Internal Disaggregation in Oticon: An Organizational Economics Interpretation of the Rise and Decline of the Spaghetti Organization

At the beginning of the 1990s, Danish hearing aid producer, Oticon became world famous for its radical empowerment and delegation experiment, popularly called the ”spaghetti organization.” Recent work has interpreted the spaghetti experiment as a radical attempt to foster dynamic capabilities by imposing structural ambiguity on the organization (Lovas and Ghoshal 2000; Verona and Ravasi 1999; Ravasi and Verona 2000). However, this work has neglected that about a decade later, many of the more radical elements of the spaghetti organization have been left. This paper presents an organizational economics interpretation of the spaghetti organization and its subsequent transformation. In such an interpretation, the spaghetti organization imposed significant organizational costs that could be tolerated as long as the benefits produced by the spaghetti organization dominated the costs. One source of organizational costs that the paper focuses on turn on the potential contradiction involved in combining a strong manager who possesses ultimate decision rights with widespread delegation. Apparently, Oticon management failed to solve, or didn’t even realize the nature of, the resulting commitment problem. A number of implications are developed, particularly with respect to the firm-market dichotomy.