The Dynamics of Japanese Organizations

Franz-Jurgen Richter, Franz-Jurgen Richter

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136168765
• Edition: 1
• Topic: Ciencias sociales
• Subtopic: Estudios étnicos

This book assessess the organizational flexibility and pragmatism of Japanese management styles and contrasts this with Western management approaches which focus more closely on patterns of stability. Issues in change and organizational renewal are covered by analysing the dynamic processes by which a Japanese company organizes itself, exploring such areas as networks, informatics, quality control circles and human systems management.

Part I

Philosophy of organizational dynamism

1 Self-renewal of corporate organizations

Equilibrium, self-sustaining, and self-renewing models

Tsuyoshi Numagami, Toshizumi Ohta and Ikujiro Nonaka

Can an organization renew itself? Two models that characterize much of organization theory today offer contradictory answers to this question. Equilibrium models hold that the organization designer is able to redesign the organization to adapt to environmental change. As long as top management is competent, an organization is capable of adaptive restructuring. In contrast, self-sustaining models hold that an individual organization reproduces itself through iterative interaction with the environment and maintains its structure in a constant state, independent of change in the environment. While evolution through single-loop learning is possible, ‘revolution’ that changes the organization’s basic form is not. Change occurs on the level of society as a whole, rather than within individual organizations, when organizations with new characteristics are founded and those with older forms do not survive.

While these models provide valuable insight into organizations, they do not explain the phenomenon of self-renewal that is observed in many organizations, especially larger ones. The objective of this article is to compare the underlying logic and assumptions of the equilibrium and self-sustaining models, discuss the implications of these models regarding self-renewal, and propose a new model of the ‘self-renewing organization’.

Equilibrium Models

Much of organization theory can be characterized by equilibrium models. Examples include contingency theory and the transaction cost approach. Contingency theory addresses the equilibrium of environmental and organizational diversity (Thompson 1967, Lawrence and Lorsch 1967, Nonaka 1972, Galbraith 1973, Kagono 1980). Transaction cost economics views organizations as systems of economic transactions and explains actual organization forms and their relationships as efforts to reduce transaction costs (Williamson 1975, Williamson 1985, Ouchi 1980).

According to equilibrium models, the source of organizational change is the environment. The environment has a distinct boundary with the organization, and it is the organization’s leader who recognizes and promotes internal change based on the concept of congruence. Equilibrium models imply the congruence assumption: that performance will improve as congruence between environment and strategy is approached. A potential level of performance can be achieved only if all variables are in accordance. The organization’s leader sponsors change with the objective of achieving a state of congruence and realizing this potential performance.

The congruence assumption in itself does not imply that self-renewal is possible. As will be seen later, self-sustaining models, which also make this assumption, assert that an organization cannot change its structure. Equilibrium models assume that an organization is capable of changing its structure to reach a state of equibrium as long as two conditions are satisfied: divergence from a state of congruence is recognizable; and change toward a state of congruence can be executed. Signals that indicate divergence in various equibrium models include transaction costs, uncertainty (gap between information-processing load and information-processing capability) and variety.

Equilibrium models satisfy the condition of recognizability by making the implicit assumption that members of the organization, at least top management, are able to observe the organization objectively and evaluate these signals from an external perspective. We call this the externality assumption. To satisfy the condition of executability, a model must assume that organizational change is reversible: that each increment of organizational change can be reversed in time, and after a change, an organization can revert to its original form. We call this the reversibility of change assumption.

Recognizability of congruence: the transaction cost model

The transaction cost approach, which can be characterized as an equilibrium model, illustrates the assumption of externality of the organization’s designer. According to this approach, an organization is said to have reached a state of congruence when transaction costs (or if the discussion is limited to within an organization, control loss) are minimized. According to Williamson (1975, 1985), the divisional system (M-form) is the best fit when the rationality of organization members is bounded, there is a tendency towards opportunistic behaviour, and the scale of the organization increases.

When an organization is small, cognitive limits of top management are not problematic and opportunistic behaviour can be controlled through internal monitoring devices and incentive mechanisms. Centralized information-processing technology is effective and a functional U-form organization is appropriate. When scale increases, however, top management faces an increased information processing load. Because cognitive limits exist, the number of organization layers will increase. Opportunities for members to manipulate information for their own interests increase, thereby increasing the probability of opportunistic behaviour. An organization form that economizes on the cognitive limits of top management as well as controlling opportunistic behaviour is required. The M-form, to the extent that it satisfies these two conditions, is superior to the U-form. The M-form organization first classifies decisions into day-to-day decisions and long-term strategic decisions and then allocates them to separate organizational units. Self-sufficient operating divisions make the day-to-day decisions, while headquarters, supported by elite staff, is responsible for the long-term decisions, thus avoiding the problem of cognitive limits of top management.

According to the logic of the transaction cost approach, if opportunism, bounded rationality or scale decreases, the U-form will again be more appropriate. The organization designer must constantly be aware of the level of opportunism and other conditions and the extent of control loss in order to ensure that the organization is always in the form that is most congruent with the environment. This assumption that members are fully cognizant of their organization and the environment is similar to that made by other equilibrium models. Equilibrium models establish an objective reality in which no substantial difference exists between the knowledge of insiders and outsiders. For example, control loss that can be recognized by outsiders such as consultants and researchers, but not by top management, does not exist unless one side or the other has intentionally (strategically) falsified information.

In equilibrium models, organization members communicate information premised on fact and need to rely only on their own judgement. They are able to step outside of the organization at any time in order to evaluate the organization and environment from an external, objective perspective. Congruence is achieved through rational analysis and design by top management and strategic staff. They are heroes who grasp the relationship of organization and environment, envisage the type of organization that is most appropriate, and effect change. If other members act along the lines foreseen by top management (it is not necessary for them to follow orders exactly) and act more rapidly than environmental change, the organization will be able to achieve a state of congruence with the environment. The significance of the ability of members to take an external perspective is that an organization designer can, at least in principle, specify all variables relevant to design, making the organization a logically closed system. Whether the design is appropriate or not depends solely on the skill of the designer.

If an insider is unable to evaluate the environment from an external perspective, there is no guarantee that a state of congruence will be achieved, although it is possible to improve the fit between organization and environment through trial and error. If for each incremental change an organization takes towards congruence the environment returns a positive signal, while for each step away from congruence the signal is negative, each step is reversible and the rate of feedback is faster than that of environmental change, then it is possible for the organization to improve its own performance gradually. It is impossible, however, to evaluate whether the organization has found the optimal solution, or has merely reached a local maximum. If a costless simulation or organizational change were feasible, it would be possible to search for another maximum through simulation. Even in this case, however, whether or not the best solution could be found depends on the simulation, and there is no guarantee that the best solution could ever be found.

Executability of change

The second assumption generally made by equilibrium models to allow for organizational change is reversibility. Change must be reversible if an organization is to maintain a state of congruence in an uncertain environment. For example, according to the transaction cost approach, the U-, M-, and H-forms can be selected freely according to firm size, level of opportunism, and level of bounded rationality. The transaction cost approach implicitly assumes that if an organization changes, it is always able to revert to its original form at a later date. If the scale of an M-form organization decreases, or homogeneity of its product or utilizable economies of scale increased through technological innovation, the U-form organization, which reduced the cost of headquarter staff, would again become the most appropriate form and the organization would revert to it.

Self-Sustaining Models

Self-sustaining models hold that even if performance is determined by fit between environment and organizational characteristics, an organization is not necessarily able to achieve this state of congruence. If the divergence from the congruent situation is not recognizable and/or if change towards the congruent situation is not executable, inertia will result and the organization will be unable to adapt to the environment as flexibly as hypothesized by equilibrium models. Such situations are not at all unusual and stem from the fact that the organization is a social rather that physical phenomenon. If an organization was like a machine and, once designed, costlessly maintained the same state until its design was changed, structural inertia might not be a problem. However, when an organization is more than a mere tool through which to achieve an objective and is the objective in itself, and/or institutionalization has been effected intentionally to facilitate the reproduction of organization structure, structural inertia will result. As soon as values and institutionalization are introduced into a model, the assumptions of externality of the designer and reversibility of change hold no more, rendering self-renewal impossible.

The assumption of externality of the designer can be made only if the information communicated by members is premised on fact and context-free transmission of those factual premises is possible. This can only occur when a one-to-one correspondence exists between a specific signal and its meaning. Because transmission of information in a social system is not only transmission of syntactic signals but is also transmission of semantic information, communication between members is only possible if they share a value system through which to encode meaning into specific signals. If members share a value system, they are unable to step freely outside the organization to observe it objectively. Their definition of ‘external perspective’ will be coloured by the organization’s value system (Nonaka and Amikura 1987).

The assumption of reversibility of organizational change can be made only if (1) the organization is nothing more than an artificial tool for the achievement of specific objectives, and (2) members make conscious calculations at high speed and low cost and can change their behaviour at a speed which corresponds to environmental change. Condition (1) does not hold when a shared value system and/or institutionalization are brought into consideration. Condition (2) is not realistic when costs of maintaining an organization and achieving the reliability and accountability necessary for survival are considered.

Shared values in self-sustaining models

Institutional theory and the organization as paradigm perspective consider an organization as more than a task-structured tool for achieving an objective (Selznick 1957, Brown 1978, Sheldon 1980, Pfeffer 1981, Kagono 1982, Scott 1987). Members are not merely processors of syntactic information but are human beings linked by meaning and values. Shared values facilitate communication and encourage integration, bringing forth from members a greater amount of energy than that determined by economic calculations alone. Therefore, shared values play an essential role in organization analysis as well as management practice. Unless the formal structure of an organization is considered as a symbol of its value system, the organization cannot be understood completely. Performance of organizations similar in structure and facing the same environment differs depending on the nature of their value systems and the level to which they are shared (Kagono 1988). Additionally, because organizations with shared values are able to achieve higher levels of performance, the more adverse the environment, the more essential shared values are to survival (Deal and Kennedy 1982, Ouchi 1981, Peters and Waterman 1982, Pascale and Athos 1982).

Shared values are double-edged swords for organizations. While they give an organization stability, they also cause insensitivity towards environmental change. They make it impossible for an organization to realize its divergence from the state of congruence, rendering change impossible. Shared values make an organization susceptible to inertia and self-renewal impossible for two reasons. First, the assumption of externality of members does not hold. Because an organization sees the environment through its shared values, it ignores environmental signals that cannot be described through the symbols of its value system. Moreover, since top management and elite staff are also organization members who share these values, their own cognition is affected by them. Second, the assumption of reversibility of organizational change does not hold in organizations with shared values. A change in value systems is by definition a change in world view. Once a value system changes, it is nearly impossible to see the world again as before.

We call models such as the above self-sustaining models because they hold that an organization maintains its structure in a constant state, independent of environmental change. This does not mean that self-sustaining models represent closed systems. The organization perceives the results of its activities through its value system, and ignores information that cannot be described through its value system, even if it directly impacts performance. Through this process, an organization’s values constantly reproduce their own legitimacy and are reinforced. An organization, while remaining open, maintains a constant state through interactions with the environment.

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