Epistemic complexity and belief conservation : an additional explanation for the lack of knowledge diffusion from global frontier firms to laggards

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Epistemic Complexity and Belief Conservation

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An Additional Explanation for the Lack of Knowledge

Diffusion from Global Frontier Firms to Laggards

Author: Tessa Kempen Student number: 9660070

Date of submission: 29 June 2018 Version: final version

Programme: Executive Programme in Management Studies, Strategy track

Institute: Amsterdam Business School, University of Amsterdam Supervisor: Prof. Dr. J. Strikwerda

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Statement of originality

This document is written by Tessa Kempen who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

In most OECD countries productivity growth slowed down in the last decade and even did so before the economic and financial crisis. A closer look tells us that not all firms experience a slowdown however; a small number of firms actually show robust productivity gains. These are the firms on the ‘global productivity frontier’, but their gains are offset however by the large number of ‘average’ firms. This productivity problem isn’t a lack of global innovation, but the failure by many firms to learn from new technologies and best practices. Common explanations for the lack of knowledge diffusion are government policies, the use of patents or a winner-takes-all mentality of the global frontier firms. This study looks into two

additional explanations: epistemic complexity and belief conservation. The aim of this exploratory study was to investigate to what extent our conventional concepts about strategy lead to a faulty, incorrect or incomplete knowledge diffusion from frontier firms to the laggards. A qualitative vignette analysis was undertaken to answer the research

question. The results showed that it is plausible that epistemic complexity and belief conservation lead to a faulty or suboptimal knowledge diffusion from frontier firms to the laggards. Underlying these results was a lack of knowledge of how organizations actually function.

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How shall I talk of the sea to the frog, if he has never left his pond?

How shall I talk of the frost to the bird of the summer land, if it has never left the land of its birth?

How shall I talk of life with the sage, if he is the prisoner of his doctrine?

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List of tables

Figure 1: End-to-end processes as an addition to the organizational structure 16

Figure 2: Relationship between language of description and organizational reality 25

Figure 3: Conceptual model 31

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1 Introduction

Knowledge as a driver of productivity is the key to economic growth in the global economy (Adalet McGowan, Andrews, Criscuolo, & Nicoletti, 2015; Harris, 2001). In most OECD countries however, productivity growth slowed down in the last decade and even did so before the economic and financial crisis (Andrews, Criscuolo, & Gal, 2015). The last productivity surge took place in the late-90s and early-2000s as a result of the rise of information and communication technology (Criscuolo, 2015; Venturini, 2015). Since then, the US and other OECD economies have witnessed a significant decline in productivity growth. A closer look at the productivity numbers tells us that not all firms experience a slowdown; a small number of firms actually show robust productivity gains. These are the firms on the ‘global productivity frontier’, but their gains are offset however by the large number of ‘average’ firms. In the manufacturing sector, the productivity of global frontier firms grew 3.5% which is double that of the average manufacturing firm. In the services sector the gap was even larger. Services firms on the productivity frontier saw a productivity growth of 5% whereas the average services firm saw a productivity growth rate of 0.3%. More importantly even is that the divide between the most productive firms and the rest has been growing (Andrews et al., 2015). Some firms obviously ‘get it’, while the rest is lagging behind (Criscuolo, 2015).

Global frontier firms are technologically ahead of the rest, they are typically larger and more profitable and they make more use of patents. Most strikingly, they are very much ‘global firms’ that operate in different countries (often as part of a multinational group). Their strength lies in their capability to innovate, and they understand that this requires more than just investing in R&D. To be truly innovative, firms need to be able to combine technological, organizational and human capital improvements. Seen from this perspective,

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the productivity problem isn’t a lack of global innovation, but the failure by many firms to learn from new technologies and best practices. It seems that knowledge diffusion between the technologically advanced firms and the laggards is not taking place anymore (Adalet McGowan et al., 2015; Andrews et al., 2015; Criscuolo, 2015).

Why do firms fail to adopt the right combination of organizational and technological innovations necessary to close the gap with the most successful firms? Access to knowledge has never been easier, and therefore doesn’t explain the learning problems of the laggards. The Internet, academic and MBA research, a large consulting industry, a dynamic labor market, numerous business schools, management books and journals, a large number of academic articles, proceedings, conferences etc. provide an almost unlimited knowledge diffusion in the economy.

Rivkin (2000) suggests that a successful strategy may simply be too complex to imitate. The complexity of a firm’s strategy and related organizational configuration, as suggested by Chandler’s dictum ‘structure follows strategy… but the market is the common denominator’ (Chandler, 1962: 382-383), depends on the number of elements of its strategy or configuration and on how these elements interact. When the elements (or decisions) that embody a strategy are numerous and tightly linked to one another, the strategy itself may be very hard to imitate, even if it is well documented and parts of it are already adopted by rivals. Vercelli (2005) states that we need to discern at least two types of complexity. The first is objective complexity and the second type is subjective or epistemic complexity. Objective complexity grows related to the growth of the economy, especially the growth of productivity (Hidalgo, Hausmann, & Dasgupta, 2009). Epistemic complexity results when an observer observes and tries to understand a situation, e.g. a new organization form, through

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complexity to see the full complexity of the observed situation (Vercelli, 2005). E.g. in the conventional theories on organization forms the organization of information does not play a role, whereas it does in the new organization forms. This epistemic complexity may explain the slow diffusion of some successful and heavily researched practices. Additionally, people have the tendency to interpret new information and new experiences in such manner that it matches prior beliefs and conserves their existing world views. This is what March (1994) calls ‘belief conservation’. Belief conservation makes us less receptive to new information and ideas and as such may hinder the introduction of new strategies or organizational forms in the organization. This leads to the following research question:

To what extent do our conventional concepts about strategy lead to a faulty, incorrect or incomplete knowledge diffusion from frontier firms to the laggards?

Complexity as a barrier to knowledge spillovers has been studied before, both from empirical and theoretical perspectives (Rivkin, 2000). However, this always concerned objective complexity. This thesis explores the concept of subjective complexity and to what extent it impedes our abilities to learn from the most successful firms globally. This is important, because the gap between the global leaders and the rest is increasing when it comes to productivity growth. The ability to learn from global frontier firms should therefore not be taken for granted: future growth will to a large degree depend on it (Adalet

McGowan et al., 2015). Or as Paul Krugman wrote in his book The Age of Diminished

Expectations: ‘Productivity isn’t everything, but in the long run it is almost everything. A

country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.’ (Krugman, 1997: 11).

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To answer the research question, this thesis taps into theoretical concepts from business administration as well as cognitive psychology. This broad focus is reminiscent of Simon's (1973) statement that a difficult problem can sometimes be easily solvable when the researcher looks beyond the original discipline (Simon, 1973: 185). It is organized as follows: in the next section the most relevant literature that pertains to global frontier firms, complexity and biases is discussed in the literature review and a number of propositions is presented. Then the research design and data analyses are explained. In the results section the most relevant findings of this study will be presented. In the discussion section the findings will be interpreted in relation to the literature. The limitations of this study and suggestions for further research can also be found in this section.

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2 Literature Review

The first sections of this chapter present an overview of global frontier firms and their distinctive characteristics. Subsequently, vicarious learning and barriers to learning from other firms learn are described. Complexity, both ontological and epistemic, is

introduced as an additional barrier to learning from other organizations. Lastly, the concept of belief conservation and related concepts are explained as possible barriers to vicarious learning.

2.1 Productivity and global frontier firms

History shows steady growth in productivity since Taylor first started to study manual work (time-motion studies) in order to improve industrial efficiency at the end of the 19th

century (Drucker, 1999). Productivity advanced as a result of elimination of redundant movements (overcoming conventions) and innovations: new tools, technologies, methods and processes. Knowledge and learning are regarded as important drivers of productivity (Harris, 2001). Improving productivity is seen as a key competitive advantage for firms, because productivity gains lead to cost reductions or quality improvements (or both)

(Bernolak, 1997). From a global perspective, productivity growth has been the source of the growth in economic welfare and social gains in the 20th_{century (Adalet McGowan et al.,}

2015; Drucker, 1999).

This explains the interest in recent OECD research that reported a global productivity slowdown since the beginning of the new millennium (Andrews et al., 2015). Productivity is procyclical, i.e. it falls in recessions due to lagging redundancies, resulting in unused

capacity, and it rises in economic booms, due to unused labor capacity being used (this however is induced growth of labor productivity, whereas the economy is in need of intrinsic

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growth of labor productivity which results from applying new knowledge). However, Andrews et al. (2015) show that the decline in productivity growth started well before the economic and financial crisis. A closer look at the productivity numbers reveals however that a small number of most productive firms (also dubbed ‘global frontier firms’) still experience solid productivity gains, while the other firms remained more or less stagnant with regard to their productivity. While it is often assumed that the United States are the global

productivity leader (Adalet McGowan et al., 2015), the OECD researchers show that the global productivity frontier is actually populated by firms from different countries. Perhaps the most important finding though, is that the productivity gap between global frontier firms and the rest is growing.

Who are these global frontier firms? According to the OECD definition, global frontier firms are the 100 most productive firms globally in a 2-digit sector each year. Competition at the global frontier is fierce, and from one year to the next approximately 50% of the firms at the frontier is replaced. After 5 years, less than 20% has remained. Global frontier firms seem to have some things in common, apart from being more productive than laggard firms. Technologically they are ahead of the rest, they are typically larger, have larger sales and are more profitable, and they are more capital and patent-intensive. They are very much ‘global firms’ in the sense that they operate in different countries, often as part of a multinational group. Not only do they constantly benchmark themselves against other frontier firms across the globe, they are also interconnected with suppliers and customers from different countries along the global value chain. As a result, innovations spread more rapidly across the globe than within a country. The divide between a Western frontier firm and a Chinese frontier firm is closing, whereas that between a Western frontier firm and a compatriot

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Strikwerda (personal correspondence, 2018) has identified the following characteristics of global frontier firms:

1. They have a clear mission (collective purpose linkable to individual purposes); 2. There is a clear hierarchy of values;

3. Strategy is clear and translated in choices, performance parameters, projects, strategic themes;

4. All employees have access to all information, including effect-information (processes), and fast-feedback information is provided;

5. Global frontier firms have an information infrastructure allowing for new business models, flexible adding and removing (end-to-end) processes, allowing efficient coordination with resource departments, absorbing complexity, compliance and institutional requirements;

6. They have a contribution measurement infrastructure allowing workers to demonstrate their contribution irrespective of processes and projects they participate in;

7. Their process/project/resource information systems allow for resource mobilization and self-organization, and the possibility to exert influence and organize support;

8. A monitoring frequency allowing for trial-and-error, experimenting and learning; 9. Employees have the freedom and are incentivized to bring in new knowledge, to

explore new ideas in a culture that avoids group think and an echo-chamber effect;

10. Work that provides identity, gratification, belongingness, personal and

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Ideas about global frontier firms can be found at two levels, (i) the level of

characteristics and (ii) the system level. At the characteristic level, global frontier firms are typified in terms of agile working, self-organizing teams etc. This means that the classical ‘command and control’ style of the organization has been replaced for a culture that could be described in terms of ‘persuade and cajole’. The role of management is to support and coach employees, rather than to closely audit and monitor them (Neilson, Martin, & Powers, 2008). A purpose-driven mission gives guidance to employees while allowing for personal creativity and ownership. Employees understand what the organization is trying to do and can allocate their time and effort accordingly, which leads to better financial performance (Bart, Bontis, & Taggar, 2001; Kaplan, Norton, & Davenport, 2004). Employees are

encouraged to explore new ideas outside their own project team, department or even organization, which leads to productivity growth and greater creative output (Pentland, 2012, 2013). And the organization understands that, besides pay, there are many other things that motivate employees to perform well (Neilson et al., 2008).

At the system level global frontier firms are characterized in terms of the

organization of information and the factoring of decision making having precedence over structure (Simon, 1997). Research indicates that information that flows freely across

organizational boundaries and a clear idea of decision rights, without second-guessing once decisions are made, are among the most important characteristics of highly successful organizations (Neilson et al., 2008). The declining costs and changing role of information have led to information-based empowerment; employees themselves decide which information is relevant in performing their duties (Strikwerda, 2012). Business models of global frontier firms have the customer value proposition as a starting point, and the

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(end-(Johnson, Christensen, & Kagermann, 2008; Kaplan et al., 2004; Osterwalder, 2004) The database of the firm is at the level of transactions and one entity, not fragmented by applications nor departments, implying a permissibility for a range of different business models, on which (end-to-end) processes can be added, altered or removed as a kind of ‘plug-and-play’ activity (Merrifield, Calhoun, & Stevens, 2008). End-to-end processes are governance mechanisms according to the economic theory of knowledge governance (Foss, 2007; Foss & Michailova, 2009). One reason for this is the transition to the knowledge economy in which knowledge has become a production factor (Strikwerda, 2017a). But the changing nature of knowledge also plays a role. In addition to codified knowledge,

uncodifiable and personal knowledge has become important. This type of knowledge becomes productive through interactions between knowledge workers, and not through transactions (Jensen, 1998). End-to-end processes are governance mechanisms to efficiently organize these interactions in order to recombine this personal, uncodifiable knowledge flexibly and quickly. As such they are a management instrument with a sound basis in

economic theory (Foss, 2007; Foss & Michailova, 2009). End-to-end processes are defined as accountable entities (including their own budget, business cases, and objectives) that are organized independently of the structure of the organization, i.e. they don’t make the original structure of the organization disappear but are an addition to the structure as a configuration of resources, as shown in Figure 1 (Strikwerda, 2017c).

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Figure 1: End-to-end processes as an addition to the organizational structure (Strikwerda, 2018; Adapted from Kanter, 2009)

Being an addition to the structure of the organization, end-to-end processes imply duality and as such an increase in internal complexity. This requires in-depth knowledge in the areas of operations management, industrial engineering, total quality management, and governance mechanisms of managers (Reenen, 2011). The conceptual complexity of

managers also appears to be a requirement to successfully deal with this complexity (Montuori, 2000). Conceptually complex managers are able to use multiple concepts from different sources to develop new strategies, they are aware of new cause-and-effect relationships, and they have a tolerance for and know how to adapt to change, conflict and complexity (Montuori, 2000: 69). This ability to look at things from different perspectives and to switch to another lens when the usual way of sense-making fails, is called ‘reframing’ by Bolman and Deal (2008). This concurs with Simon’s (1973) proposition that if a problem is too complex to solve in its original problem space, it might be easily solvable if one has the

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wit to use knowledge from another discipline (Simon, 1973: 185). Integrative thinking is another ability that managers who appear to deal with complexity and change well possess (Martin, 2007). Most decisions are the result of a certain degree of consensus, even though this often leads to middle-of-the-road decisions. Integrative thinkers can work with two opposing ideas simultaneously in their minds and then make a decision that has elements of both ideas but at the same time improves on each.

Even though many of the above-mentioned characteristics are well-known and proven successful, they are hardly adopted by laggard firms. An explanation for this is that these characteristics are scattered throughout several different sources. So far, no

authoritative and accessible management book has been published that transfers these insights to a larger audience.1

To summarize: global frontier firms innovate continuously, and they understand that this requires more than just investing in R&D and implementing technologies nowadays. Their strength lies in their ability to combine technological, organizational and human capital innovations and improvements on a global scale (Criscuolo, 2015). Seen from this

perspective, the productivity problem isn’t so much a lack of global innovation, but the diminishing capacity of the other firms to learn from the global frontier firms (Adalet

McGowan et al., 2015). It seems that the laggards don’t make use of knowledge spilling over from the global frontier firms anymore.

1_{An example of such a highly influential management book is Concept of the Corporation by Peter Drucker}

(Drucker, 1946). Drucker’s book was about one case, General Motors. His insights were reasonably in line with scientific management, there was a supporting new accounting technique, and what he described fit within the organization theory of those days, especially the military organization. To a large number of organizations worldwide, the organization principles of GM became models for effective management. The organizational practices that are developing now do not fit within the conventional organizational theory however. They further disseminate management information and accounting information and they impose higher demands on people in terms of being able to deal with complexity. In addition, in the academic world abstract models have developed that do not reveal the technicality of these new forms of organization, also because it requires looking across disciplinary boundaries.

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2.2 Vicarious Learning and Knowledge Spillovers

Learning by observing other organizations, i.e. vicarious learning, is one way for organizations to acquire knowledge (Huber, 1991). Firms copy strategies, procedures,

routines and technologies from similar, more successful firms, especially when uncertainty is high due to poorly understood organizational technologies and goal ambiguity (House & Singh, 1987). This spilling over of knowledge from one organization to other organizations leads to the accumulation of the public stock of knowledge (Caballero & Jaffe, 1993). Though the notion of knowledge spillover is not conceptually clear (Breschi & Lissoni, 2001), the literature does agree on the importance of knowledge spillover for innovation (Caballero & Jaffe, 1993; Levitt & March, 1988). Some researchers define knowledge spillover as the unintentional exchange of knowledge with others, and intentional knowledge transmission as knowledge transfer (Fallah & Ibrahim, 2004). Breschi & Lissoni (2001) argue that

knowledge spillovers should be seen as an externality, because firms that invest in R&D facilitate other firms’ innovation efforts. This can either happen unintentionally, such as when innovations lead to imitation, or intentionally, for example when researchers publish the results of their work or in the case of open source software. Carlino (2001) identifies two types of knowledge spillovers. The so-called MAR spillover denotes a spillover due to a concentration of firms within the same industry, with the semiconductor industry in Silicon Valley as an often-cited example. In contrast to MAR spillovers, Jacobs spillovers are related to the diversity of industries in an area. The more diverse the environment, the more it is comprised of people with different backgrounds and perspectives. Exchanges of ideas between people can then encourage the development of innovations.

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channels for acquiring information about what other organizations are doing and how they do it are diverse. Management consultants have played a major role in knowledge spillovers in the USA since the 1930s. New Deal banking and securities regulations in the 1930s led to a rapid growth of consulting firms, and management consultants started carrying ideas

between both public and private organizations. By doing so they contributed to economic growth and narrowed the gap between innovative firms and laggards (McKenna, 1995). Another channel for vicarious learning is the reverse engineering of a rival product, a practice not uncommon in the manufacturing industry. Employees changing jobs from one organization to another are another important source of information, just as employees being part of informal communication networks or visiting conferences, trade shows or professional meetings. Organizations oftentimes closely and thoroughly examine new patent applications and in some industries suppliers and customers pass on relevant information about another organization and its products or strategies (Mansfield, 1985).

2.3 Barriers to knowledge spillovers

Why is the pace at which firms make use of knowledge spillovers to close the gap with the technologically advanced and highly productive firms slowing down? Different government policies and frameworks between countries only seem to be a partial explanation for the existing productivity differences (Bravo-Biosca, Criscuolo, & Menon, 2016). Since access to knowledge has never been easier, this doesn’t explain the learning problems of the laggards either. The Internet, academic and MBA research, a large consulting industry, a dynamic labor market, numerous business schools, management books and journals, a large number of academic articles, proceedings, conferences etc. suggest an unlimited knowledge diffusion in the economy. Endogenous growth theory

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supports this and claims that economic growth is not the result from external forces but is generated within the system. The theory holds that investments in human capital,

innovation and knowledge contribute significantly to economic growth (Strikwerda, 2000). However, there are barriers to knowledge spillovers that prevent the imitation of innovative products or successful strategies. Research mainly focuses on two types of barriers. On the one hand, proponents of the resource-based view of the firm argue that because of causal ambiguity, tacit knowledge, asset erosion, first-mover advantages, social complexity and path dependency, strategies may be difficult to imitate (e.g. Barney, 1991; Dierickx & Cool, 1989). The importance of tacit knowledge as a barrier to knowledge spillover is also acknowledged by Adalet McGowan et al., who suggest that the higher productivity levels of global frontier firms are not only explained by their investments in knowledge-based capital, but in their capability to tacitly combine organizational, technological and economic competencies and improvements in the production process (Adalet McGowan et al., 2015).

On the other hand, industrial economists focus on the barriers that incumbents erect to make imitation difficult or costly for imitators, such as patents. Frontier firms

understandably might raise barriers to keep their strategies and processes a secret as well, but in their study Andrews et al. (2015) acknowledge that even seemingly non-rival

technologies are not spilling over to laggards. The OECD looks at barriers from a

macroeconomic perspective and proposes a number of policy improvements to improve competition and revive what is called ‘the diffusion machine’ (Andrews et al., 2015).

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2.4 Complexity as a barrier to knowledge spillover

Rivkin however (2000) proposes that strategies can simply be too complex to be imitated. Complexity is often defined as the amount of information needed to describe and predict the properties of a particular system (Vercelli, 2005). In his seminal paper The

architecture of complexity, Simon (1962) argues that complex systems such as organizations

are complex because of two factors: (i) the number of parts that make up the system and (ii) the degree of interaction between those parts. Vercelli (2005) states that we need to discern at least two types of complexity. The first is objective or ontological complexity and the second type is subjective or epistemic complexity.

2.4.1 Objective or ontological complexity

Objective or ontological complexity refers to the nature of a phenomenon; it is concerned with the objective properties of organizations, systems and objects in the real world (Schapper, De Cieri, & Wolfram Cox, 2005). Rivkin (2000) describes how, from the perspective of ontological complexity, a strategy can be too complex to imitate. In an

adaptation of a model developed for evolutionary biology by Kauffman (1993) and first used in management science by Levinthal (1997), he shows how the number of components (or decisions) that comprise a strategy, and the degree of interaction among those components can make a seemingly well-known strategy too complex to imitate.

Some researchers find that simulation models such as the NK model used by Rivkin do not add very much to theory development. Davis, Eisenhardt and Bingham (2007) argue that the zero-search cost assumption in Rivkin’s model is unrealistic, and that values of 0 and 1 as representations of strategic choices are empirically distant. Notwithstanding the

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the best strategic decision, as some economic models posit, but that they are looking for the best possible combination of strategic choices. It also makes clear that the degree of

interactions makes this search for the optimal combination very hard. When a strategy consists of a large number of decisions and these decisions interact with each other, even well-known winning strategies may be too complex to imitate (Rivkin, 2000). Moreover, complexity theory makes clear that the initial position of an organization has a unique influence on where the organization might end up. Even it manages to copy a winning strategy exactly, it can still end up in a different, less successful, position than its rivals (Kauffman, 1993; Schneider & Somers, 2006).

In 1962, Simon already proposed the idea that organizations are complex systems (Simon, 1962). Complex systems are composed of hierarchically organized sub-systems, but between these hierarchical levels there is loose programming allowing for localized

instances of adaptive behavior in response to new situations. The cross-cutting connections between sub-systems make complex systems difficult to understand and model. However, many complex systems are redundant and this redundancy is used to simplify their

description.

Adding to the aforementioned complexity is the notion that companies that compete on the edge in high-velocity markets have temporary and unpredictable strategies

(Eisenhardt & Brown, 1998) or that they sometimes pursue more than one strategy at a time (Schwenk, 1995). Strikwerda (2008) describes how the increasing complexity of markets forces organizations to either more organizational complexity in the case a firm wants to maintain a dominant market position, or to regress to a small niche in that market based on a simple model.

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Ontological complexity grows related to the growth of the economy, especially the growth of productivity (Hidalgo et al., 2009). Adam Smith in his Wealth of Nations already mentioned that specialization (i.e. the division of labor) is necessary for economic growth (Smith, 1776). Specialization leads to more complexity, because the increasing number of specialized activities all need to interact efficiently and effectively. Thus, even though the information to describe new strategies or organization forms might be too complex for vicarious learning to take place, this complexity is also necessary for productivity growth.

2.4.2 Subjective or epistemic complexity

Epistemic complexity refers to the complexity in our thinking. It results when an observer observes and tries to understand a situation, such as a new organization form, through the lens of a (conventional) concept or theory (including language) which lacks the requisite complexity to see the full complexity of the observed situation (Vercelli, 2005). For example, as described above in new organization forms the organization of information plays a role, but in our conventional theories on organization forms it does not. These conventional theories are the subjective concepts or models that we use to describe or forecast objective systems with. However, the degree of subjective complexity does not correspond with the degree of objective complexity required to semantically understand these objective systems.

Schapper et al. (2005) even argue that organizational complexity is an epistemic matter, rather than an ontological issue. Our current economic models and concepts are based on systems that reach a stable equilibrium and cannot satisfactorily describe and explain systems that keep changing continuously and that never reach such an equilibrium. Our causal models with their boxes and arrows are simply not adequate to describe and

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understand systems with a high number of complex interactions and feedback loops

(Anderson, 1999). In order to comprehend the irreducible ontological complexity of the real world, it is necessary to introduce at least a minimal level of epistemic complexity in our theoretical models and concepts (Vercelli, 2005).

Language can also lack requisite complexity to understand the full complexity of an observed situation (Daft & Wiginton, 1979). An appropriate fit between organizational reality and the language to describe this reality is required to gain insight into complex organizational behavior. Natural language contains a vast amount of words and these words can be combined into an infinite number of combinations to communicate ideas, concepts, and strategies. It has a high variety but is also imprecise. Artificial languages, such as computer code, are far more precise because they are designed specially to communicate narrowly defined concepts unequivocally. To make significant statements about complex organizations a high variety language of description is required (see Figure 2). Daft and Wiginton (Daft & Wiginton, 1979) argue that our current concepts and models are mainly found in cell 3 and 4, because in order to be unambiguous about the results researchers tend to use low variety languages. Complex organizations however require high variety languages as found in cell 2. The use of a low variety language description to describe a complex organization leads to oversimplification and the potential lack of insights.

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Figure 2: Relationship between language of description and organizational reality. Adapted from (Daft & Wiginton, 1979).

The notion that our conceptual models lack the requisite complexity to see the full complexity of a certain situation is not new. In the 1950s General Systems Theory was an influential theory about (properties of) systems that were believed to be universally significant for all disciplines (Boulding, 1956). Systems were categorized into a hierarchy of complexity consisting of nine levels. The more complex phenomena (level four and higher) are so-called ‘open systems’ because they were thought to have the capacity for self-maintenance by importing energy flows from its environment. Human organizations are level eight phenomena in Boulding’s hierarchy of complexity, only to be surpassed by level nine systems. The ninth level was added by Boulding to reflect the possibility that systems might emerge whose complexity could not yet be imagined (Pondy & Mitroff, 1979;

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argue that our conceptual models of organizations are rooted at a far lower level than human organizations themselves. Our conceptual models to describe them are level four, and our data collection efforts are level two. Phenomena such as the birth, death or reproduction of an organization, but also the creation of meaning and the use of language, are at a higher level of complexity than both conceptual and formal models could describe (Pondy & Mitroff, 1979: 10).

Epistemic complexity leads to new complex strategies being described using

conventional models. End-to-end processes are an example of complex strategies, because they are an addition to the original structure of the organization and as such imply duality. Due to epistemic complexity end-to-end processes are often regarded as a matrix

organization design. The matrix organization was designed as an attempt to combine the benefits of project organization and functional organization (Galbraith, 1971). Instead of offering the best of both worlds however, the matrix organization suffered from a number of problems that were directly related to the design itself (Davis & Lawrence, 1978). These problems were real, but were also partly the result of Galbraith (Galbraith, 1971) (and others) trying to describe the matrix design in terms of the traditional Weberian linear hierarchy (Strikwerda & Stoelhorst, 2009). Self-organization, another complex strategy because it requires a redesigned resource allocation process, is due to epistemic complexity described as changing the functional organization into a unit organization. Implementation of these new, complex strategies will be suboptimal as long as they are described and

understood by simple, conventional models. To fully understand their complexity and impact on the organization when implemented properly, managers have to broaden and deepen their knowledge (H. A. Simon, 1973; Strikwerda, 2017a).

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P1. Epistemic complexity leads to an incomplete understanding of the complexity of new organizational forms by managers, which makes the successful copying of these organizations forms more difficult.

2.5 Heuristics and cognitive frames

Managerial decision-making is characterized by uncertainty. Complex situations are uncertain, because information is incomplete or not quantifiable and therefore not all possible options with their outcomes and consequences are known. Because of this uncertainty, many managers rely on heuristics for decision-making (Artinger, Petersen, Gigerenzer, & Weibler, 2015). Gigerenzer and Gaissmaier define heuristics as ‘strategies that ignore information to make decisions faster, more frugally, and/or more accurately than more complex methods’ (Gigerenzer & Gaissmaier, 2011: 254). Not always do heuristics lead to better decision-making however. Some heuristics are based on past experiences and managers that use them consider them valid for decision-making if their previous experience was successful. Because of these heuristics, assumptions underlying administrative

processes sometimes remain implicit and, especially in the case of new situations, as a result their limitations in terms of applicability and validity remain implicit as well. In such case, relying on a heuristic that once was useful, may now lead to problems (Martin, 2007; Strikwerda, 2017a: 36). The same applies to the use of models: they highlight certain variables, but direct attention away from others. Highly successful models may also lead to habituation, resulting in a reduced responsiveness to other models (Pondy & Mitroff, 1979).

Managers tend to stick to existing heuristics, even though they may not be successful anymore, because of a characteristic of our thinking that is aimed at keeping our world view intact if we are confronted with new information. This is what March (1994) calls belief

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conservation. People have the tendency to interpret new information and new experiences in such manner that it matches previously existing beliefs and conserves their existing world views. An individual’s belief is usually strong, and because experience tends to be

ambiguous, the effect of belief conservation is substantial. Belief conservation has its roots in the cognitive psychology of the 1960s, where it is known as confirmation bias, one of the most studied and widely accepted cognitive biases. It is the irrational tendency to favor information that confirms our prior beliefs. Confirmation biases impact how we gather new information, but they also influence how we draw inferences and recall information

(Whittlestone, 2017).

Largely based on the idea of confirmation bias, in the 1980s Prahalad and Bettis (1986) introduced the concept of ‘dominant logic’. Dominant logic is defined as top

managers’ interpretation or conceptualization of the organization and the influence it has on the way they make critical resource allocation decisions. Whereas confirmation bias takes place at the individual level, dominant logic takes place at both the individual and

organizational level. It can be seen as an information filter, through which only data that are considered relevant by the dominant logic pass, confirming that dominant logic. As a result, top management will pay hardly any attention to data that are deemed irrelevant (Bettis & Prahalad, 1995; Prahalad & Bettis, 1986). The dominant logic determines how an

organization applies knowledge (Lane & Lubatkin, 1998) and as such is a fundamental part of organizational intelligence, but at the same time it puts serious constraints on an

organization’s ability to innovate (Bettis & Prahalad, 1995). Dominant logic thus is a source of organizational rigidity (Lane & Lubatkin, 1998). Change in the dominant logic is almost always triggered by a crisis (Prahalad & Bettis, 1986). Lane and Lubatkin (1998) argue that

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both organizations should show similarities. Global frontier firms appear to have a

traditional structure but in reality, structure is subordinate to processes (and information is organized disentangled from that structure, contrary to the traditional M-form) and its function is reduced to resource configuration (Strikwerda, 2017b) (see Figure 1). This would imply that the dominant logics of global frontier firms and laggard firms, for whom structure is still the key coordination mechanism, will seldom show similarities. However, those observing the organization of global frontier firms through the lens of laggard firms, that is, conventional organization concepts, will observe a traditional structure in those frontier firms. They will not see the different organization of information, will interpret processes as cooperation, not as governance mechanisms, and tend to explain what cannot be explained by structure, in terms of culture. Learning from global frontier firms will therefore be

difficult.

Some researcher find the view of the dominant logic on cognition too static, as if managers were held captive in a ‘psychic prison’ (Bolman & Deal, 2008). Kaplan (Kaplan, 2008) explores a less static sense of cognition by linking cognition and politics to elucidate how strategic choices are shaped during times of high uncertainty. She introduces the ‘framing contests’ model, which explains how actors attempt to attune their own cognitive frames to those of the organization through their interactions with that organization. Frames are guides that help us interpret our environment and that are constructed through

interaction. When frames about strategic decisions don’t correspond, actors start framing activities in an attempt to make their own frame resonate and gain support for it from others. If they are successful, their frame will become the predominant frame that will serve as a guide in strategic decision-making. If they are not successful, diverging frames may lead to postponing strategic decisions. A framing contest is therefore a political process that is

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very much intertwined with the pursuit of interests and which at times may be highly contested.

Belief conservation, confirmation bias and dominant logic are often considered as mistakes in our reasoning that should be avoided. This is a somewhat naïve way of thinking about these concepts however. If we wouldn’t have any expectations or assumptions about the world, making sense of it would be extremely cognitively demanding (Whittlestone, 2017). For top management, having a deep understanding of the core business is an important source of information (Prahalad & Bettis, 1986), it ensures focus and as such is a prerequisite for success (Strikwerda, 2017b). And even if management prefers information that confirms their existing beliefs, this doesn’t necessarily mean that management is biased or irrational. Existing beliefs can be a helpful guide in an uncertain world (Whittlestone, 2017).

However, a dominant logic may become a filter that blocks the passing of novel information and as such prevents the ability to see new opportunities and make use of new business models (Bettis & Prahalad, 1995; Strikwerda, 2017b). And strong existing beliefs and assumptions do influence our thinking and make us less receptive to new information (Whittlestone, 2017). Thus, belief conservation may hinder the introduction of new

strategies or organizational forms in the organization. This leads to the second proposition:

P2. Belief conservation leads managers to reinterpret new information into familiar concepts which makes the successful copying of these organizations forms more difficult.

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2.6 Conceptual model

The above-mentioned propositions lead to the following conceptual model:

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3 Research Design

This section gives a detailed description of the research design, data collection and sample of this study. The nature of this study is abductive; by exploring data and looking for a pattern, I am looking for a broadening of insights. Rather than looking to confirm existing theories, abductive research is related to the development of concepts and theoretical models (Dubois & Gadde, 2002); it is the operation through which we learn to understand anything new (Peirce, 1974). This does require a leap of faith from the reader, since in this thesis I’m not testing hypotheses but I’m looking for inference to the best explanation. The approach of this thesis is a qualitative one. When a topic is little known, as is the case with subjective complexity and to what extent it impedes vicarious learning and thus the successful copying of new organization forms, qualitative research can potentially uncover concepts and relationships through the rich data it generates (Saunders & Lewis, 2012).

3.1 Research Method

To answer the research question, a qualitative quasi-experimental vignette study consisting of four carefully constructed hypothetical scenarios was conducted. Though vignette analyses are mainly used in quantitative studies, they can and have been used in qualitative studies as well (Hughes, 1998). Most of these vignettes have been employed in social research though, e.g. in studies about violence among children in residential children’s homes (Barter & Renold, 2000), the perceptions of drug injectors regarding the risk of HIV (Hughes, 1998), ethical dilemmas in social work (Wilks, 2004), and caregivers’ sensitivity to conflict (Rahman, 1996). To my knowledge, qualitative vignette studies have not been used in management studies before.

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A vignette is a short story or detailed description of a situation to which research participants respond. By doing so, participants reveal their beliefs, perceptions or attitudes about these situations (Atzmüller & Steiner, 2010). Unlike a quantitative vignette analysis however, the vignettes constructed for this study did not contain variables that could be manipulated by the researcher and that allow respondents to rank or rate the vignettes (Aguinis & Bradley, 2014). Instead every respondent was presented the same hypothetical situations and was asked to answer open-ended questions about them as if they were part of the situation described (Finch, 1987). A form of manipulation was present however in the first three vignettes, in which respondents were confronted with a cognitive intervention to which they had to respond. Because the hypothetical cases approximate real-life situations, they acknowledge that cognition and meaning are specific to the participants’ situation (Hughes, 1998). The vignette analysis therefore seems an appropriate tool to explore to what extent epistemic complexity impedes vicarious learning.

To test for epistemic complexity and belief conservation, respondents are presented different organizational problems and then confronted with a solution to these problems in line with the strategies of global frontier firms. All vignettes are written in such way that the respondents are explicitly made part of the story (i.e. phrases such as ‘you work for an organization’, ‘a consultant tells you’ etc. are used). The first three vignettes consist of two parts and two open questions per part. In the first part a traditionally structured

organization consisting of different departments is introduced; each department has its own tasks, responsibilities, authorizations and its own budget. The market in which the

organization operates has become much more dynamic in recent years and change is frequent. This introduction is similar for all three vignettes. The first vignette then describes how by means of multidisciplinary project teams the organization expects to better cope

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with the changing environment; however, because the organization fails to redesign its resource allocation process, many projects do not deliver the intended results. Although the project teams are multidisciplinary, the effort of the team still runs according to the

functional plan. Respondents are asked to describe the problem, this allows me to

understand how they define the problem. Do they attribute the problems to the culture or structure of the organization, or do they understand that this organization has failed to properly design the resource allocation process and the access to information? As a control question the respondents are then asked how they would solve the problem. The second part of the vignette introduces the cognitive intervention. A consultant offers a solution to the problem based on a redesigned resource allocation process, with clearly defined decision rights and centrally available information, but department heads oppose this solution. The respondents are asked once again to describe the problem and how they would solve it. This time I want to check if they really understand the solution and if they see what is needed to make it work (i.e. training and coaching for the department heads, whose jobs are about to change significantly).

The second vignette describes how the organization uses the Plan-Do-Check-Act cycle to monitor the quality of products and services and to experiment with new techniques and protocols. However, improvements are currently taking too long. Respondents are once again asked to describe the problem and how they would solve it. Do the respondents understand that PDCA is a method that is inwardly focused and does not allow for

exploration? The second part of the second vignette introduces the OODA-loop (Observe, Orient, Decide, Act) as an alternative to the PDCA-cycle, with the advantage of being more flexible, outward oriented, and faster than the latter. However, the concern controller does

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are asked to describe the problem and their solution of the problem. This time I hope to learn how the respondents react to the OODA-loop and what they think should be the role of the controller.

The third vignette describes how rigid hierarchic structures have arisen in the organization that make it difficult for the organization to deal with the ever-increasing complexity of the environment. There is hardly any horizontal cooperation and coordination between employees of different departments. A training program to teach employees better communication skills is proposed to solve the problem. This time the respondents are asked to mention both the weak and strong points of the proposed solution. This allows me to find out whether respondents are preoccupied with structure or behavior, or that they

understand that in order to solve the communication problems, knowledge and information should be disentangled from the organizational structure. The cognitive intervention in the second part of the vignette involves a proposal for the introduction of end-to-end processes as the solution to the vertical silos that have arisen. Again, respondents are asked to

enumerate the strengths and limitations of the proposed solution. This allows me to find out if the respondents truly understand end-to-end processes and the implications for the organization. Presentations given by prof. Strikwerda served as the source for the stories in the first three vignettes (Strikwerda, 2016, 2017c, 2018).

The fourth vignette has a slightly different design than the first three. It consists of one part with one open-ended question at the end. This vignette describes how the

organization, in view of the unpredictability of the developments in the market, has started looking for flexible organizational structures in which employees are given the opportunity to use their own creativity and learning ability. The organization wants to start working with self-organizing teams to achieve this. The respondents are asked what they think should be

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done in the organization to enable working with self-organizing teams. If respondents look at this problem through a conventional lens, they would probably mention that the

organizational culture should foster self-confidence and trust etc. If respondents however look through a lens that understands the complexity of the situation, they would mention that to enable self-organizing teams, management has to take a number of administrative measures. The main source for this vignette was the book ‘Semco in de polder’ (Droste, 2017).

After developing the vignettes and programming them in Qualtrics survey software, they were pilot-tested by three individuals to check for comprehensibility and to avoid misinterpretation or misunderstanding. Some minor alterations were made after the test results and additional comments of the three respondents came in. It took the pilot

respondents between 20 and 40 minutes to complete the survey. Please refer to Appendix 2 for an English translation of the vignettes and to Appendix 3 for the Dutch online version.

3.2 Sample

To be able to answer the questions, knowledge of organization design, familiarity with the optimization of work processes and understanding of managerial terminology are required. Even though vignettes are hypothetical stories, relevance and realism are

important to increase similarity to participants’ real lives and to prevent an atmosphere of pretense (Finch, 1987; Hughes, 1998). Thus, I recruited a purposive sample of respondents so that the vignettes would be relevant to them (Saunders & Lewis, 2012). Sixteen people started the vignette study, but four of them didn’t answer all questions and were left out of the study. The twelve remaining respondents (6 male, 6 female, aged between 34 and 56)

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experience with organization design and process optimization (see Appendix 1 for an overview of the respondents). Organization size varied from small (1-50 employees) to very large (1000+ employees), but none of the organizations could be qualified a global frontier firm. The respondents’ managerial responsibilities ranged from team leader to general director. Initially I approached potential participants in my own professional and private network; some of the participants then identified other possible respondents who were subsequently asked to complete the survey.

Data collection was online due to time constraints. Inevitably this rules out the possibility to probe for answers or to take note of non-verbal cues present in face-to-face interviews (Saunders & Lewis, 2012). The survey link was valid from May 10 until May 26. The respondents could complete the vignette study anonymously; in this thesis I refer to them as respondent ‘A’, ‘B’, ‘C’, etc.

3.3 Data analysis

The results were analyzed with template analysis to code the data (King, 2004). Template analysis is a less well-known but still much-used qualitative method (especially in psychology) for analysis (Braun & Clarke, 2006). It is a suitable method for identifying and thematically organizing and analyzing qualitative data. It is less prescriptive than for example grounded theory, which is the most used approach for qualitative studies (Saunders & Lewis, 2012). It therefore gives researchers the possibility to tailor it to their own preferences. This flexibility allowed me to apply this technique from cognitive psychology with organizational and managerial terminology and look for what was not said, this in contrast to content analysis (the other commonly used method in qualitative research) that focuses on what is said.

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The most important difference between grounded theory and template analysis (and content analysis, for that matter) is the use of a priori codes in template analysis (King, 2004). This allowed me to draft a preliminary code template before the first cycle of coding. In this first cycle I only focused on whether the respondent tried to understand the situation through a conventional lens or through a lens that appreciated the full complexity of the situation. I assumed that both situations would occur, though not necessarily in the same degree. In the second cycle of coding, I looked deeper into what the respondent actually said but also into what was not said. When a respondent expresses a preoccupation with culture, he or she does not mention a redesign of the resource allocation process. This led to new codes being added to the template and redundant codes being removed.

While going through this second round of coding I realized that one new code appeared very often: a lack of knowledge. This lack of knowledge was so prominently present, that not one respondent managed to mention a solution that reflected a full understanding of the outlined situation. Thus, after long deliberation I decided to

significantly alter the code template. It appeared that the conventional lens was the norm, and the lens that appreciated the full complexity of the situation the ideal type. Because of a lack of knowledge respondents could not bridge the gap between the conventional and new lens.

Because the aim of this thesis is to investigate to what extent subjective complexity impedes vicarious learning, in the results I mention how many of the respondents expressed a certain convention or made use of biases as belief conservation. This does not mean that the data were simply reduced to frequencies; the emphasis of the analysis was still on finding meaningful patterns in the data.

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4 Results

In this section I will describe the most relevant findings of this study, firstly per vignette and concluding with an overall picture.

4.1 Multidisciplinary teams

The first vignette describes an organization that has decided to work on a project basis to bring innovative products and services to the market faster. However, many projects do not deliver the intended results. In essence, the outlined problem is an information problem as a result of an improperly redesigned resource allocation process. However, six out of twelve participants classify it as a lack of or insufficient communication about the goals and intentions of the organization. The solution is logically found in communicating more to improve the results of the multidisciplinary teams. Respondent I mentions for example that:

The organization should explain the project-based way of working / multidisciplinary teams better, so that the organization understands better why this is done.

Though communication undeniably is a crucial aspect of managing organizational change, the sole focus on communication suggests that participants adhere to the classical method for management of change, which focuses on overcoming resistance to change (Strikwerda, 2017a). It shows a lack of knowledge about internal governance mechanisms and the need to properly design a resource allocation process to ensure coordination

between projects and resource departments. The emphasis on communication also suggests that respondents find it hard to break away from the existing structure of and positions in

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the organization and look for a solution that matches their existing ideas about change management. This corresponds with March’s idea of belief conservation (March, 1994). It is also striking that respondent I appoints the organization as actor, and not management. This indicates the avoidance of responsibility. Furthermore, the respondent fails to mention that management should not just explain the changes but should tell they are necessary in the resource allocation process (R. S. Kaplan & Norton, 2008).

Two respondents mention that the organizational structure hampers the successful introduction of working in multidisciplinary teams, but for two others, it is not the structure but the culture of the organization that stands in the way of change. Be it structure or culture that is mentioned as the problem, the solution in both cases is found in obtaining commitment from the department heads by making them partly responsible for the results of the projects:

B: You could also make the department heads partly responsible for the result of the multidisciplinary team in order to get them more involved.

Again, this suggests that respondents have insufficient knowledge about modern management control and how project-based organizations operate. Multidisciplinary teams do not reside within a department and therefore a department head can never be made responsible for the results of the team. The department heads are responsible for making the right people at the right team available for projects and that is what they can be held accountable for (Kaplan & Norton, 2008).

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The organization is not consistent. It should either work with multidisciplinary teams and team members that are accountable to the team (product owner or stakeholder), or it should cut a project in functional pieces and have these carried out by line or operation managers.

Other respondents mention that teams lack the necessary decision rights or should have access to all information. Problematic however is that oftentimes respondents on the one hand seem to acknowledge the need for new strategies or organizations forms, but on the other hand do not seem to understand how to develop or adopt these new strategies and organization forms. Respondent J for example defines the situation as an information problem but thinks this is rooted in the organizational culture. By doing so, he or she fails to see that it requires a redesign of the process of resource allocation for organizational change to be successful and for vertical and horizontal information asymmetry to be lifted

(Strikwerda, 2008).

J: The organization has switched to a new way of working, but this is not sufficiently embedded in the organizational culture and among the employees who ultimately are part of the project. Do they know what this means for them and what is expected of them? Does everybody have access to the same information? Project leaders should have access to all information.

After the intervention, all respondents suggest that parochial self-interest (Kotter & Schlesinger, 2008) is the main driver for the departments heads’ resistance against treating projects as a profit center. The proposed change means that department heads will have to

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give up their position, power, or authority, which, according to the participants, is something they are not willing to do. The respondents also seem to understand that the consultant’s proposal to turn projects into profit centers affects the content and context of the

department heads’ jobs, since they will have a different position with less authority. The respondents acknowledge that the organization should take care of this, however, most of them are rather vague and passive about what the organization should do for the

department heads. E.g. it is mentioned that the organization should ‘clarify their role’ (respondent J), ‘involve them in the transition and see if they can play an important role’ (respondent I), or ‘give department heads a role in the process as talent manager’

(respondent K). When an organization changes its management control system, as in this vignette, it also has to actively change the conditions for its employees. I.e. for a department head to become a talent manager, it is likely that he first needs to be properly trained in this new role. The reason for not creating the proper conditions in the organization can be found in, again, a lack of knowledge of modern management control, or in the reluctance to

change the social system in the organization. The proposed solution requires a change in the internal balance of power in the organization, but most managers find it difficult to

implement this because they make decisions as a rule-based activity (March, 1994). Rather than making rational decisions, they follow certain rules, obligations and duties by asking themselves what social system they have to maintain and what the social system expects from them. In other words, they don’t make rational decisions but appropriate decisions (as per the rules). In addition, this sub-optimal rule-following decision making is legitimized by explaining everything with 'culture'.

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Only respondent A clearly states that in order to make the multidisciplinary teams a success, department heads need proper training. Respondent D articulates very well, albeit rather passively as well, why this is important:

The department heads could have a new and important role. I would involve them in this change process because in this new situation they could be key figures and drivers of change. Their jobs will also be more fun, they are no longer a conduit and bottleneck when it comes to growth but can excel and really add value to the company. Obviously, they once became head of department for a reason. A small part will be able to develop as a manager / coach for a larger group. The department heads who were actually the best employee of the department and therefore came into the somewhat unfortunate role as department head, can be given a large responsibility in a project in an area in which they are strong performers.

All but one respondent is willing to accept the proposal of the consultant but in their acceptance, they also show a preoccupation with structure, i.e. the idea that a successful execution of a new strategy rests more on clear decision rights and on information flowing freely across organizational boundaries, than on organizational structure, seems either unknown or hard to grasp. This preoccupation with structure becomes clear in respondent B’s response to the intervention:

If you really want to introduce this way of working, then you will have to change the whole organization and then perhaps department heads will no longer be necessary.

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It is correct that the proposed change affects all aspects of the organization, but multidisciplinary projects do not change the original organizational structure in terms of resource configuration. Instead, multidisciplinary projects (or end-to-end processes) as accountable entities are an addition to the organizational structure. Since thinking about structure forms a fundamental part of organizational thinking and people have been used to work in linear hierarchies for centuries, this preoccupation with structure is understandable. The new organization forms however go beyond the traditional description of structure and this requires that one can let go of conventions to appreciate the difference (Strikwerda, 2017b). That it is extremely difficult to let go of conventions is made clear by respondent C, the only one to reject the advice of the consultant and who instead proposes to introduce end-to-end processes. Even though respondent C introduces another new organization form as an alternative to multidisciplinary teams, the preoccupation with structure can still be observed:

I would not choose to translate strategic objectives into projects and then into departments. I would choose to set objectives for end-to-end processes. In order to work completely agile, I would let go of the hierarchical structure with department heads, tasks, responsibilities and authorities. I would let employees work together in end-to-end processes to add value for the customer, whereby they, as the consultant proposes, have their own budget, control space and objectives.

4.2 OODA loop

The second vignette describes an organization that uses the Plan-Do-Check-Act cycle to monitor the quality of its products and processes. The organization’s environment

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although the PDCA cycle has been used with great success in the past, improvements are currently taking too long and competitors seem to be able to react faster to the ever-changing market conditions.

Half of the respondents recognize that the PDCA cycle is too static and inflexible to apply successfully in a highly dynamic environment. PDCA doesn’t allow an organization to respond fast to changing conditions and feedback is only received at the end of the cycle. In a high-paced environment, this means that you will find out too late if something is wrong. More importantly however, PDCA is a closed model, which takes the environment for granted:

K: It sounds as if the organization has an inward focus. The PDCA is primarily an internal instrument as well. That raises the question: does sufficient information flow from the outside to the inside?

This respondent touches upon a most important issue in the second sentence, the inflow of new knowledge, and thus demonstrates a sound insight. Respondent K proposes to combine PDCA with another instrument that has a more external orientation. Other

respondents suggest to look for a completely new method or to use PDCA for some areas and combine it with another method for other areas that require faster decision-making:

H: I would introduce an Agile way of working. Do not try to capture all information in advance, but just start and add functionalities as you go along. Retrieve constant feedback from users and add continuous improvements. Bring services to the market faster.

Epistemic complexity and belief conservation : an additional explanation for the lack of knowledge diffusion from global frontier firms to laggards