and iii) joint problem-solving helps firms work through

problems, rather than simple exit-responses, which promotes learning and innovation while

reducing errors (Ibid., pp. 45-47). Second, the negative aspects - embedded ties do not exclusively

provide assets, certain paradoxical liabilities can be identified where embedded firms are more

vulnerable than market-oriented firms; e.g. when: i) A core network player unexpectedly leaves the

network, ii) Some institutional force rationalizes markets, such as when a conglomerate bought the

NY retailers, and iii) An echo-chamber of information develops in overly embedded, redundant

networks, sequestering them from external information (Ibid., pp. 57-58). Thus, to achieve the best

8

of both worlds, the fashion firms would be wise to “mix and match” the two types of ties. ‘Network

structures that integrate arm’s length and embedded ties optimize an organizations performance

potential’, whereas having solely one of the two increases the rate failure and increases vulnerability

(Ibid., pp. 59-60).

Uzzi’s findings build and expand upon the central concepts of organizational theory covered in the

first half of the paper and contributes new findings as well. In terms of rationality, Uzzi employs

terms from Simon (1997), such as satisficing, highlighting bounded rationality. The notion that

‘Actors follow heuristic and qualitative decision rules rather than intensively calculative ones‘ is very

much in sync with Simon’s description of intuitive decision-making (Uzzi, 1997, p. 61). However,

Uzzi also contributes a new type of ‘expert’ rationality to fit his embedded network theory, which

is ‘Neither purely rational or boundedly rational, but expert’, which fits the unique logic of the

embedded model (Uzzi, 1997, p. 63). Thus, Uzzi can be shown to build directly on and modify the

concept of full rationality from Weber and Taylor and the bounded rationality of Simon. The

concepts of information and transactions are also crucial aspects of Uzzi’s work. His account of

information is more nuanced than the early theorists such as Weber and Taylor, who look at

efficiency, and Michels, who looks at power, and can be most aptly compared to the account given

by Blau (1955). Blau works on a different level of analysis though, where he considers early, intra-

organizational, informal “networks” and transactions of information between them, conversely,

network theory can consider the inter-organizational level of transactions and ties. Both observe

and describe the efficiency and benefits attained by informal information exchanges, one by-

passing stifling, rigid formal structure and the other by-passing the noisy price information of

atomized markets.

Precisely transactions are central in Uzzi’s work, as he deals with exchanges in economic life and

highlights his differences from Williamson (1978), quite like network theorists before him. TCE and

other economic approaches are characterized as insufficient (Uzzi 1997). The subjects interviewed

all heavily emphasize trust in transactions with embedded ties, differing from the cost-based, self-

seeking market account of Coase and Williamson, where monitoring and contracts play major

parts. TCE is critiqued for its focus on dyadic relations while ignoring of social relations and for

having ‘bias towards opportunistic rather than cooperative relations’ (Ibid., p. 37). Market

enforcements are made redundant in embedded ties through mutual trust as the ‘primary

9

governance structure’, although the terms are still applicable in the arm’s length ties. Uzzi also

builds on Ouchi (1980) whose account of highly-socialized and trust-based clan structures share

these similarities with the Uzzi’s concept of embedded ties, albeit on the intra-organizational level.

Ouchi’s clan model is also considered most efficient for exploratory firms due its unique socialized

character, while Uzzi states that NY fashion industry with its specific characteristics such as time

sensitivity may have proven especially conducive to embedded ties (Ouchi, 1980; Uzzi, 1997, p. 64).

Uzzi explicitly states that if ‘the trend towards smaller, flatter, more connected organizations

continues, networks could become an important way of organizing, which is a structure very similar

to clans, networks could become a more important way of organizing, suggesting a synergetic effect

(Ibid., p. 64). Uzzi can then be said to offer contributions to the concepts of rationality, information

and transactions.

Of course, Uzzi also shares theoretical ground with and explicitly builds on the works of

Granovetter (1973; 1985) and Burt (1992). Uzzi agrees on the importance of social capital, as

mentioned in Burt (1992), and he picks up on Granovetter’s work of embeddedness, but Uzzi

himself states that he ‘adds complexity’ to both these views (Uzzi, 1997, p. 63). Firstly, Burt’s theory,

which assigns tremendous value to the existence of structural holes, is made more nuanced by the

explicit differentiation between embedded and arm’s length ties, which helps further

understanding of networks by emphasizing the importance of quality and management of each

relationship to access opportunities(Ibid.). Both Uzzi and Burt can be said to deal with the ‘how

question’ of network theory, as opposed to ‘who’, but where Burt emphasizes calculating rates of

return based on the sheer number of structural holes, Uzzi details how different configurations of

embedded and arm’s length ties provide opportunities and risks. Secondly, Uzzi agrees with

Granovetter (1985) that much of economic life is embedded in social relations, but he also nuances

Granovetter’s work. Uzzi reaches somewhat of a more moderate conclusion than Granovetter, as

Uzzi highlights the existence and importance of atomistic transactions as well, even though he

assigns the most importance to socially embedded transaction, “siding” with Granovetter over

neoclassical approaches. Uzzi (1997), then, offers contributions of nuanced value to network theory.

10

Where the first part of this paper explicitly defined and explained the central concepts of rationality,

information, transactions and networks and their employment, the second part analyzes and

assesses the case of the NY fashion industry by Uzzi (1997). I highlight how he builds on the central

concepts as they are employed in both earlier and contemporary theories, and how he contributes

to both network theory in particular and organizational study as a whole through his findings. This

further underlines the natural progression in the field of organizational study and the intertwined

nature and progression of the central concepts.

11

Bibliography

Blau, Peter (1955): Consultation Among Colleagues, Ch.9 in Dynamics of Bureaucracy, Chicago:

University of Chicago Press, pp. 99 -116

Burt, Ron (1992): Structural Holes, Cambridge & New York: Harvard University Press. Ch 1, The

Social Structure of competition, pp. 8-49

Coase, R. (1937): 'The Nature of the Firm', Econometrica, pp. 386-405

Ellersgaard, C. (2016). Network Theory.

Granovetter, Mark (1985): Economic action and social structure: The problem of embeddedness,

American Journal of Sociology 91:481-510

Lipset, Seymour Martin (2009): Introduction to Robert Michels Political Parties, in Robert

Michels (2009) [1915]. Political Parties. New Jersey: Transaction Publishers

Ouchi, William (1980), Markets, Bureaucracies and Clans, Administrative Science Quarterly 25: Pp.

129-140

Scott, W. Richard (1998), Combining the Perspectives in Organizations: Rational, Natural and

Open Systems, 4th Edition, Englewood Cliffs, NJ: Prentice-Hall. Pp. 127-132

Simon, Herbert (1997): Administrative Behavior, 4th edition. New York: Free Press. Ch.5, pp.92-139

Taylor, Frederick Winslow (1916): 'The Principles of Scientific Management', Bulletin of the Taylor

Society, pp 69-80

Uzzi, Brian (1997): Social Structure and Competition in Interfirm Networks: The Paradox of

Embeddedness. In ASQ, pp.35-67

Weber, M. (2009[1911]) Bureaucracy in H.H. Geertz and C. W. Mills (eds) 2009: Essays in

Sociology. NY: Routledge pp. 196-244

12

Weber, M. (1978): The types of legitimate domination' in Economy & Society: An Outline of

Interpretive Sociology, vol.1. Oakland: University California Press, pp.212-226

Williamson, Oliver E. (1975) Markets and Hierarchies. New York: Free Press, pp 132-154 on the

multidivisional structure