Paper to be presented at the DRUID Summer Conference 2007

on
APPROPRIABILITY, PROXIMITY, ROUTINES AND INNOVATION
Copenhagen, CBS, Denmark, June 18 - 20, 2007
ORGANIZATIONAL TRADEOFFS AND THE DYNAMICS OF SEARCH AND
COORDINATION
Nils Stieglitz
Strategic Organization Design, University of Southern Denmar
nst@sam.sdu.dk
Stephan Billinger
Strategic Organization Design, University of Southern Denmar
sbi@sam.sdu.dk
Abstract:
We analyze the interactions that result from organizational search and coordination. Our analysis suggests an
antagonistic relationship between search and coordination. The more an organization searches, the higher is
the demand for coordination. Meeting the demands for coordination degrades the efficacy of search processes.
Based on a case analysis, we identify four fundamental organizational tradeoffs in the coordination of
interdependent search processes that give rise to the antagonistic relationship between the two. These are (1)
the specialization of tasks, (2) the interdependencies between tasks, (3) the delegation of tasks and (4) the
incentives for organizational members.
JEL - codes: M10, D83, M21
Organizational tradeoffs and the dynamics of
search and coordination


Stephan Billinger

and

Nils Stieglitz



Strategic Organization Design (SOD),
University of Southern Denmark
Department for Marketing and Management,
Campusvej 55, 5230 Odense M, Denmark
Tel: +45 6550 3187, Fax: +45 6515 5129
sbi@sam.sdu.dk and nst@sam.sdu.dk



V 2.3
J une 1st, 2007




Please do not cite or distribute without permission




We would like to acknowledge the Institute of Technology Management of the University of St.Gallen
for providing the exceptional research setting. Our sincere thanks go to the executives and the
reengineering team of Fashion Inc. for their involvement, patience in explaining the context to us and
support. We would also like to thank Thorbjrn Knudsen and Markus Becker, as well as the members
of the SOD seminar series at the University of Southern Denmark for comments on earlier versions and
incarnations of the paper. Both authors have equally contributed and all errors remain our own. For
correspondence, please email Stephan Billinger, at sbi@sam.sdu.dk.
1
Organizational tradeoffs and the dynamics of search and coordination

We analyze the interactions and tradeoffs that result from organizational search and
coordination. Our analysis suggests an antagonistic relationship between
organizational search and coordination. The more an organization searches, the higher
is the demand for coordination. However, meeting the demands for increased
coordination may degrade the efficacy of search processes. Based on a case analysis
and insights from existing theory, we identify four fundamental organizational
tradeoffs in the coordination of interdependent search processes that give rise to the
antagonistic relationship between the two. These are (1) the specialization of tasks, (2)
the interdependencies between tasks, (3) the delegation of tasks and the constraints
placed on organizational members to carry out these tasks, and (4) the incentives for
organizational members. Our findings may be useful for the analysis of organizational
strategies and structures, interorganizational modes of coordination, and industry
architectures.

Keywords: Search, coordination, organization design, interdependence.
2
1) Introduction
Organizations are constantly engaged in search activities to better adapt their tasks or
activities. They attempt to refine existing activities and look for new promising
activities (March, 1991; Ghemawat & Costas, 1993). The specialization and
multiplicity of search processes is a core feature of the modern firm. Marketing may
search for new ways of segmenting customers, manufacturing looks for ways to lower
production costs, while procurement scans prospective suppliers for better quality or
lower costs. In many cases, these search processes are interdependent. For example,
the choice of a new, more flexible production technology might allow for broader
product differentiation, requiring new input factors from outside suppliers (Milgrom
& Roberts, 1990). Targeting new customer segments might entail changes in
production schedules and logistics, and so on. However, decentralized search efforts
may be frustrated or discouraged, if an organization fails to coordinate interdependent
search processes (e.g. Ethiraj & Levinthal, 2004; Siggelkow & Rivkin, 2006).
While prior research has established the need of coordinating interdependent search
processes in organizations, the crucial interactions between search and coordination
has received much less attention. Search and coordination have been treated as two
distinct stages, with virtually no interactions between the two (e.g. Harris & Raviv,
2002; Rivkin & Siggelkow, 2003). We use a longitudinal case study of an established
firm that underwent organizational change to illuminate the interactions of
organizational search and coordination. The firm redefined its organizational
boundaries to increase the scope and intensity of search, thereby increasing the
demand for internal coordination. Satisfying this requirement for more coordination
by restructuring the organization, on the other hand, led to design choices that in turn
influenced organizational search. Accordingly, the present paper sets out to explore
the relationship and especially the interactions between organizational search and
coordination.
Our case study points to critical tensions and tradeoffs between coordination and
search that previously have not been addressed in the literature. Broadly, our analysis
suggests an antagonistic relationship between organizational search and coordination.
The more an organization searches, the higher is the demand for coordination.
However, meeting the demands for increased coordination may degrade the efficacy
of search processes. Based on our case analysis and insights from existing theory, we
identify four fundamental tradeoffs in the coordination of interdependent search
3
processes that give rise to the antagonistic relationship between the two. These
tradeoffs result from the specialization and the assignment of tasks, the
interdependencies between tasks, how tasks are delegated, and the incentives for task
performance. The formal and informal design of an organization its organizational
structure shapes these four tradeoffs and influences how a firm searches and
coordinates. Thereby, the organizational design influences the balance between
exploration and exploitation (March, 1996) as well as the internal distribution of
(bargaining) power (e.g. Rajan & Zingales, 1998).
We build on and extend prior research in a number of ways. First, our analysis
suggests an intricate interrelationship between organizational search processes and
their coordination that has not received much prior attention. Second, we specify and
differentiate this interrelationship further by pointing to four organizational tradeoffs
that are shaped by the organizational structure of the firm. Our framework points to a
potentially more nuanced analysis of organizational structures and coordination
mechanisms. Third, we provide an empirically grounded analysis of organizational
search and coordination that complements recent formal modeling efforts. Fourth, on
a more fundamental level, our analysis conceptualizes the firm as a coordinating
device for interdependent search processes. This perspective has not been
systematically developed in the organization literature.
The paper is organized as follows. In the next section, we give an overview of how
previous research has addressed the coordination of interdependent search processes,
and we identify the relevant gaps and tensions in the theoretical literature. In section
3, we introduce the setting of our case study and discuss the method used. Section 4
covers the case study itself. In section 5, we analyze the relationship between
organizational search and coordination in the case. Section 6 generalizes the case
findings in a framework that traces the origins and consequences of the four tradeoffs
in the coordination of organizational search processes. In section 7, we discuss the
implications of our framework and point to several avenues for further research.
Section 8 concludes.
2) Prior research
In this section, we offer an analysis of prior research that deals with organizational
search and coordination. We briefly review the central tenants of the classical
behavioral theory of the firm that introduced organizational search. We show that
research rooted in the behavioral school branched out into research on organizational
4
learning and knowledge management and on organizational adaptation in complex
task environments. Recent contributions based on organizational economics also
highlight the significance of search and coordination for effective organization design.
However, while the tension between organizational search and coordination appears
to be a core issue of much of prior research, search and coordination is conceptually
treated as two distinct, independent stages, with no interactions between the two.

The behavioral theory of the firm
Organizational search has been a central research topic in the organizational literature
ever since the inception of the behavioral theory of the firm (March & Simon, 1958;
Cyert & March, 1963). Bounded rationality prevents individuals from optimizing
complex choices, as the set of alternatives and their respective outcomes may be
unknown (Simon, 1955). Individuals must search for new alternatives and learn about
their performance outcomes (Levinthal, March 1981). Organizational search tends to
be problemistic and simple-minded (Cyert & March, 1963; Greve, 2003): It is
triggered by a perceived problem and commences in the neighborhood of existing
solutions. Only if neighborhood search fails, individuals tend to broaden search to
more distant alternatives only if neighborhood search fails.
According to Simon (1979, p. 501), elaborate organizations consisting of multiple
organizational members can only be understood as machinery for coping with the
limits of mans abilities to comprehend and compute in the face of complexity and
uncertainty. The decomposition of the organizations general task into many
subtasks simplifies the choices of the organizational members, since each member
only has to attend to a restricted range of situations (March & Simon, 1958; Simon
1981). However, the division of labor and specialization create interdependencies
between subtasks, since the efficacy of one task depends on the performance of
another. This increases the demand for organizational coordination between
interdependent subtasks. Organizations coordinate either by plan or by feedback or
they could lower the demand for coordination by establishing only loosely coupled
units that may act semi-independently (March & Simon, 1958).
Taken together, the ideas of bounded rationality, problemistic search, and near-
decomposability have powerful implications for organizational search. Since an
organization cannot cope with a problem in its entire complexity, it tends to proceed
sequentially by solving one problem in a subtask before addressing problems in other
5
subtasks (March & Simon, 1959).
1
The organizational structure enables this
sequential and problemistic search on an organizational level by stabilizing the
choices in other subtasks. Later research formalized the adaptively rational system as
comprising of one or more independent search process (e.g. Levinthal & March,
1981; Nelson & Winter, 1982; Herriott, Levinthal & March, 1985).
2
The coordination
of multiple interdependent search processes thus did not evolve into a primary topic
for research.

Organizational learning and knowledge management
The behavioral theory of the firm also serves as the formal underpinning for
organizational learning and knowledge management (Levitt & March, 1988; Huber,
1991; Argote, McEvily & Reagans 2003). Foss (1996, p. 18) argues that firms exist
because they can more efficiently coordinate collective learning processes than
market organization is able to. Likewise, Levitt and March (1988) point to
organizations as collections of learning subunits. The coordination of dispersed,
interdependent learning processes in an organization could therefore be a crucial topic
in organizational learning and knowledge management.
However, research on the core processes of organizational learning and knowledge
the creation, retention, and transfer of knowledge (e.g. Huber, 1991; Argote, McEvily
& Reagans, 2003) usually does not address how learning processes are coordinated
within an organization.
3
The literature on knowledge creation is primarily concerned
with how the characteristics of organizational members affect creativity (Argote &
Ophir 2002). While Grant (1996), Conner and Prahalad (1996), and Foss and Mahnke
(2003) point to the importance of knowledge integration in managing the knowledge
base of a firm, their analysis does not consider how the coordination of learning
processes impacts the creation of new knowledge itself. The underlying assumption is
that specialists within an organization create stocks of knowledge that then needs to

1
Simon (1981) points to the hierarchical decomposition into smaller subtasks as a critical problem-
solving strategy. See Ethiraj & Levinthal (2005) for a formal analysis of the decomposability of a
problem.
2
Herriott, Levinthal & March (1985, p. 301) specifically point to the interdependencies among the
rewards of learning processes. However, the possible organizational coordination of these learning
processes is not addressed.
3
A careful review of two recent handbooks on organizational learning and knowledge management
edited by Dierkes, Antal, Child & Nonaka (2001) and by Easterby-Smith & Lyles (2003) also reveals
that the coordination of learning processes within an organization is not a core issue in the field of
organizational learning and knowledge management.
6
be integrated.
4
In essence, while the research conceptualizes organizational learning
as a collection of learning processes, the coordination of these learning processes is
not a central research topic. In the same spirit, Schulz (2002, p. 433) argues that the
management of dispersed learning processes is one the central open questions of
organizational learning that remains unanswered. This appears to be a major deficit
from a strategy and organization perspective since the creation of significant new firm
capabilities often requires the integration of overt learning processes between
organizational units (Winter, 2000; Stieglitz & Heine, 2007).

Organizational adaptation in complex task environments
During the past decade, formal research on organizational learning and adaptation was
reinvigorated by the combination of the behavioral theory of the firm and simulation
models drawn form evolutionary biology (Nelson & Winter, 1982; Levinthal, 1997,
Srensen, 2002). The NK model, originally developed by Stuart Kauffman (1993),
became a new workhorse model that has been widely applied to topics in
organizational search and change (McKelvey, 1999; Srensen, 2002; Hodgson &
Knudsen, 2006). The NK model conceptualizes an organization as consisting of N
elements (representing activities or tasks like procurement, manufacturing, marketing
etc.) with K interactions among these elements and creates a fitness or performance
landscape for all possible configurations. Performance landscapes are smooth with a
single global optimum when there are no interactions between elements. As K
increases, the landscape becomes more rugged, with multiple local performance
landscape, representing a more complex task environment.
Early studies treated the organization as essentially consisting of one organizational
search process (e.g. Levinthal, 1997; Levinthal & Warglien, 1999; Rivkin, 2000;
Kauffman, Lobo & Stuart, 2000; Gavetti & Levinthal, 2000).
5
More recently, J eremy
Rivkin, Daniel Levinthal and Nicolai Siggelkow have developed a modeling structure
based on the NK framework that explicitly treats organizational search as a

4
Likewise, Pawlowsky, Forslin & Reinhardt (2001) and Almeida, Phene & Grant (2003) treat
knowledge integration as a separate stage in the knowledge management process that does not affect
the knowledge generation.
5
See also Srensen (2002, p. 680) who criticizes early NK models for not considering the effectiveness
of decentralized learning: Most organizations delegate responsibility across a range of decision
makers. Therefore, an aggregation of several independent searches might represent the search behavior
of organizations more accurately than a model that treats the firm as though some central manager
controls all of its activities.
7
decentralized effort with multiple agents (Rivkin & Siggelkow, 2003; Siggelkow &
Rivkin, 2005; Siggelkow, Levinthal, 2005; Siggelkow & Rivkin, 2006).
6

A core claim stemming out of their research is that interdependent search processes
must be coordinated. Otherwise, the efficacy of organizational search may suffer by
decreasing performance (Siggelkow & Rivkin, 2006). Organizations are modeled as
organizational forms that differ in the role of senior management, the level of
information flows, the abilities of lower-level managers, and the presence of firm-
wide or parochial incentives. Lower-level managers search a fixed part of the N
string, with their search ability determining how many alternatives (variation of the N
elements) they create and evaluate.
7
With no organization-wide coordination,
decentralized search may backfire and reduce performance when interactions between
elements are pervasive, since middle managers do not consider the impact of an
alternative for overall performance (Siggelkow & Rivkin, 2006). This result firmly
establishes the need to coordinate interdependent learning processes in general. The
role of an active senior management
8
is to coordinate the alternatives generated by
middle management. Depending on the level of information flows, middle managers
send up a number of proposals to the CEO who combines and evaluates the proposals
for overall performance. Firm-wide incentives ensure that middle managers evaluate
and recommend proposals based on the performance impact for the whole firm and
not just for their respective departments (cf. Dosi, Levinthal & Marengo, 2003).
9

While the model firmly establishes the demand for organizational coordination when
decentralized search processes interact, it nevertheless falls short in disentangling
search and coordination. First, the model treats the active CEO as functionally

6
Gavetti (2005) develops a very similar modeling structure to study the effect of managerial cognition
on different hierarchical levels for the efficacy of organizational search.
7
Levinthal & Knudsen (2007) extend the NK model by allowing for imperfect evaluations of
alternatives and demonstrate how a firms organizational architecture may increase the effectiveness of
decision-making processes.
8
The model contrasts an active CEO with a passive, rubberstamping CEO who does not combine
and evaluate proposals.
9
A key result of Rivkin and Siggelkow (2003) is that an active CEO and firm-wide incentives
complement each other and may broaden search. Firm-wide incentives are not a perfect substitute for
an active CEO since middle managers evaluate alternatives on the assumption that other departments
do not change their choices (and do not search). Siggelkow and Rivkin (2003, p. 306, their emphasis)
argue that firm-wide incentives can coordinate the intentions, but they do not necessarily coordinate
the actions of subordinates when decisions interact. The model also assumes that only alternatives that
increase performance get passed up to the CEO for review. Note that these two assumptions have
subtle consequences for the results derived from the model. Since local peaks constitute Nash equilibria
(Levinthal & Warglien, 1999), each and every alternative considered by middle managers decreases
expected performance and gets discarded. The model therefore fails to explain how organizations break
out of consistent configurations.
8
equivalent to a form of lateral communication in which subordinates rank department
options, convene in a conference room, consider composite alternatives, and pick the
composite that is best for the firm (Rivkin & Siggelkow, 2003, p. 298, fn 6). Past
research on organization design stresses the fundamental differences between
centralized decision-making and mutual adjustment as coordination devices (e.g.
Mintzberg, 1979). Second, incentives are only analyzed in respect to organizational
coordination. They do not influence middle managers willingness to engage in search
or to invest into their search abilities. For example, firm-wide incentives could
decrease overall search efforts by lowering the incentives to do so for all middle
managers (e.g. Rotemberg & Saloner, 1995; Kaplan & Henderson, 2005). Third, the
model identifies middle management as the driving force of organizational search. In
essence, only horizontally dispersed search processes are considered (and
coordinated). Search processes could also be divided vertically, with each hierarchical
level searching differently, potentially requiring a different approach to coordination.
Overall, this important body of theoretical research firmly establishes the demand for
organizational coordination when search processes interact. Yet, it treats search and
coordination as two independent processes. Organizations first search for better
alternatives and then coordinate proposals.

Organizational economics
Traditional research in organizational economics is not primarily concerned with
organizational search. Rather, the formal analysis of principal-agent relationships
clearly dominated theoretical inquiry (e.g. Athey & Roberts, 2001; Zajac & Westphal,
2002). Theoretical work on agency problems in multi-tasking environments
corroborates a key result of the behavioral theory of the firm: Organizational search
by agents must be enabled by lifting the constraints placed on an agents activities and
it must be motivated by providing private incentives to engage in risky search
activities (e.g. Milgrom, 1988).
In the last decade, organizational economics has increasingly widened its explanatory
scope, developing theoretical insight that might be relevant for our analysis of search
and coordination. The economic analysis of organizational structures stresses the
importance of senior management in coordinating interdependent or complementary
tasks across organizational subunits (Aghion & Tirole, 1997; Harris & Raviv, 2002;
Hart & Moore, 2005). Then again, these models do not consider organizational
9
search, since senior management operates under certainty or asymmetric information.
More to the point, Rotemberg and Saloner (1995) highlight the role of inter-functional
conflicts for the generation of new information, especially the conflicts between the
sales and the production departments. These conflicts may be beneficial for a firm by
producing valuable new information about a firms opportunities, but excessive
conflicts may undermine this advantage by sharply increasing the costs of gathering
and communicating information. Senior management may ameliorate the conflict by
committing to a business strategy or personnel policy that systematically favors one
departments proposals over the other, reducing the incentives of the less preferred
department to engage in information gathering. Here, organizational search and
coordination clearly interact. Inter-functional conflicts increase the amount of
valuable information as well as the demand for coordination. A firm that decides to
coordinate by changing the incentive structure thereby decreases organizational
search in the less favored department.
Milgrom and Roberts (1990; 1995) also point to the pitfalls of uncoordinated search.
Complementarities among tasks give rise to multiple Nash equilibria with different
payoffs. A firm in an inferior Nash equilibrium fails to move to a higher performing
equilibrium if it solely relies on uncoordinated local adaptation. The decentralized
search processes must be coordinated to increase performance. Milgrom and Roberts
(1992) also offer an analysis of coordination devices, pointing to search processes on
different hierarchical levels. They argue that mutual adjustment or lateral
communication by middle managers may fail to identify the equilibrium with a higher
payoff, since they may not have access to all relevant information. Rather, in these
circumstances, information must be acquired from outside the organization and
assessed, a coordinated decision must be made on the design variables, and then this
decision must be communicated to the affected parties (Milgrom & Roberts; 1992,
p. 113).
10
An important extension is offered by Dessein and Santos (2006) that model

10
Organizational economics increasingly pays attention to the vertical specialization of learning
processes and knowledge generation. Demsetz (1988; 1995) interprets the organizational hierarchy as a
way to economize on the acquisition and use of knowledge by specialists. Managers on the different
rungs of the hierarchical ladder specialize in problem-solving (Garicano, 2000). In Hart and Moore
(2005), coordinators at the top of the hierarchy and specialists with local expertise develop
fundamentally different ideas on how to improve a business. Specialists might come up with ideas
more frequently, but big thinkers (Hart & Moore, 2005, p. 696) locate at the top of a hierarchy,
because they generate ideas with a higher expected value: Although strategic planners may only
occasionally come up with major ideas, these ideas, when implemented, will necessarily have an
impact on most, if not all the individuals working in the organization. In this respect, our assumption
10
the tradeoff between uncoordinated local adaptations and the costs of coordinating
interdependent tasks. In carrying out a task, an organizational member has to pay
attention to local information within the task as well as the interdependencies with
other tasks. Responding to local information increases the demand for the
coordination of interdependent tasks. A firm may either rely on ex ante coordination
by foregoing adaptation to local information or ex post coordination by costly
communication among organizational members.
11
However, the model does not
consider search and learning by organizational members.
Recent research in organizational economics therefore also points to the importance
of coordinating interdependent search activities. Moreover, organizational economics
also address how coordination mechanisms may influence the incentives to carry out
an activity like searching for new local information. However, organizational search
itself is heavily underspecified and the models treat the organizational search process
as a straight-forward task based on rational expectations (e.g. Hart & Moore, 2005;
Dessein & Santos, 2006). In sharp contrast to the behavioral theory of the firm (and
most research in organization theory), search and learning are perceived as rather
unproblematic endeavors that may be optimized just like any other activity.

Overall, our review of prior research suggests that interdependent search processes
require coordination to increase organizational performance. This claim seems to be
well-supported in the literature. In addition, prior research points to the importance of
specialization (how search processes are allocated), to the interdependencies between
search processes (whether they interact in performance outcomes), to the delegation
of tasks (what constraints are being placed on the agents activities within a given
task), and the need to motivate risky search activities within the organization. These
four aspects reflect traditional dimensions of organization design. However, virtually
no systematic attention has been directed towards understanding the relationship and
especially the interactions and tradeoffs between search and coordination in
organizations. Accordingly, the present paper sets out to explore the relationship and
interactions between organizational search and coordination. In other words, our

that a coordinator with an idea requires, and crowds out, access to all the assets he is working on may
not be unreasonable (Hart & Moore, 2005, p. 697).
11
This characterization of coordination mechanism closely resembles March and Simons distinction of
plan and feedback.
11
research investigates the tradeoffs involved in the organizational coordination of
decentralized, independent search processes.

3) Methods
The nature of the research question raised above suggests an approach that allows for
the detailed analysis of search and coordination within a single organization. For this
approach, a longitudinal case-study is ideal, as it allows us to examine the micro-level
mechanisms with which organizational members shape organizational search. It also
reveals how search is reflected in an organizations coordination efforts and vice
versa. Moreover, the four traditional aspects of organization design specialization,
interdependencies, delegation and incentives provide an analytical lens, which also
allows us to aggregate our findings in a way that furthers theoretical development. We
also view this approach as a mean to develop theoretical insights, which are deeply
rooted in organizational reality and that have previously been overlooked or
deemphasized by other scholars.
Therefore, this paper uses a qualitative, inductive longitudinal case-study that allows
us to illustrate the characteristics, the interplay and causality when an organization
coordinates multiple search processes. We use this approach for developing reliable
constructs that increase our understanding of the research gaps and tensions described
in the previous section (Eisenhardt & Graebner, 2007; Siggelkow, 2007). We also
compare our evidence with that from existing related case-studies (see e.g. Siggelkow
2001, Gavetti 2005, or, Milgrom and Roberts 1995) in order to control and verify our
own findings and also establish a basis for further generalizability. We would also like
to point out that our research setting was chosen on conceptual grounds, not for its
representativeness (Firestone, 1993).



Setting
This paper uses the case of Fashion Inc. which is a major European apparel
manufacturer that designs and produces garment for major department stores and
independent retailers. In 2002, the firm employed about 3500 employees and its
biggest unit generated revenues of more than 250 million. The firms headquarter is
located in Western Europe and its own manufacturing mainly takes place in Fashion
12
Inc.s production facilities in Eastern Europe. Depending on product category and its
particular characteristics (e.g. lead times, fashion sensitivity), some product types are
sourced from external Asian suppliers. While the firms own brand is well-established
in some of Europes major markets, Fashion Inc. is also a supplier and strategic
partner of global brands that have outsourced manufacturing, fashion design, or both
activities to Fashion Inc.
In early 2000, Fashion Inc.s traditional business model of vertical integration came
under severe pressure from the market, resulting in a major restructuring project
between 2001 and 2006. We chose this transformation process and the Business
Process Reengineering (BPR) as our setting and we elaborate on the details below.
12

Data gathering
Throughout the change process, Fashion Inc. allowed several researchers to study the
organizational transformation. The research effort was guided by the principles of
case-study research (Yin, 1994) to ensure validity and reliability. The data collected
encompasses documentation on the firms strategic planning, project management and
Business Process Reengineering (BPR). In addition, the dataset also includes
information from semi-structured interviews, workshop reports, the firms archives,
and the researchers notes (see Table 1). While this paper is mainly based on the
analysis of a specific part of the dataset (see below), the richness of the data allows us
to triangulate various types of data and sources.
Insert Table 1 about here
Another critical aspect is the participant observation that took place throughout the
project. In total, we participated in 146 BPR-workshops which gave us a first-hand,
detailed overview of the actual change process (see Table 2). Fashion Inc.s senior
management strongly supported this participatory approach, as by this means it gained
an objective external perspective that allowed the firm to better reflect on its
transformation process. In turn, the researchers were able to ground their theory
development on direct observation. In addition, the involvement of several researchers
allowed findings to be triangulated, and ensured an accurate reflection of the actual
change process.
Insert Table 2 about here

12
Fashion Inc.s transformation process seemed to play out successfully, as the firms new structure
provides the basis for sustainable competitive advantage which also shows in the firms performance.
This encouraging fact aside, please note that performance is not considered within this paper, because it
does not help us answering our research question.
13

Data analysis
Fashion Inc.s change project revolutionized the organization in many ways, and we
have numerous instances of organizational search, coordination between units (and
people), and documentation of organizational learning. We studied these instances by
looking at the tradeoffs that the organization was confronted with during the
organizational change, and we studied how the various BPR stages and their
outcomes dynamically influenced and shaped the firms transformation process. In
particular, we used the meticulous protocols of the reengineering teams internal
meetings and the BPR workshop protocols to analyze the change process in detail.
13

In these meetings, senior management and the reengineering team discussed and
coordinated the firms transformation process. Meetings were held at least twice a
month and, at times, required the presence of middle managers or experts in various
fields, to facilitate discussion on alternative organizational choices. The meeting
documentation was distributed among all participants to ensure a common
understanding of the actual results of a meeting.
14
Using this documentation of the
common ground allowed us to analyze the cognitive representations of the various
participants throughout the project. This was central to the analysis of who did what
and why, a critical aspect for the discussion of organizational tradeoffs, as it helps
better understand the coordination of search processes between the various
organizational actors. Moreover, the protocols also revealed where organizational
search originated, how alternatives were evaluated and coordinated, how selection
was made, how organizational choice was implemented, and how it was altered when
necessary. The fairly long time-span of the entire research project also allowed us to
examine repetitive organizational search, i.e. the recurring search for new or
alternative options to allow the firm to better align itself with its environment. The
longitudinal character of this study allowed us to better understand the motivations of
the organizational members, the evolution of their cognitive representations, and how
these influenced organizational design. Finally, interviews and discussions with

13
In our analysis we concentrated on the first two and a half years of the project, as this was the time in
which one of the authors had direct and continuous access to the firm. We used the following years to
further monitor and study the firm and examine success and failure of particular choices.
14
Frequently these documents were also discussed in detail, and sometimes revised to satisfy all parties
that their viewpoints were adequately reflected.
14
representatives from all levels of the firms hierarchy allowed us to develop a
thorough understanding of the setting.

4) The Stimulus for Organizational Change: How Fashion Inc. outlined its new
strategy and organizational structure
Why the organization changed: The strategy process
In the late 1990s, Fashion Inc. was coming under severe pressure from its end market.
The firms traditional corporate strategy was focused solely on the design,
manufacture and distribution of Fashion Inc.s own brand, which targeted the mid-
price market segment. This business model was also used by most of Fashion Inc.s
competitors, creating an industry constellation in which comparable firms were
competing for the same or similar market segments. Consequently, prices were falling
and all the players were being forced to review their strategies. The situation was
exacerbated because overall European spending on apparel was decreasing. In
addition, consumers behavior was changing in response to the mid-price market
segment losing market share either to Asian low-cost import or to international
premium or fashion brands.
15

Critical to the future corporate development was the perspective of senior
management, and a central statement made by the CEO was that: If we continue like
this, we are out of business soon. This view derived from the CEOs (and the senior
managements) own perspective, which was exemplified in a rigorous industry
analysis. The results of the analysis showed that production cost was driving change
within the industry and would continue to drive it in the future. In addition, the
importance of this aspect had dramatically increased: In the 70s, 80s, and in the
90s, relocation of manufacturing had resolved the cost-trap for some 5-10 years;
but in 2001 senior management was postulating that further relocation would provide
a short term fix for less than 5 years. The industry analysis also identified that
optimizing inter-organizational processes was certainly an important issue, in
particular because the lead times and product cycles of some product types were
drastically decreasing (for a discussion see Richardson, 1996). However, senior
management also recognized that other firm had managed to respond to these
conditions (e.g. Zaras fast-fashion, as discussed by Ghemawat & Nueno, 2003), and

15
ForadiscussionseetheanalysisofZARAandH&MbyDeutscheBank,2002.
15
the question then became: Can we compete with them? The other obvious option,
the outsourcing of production, was a questionable solution; for some competitors it
had been unsuccessful due to their inability to differentiate their products in a
marketplace that was becoming ever more complex.

What the organization changed
To identify its future corporate strategy, Fashion Inc. underwent a thorough strategic
business planning exercise. Senior managements interpretation of the industry
analysis was the basis for this exercise. The CEO stated that: If we follow the
bandwagon, we are likely to lose! He was referring to one of the findings from the
analysis, which was that neither outsourcing nor copying another firms strategy
would produce a business model that would provide sustainable competitive
advantage and a decent return on investments.
Fashion Inc. therefore analyzed its entire activity system and explored the potentials
along its value chain. It found that firm profit could be derived from all steps along
the value chain, and that the industrys bandwagon behavior of concentration on
branding meant that these activities were becoming more competitive. As a result,
other parts of the value chain also became relatively more attractive. In addition,
Fashion Inc. concluded that its competitive strengths were in such activities as
upstream production, logistics, and fabric development. A manager of the marketing
department summed-up the situation by saying: Many competitors outsource why
shouldnt we help them?
Fashion Inc.s senior management concluded that disaggregating the value chain was
a promising option, i.e. the firm would establish distinct Strategic Business Units
(SBUs) along its value chain (see Figure 1). This would drastically increase the firms
search efforts by opening-up the value chain and by exposing it to various
(intermediate) markets. These SBUs would then be able to sell to internal units and to
external customers, and they would be allowed to buy from internal and external
suppliers. Reflecting the new strategy, Fashion Inc. created three SBUs: the Fabric
Unit, the CMT Unit (cutting, making, and trimming), and the Service Unit (for a
description see Figure 1).
16


16
The decision to create three units and separate the value chain in this distinct way was mainly
determined by the intermediate markets (i.e. fabric and garment), which were also influenced by the
way manufacturing is organized within the sector.
16
Insert Figure 1 about here
The rationale for the disaggregating the corporate structure is rooted in three types of
benefits: First, efficiency and effectiveness would increase as a result of standardized
processes and a modular process architecture (see Figure 2). Second, direct interaction
with (intermediate) markets would help the firm to search for new business
opportunities along the entire value chain, to develop strategic capabilities (e.g.
advanced fabric development), and to change the firms propensity to innovate. Third,
external markets would allow the firm to benchmark internal resources against
external resources and use this information for future corporate resource allocation.
All these benefits became Fashion Inc. underlying rationale that justified the
permeable value chain and allowed it to create competitive advantages.
17

Insert Figure 2 about here
The establishment of new SBUs made it clear that the future organization would not
only address the end market, but also intermediate markets. Hence, different entities
would simultaneously search within the future corporation, and a new organizational
structure was required to coordinate these multiple search processes (see also Figure
2). The transformation from the old to the new organizational structure offers
therefore the opportunity to examine how a firm coordinates multiple search
processes by studying how it managed specialization, interdependencies, delegation
and incentives. These theoretical constructs are the structural components that guide
the following analysis of the case, i.e. we examine how each construct can be
characterized within the case, how it was shaped by the course of events, and how it
influenced the coordination of the firms new and old search processes.

Specialization
Before the transformation process, Fashion Inc.s specialization reflected the firms
traditional vertical integration. It used information from the end market, e.g. sales
figures of standard T-shirts, to plan future demands. Fashion Inc.s value chain
therefore consisted of capabilities that reflected the needs of the end market, and any
search for improvement was targeted towards strengthening Fashion Inc.s position in
the end market.

17
See also J acobides and Billinger (2006) who discuss these type of benefits in detail.
17
This situation changed with Fashion Inc. having distinct SBUs, which addressed their
own markets. The change required questioning and also eliminating several tasks of
the traditional vertical integration. For instance, some sales representatives used to
have a fairly broad task assignment and they developed a routine for processing small
number inquiries (e.g. local sport teams inquiring t-shirts with their logos, etc.). As it
turned out during the BPR project, the total revenue from these orders was very low,
and in less than 90% of all inquiries Fashion Inc. did actually get the order. Hence,
this task was fairly expensive as it caused significant internal actions without return.
In this case, the sales representatives had a broadly defined task (i.e. finding new
customers) and they did not see the costs of the entire order assessment, as it was a
fairly easy inquiry for them but not for the entire organization. Fashion Inc. therefore
decided not to process these inquiries and orders any more, and it got rid of this
particular sub-task. In addition, and as a consequence of the experience with the old
task, the firm also narrowly defined criteria for identifying new clients (including the
assessment of overall costs).
Another example was the planning department. Here it was necessary to clearly
define any planning tasks, because planning would now take place on the corporate
and on the SBU-level. That is, Fashion Inc. would now not only have demand from
the end market but also from intermediate markets, and independent SBUs could not
be coordinated by a single centralized planning department. Hence, the former
planning activities were too broadly defined and needed a redefinition due to the new
requirements for coordinated SBU-level and corporate-level search. To solve this type
of problem, Fashion Inc. used the BPR project to confront most tasks within the
organization with questions such as: What is the core of the task? Is this task done
the best way? How can it be decomposed in sub-tasks? These questions became
guidelines for the modularization of the value chain, and the firm initiated a process
of identifying the essential tasks within the entire organization. In some instances, this
was a straightforward exercise as one manager of the Fabric Unit pointed out: We
know how to dye fabric, and it was clear that Fashion Inc. could rely on its existing
capabilities. This was in particular the case within tasks that were already narrowly
defined and delegated. In other circumstances, Fashion Inc. was able to recycle
capabilities that seemed to be irrelevant in the new structure. For instance, fashion
products required quick response capabilities (see e.g. Ghemawat & Nueno 2003) that
are similar to the old vertical integration, and the old centralized planning department
18
had the specific capabilities to design and run such a mode of procurement in
collaboration with the SBUs involved.
When analyzing the characteristics of the old planning example, we also identify a
first antagonism: Broader specialization in the former planning task lead to
diminished search (i.e. exclusively for end market products), and it required more
coordination in the various steps of the value chain. We also find that the assignment
of tasks, i.e. the specialization or division of labor shapes organizational search and
coordination. It constitutes the first organizational tradeoff specialization, which can
be characterized as either narrow or broad.

Interdependencies
Fashion Inc.s old organizational structure is characterized by the conventional
vertical integration which had high degree of interdependence between the various
functional departments. For example, when the senior marketing manager decided to
introduce new products, it was clear that the product development had to develop
these products, the planning department had to ensure that production capacities were
available, and the manufacturing departments organized the workforce and the
logistics. Each individual task and its interdependencies with other tasks was
historically grown and thereby internally defined. Whenever the firm produced its
traditional and well-understood products, the organization operated smoothly.
Whenever innovative products or ways or procurement were introduced, the
organization had problems adjusting. This was particularly apparent in product
development, as this was the business process that was responsible for introducing
new products. In the old structure, product development would develop a prototype of
a new product and then assess it. If it was in compliance with the envisioned product,
manufacturing would then produce a pre-series and product development would
assess it. If it was in compliance with the envisioned product, the product went into
full-size production. As a fundamental result of the BPR project, the reengineering
team identified many instances, in which problems prolonged the process, as several
members of the reengineering team pointed out: It takes way too long because too
many people are involved. In particular feedback loops between the various
departments were in place in order to ensure the completion of the product. The
feedback loops drastically increased the time needed for the completion of many
products, and one of the central objectives of Fashion Inc.s modularization process
19
was the weakening of interdependencies between tasks. Within this context senior
management acknowledged that in some cases strong interdependencies with non-
standardized interfaces were necessary but only when these were allowing for
value-adding, i.e. complementary, information flows. This also meant that the
organization would hinder unwanted information flows to take place, as the CEO
pointed out: We need well-defined interfaces! It cant be that anyone can influence
anything in any process! It became therefore a paramount characteristic of the
modularization endeavor that interdependence between tasks was only allowed if
there were complementarities that would justify the interdependence. One example
for a well-defined interface can be found in Figure 3, which illustrates how an
employee in the customer service center processed a customer inquiry within the new
organizational structure. The inquiry was finalized by placing an order in the IT
system (see circle with #1 and the output column in Figure 3), which was then the
interface to the next business process. In the old structure, the situation was
completely different as several sales representatives would sometimes call production
to ensure, for instance, timely delivery. However, this procedure would cause major
confusion regarding the prioritization of orders and the associated coordination
between different locations.

Insert Figure 3 about here
With Fashion Inc.s new modular organizational form (see Figure 2), business
processes had well-defined interdependencies, which also affected search and
coordination. For instance, the previously mentioned product development department
was separated in a research and a development process. In the research process, the
firm experimented with new designs, colours, materials, etc. until research was
completed. The development process would then use this output of the research
process to design the actual product without feedback loops. As a result, strong
interdependence was allowed during (i.e. within) the research process in order to
increase search. However, the standardized interface at the end of the research process
facilitated coordination with other departments. As a result, the interface between
research and development allowed for only weak (or no) interdependencies during the
development process in order to increase this processs efficiency and effectiveness.
More to the point: Because of this interface, search became more intense and required
less ex post coordination for the research process. This represents another example for
20
an antagonism between search and coordination, which we see here within the
organizational tradeoff interdependency. We therefore suggest that the definition of
interdependencies between tasks is directly associated with the way organizations
search and coordinate. It constitutes the second organizational tradeoff
interdependence, which can be characterized as either strong or weak.

Delegation
Fashion Inc.s old organizational structure consisted of a hierarchical system that
delegated an organizational members freedom to act on the basis the firms basic
functions. The functions themselves defined the degree of freedom and the constraints
of activities using the traditionally grown understanding of the function, i.e. the
marketing manager did marketing, and the production manager controlled
manufacturing. While this implicit definition of these functions was fairly rigid on the
general level, it was much less defined on a detailed micro-level. A central reason for
this situation was bottom-up grown, non-formalized routines that oftentimes
resulted from employees working and collaborating in the various areas over many
years, as one member of the reengineering team pointed out (in various examples as it
turned out): They have been doing it this way for many years! As a result, many
feedback loops took place on the micro-level, due to loosely defined constraints and
the organizational members freedom to act autonomously. Within the new modular
structure, it then became critical to explicate and better define the delegation of tasks
throughout the organization.
Fashion Inc.s goal was to precisely delegate who would be allowed to do what in
which modular element. On a general level, this was done by creating SBUs with own
CEOs and management teams who were responsible for all tasks within the newly
established unit. This allowed the SBU to freely address business opportunities in the
intermediate markets. On a granular level, the reengineering team designed business
processes by defining specialization and interdependencies in a first step. In a second
step, Fashion Inc. then allocated decision-rights and the responsibility to execute. In
this latter exercise a central question was: who is doing it [the process]? This
question (referring to individuals or units, teams, etc.) raised the question of who
would be capable of creating and/or executing a particular task, or who could be
trained to do it. For instance, when the new corporate planning unit was designed,
management defined the tasks and the interdependencies with other units. As this was
21
a critical unit, senior management defined not only the head of the unit but also the
individuals and their particular tasks and the scope of their individual activities (this
was a rather small unit with only 3-5 employees).
18

One example that illustrates how Fashion Inc. precisely determined constraints and
the freedom to act can be found in Figure 4. It shows an example of the product
development in which processes were directly allocated to individuals.
19
Remarkable
in this example is the fact that for an individual process (e.g. Trend Research),
Fashion Inc. defined the particular role for each individual by clarifying (a) who has
the responsibility for the task, (b) who is executing it, (c) who is participating in it,
and (d) who gives input. This example shows a fine-grained and rigid definition of the
scope of activities that an organizational member had within the new organizational
structure. The workshops also clearly illustrated that knowing a task and its potential
complementary interdependence with other tasks was not sufficient to define the new
organizational structure. It was also necessary to delegate the actual responsibilities
and decision-rights within and between tasks, and thereby to constrain each
organizational members influence on other tasks.
Insert Figure 4 about here
Comparing old and new organizational structure, we find that delegation can be either
loose or rigid. For instance, in the old organizational structure micro-level tasks were
loosely defined which created micro-level feedback-loops. In the new structure,
micro-level tasks were rigidly defined to ensure that unwanted feedback-loops or non-
formalized routines would be not in place. This rigid definition on the micro-level
allowed middle and senior managers to have more freedom to act on the macro-level
(due to the reconfigurable modular business processes). In several examples we found
that search on the SBU-level increased, and so did the demand for coordination.
However, Fashion Inc. could decrease the coordination efforts by clearly delegating
tasks in terms of the constraints and the freedom to act for the organizational members
involved. This represents another example for an antagonism between search and
coordination, which shows in the third organizational tradeoff delegation. The above

18
As a note on the side: Even between senior management there was a discussion regarding who would
supervise this unit and have the rights to influence corporate planning. Throughout the course of this
discussion it became essential to have a rigid delegation for these particular tasks.
19
We use here the fake names Ann, Peter and J oe; the spreadsheet itself stems directly from the
reengineering workshop.
22
examples also illustrate that the actual tradeoff lies in choosing either loose or rigid
delegation.

Incentives
In the old organizational structure, incentives were only used in particular areas
within the organization. These areas were defined by measures that stemmed from the
overall or specific performance of the organization (e.g. sales representatives received
a bonus when they managed to sell more products). All of these incentives were
associated with operational performance and employees were only rewarded when
they managed to contribute to the increase of performance. The incentives were not
designed to innovate the organization, and managers and employees were only
improving the existing structure but not questioning the fundamental challenges that
the structure was facing (see chapter 4).
With the new strategic direction and the fundamental decision regarding
disaggregation, Fashion Inc. also changed its incentive system. For instance, it
introduced incentives for achieved milestones during the BPR, and collective bonuses
for the reengineering team were solely based on the completed task (e.g. mapping of
particular business processes within a given timeframe). Of course, during and after
the transformation, Fashion Inc. kept operational incentives in areas where most
employees were not directly involved in the transformation process (e.g. the examples
mentioned above). The operational incentives targeted the organizations performance
in everyday operations, and ensured its alignment with corporate strategy. Most of
these incentives were designed for individual organizational members. For instance,
Fashion Inc. had a piecework rate for certain workers in manufacturing (which also
did not change). What is of significance here is that Fashion Inc.s original business
plans were designed with SBU managers having incentives solely based on their
SBUs performance. However, as it soon turned out, this arrangement jeopardized
some of the overall corporate goals and created much demand for coordination
between SBUs. For instance, SBU managers started to negotiate individual products
instead of entire fashion collections or series. Corporate managements view,
however, was that this was missing the point, mainly because it used up valuable
management time and created an unwanted situation. It therefore implemented an
adjusted incentive system in which managers were rewarded based on corporate
results (50%) and SBU performance (50%). This ensured that inter-SBU business was
23
fair and that coordination efforts were limited, as the CEO pointed out: We do not
have these major discussions any more. The arrangement also ensured that global
(corporate) and local (SBU) search efforts would not completely jeopardize each
others objectives.
Our analysis shows that the old and the new organizational structure used incentives
that were either individual or collective. For instance, workers in manufacturing were
rewarded individually which did not lead to search and did not require coordination,
however, this incentive did produce a very well-known output. On the other hand, the
reengineering team was (partially) rewarded collectively, for instance for mapping
processes and identifying potential improvements. In this example search increased
because of the expected bonus for the team. In addition, the demand for coordination
increased because the nature of the task (as a special assignment and the need to
identify improvements). However, Fashion Inc. managed to decrease coordination
because the output of these particular tasks was previously known and standardized
(i.e. mapped processes and a list with potential improvements as a result of a
successful team effort). This example represents again an antagonism between search
and coordination which was achieved by the design of the appropriate incentive
system. It is rooted in the fourth organizational tradeoff incentives, which can be
characterized as either individual or collective.

Organizational Tradeoffs and the Dynamics of Search and Coordination
The case analysis reveals that organizational tradeoffs are linked with an
organizations search efforts and the way it coordinates. We have also shown that the
relationships between organizational tradeoffs on one hand and search and
coordination on the other hand are critical when defining an organization. Having this
first building block in place, we now want to shift our focus on how an organization
manages the various organizational tradeoffs within their organizational design.
The above examples illustrate an antagonism between search and coordination by
looking at each organizational tradeoff individually. All these examples reflect
situations in which the single tradeoff is the main determinant for an antagonism.
However, one must bear in mind that in each of these examples all the other tradeoffs
are apparent and that organizational designers must consider them when designing the
organization. For instance, the organization of Fashion Inc.s reengineering team is an
example of how the firm managed the various organizational tradeoffs within is
24
organizational unit (or member). First, there was the arrangement of the team as an
independent specialized entity that was not influenced by other employees or middle
managers; its tasks were dedicated to organizational change. Second, the teams
incentives were designed to only support the corporations transformation. Hence, the
team was not concerned with operational measures of everyday business. Third, the
team was entitled to gather information across the entire organization. Senior
management delegated the responsibility of the reengineering task to the team; it kept
the ultimate decision-right when it selected the alternatives presented by the team.
Fourth, the teams members were drawn from diverse departments. They had
differing but partially overlapping backgrounds, which gave them complementary and
interdependent knowledge. This little example demonstrates how all organizational
tradeoffs needed to be managed and balanced, and that consideration of only one
would have been insufficient for a coordinated search effort.
This brings us to the relationship between search and coordination. While our case
analysis concentrates on the antagonism between both, we also identified analogous
search-coordination patterns. For instance, in manufacturing Fashion Inc. had very
well-defined SOPs which did also not change during the corporate transformation.
Within these SOPs (e.g. sewing), workers had strictly defined working steps (i.e.
specialization); their input and output and interdependence with other steps was very
clear (e.g. the sewed t-shirt); it was also clear what freedom their job would entail
from the moment they were hired (i.e. delegation); and finally incentives were also
well established within the industry (e.g. one minute sewing time in Bulgaria). Within
this task search is very low and the need to coordinate is also very low due to well-
known inputs and outputs. In contrast, Fashion Inc. established a new fabric
development department, which had the task to develop contemporary state-of-the-art
fabrics (e.g. for sports garment). Here it was clear that this R&D activity would
require a certain degree of freedom and it was also clear that the output was likely to
require coordination (e.g. would the fabric also qualify for mass production?). In
this example, search was high, the demand for coordination, and the actually used
level of coordination was high. This and the previous example illustrate analogous
search-coordination patterns, i.e. search and coordination were either high or low.
However, analogous search-coordination patterns are straightforward examples,
which one would expect, and which were also not critical in terms of the degree of
uncertainty that they would impose on the organization. In particular from the
25
perspective of an organizational designer, analogous search-coordination patterns
were obvious examples and the involved managers (or project team leaders) normally
knew what the managerial implications were (e.g. the demand for a high or low
coordination effort). Interesting for our discussion is the fact that there are
antagonistic search-coordination patterns. In our case analysis, we have shown that
they can impose a tension in the relationship between search and coordination,
because they confront an organizational designer with challenges that are critical for
making choices regarding an organizations structure. We also show that this tension
is rooted in the organizational tradeoffs which are especially prevalent when an
organization has to coordinate multiple interdependent search processes.

Towards a framework of search and coordination
Using a case study we have identified organizational tradeoffs that fundamentally
shape organizations. We now reflect on these tradeoffs in order to contextualize their
relationships. To do so we start from the notion that organizations need to make
choices regarding the tradeoffs and their organizational structure. These choices are
made by organizational designers, who can be managers, team or project leaders, and
they consider organizational members, who can represent an individual or an
organizational unit. Having these basic conceptualizations in place, we now return to
the tradeoffs to reflect on their characteristics and their role within the organization by
relating them to existing theory.
The case study illustrates that a firm usually searches in more than one functional
domain as well as on several hierarchical levels. Very often, these decentralized
search processes are interdependent, since the efficacy of one search process depends
on the results of others. The interdependency of search processes increases the
demand for organizational coordination. Otherwise, search efforts may be frustrated
or discouraged. In the case, Fashion Inc. opened up its vertical boundaries to search
for and address business opportunities in intermediate markets. The change in the
pattern of organizational search was accompanied by a transformation of the
organizational structure and the ways Fashion Inc. coordinated its internal activities.
The specific structural choices made by Fashion Inc.s management to meet the
demands for coordination, however, influenced the search processes. Thus,
organizational search and coordination interact. The analysis also revealed that this
interrelationship between search and coordination was antagonistic, since the
26
requirements for effective search are often detrimental to effective coordination, and
vice versa. We specify and differentiate this interrelationship by pointing to four
organizational tradeoffs. We support our framework by drawing on previous research
in organizational theory and organizational economics.
(1) First, the organizations division of labor and specialization of tasks influences
how an organization searches and coordinates. The relevant tradeoff here is between a
narrow and a broad assignment of tasks to organizational members. Fundamentally,
the internal division of labor determines how tasks get assigned to organizational
members (Simon, 1957; March & Simon, 1958; Mintzberg, 1979). Since an
organizational members cognitive and learning capacities are limited (Simon, 1955;
Levitt & March, 1988), the way in which tasks are assigned directly impacts search
and coordination. A narrow task assignment allows for more rapid learning and
intense search, since the organizational member specializes in one subtask (March &
Levinthal, 1981; Demsetz, 1995). A broad task assignment, on the other hand,
allocates more than one subtask to an organizational member. Since the member now
must cover a broader set of subtasks, search and learning tends to be shallower in each
subtasks. The tradeoff thus reflects the theoretical and empirical research on
generalists and specialists in organizations (e.g. Ingram & Baum, 1997; Haunschild &
Sullivan, 2002; Ferreira & Sah, 2007). A broad task assignment facilitates
coordination among subtasks, on the other hand, since it decreases the number of
organizational members that need to engage in (costly) coordinative efforts (March &
Simon, 1958; Milgrom & Roberts, 1992; Lindbeck & Snower, 1998).
(2) Specialization, however, is not a sufficient requirement for organizational
coordination. Tasks only need to be coordinated if they are interdependent (e.g.
Thompson, 1967; Harris & Raviv, 2002). The second tradeoff that we identify is
between weak and strong task interdependencies (Levinthal & Warglien, 1999). If
tasks and thereby also the search processes within the task are independent,
organizational members may engage in search activities autonomously (Herriott,
Levinthal & March, 1985). If tasks are interdependent, the value of an activity taken
in a task also depends on activities taken in other tasks (Levinthal, 1997; Dessein &
Santos, 2006). Individual search by organizational members thus may be frustrated in
their attempt to find better alternatives if these require changes in other tasks. A local
improvement in one task might be found by a member individually, but it may fail to
realize the potential value of more coordinated changes across tasks. Weakening
27
interdependencies between tasks thus favors search for local improvements within a
task, while allowing for strong interdependencies supports global optimization of a set
of interdependent tasks (Dessein & Santos, 2006).
20
Strong interdependencies
conversely increase the demand for coordination, since the activity in one task not
only depends on local information, but also on the activities taken in interdependent
tasks. Coordination may be achieved by weakening interdependencies (e.g. the
standardization of interfaces between tasks), although with the associated detrimental
effects on the search for global optimal solutions (March & Simon, 1958; Levinthal,
Warglien, 1999).
(3) While task assignment delineates organizational members use and decision rights
for subtasks, the division of labor does not determine how these rights get delegated
(Mintzberg, 1979; Milgrom, 1988). The organizational tradeoff for search and
coordination is between placing tight or loose constraints on activities within an
assigned task.
21
Placing only loose constraints on the activities of an organizational
member enables search by allowing for experimentation and adaptation to local, task-
specific events. Loose constraints translate into more organizational slack to conduct
experiments (March & Simon, 1958). Tight constraints stifles organizational search
within a task by curtailing the freedom to act of the organizational member
(Holmstrom & Milgrom, 1994). It facilitates ex ante coordination of interdependent
tasks by making the activities of organizational members more predictable. Loose
constraints, on the other hand, complicates coordination, since the organizational
members activities are less predictable and members have to fall back to more costly
ex post coordination.
(4) Lastly, organizational members must be rewarded for engaging in risky search and
costly coordination, especially if they had been assigned multiple tasks and they must
allocate limited attention or effort (Occasio, 1997; Kaplan & Henderson, 2005).
Organization design faces a tradeoff between individual and collective rewards for
performing search and coordination. Rewards could be extrinsic or intrinsic (Osterloh
et al., 2002). Individual rewards for an organizational member based on her activities
(or, indirectly, of her subordinates) motivate to put effort in risky search activities

20
An analogous tradeoff exists in the design of product architectures between the local optimization of
individual components and the global optimization of the whole product system
21
In a similar spirit, Arrow (1974), p. 50 distinguishes active, monitored, or passive decision areas of
an organization. An active area is one in which experiments are conducted, while no experimentation is
allowed in passive areas.
28
with uncertain payoffs (Arrow, 1962; Cyert & March, 1963). Collective reward
systems, where rewards also depend on the performance of other, non-subordinated
organizational members, increase the risk of free-riding (Alchian & Demsetz, 1972),
thereby increasing the propensity to search. Coordination becomes more difficult with
private rewards, however, since it increases the incentives to respond to local events
while disregarding the impact on tasks not assigned to the organizational member
(Dosi, Levinthal & Marengo, 2003). Collective reward systems aid the coordination
of interdependent tasks by providing incentives to engage in costly coordination
efforts (Rotemberg & Saloner, 1995).

Insert Table 3 about here

Table 3 summarizes our framework (SIDI) and gives a stylized account of the
organizational tradeoffs impact on search and coordination. The formal and informal
organizational structure shapes how an organization balances the tradeoffs and the
antagonistic relationship between search and coordination. This may also suggest that
the organizational designers design choices plays in central role, since he decides on
how to balance and manage the four tradeoffs, thereby influencing how a firm
explores and exploits business opportunities.

Insert Figure 5 about here

The framework proffers that organizational structures are fundamentally concerned
with the balancing of the conflicting demands of organizational search and
coordination. Whenever an organizational designer alters elements of the
organizational structure, this will have an intended or non-intended effect on all four
tradeoffs, thereby influencing how the organization engages in search. Thus, an
aspiring designer needs to consider the effects on all tradeoffs. In addition, the
tradeoffs are a recurring phenomena on the different levels of an organization. While
senior management is concerned with aligning the overall organization with corporate
strategy, middle managers have the same responsibility in their particular task
environment (which might involve interactions with external customers, suppliers, or
complementors), and team managers must coordinate the interdependent search
efforts of team members.
29

Discussion and Implications
Our analysis proffers an explanatory framework that illustrates how organizational
search and coordination is shaped by organizational design. It offers a more nuanced
view of how organizations coordinate multiple search processes. Search and
coordination interact, confronting the organization designer with clear tradeoffs. The
analysis highlights that choices regarding the organizational structure are ultimately
driving any search process, as each organizational choice might redefine the boundary
conditions of the search process. While existing theory has taken an organizational
perspective on search, it only provided a very coarse representation of actual
underlying mechanisms and their interactions. Our framework opens the way to more
detailed (formal) treatment of mechanisms and how they shape search and
coordination within an organization.
Our analysis enriches existing theory by highlighting that the vertical and hierarchical
levels of an organization search differently, as they are drawing on and expanding
diverse knowledge bases. Thus, the firms specialization the structure of use and
decision rights shapes knowledge generation and organizational search. While
existing models study the interaction of the organizational hierarchy and the division
of knowledge, much less research has been devoted to understanding how this
influences the level and nature of organizational search. Since organizational
mechanisms usually allocate decision rights to organizational members, the evaluation
of alternatives becomes critical for exploration and exploitation (Knudsen &
Levinthal, 2007). Moreover, the evaluation of alternatives by organizational members
might also depend on their knowledge bases and hierarchal positions in the
organization.
This brings us to the role of the organizational change agent. In our case we identify
senior managers to be the drives of organizational change. Gavetti (2005), on the
other hand, in a study of Polaroid, found that middle managers were the driving forces
for innovation and change. We believe that both observations (and the interpretations
derived) can apply to a single setting, and the contrasting views reflect the nature (and
limitations) of case-study research. They also suggest that explanations that were not
necessarily the focus of the original case study can play a critical role. For instance,
other reasons for the critical role of middle or senior managers might be rooted in the
30
particular setting of the firm, its approach to corporate entrepreneurship (Stopford &
Baden-Fuller, 1994), or leadership within its hierarchy (Rosenbloom, 2000).
However, the fact that we can use these varying explanatory frameworks also
suggests that we need to abstract from the specific findings of a particular case, and
try to identify, contextualize and theorize the underlying mechanisms that go beyond
existing theory, and we hope our findings help achieve this goal.
Our findings also contribute to the stream of literature that examines the process and
evolution of strategy. For instance, our data confirms that strategic direction by senior
management is critical for building a successful organization; it requires top
management to be involved in building the strategic process while concerning
themselves with the content of strategy (Burgelman, 1991). This view also
conceptualizes strategy making (within a large, complex firm) as an iterative process
of resource allocation (Barnett & Burgelman, 1996), or a process of guided evolution
(Lovas & Ghoshal, 2000). The case of Fashion Inc. supports all of these previous
findings. However, our findings also shed light on the organizational apparatus
underlying the strategic process. While existing research concentrates on strategy and
normally refers to the aggregate constructs resources or (dynamic) capabilities, we
hope that our framework offers a way to better explain what happens within the
organization on a more granular level. Moreover, our case also illustrates that in
particular the four dimensions of the SIDI framework can not only have a
considerable impact on strategy in general, but also significantly broaden or constrain
the evolutionary process by which a firm defines its strategy.
Moreover, an organizational choice is closely linked to a firms strategic choice,
which is defined by an organizations position within its market, and how it copes
with the intensity of the particular competitive environment (Porter, 1985). The
strategic choice is directly and critically linked to financial performance measures. A
choice regarding an organizations structure, however, can only be linked to
organizational performance, which is not necessarily the performance measured in
monetary terms. That is, organizational designers can make organizational choices
that do not increase financial performance, but serve other purposes. For instance, by
making an organizational choice, an organizational designer might want to influence
the distribution of intra-organizational power, or she might have a cognitive
representation that differs from the one that senior management has (e.g. regarding
how organizational value creation and value capture can be achieved). In theoretical
31
terms our findings suggest that the choice of organizational structure, i.e. the chosen
pattern of SIDI, strongly influences the balance between search (exploration) and
execution (exploitation) and the effectiveness of organizational search (March 1991).
In addition, the chosen pattern also influences the distribution of intra-organizational
(bargaining) power (Hinings et al, 1971). The incentives provided by the organization
directly influence how rent streams are shared within organization. However, in
dynamic context, the pattern of specialization and delegation also drives the
acquisition of (firm-specific) knowledge, thereby changing the relative bargaining
position of organizational members (Rajan and Zingales, 1998). Thus, the choice of
organizational structure bears on the dynamics of organizational value creation and
value appropriation.
Another important aspect emerges when comparing the various search-coordination
examples in Fashion Inc.s old and new structure. It is the role that organizational
mechanisms play when organizations coordinate multiple search processes. In our
setting we identified two of these organizational mechanisms: First, the ability to
standardize processes and routines as well as the degree and nature of modularization
determine the uncertainty of a tasks input or output. This drastically influences the
demand for coordination. Second, any interaction with external parties (mainly on the
demand side) would introduce market mechanisms that can partially replace the
demand for internal coordination. Therefore, the permeability of Fashion Inc.s
vertical architecture (cf. J acobides & Billlinger 2006) did replace coordination that
otherwise would have been executed by the corporate headquarters. Both
organizational mechanisms provide organizational designers with tools that can help
them in making better choices regarding the organizations design. However, at this
point we are also cautious with regards to the conditions under which organizational
mechanisms work. Given the nature of a single case study, we feel that our findings
only provide a first step and we suggest this area as a promising path for future
research.
With regards to the applicability of our findings and the SIDI framework in particular,
we propose a number of potential links to existing research. First, our
conceptualization of the firm as a coordinating device for interdependent search
processes might provide a new perspective on the underlying theoretical concepts that
help us better understand continuously changing organizations (Brown & Eisenhardt
1997). On one side, our findings can help better explain intra-organizational
32
phenomena such as questions regarding how complex or simple organizational forms
learn with different type of information (Haunschild & Sullivan 2002), or how weak
or strong ties among organizational members change knowledge sharing and learning
(Hansen 1999; Lynch 2007). It might also provide a fresh view on dynamic delegation
(Klein et al 2006), governance and organizational structures (Nickerson & Silverman
2003), or routines as a source of change and stability (Feldman & Pentland 2003).
On the other side, the findings allow for a more nuanced view of inter-organizational
phenomena. For instance, organizational transformation, when conceptualized as a
logic of action that results from changes on the institutional level and that impact the
core of the organization (Bacharach et al 1997), can probably be narrowed down by
examining the various aspects of SIDI. Other examples are the role of creating and
maintaining a network on the basis of integration and specialization (Brusoni et al
2001), the underlying architecture of complexity of organizations (Ethiraj & Levinthal
2004) or the architecture of industries (J acobides 2006).
All of the above studies examine causes and effects of organizing within one or across
several entities. We would argue that specialization, interdependencies, delegation
and incentives are fundamental tradeoffs of organizing in all these settings.
Examining only a selection of these tradeoffs probably requires justification in every
research setting, as the any effort to organize tasks is confronted with search, learning
and the need to coordinate.
In more general terms, our findings also further develop existing theoretical construct.
In particular the choice of an organizations structure can support local or global
search and adaptation (Levinthal & Warglien, 1999), and it can be loose or tight
(Levinthal, 1997; Roberts, 2004). It can also allow flexible or non-flexible ways of
organizing (Galunic & Eisenhardt, 2001; Sanchez & Mahoney, 1996; Schilling &
Steensma, 2001; Volberda, 1998; Worren et al., 2002), and shape the evolution of
dynamic or non-dynamic capabilities (Eisenhardt & Martin, 2000; Teece et al., 1997).
It can represent a mechanistic or an organic (Burns & Stalker, 1961) as well as an
autocratic or democratic (Schein, 1992) organizational structure. Casual observations
in our case and the comparison with other cases also suggest that organizational
culture can be an additional factor for influencing choices about organizational
structures (Schein, 1996).
We therefore suggest a connection between the literature on search and coordination,
and organizational learning or organizational behaviour. In particular the detailed
33
dynamics that occur when a firm is balancing its organizational tradeoffs can also be
associated with dynamics of individual behaviour or sociological phenomena in
general. We therefore believe that our findings do not only hold in the specific context
of search and coordination, but might also provide guidelines for strategic
organization design in general.

Limitations and conclusions
Our study has various limitations. First, our setting provides insights from only one
case study and our findings are not derived from a sample of firms that experienced
different types of organizational transformation. We see this topic as an area for future
research; in particular because a great deal of recent conceptual advances derive from
case study research. Testing these findings in a comparative empirical study would be
a fruitful endeavour.
Second, our approach integrates several theoretical perspectives, and we were not able
to give them the attention they deserve. This is partly because the paper is based on
two specific theoretical streams and develops various additional streams of research.
Third, we have developed a view that organizational design needs to consider all the
various tradeoffs. We acknowledge that some tradeoffs might be irrelevant in certain
settings. For instance, there may be no complementarities between activities in certain
environments. These conditions are captured by our framework; however, they
certainly deserve additional attention.
Fourth, the case analyzed in this paper also illustrates that the identified tradeoffs
interact in subtle ways. For example, the internal division of labour shapes how
complementary activities are bundled into functional department or strategic business
units and it also influences the incentives of organizational members. While we
managed to identify this characteristic, we do not specifically elaborate on it as this
would be beyond the scope of the current study. However, this would be a fruitful
field for future research.
Fifth, we acknowledge that organizational tradeoffs have already been discussed by
scholars who looked, for instance, at operational criteria (e.g. quality, cost and time)
and the need to balance the relationship between manufacturing decisions and
corporate strategy (see research that departed from Skinner, 1969). However, these
notions are normally considering a stable organizational structure, i.e. the SIDI
dimensions are taken for granted. Hence, search and coordination is defined and does
34
not change, and the organization is then concentrating on operational execution. In
this paper, we discuss a setting with both execution and dynamically changing search
and coordination processes, and we identify the tradeoffs associated in these settings.

35
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40
Figure 1: The Apparel Value Chain and Fashion Inc.s new Corporate
Structure
Fashi on Inc.s new corporate structure
Fiber & Fabric
Cut Make
& Trim
Original Brand
Name Manuf.
Retail
Production of fiber
and fabric
Material handling,
packaging, logistics
Cutting, making and
trimming of apparel
Material handling,
packaging, logistics
Design and product
development
Branding and marketing
Material handling,
packaging, logistics
Marketing at the
points of sale
Selling of products to
the final customer
Material handling,
packaging, logistics
Fabric Unit CMT Unit Service Unit


Figure 2: Fashion Inc.s overall Process Architecture
Retai l OBM CMT Fabri c
Order Processi ng
Product Devel opment
Auf t ragsabwi ckl ung
Mat eri al -
f l ow
Mat eri al -
f l ow
Cust omer Rel at i onshi p Mngt
Corporat e Capaci t y Pl anni ng
Cust omer Rel at i onshi p Mngt Cust omer Rel at i onshi p Mngt
Product Devel opment Product Devel opment
Order Processi ng Sourci ng
Order Processi ng Sourci ng
Fabri c Product i on
Sourci ng
CMT Product i on
Mat eri al -
f l ow
Mat eri al -
f l ow
Fabri c Uni t speci f i c processes
CMT Uni t speci f i c processes
Servi ce Uni t speci f i c processes
Generi c processes


Figure 3: Defining Business Processes

41
42




Incentives
Figure 4: Allocation of decision and use rights

Figure 5: Organizational Tradeoffs: The SIDI framework
Specialization
Interpendencies
Delegation
Incentives
Choice of
organizational
structure
Choice of
organizational
structure
Specialization
Delegation
Interpendencies

Table 1: Sources of evidence throughout the study
Sources of Evidence
in each stage of the Study

Stage 1:
June 2002
January 2003
Stage 2:
January 2003
February 2004
Stage 3:
February 2004
May 2006
Primary Sources of Data

Workshop participation, workshop
documentation (i.e. handouts, workshop
transcripts, working documents, process
maps)
Project management documentation
Personal research notes
Internal documents
SBU business plans
Ongoing discussions with project
management team, as described in Table
2; initial discussion and framing
Workshop participation, workshop
documentation (i.e. handouts, workshop
transcripts, working documents, process
maps)
Documentation for IT requirements
Project management documentation
Internal documents
Personal research notes
Employeesurvey
Ongoing discussions with project
management team, as described in Table2

Workshop participation, workshop
documentation (i.e. handouts, workshop
transcripts, working documents, process
maps)
Internal documents
Personal research notes
Project management documentation
IT-design documents
Ongoing discussions with project
management team(seeTable2)
Semi-structured interviews to confirm
theory-building, described in Table2
Secondary Sources of Data

Historical studies of
Fashion Inc.
Sector descriptions
Research papers with apparel focus
Analyst reports
Sector descriptions
Press releases
IT-manuals
Company manuals
Sector descriptions
Press releases
IT-manuals
Company manuals
Company Events involved in

Workshops as described in Table2
Firm-widegatherings (1 presentation of
thenew collection, firmanniversary, 2
firmparties
Workshops as described in Table2
Firm-widegatherings (1 presentation of
thenew collection, 2 firmparties)
Workshops, as described in Table2
Firm-widegatherings (1 presentation of
thenew collection, 1 firmparty)


43
Table 2: Workshops involved in / attended during the transformation, per objective and list of interviews, meetings
Type of workshop dates

Number of
participants
Number
of
meetings
Main objective
of workshops
Demographics of
workshop participants
June 2002 to January 2003
Weaknesses in the former processes in 2002
Research and Development
Sourcing and Order Processing
Customer Relationship Management
Production (in 4 different countries)

205
40
55
20
90

8
1
2
1
4

Identification of operational
weaknesses and required IT
functionalities
Brainstorming on possible
improvements

Employees and middlemanagement; including all
key persons of operations
50% of which weremorethan 10 years with
Fashion Inc.; 25% between 5 and 10 years; 25%
less than 5 years
October 2002 to January 2003
Strategy
Market Analysis (ECR & PARTS)
Processes (Process & Portfolio)
Development (SEP, Evaluation, consol.)
Implementation (2 x BSC, Sourcing)
Quality & Review

75
10
10
10
15
15

14
2
2
3
3
4

Translation of SBU business plans
into operations
Strategic framing for process
redesign

Top management
Representatives of there-engineering team
30% of which weremorethan 5 years with
Fashion Inc.
70% of which wereless than 5 years with Fashion
Inc.
January 2003 to December 2004
Process Redesign and Implementation
Research and Development
Sourcing and Order Processing
Customer Relationship Management

43
20
20
3

65
25
35
5

Design and implementation of
futureprocesses with optimized
interfaces
Identification of SBU-specific and
generic processes

Middlemanagement and motivated key persons of
operations
95% of which wereat least 5 years with Fashion
Inc.
October 2003 to February 2004
Selection of ERP system

15

3

Design of IT prototypes
Selection of futureIT

Middlemanagement and motivated key persons of
operations
95% of which wereat least 5 years with Fashion
Inc.
June 2002 to May 2006
Regular Milestone & Project Meetings
Project review meetings & discussions
Interviews (Fashion Inc.
*
and IT consultants
**
)
General setting
*

IT infrastructure
*/**

ERP and MSP / SCP systems
**

Verification of research results
*/**


2-10

25


108

35
7
12
10
6

Project management of thechange
project
Verification of research layout,
tentativeand final findings

30% morethan 20 years with Fashion Inc.
40% morethan 10 years with Fashion Inc.
30% less than 2 years with Fashion Inc.

IT consultants: morethan 5 years in IT
44
Table 3: Organizational tradeoffs and their impact on search and coordination
Dimension Tradeoff Impact on search Impact on coordination
Specialization

Narrow broad Narrow =deep search
Broad =expansive search
Narrow =coordination
Broad =coordination
Interdependencies
Weak strong Weak =search for local optimum
Strong =search for global optimum
Weak =coordination
Strong =coordination
Delegation
Loose rigid

Loose =search
Rigid =search
Loose =coordination
Rigid =coordination
Incentives
Individual collective Individual =search
Collective =search
Individual =coordination
Collective =coordination



45