How Organizational Structure Can Compensate for Flawed Mental Representations

Abstract

This paper presents a theory about how firm performance depends on cognition, aggregation structure, and the environment. The theory is developed as a formal model, and it characterizes: cognition in terms of managers' experience and mental representations (whether they apprehend the environment from a specialist's versus a generalist's viewpoint); aggregation structure as decision rules (whether the firm's decisions are made by one manager or by several managers); and the environment as the projects --- of varying complexity and uncertainty --- considered by the firm. The results show that, in environments of low uncertainty or high complexity, an inexperienced generalist outperforms groups of experienced specialists at managing firms; yet when the environment is uncertain but not complex, groups of experienced specialists do better. The model is used to identify industry conditions under which it may be advantageous to use co-CEOs, inexperienced CEOs, or specialist CEOs. The paper also discusses whether management education should focus on training specialists or generalists and whether firms should follow simple or complex rules.