Revisiting the Problem ofOrganizational Goals: From Problemsof Motivation to Problems of Direction             Daniel Levi...
Alternative Perspectives on Choice   • Bounded Rationality                           • Rational Choice©Daniel Levinthal
Economic Perspective on the Problem          of Organizational GoalsProblems of Incentive Problems of Property Rights©Dani...
Why Goal Conflict?   • Role structures and the division of labor       – Cyert & March (1963)            • Divergent goals...
Behavioral Perspective: Problems of          Direction and Evaluation  Problems of direction                     Problems ...
Problems of Ex-Post Evaluation   • Aspiration driven learning       – What constitutes the appropriate referent?       – W...
Inherent “physics” or                       social construction           Behavior    Outcome(s)                      Feed...
Disentangling Incentives and                     Intentionality                                      Goals as             ...
Linkage of Problems of Motivation and           Problems of Direction   • Pathologies of high-powered incentives and imper...
Forward-looking Evaluation   • Institutional theory and ideas of alternate     “logics”       – Logic of appropriateness  ...
Bounded Rationality:                         The “Other” Bound   • Bounded rationality (as interpreted)       – Search for...
“Footnotes” to the Problem                     of Direction   • Valuation of intermediate states       – Myopia of selecti...
Rational Choice Alternatives to Myopia      • Dynamic programming           – Curse of dimensionality           – Terminal...
Myopia of Selection and                    Evolutionary Processes                      (Levinthal and Posen, 2007)        ...
Explicitly myopic                     Products                          Product                                           ...
Revisit the Exploration /Exploitation                    Tradeoff   • Classic result of statistical decision theory       ...
“Footnotes” to the Problem                     of Direction • Valuation of intermediate states Consider from adaptive     ...
Credit Assignment   • Contrast of learning in a t-maze versus a labyrinth     (Denrell, Fang, and Levinthal, 2004; Fang an...
Sequence of Action with Limited Market                          Feedback   •       How can firms learn to value these inte...
Emergence of Routines           (Denrell, Fang, Levinthal, 2004)                           • Routines as fast but not     ...
“Footnotes” to the Problem                     of Direction   • Valuation of intermediate states       – Myopia of selecti...
Multiple Goals and Organizational Schizophrenia  • Organizational goals have multiple goals with remarkably low    correla...
Basic Problem   • Organizational actors inevitably are faced with multiple     outcome objectives   • Integrating across o...
Power of False Goal Structures                    (Ethiraj and Levinthal, 2009)   • Linking characterization of choice to ...
Complementarity of Rationality and                 Structure of Goals    True Goal Structure                           Rat...
“Footnotes” to the Problem                     of Direction   • Valuation of intermediate states       – Myopia of selecti...
Doing versus Seeing: Acts of Exploitation and        Perceptions of Exploration (Adner and Levinthal, 2008)• What is explo...
Alternative View of Exploration      • Exploration as exploitation on dimensions        not fully sanctioned or recognized...
Novel               dimension                                                           “Flatland”   • Legitimating other-...
Inevitably of “Flatlands”   • Bounded rationality   • Need to coordinate and direct action among     disparate individuals...
Organizations as Artificial Selection                  Environments    • Behavioral tradition has focused on search       ...
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Dan Levinthal 2010 OMT Division Distinguished Scholar

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Dan Levinthal was named the 2010 Distinguished Scholar by the Organization and Management Theory Division of the Academy of Management. He gave this presentation on the occasion of his award, August 9, 2010, in Montreal, Quebec.

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Dan Levinthal 2010 OMT Division Distinguished Scholar

  1. 1. Revisiting the Problem ofOrganizational Goals: From Problemsof Motivation to Problems of Direction Daniel Levinthal Wharton School, University of Pennsylvania
  2. 2. Alternative Perspectives on Choice • Bounded Rationality • Rational Choice©Daniel Levinthal
  3. 3. Economic Perspective on the Problem of Organizational GoalsProblems of Incentive Problems of Property Rights©Daniel Levinthal
  4. 4. Why Goal Conflict? • Role structures and the division of labor – Cyert & March (1963) • Divergent goals conflict stemming from division of labor and roles • Lack of complete task interdependence – Non-fully decomposable systems (Simon, 1962) • Variant of the property rights perspective – Assignment of task [rather than property] creating conflict©Daniel Levinthal
  5. 5. Behavioral Perspective: Problems of Direction and Evaluation Problems of direction Problems of evaluation©Daniel Levinthal
  6. 6. Problems of Ex-Post Evaluation • Aspiration driven learning – What constitutes the appropriate referent? – What are the behavior consequence of “success” and “failure”? – Grey zones: are the boundaries between “success” and “failure” clear? • Issues of inference – Near misses – Hypothetical histories and counter-factual reasoning • Sense-making©Daniel Levinthal
  7. 7. Inherent “physics” or social construction Behavior Outcome(s) Feedback processes©Daniel Levinthal
  8. 8. Disentangling Incentives and Intentionality Goals as Incentive Intentionality Alignment Problems of Motivation Goals as directional©Daniel Levinthal
  9. 9. Linkage of Problems of Motivation and Problems of Direction • Pathologies of high-powered incentives and imperfect measures – “hoping for A rewarding B” problem • Second-best solution to incentive alignment in a world of imperfect measures Or • Ideological commitment to notion of incentive problem – Prompts high-powered incentives – Generate pathologies of behavior©Daniel Levinthal
  10. 10. Forward-looking Evaluation • Institutional theory and ideas of alternate “logics” – Logic of appropriateness – Alternate calculative logics • Attentional view – What among the set of goals and objectives get activated at a particular moment Outcome1 Outcome2 F(actions) → Outcome3 . . . OutcomeN©Daniel Levinthal
  11. 11. Bounded Rationality: The “Other” Bound • Bounded rationality (as interpreted) – Search for alternatives that satisfy a minimal threshold • Bounded rationality (as expressed) – Individuals have multiple goals that act as independent constraints • Actors do not make compensatory tradeoffs among outcome attributes – Large amounts of subsequent psychological research that validates this assertion » Thaler and mental accounting » Tversky (1972): Elimination by Aspects©Daniel Levinthal
  12. 12. “Footnotes” to the Problem of Direction • Valuation of intermediate states – Myopia of selection (evaluation) – Problem of credit assignment • Multiple goals – Implausibly balanced scorecards – Exploration and the ecology of goals Goals as directional Problems of evaluation©Daniel Levinthal
  13. 13. Rational Choice Alternatives to Myopia • Dynamic programming – Curse of dimensionality – Terminal value problem Imputation problem (Winter, 1987) V(a*t , st ) π + V(a*t+1 , st+1 ) • Stock market as a solution – Valuation over the infinite future [appropriately discounted] • Expectations of the future can only be based on the observables of the present – Projections based on some mixture of explicit calculation and valuation heuristics©Daniel Levinthal
  14. 14. Myopia of Selection and Evolutionary Processes (Levinthal and Posen, 2007) Selection QGTs Environment©Daniel Levinthal
  15. 15. Explicitly myopic Products Product markets Selection QGTs Environment Market share Financial Patents & new markets products Forward-looking but conditional on current outcomes©Daniel Levinthal
  16. 16. Revisit the Exploration /Exploitation Tradeoff • Classic result of statistical decision theory – Search (explore) broadly early on and then lock-in (exploit) a superior alternative • Reconsider exploration/exploitation tradeoff in the face of selection pressure – In the absence of slack (or buffers), there is a need to exploit in the face of survival pressure – Small, modestly funded start-up exploits a particular trajectory and if resources accumulate may engage in broader exploratory behavior©Daniel Levinthal
  17. 17. “Footnotes” to the Problem of Direction • Valuation of intermediate states Consider from adaptive perspective of the – Myopia of selection (evaluation) learning process – Problem of credit assignment • Multiple goals – Implausibly balanced scorecards – Exploration and the ecology of goals©Daniel Levinthal
  18. 18. Credit Assignment • Contrast of learning in a t-maze versus a labyrinth (Denrell, Fang, and Levinthal, 2004; Fang and Levinthal, 2009)©Daniel Levinthal
  19. 19. Sequence of Action with Limited Market Feedback • How can firms learn to value these intermediary activities with no immediate market feedback? $ procurement manufacturing Sales and marketing • Samuels (1956): Credit assignment and reinforcement learning o Mental model of intermediate states as reinforcement©Daniel Levinthal
  20. 20. Emergence of Routines (Denrell, Fang, Levinthal, 2004) • Routines as fast but not necessarily efficient solution to problem of interdependent (multi- stage) behavior©Daniel Levinthal
  21. 21. “Footnotes” to the Problem of Direction • Valuation of intermediate states – Myopia of selection (evaluation) – Problem of credit assignment • Multiple goals – Implausibly balanced scorecards – Exploration and the ecology of goals©Daniel Levinthal
  22. 22. Multiple Goals and Organizational Schizophrenia • Organizational goals have multiple goals with remarkably low correlation – “Firms are swamped with measures…it is commonplace for firms to have fifty to sixty top-level measures, both financial and non-financial…includes 20 financial measures, 22 customer measures, 16 measures of internal process, nineteen measures of renewal and development…” (Meyer, 2001: 7) – “Common sense measures…profitability, market share, customer satisfaction, and operating efficiency are weakly and sometimes negatively correlated” (Meyer, 2002) • Individual acts impact multiple outcomes©Daniel Levinthal
  23. 23. Basic Problem • Organizational actors inevitably are faced with multiple outcome objectives • Integrating across outcomes is problematic – Judgment over a vector versus evaluation of scalar • Satisficing as satisfaction of independent constraints (Simon, 1957) • Elimination by aspects (Tversky, 1972; Payne et al., 1993) – Mental accounting and financial payoffs • Individuals are found to treat unexpected gains and losses across time periods and categories separately (Thaler, 1985 and 1999) – Explicit weights are typically not articulated • Common source of speculation among actors as to what really “counts” • Puzzle: – What are the implications of the above two postulates about organizations and individuals? – How does behavior vary for different goal structures?©Daniel Levinthal
  24. 24. Power of False Goal Structures (Ethiraj and Levinthal, 2009) • Linking characterization of choice to problem representation – More accurate problem representation may be an unabashed good in a world of rational agents – Less accurate representations may enhance performance in a setting of bounded rational actors • Implications of simplifications – Lead to a clarity of action – Lead to climbing false “landscapes” • Strategy as solving not only the coordination problem of collectives, but for individual actors as well • Simplifications – Focus on a subset of the full array of goals – Focus sequentially on distinct goals©Daniel Levinthal
  25. 25. Complementarity of Rationality and Structure of Goals True Goal Structure Rational Actor ◦ Power of “integration Simplified Goals Bounded Rationality “It is logically impossible to maximize in more than one dimension at the same time unless dimensions are what are known as monotonic transformations of one another. Thus, telling a manager to maximize current profits, market share, future growth in profits, and anything else one pleases will leave that manager with no way to make a reasoned decision.” (Michael C. Jensen, 2001: 11-12)©Daniel Levinthal
  26. 26. “Footnotes” to the Problem of Direction • Valuation of intermediate states – Myopia of selection (evaluation) – Problem of credit assignment • Multiple goals – Implausibly balanced scorecards – Exploration and the ecology of goals©Daniel Levinthal
  27. 27. Doing versus Seeing: Acts of Exploitation and Perceptions of Exploration (Adner and Levinthal, 2008)• What is exploration? – Pursuing initiatives for which there is less information/experience and in turn higher variance• What is not exploration?©Daniel Levinthal
  28. 28. Alternative View of Exploration • Exploration as exploitation on dimensions not fully sanctioned or recognized by the organization – Exploration as exploitation along a N+1st dimension©Daniel Levinthal
  29. 29. Novel dimension “Flatland” • Legitimating other-directed initiatives – Link to initiatives that are valued by the organization – Direct link to the external fitness landscape • Variety of external markets • Common numeraire of money • Requires immediate feedback©Daniel Levinthal
  30. 30. Inevitably of “Flatlands” • Bounded rationality • Need to coordinate and direct action among disparate individuals Solution can not be simply adding additional dimensions • Importance of supplanting one cognitive dimension of performance with another – Powerful form of entrepreneurship and strategic change is the initiation of a cognitive shift that offers a different topology – Punctuation event©Daniel Levinthal
  31. 31. Organizations as Artificial Selection Environments • Behavioral tradition has focused on search – Actors not aware of full choice set and scholars have examined how the latent choice set might reveal itself • Little attention to the problem of evaluation and “direction” – Having identified an alternative, generally [implicitly] assume no ambiguity as to its value relative to the status quo (Gavetti and Levinthal, 2000; Knudsen and Levinthal, 2007) – Similarly, processes of adaptive learning treat feedback as unambiguous (see Rerup on the “grey zone”) – If actors are intentional/forward-looking then objectives/goals as “direction setting” are critical • Firms mediate between market outcomes and individual initiatives and activities – Artificial (firm-centered) selection environment (Levinthal and Warglien, 1999)©Daniel Levinthal

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