Selective Intervention and Internal Hybrids: Interpreting and Learning from the Rise and Decline of the Oticon Spaghetti Organization

Infusing hierarchies with elements of market control has become a much-used way of simultaneously increasing entrepreneurialism and motivation in firms. However, this paper argues that such “internal hybrids,” particularly in their radical forms, are inherently hard to successfully design and implement because of a fundamental incentive problem of establishing credible managerial commitments to not intervene in delegated decision making. This theme is developed and illustrated, using the case of the world-leading hearing aids producer, Oticon. In the beginning of the 1990s, Oticon became famous for its radical internal hybrid, the “spaghetti organization.” Recent work has interpreted the spaghetti organization as a radical attempt to foster dynamic capabilities by organizational means, neglecting, however, that about a decade later the spaghetti organization has given way to a more traditional matrix organization. In contrast, an organizational economics interpretation of Oticon organizational changes is developed. This lens suggests that a strong liability of the spaghetti organization was the above incentive problem: Frequent managerial meddling with delegated rights led to a severe loss of motivation, and arguably caused the change to a more structured organization. Refutable implications are developed, and the discussion is broadened to more general issues of economic organization. (Internal Hybrids; Organizational Change; Delegation; Managerial Commitment Problems; New Organizational Forms) Introduction In academic research as well as in managerial practice, the search for the sources of competitive advantage has increasingly centered on organization-related factors (e.g., Barney 1986, Kogut and Zander 1992, Mosakowski 1998, Nahapiet and Ghoshal 1999). Thus, it is argued that many firms radically change the way in which they structure their boundaries (e.g., Helper et al. 2000) as well as their internal organization (e.g., Miles et al. 1997). They arguably do this in an attempt to foster the dynamic capabilities that are necessary for competing in the emerging knowledge economy. Fundamental advances in IT and measurement technologies have facilitated these changes (Zenger and Hesterly 1997), while equally fundamental developments in the organization and motives of capital markets as well as increasing internationalization are claimed to have made them necessary (Halal and Taylor 1998). From an organizational economics perspective, these experiments with economic organization fall into the categories of either external hybrids (Williamson 1996) (that is, market exchanges infused with elements of hierarchical control), or internal hybrids (Zenger 2002) (that is, hierarchical forms infused with elements of market control). The aims of the experimental efforts are to reduce coordination costs, improve incentives, and help to clarify the nature of the businesses the firm is in, thereby improving entrepreneurial capabilities and the ability to produce, share, and reproduce knowledge (Grant 1996, Day and Wendler 1998, Miles et al. 1997, Mosakowski 1998). Although both internal and external hybrids are means to reach these aims, they would seem to be highly imperfect substitutes. For example, adopting an internal hybrid form has the benefit of involving fewer layoffs relative to adopting external hybrids. Also, spin-offs, carve-outs and the like are often legally complex operations, whereas adopting an internal hybrid may simply be a matter of managerial fiat. Further, management may fear that leaving too many activities in the hands of other firms will hollow out the corporation (Teece et al. 1994), or make it difficult to protect valuable knowledge (Liebeskind 1996). Given this, one may wonder why firms should ever make governance choices in favor of external hybrids. However, a main point of this paper is that internal hybrids are beset by distinct incentive costs that external hybrids tend to avoid, and 1047-7039/03/1403/0331$05.0