Modularity and strategic flexibility: a cognitive and dynamic
perspective
E.D. Adamides', Y. Stamboulis” and N. Pomonis!
‘Industrial Management & Information Systems Lab
Department of Mechanical Engineering and Aeronautics
University of Patras, GR-26500, Patras, Greece
{adamides, npomo} @mech.upatras.gr
Department of Economics
University of Thessaly
Argonafton & Fillelinon, GR-38334, Volos, Greece
ystambou @ uth. gr
Abstract
The paper addresses the question whether a modular organizational structure breeds
mechanisms that promote proactive strategic flexibility. We examine this question from the
perspective of the cognitive school of strategic management with the aid of system dynamics
modeling and simulation to explore long-term dynamic effects. Both our analysis and our
experiments with the model suggest that modular organizations do not necessarily encourage
the construction of managers’ mental models with a capability to generate more strategic
options and, thus, do not increase strategic flexibility.
1. Introduction
Strategic flexibility is defined as the ability to precipitate intentional changes and
adapt to environmental changes through continuous rethinking of current strategies,
asset deployment and investment strategies (Bahrami, 1992; Evans, 1991; Sanchez,
1995). Consequently, strategic flexibility can be thought as extending along two
dimensions: on the one dimension, it concerns the variation and diversity of strategies,
while on the other, it refers to the degree at which firms can rapidly shift from one
strategy to another (Slack 1983; Nadkarni and Narayanan, 2004). Sanchez and Heene
(2004) argue that strategic flexibility is a function of the firm’s resources flexibility
defined as the number of different uses to which the resources can be applied, the cost
and time required to switch the resources to different uses, as well as of the
managerial capabilities required to achieve coordination flexibility. The latter refers to
the capabilities required in identifying new resources which can be effectively applied
in responding to new opportunities and demands, configuring these resources into an
effective system, and deploying the new resources to new purposes. In other words,
coordination capability, on which indirectly the sustainability of resource flexibility
depends on, is contingent to the ability of management to generate strategic options
with respect to resource endowments, e.g. to envision and implement the type and
range of flexibility of its products and its production system.
It has been argued by many authors (e.g. Worren et al, 2002; Sanchez and Heene,
2004) that product and organization modularity is a strategic decision that results in
augmenting the strategic flexibility of organizations. According to this stream of
logic, modular products lead to modular organizations (Sanchez and Mahoney, 1996)
as the various units involved in the design process of products with interchangeable
components are loosely coupled, operate autonomously, and can be easily
reconfigured. Loosely coupled organizational forms allow organizational components
and their corresponding resources to be flexibly recombined into a variety of
configurations (Schilling and Steensma, 2001), thus increasing strategic flexibility by
managing organizational knowledge in a way that facilitates specific forms of
“coordinated self-organizing processes” (Sanchez and Mahoney, 1996).
In other words, in modular organizations, coordination tasks are delegated to
individual modules (functions, teams, etc.) and coherence is achieved easily through
fully specified interfaces. In addition to the reduction of managerial complexity, this
structural, hierarchical function-based decomposition results in the localization of the
impacts of environmental disturbances within specific modules, increasing the
immunity and adaptability of the overall organization in a turbulent environment
(Sanchez and Mahoney, 1996).
A fundamental question that arises from the operational characteristics of a modular
organization is whether this organizational form can be self-sustained by promoting
internally the attributes of strategic flexibility. That is, whether this organizational
structure breeds mechanisms that promote proactively strategic, not only operational,
flexibility. In this paper, we examine this question from the perspective of the
cognitive school of strategic management, and with the aid of system dynamics
modeling and simulation we explore long-term dynamic effects. In the cognitive
perspective, based on the assumption that strategies are mental constructs, the specific
research question becomes: do modular organizations encourage the construction of
managers’ mental models with the capability to generate more strategic options and,
thus, increase strategic flexibility? Our research aims at contributing to the growing
stream of research that examines the role of managers’ cognition in the achievement
of strategic flexibility (e.g. Combe and Greenley, 2004; Shimizu and Hitt, 2004) by
including a system dynamics perspective to challenge the assumption that
organizational modularity leads to strategic flexibility.
2. Cognitive schemata and strategic flexibility
The term cognition refers to the way individuals perceive, filter and conceptualize
information (Weick, 1990). These perceptions are cognitive schemata that take the
form of frames (Goffman, 1974), mental models (Senge 1990), cognitive maps
(Axelrod, 1976) (and many other names) that indicate the way individuals associate
various concepts and use them as the foundation of decisions and action.
The impact of executive cognition in the strategy formulation processes and their
outcomes has been a subject of great interest in the strategic management literature.
According to upper echelons theory (Hambrick and Mason, 1984), the organization is
a reflection of its top managers whose beliefs, in turn, have a decisive impact on the
majority of the strategy attributes (innovation, diversification, quality management,
risk-taking, etc.) (Adamides and Karacapilidis, 2005). The factors and processes that
shape executives’ beliefs include executive demographics, functional position and
professional background, peer-assigned roles and performance metrics (Schwarz,
2003), and organizational issues such as size, structure, strategy and (recent) financial
success (Barr and Haff, 1997; Schwarz, 2003). While cognitive schemata, such as
frames, originate from the cognitive psychology of the individual, management
scholars have found it useful to conceptualize them as a property of larger
organizational entities such as groups and firms (Reger and Huff, 1993; Prahalad and
Bettis, 1986). The strategy development process, i.e. which and how individual
mental models converge (or are “accommodated”) towards a coherent list of actions,
plays a decisive role in the justification of this assumption.
Two key attributes of mental models (in the rest of the paper we use the term “mental
model” to include the characteristics of all similar cognitive schemata) are of
particular importance to strategic flexibility: complexity and centrality (Nadkarni and
Narayanan, 2004). Complexity is the result of the degree of differentiation (the range
of internal and external environmental concepts included in the model) and
integration (degree of connectedness among concepts) of the model. Complex
strategy-related mental models embrace a wide range of strategic logics and a diverse
set of alternative strategic solutions. At the organizational level, they allow firms to
notice and response to more stimuli, thus increasing their adaptability (Lyles and
Schwenk, 1992). Complex mental models contribute to strategic flexibility by
reducing discounting (the phenomenon of focusing in specific (more familiar) events
ignoring other more important) and cognitive inertia (the search for specific events
and causes to strengthen the dominant logic(s) of the model). They allow managers to
scan the environment and to respond to stimuli coming from it more effectively by
considering more options and (eventually) implementing a wider range of them.
Centrality, on the other hand, refers to the focus and hierarchy of mental models. A
centralized model is focused around a limited number of core concepts. The
continuous long-term involvement with a limited number of concepts breeds
centrality of mental models (Carley and Palmquist, 1992) and, as a result, amplifies a
limited number (frequently a single) of dominant strategic logics. Centralized mental
models lead to cognitive inertia as firms always refer to their past key successes
instead of looking how to absorb new knowledge and create novel strategic options
(Reger and Palmer, 1997; Adamides et al., 2003).
Vickers explained the formation and dynamics of individual and shared/group mental
models though the concept of “appreciative systems” (Vickers, 1983). He
distinguished human systems from natural and manmade systems by identifying
judgment as the additional aspect of the former (Vickers, 1984). Judgment is an
inherent attribute of decision making’s three principal functions: noticing things about
the situation (receiving information), evaluating the information (comparing to a
“standard”), and acting on the interpretation (selecting a response). This was termed
by Vickers as an appreciative system and the mental activity and social process of
attaching meaning to perceived signals as appreciation. The appreciative system
determines what facts to select from those related to the situation, the meaning that is
given and the means that are used to fill the gap between existing and desired
situations. The standards or criteria by which actions to be followed are judged are not
given from outside. They are generated by the previous history of the system (past)
and its interaction with the environment (culture).
This means that in the strategy formulation context, managers set standards or norms
subjectively (rather than objective measurable goals of Simon’s rationalistic tradition
(Checkland and Holwell, 1998)) and they focus on managing relationships according
to standards generated by their own culture, history and power status, and maintained
through their self-reference attribute. The discussion and debate which leads to action
is one in which those taking part make judgments about both “what is the case”
(reality judgments) and about its evaluation as “good” or “bad”, “satisfactory” or
“unsatisfactory” (appreciative judgments). Under this prism, strategy making can be
thought as social action based upon personal and collective sense making rather than a
one-off task performed on the basis of objective scientific foundations. Consequently,
in the long term, strategic processes per se influence executive beliefs and mental
models in the same way their outcome is influenced by them (Chattopadhyay ef al.,
1999; Weick, 1995). In knowledge management terms, different perceptions/beliefs
are the result of managers’ association with different sources of principally tacit,
cultural and, to a lesser extent, codified, knowledge.
Naturally, as the above discussion suggests, strategic processes are contingent to
organizational forms and to operational structures. Strategic flexibility and managerial
mental models are not related only through external environmental attributes, such as
industry clockspeed (Nadkarni and Narayanan, 2004), but also through internal
(organzational) ones. Narrow strategic processes with limited participation and
interaction, which are simplified through well-defined interaction rules/interfaces,
lead to managerial mental models of limited complexity, as managers have to focus in
a limited number of concepts (a specific technology, a specific product or certain
functional elements of a product range) and communicate them through the
established interfaces. In a static, or short-term, view this seems logical and is the
main advantage of the modular organization. A different, more dynamic, stance,
however, suggests that modular organizational architectures enhance the centrality of
managers’ mental models at the expense of complexity. As a consequence, the ability
of managers to envision and create options (i.e. novel systems of activities and
resources) is reduced and the firm’s strategic flexibility does not increase. On the
other hand, strategic development and implementation processes that include
managers with wide mental horizons, who can actively contribute to them, do not
only result in more diverse and novel strategies, but also themselves widen further the
mental models of the participants. Under these assumptions, to explore the dynamics
of mental model characteristics with respect to organizational modularity and strategic
flexibility, we have built the system dynamics model presented in the following
section.
3. The dynamics of cognition in modular and strategically flexible (?)
organizations
The system dynamics simulation model developed to explore the dynamics of the role
of managerial cognitive models to strategic flexibility in modular and non-modular
organizations is shown in figure 1. All variables can refer to both individual managers
or organizational entities. The two principal attributes of mental models which are
relevant to strategic flexibility, complexity and centrality, are represented as stocks.
The flow build_new_nodes represents the addition of new nodes/concepts
(horizontally, adding breath) in the managerial mental models which result in
increasing their complexity (flow in the COMPLEXITY stock). The flow
nodes_not_used represents the natural depletion of mental models’ complexity as
nodes that are not used become obsolete and are rejected because the limited capacity
of the human brain replaces them with new ones. As far as CENTRALITY is
concerned, the flow strengthen_links refers to the process of strengthening existing
links between existing nodes (or adding depth to a specific node), whereas the
opposite is represented by the flow weaken_links. The continuous consideration of the
same, or similar, concepts strengthens the links of existing nodes while, on the other
hand, increased focus to core concepts results in the loosening of some concepts in the
periphery which are then gradually driven out of the model. In addition, naturally, as
no new events are noticed (or taken into account seriously) to confirm existing links,
some facts are gradually disassociated.
The stock ABILITY_TO_CREATE_OPTIONS represents the ability of managers to
create new options and, consequently, acts as the principal measure of strategic
flexibility. In the model, the rate of increase of this stock’s level
(increase_in_ability_to_create_options) depends on the difference between the values
of COMPLEXITY and CENTRALITY. This is a valid assumption as the ability to
create options is positively correlated to complexity and negatively to centrality, and
the two variables are not mutually exclusive at the short term (single simulation
interval). Since both are stock variables, an increase in CENTRALITY, for instance,
will only have a relative effect on the ability to generate options since the level of
COMPLEXITY will not be reduced in proportion to the increase in the other variable.
It should be noted that at the level of organization ABILITY_TO_CREATE_OPTIONS
represents organizational ability as a sum of individual abilities.
modularity
degree of coordination
[RANGE OF IWVMENT IN IMPLD OPTIONS
complexe?
@
build new nodes nodes not used i
ABILITY TO CREATE OPTIONS
Increase in abilityfto create options ‘environmental turbulance
CENTRALITY
strengthen links wreak ik
Fig.l. The system dynamics model for exploring the dynamic relation between mental
models, organizational modularity and strategic flexibility.
The degree of managers’ involvement in strategic option creation and implementation
(involvement_in_options) depends on three factors: first, on the range of past
involvements (level of stock RANGE_OF_INVMENT_IN_IMPLD_OPTIONS),
second on the ability to create options, and third, on the degree of coordination that
the creation and implementation of the options requires. The latter is a measure of the
quantitative and qualitative degree of participation of the individual managers in the
strategic processes and it depends on the level of modularity of the organization. As
the proponents of the modular organization claim, this form of organizational
structure delegates coordination to simply interfacing work tasks and deliverables to
the organizational architecture through standardized interfaces. As a result, managers
in such organizations are involved only in specific issues and in a limited number of
implementations of strategic options and cannot contribute actively to a novel
consistent corporate strategy providing their own “helicopter-view” perspective
(Friedli er al., 2004). Hence, the converter degree_of_coordination represents the
ability to contribute in the construction of strategic options as systems by integrating
knowledge and perspectives (collective sense making), and is inversely proportional
to the degree of modularity (modularity). This means that, if in two different
organizations, the stocks ABILITY_TO_CREATE_OPTIONS have the same value but
one of them has a modular organization the degree of manager involvement in the
creation and implementation of strategic options will be smaller. The rate of
devaluation of options (outflow devaluation_of_options) as learning cases and,
therefore, as factors determining mental model characteristics depends on the degree
of environmental turbulence (environmental_turbulence). In relatively _ static
environments the experiences gained from the involvement in the majority of the
strategic options creation and implementation count more than in turbulent ones. In
dynamic settings some of these experiences as learning paradigms, and mental model
influencing factors, devaluate very rapidly. Finally, according to the discussion in
section 2, the level of the stock RANGE_OF_INVMENT_IN_IMPLD_OPTIONS
increases the rate of building new nodes (i.e. increases the complexity of mental
models), whereas the opposites happens with respect to the centrality attribute.
Involvement in the development and implementation of novel strategic options does
not strengthen existing links between nodes; it just adds new ones.
Figure 2 shows three traces of the simulation of the model. The simulated variable is
the ABILITY_TO_CREATE_OPTIONS, an indirect measure of an organization’s
strategic flexibility. AB/LITY_TO_LCREATE_OPTIONS aggregates the _ three
dimensions of strategic flexibility: market flexibility (ability to assess several
markets), resource flexibility (ability to proactively assess resource flexibility) and
coordination flexibility (understand market and resource flexibility so that they can be
balanced). Trace 1 refers to a modular organization, whereas trace 2 concerns an
organization with half the modularity of the first. Trace 3 refers to the second
organization operating, however, in more turbulent environment. All three traces
indicate that, for the specific set of parameters, the reinforcing loop that extends from
build_new_nodes to RANGE_OF_INVMENT_IN_IMPLD_OPTIONS dominates the
balancing one that extends from strengthen_links to the — stock
RANGE_OF_INVMENT_IN_IMPLD_OPTIONS.
2 | saurr ro create mone 2: ABUT To eEATE OPTION {ABUT T0 CREATE OFTEN
* wa
*: ane
Sas! op crete soos cree etm
Fig. 2. The effect of modularity (traces 1 and 2) and environmental turbulence (trace 3) on
strategic flexibility (ABILITY_TO_CREATE_OPTIONS)
Trace 2 indicates that based on the assumptions made, reducing modularity results in
a significant increase in strategic flexibility as mental models become more complex
and capable of generating more strategic options. Therefore, organizational
architecture, through its associated strategic processes, regulates the mental model
complexity loop so that it either dominates, or is dominated by, the option creation
processes and consequently strategic flexibility. Fast devaluation of implemented
strategic options, however, (turbulent environment — trace 3) results in decreased
performance, as far as strategic flexibility is concerned. One implication of this latter
observation is that managers in dynamic industries need to be involved in learning-
before-doing exercises (such as strategic simulations) to accelerate the adaptation of,
as well as widen their mental model structures.
4. Conclusions
In this paper we have addressed the question of whether a modular organizational
structure promotes long-term proactive strategic flexibility. We examined this
question from the perspective of the cognitive school of strategic management and
with the aid of system dynamics modeling and simulation to explore long-term
dynamic effects. Both our analysis and our experiments with the model suggest that
modular organizations do not necessarily encourage the construction of managers’
mental models with capabilities to generate more strategic options and, thus, at least
in this respect, they do not promote strategic flexibility at a higher degree compared to
more traditional organizational structures with more involving strategic processes.
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