An Efficient Frontier in Organization Design

Abstract

This paper develops a parsimonious process-level theory that connects organizational structure to exploration and exploitation. Toward this end, it develops a mathematical model of organizational decision making that combines an information processing approach in the spirit of Sah and Stiglitz (1986) with elements from signal detection theory. The model is first used to explore a space of organizations and identify trade-offs and dominance relationships among alternative organization designs. The paper then studies open questions in the organization design literature, such as the extent to which exploration and exploitation can be produced by one organization and what is the effect of organization size on exploration. More broadly, this research speaks to calls for introducing more process-level explanations in the organizations literature. The paper concludes with testable hypotheses and managerially relevant insights.