Bureaucracy and Innovation - Literature review Example

 Bureaucracy and Innovation Literature Review The discussion on bureaucracy and innovation needs to look on some theoretical framework which would help in better understanding of the research topic. Numerous sociologists have put forward their theories regarding management of human behavior within a society and in work environment. These theories could be identified as Theory X and Theory Y which provide an opposite view of the organizational structure. Theory X supports formal authoritative and administrative view of the organization whereas on the other hand Theory Y seeks out ways to enhance human motivation and interrelationships in an informal organizational setup (Bolman & Deal, 2003). It is also clear that both these theories are not completely independent of each other and their acceptance and application is somewhat overlapping. McGregor Douglas who built these theories on Maslow’s Theory suggested that conventionally managers support Theory X as they believe that this is the only to achieve corporate objectives through delegation of work to their subordinates. On the other hand Douglas also advocated Theory Y with a view of fulfillment of psychological needs of humans working in organizations. He proposed that “the essential task of management is to arrange organizational conditions so that people can achieve their own goals best by directing their efforts toward organizational rewards” (Gregor, 1960, p.61). March and Simon (1958) made an argument that the existence of hierarchical structures within organizations allows companies to formulate programs for translating corporate goals into lower operational tasks. These assist top management to alter behavior of subordinates and such structure does not allow any non-hierarchical form and interdependence. Discussion regarding the impact of bureaucracy requires understanding of the inherent uncertainty that lies ahead of innovation. This is because of innovation is marked as “a process whose every element takes considerable time in revealing its true features and ultimate effects” (Schumpeter, 1950, p. 83). Therefore, despite of having established technical feasibility for an innovation it is often difficult to anticipate future impact of successful innovation as it generically alters with time and its results are to a great extent uncertain over the life of the project (Rosenberg, 1994). Victor A. Thompson (1969) defined innovation as “the generation, acceptance and implementation of new ideas, processes, and products or services”. Qian & Xu (1998) made an investigation of relationship between innovation and bureaucracy. They examined this relationship by setting out two constraints for their research that were bureaucracy and availability of finance. Furthermore, they studied two different scenarios where organizations were faced with either soft or hard budget constraints. Qian & Xu were of the opinion in hard budget constraints there is a lack of commitment from the employees and bureaucracy takes on the decision making role. However, it is observed that screening of projects by bureaucracy accounts for differences in innovation between centralized and decentralized setups. In large corporations which have soft budget constraints pre-screening of projects is more of bureaucratic nature and it is considered to be more successful with projects having low uncertainties and results from research conducted are very much clear. Bureaucratic pre-screening of projects is often criticized for letting go of feasible projects which could yield in better outcome for the business. Furthermore, the tendency of letting go of projects quickly is higher in such bureaucratic setups which undermine the drive for innovation. Another view of centralized economies have been put forward by Hayek (1945) who claimed that innovation in such economies is restricted and results from innovation are lost because of the lack of incentives for potential innovators. Managers’ not getting rewards for their innovation lack motivation and move away from taking on active role in decision making. Furthermore, it is suggested by Deardon, Ickes, & Samuelson (1990) that the “ratchet effect” related to the job satisfaction makes innovations too costly to be adopted. Bureaucratic organizations are also studied for the impact of automation in organizational systems by Meyer (1968). In this research he collected data from 254 city, county and state departments of finance. These departments are characterized by several complex levels of hierarchy where control is widely dispersed and limited number of employees is under direct control of higher supervisors. Even those who have the supervisory role in these departments have limited scope of responsibility and the actual decision power lies somewhere at the top of the hierarchy chain. Automation which is considered as a way of bringing technical innovation within organizations through the use of computers is viewed to have opposing impacts on human behavior and organizational efficiency. It has been suggested that automation can lead to diminishing workers’ satisfaction whereas on the other hand others are of the opinion that automation evokes better participation in decision making process. Meyer (1968) presented findings that conclude that automation has not much influence on formal bureaucratic structure however the way in which data processing function is organized does have impact on the administrative process. Bureaucracy has been defined as “A structure with highly routine operating tasks achieved through specialization, very formalized rules and regulations tasks that are grouped into functional departments, centralized authority, narrow spans of control and decision making that follows the chain of command” (Robins, 1996). Perhaps the most prominent advocate of the bureaucratic model was Max Weber. Weber (1947) put forwarded arguments supporting bureaucratic form of organization as determinant of operational efficiency mainly due to the formalization of clear authority and responsibility which eventually leads to coerce effort and adherence by employees. He is of the opinion that organizations which are bureaucratic and have formalized structures are “technically superior to all other forms of organization” (1947, p. 196). However, Weber’s (1947) opinion of bureaucracy is viewed to be ambiguous as it is indentified on the basis of either “incumbency in a legally defined office” and “the exercise of control on the basis of knowledge” which has resulted in subsequent researches split correspondingly. Researches since Weber’s (1947) view of bureaucratic organizations have focused upon an organic view of firms. The later argument implies achieving a level of authority through technical competence whereas the earlier suggests formalization of duties and reduction of conflicting roles and ambiguity (Udy Jr., 1959). Adler & Borys (1996) are of the opinion that there are two perspectives to the bureaucratic form of organizations. One is negative which suggests that bureaucracy in organizations hinders creativity leading to dissatisfaction and demoralization of employees. A much positive view provides that within bureaucratic setup identification of responsibilities and position making working of the organization more effective. Supporters of bureaucratic organizations argue that rules under bureaucratic regime prevent collusion of interests between workers and they allow better control and are necessary for curbing the detrimental factors which could undermine the ability of workers to achieve corporate objectives (Tirole, 1986; Milgrom, 1988). Furthermore, it has been suggested that large corporations tend to prefer routine level work rather than innovation as it allows easier evaluation of tasks and avoid risk bearing decisions which characterize innovations (Holmstrom, 1989). Merton (1949) suggested that bureaucracy in organizations become inflexible because of the unanticipated outcome of the policies they adopted and therefore leads to lower morale and dissatisfaction amongst employees which leads them to become less creative and interested in their work. Burns & Stalker (1961) suggested that organizations that follow Weber’s proposition and where work is “distributed among specialist roles within a clearly defined hierarchy” are not able to manage to respond quickly to the changing business needs and they are most suitable where the environment is static. The mechanistic model supports bureaucratic view of an organization and it implies that the structure of such an organization is only suitable to for stable and unchanging environment and there is more emphasis on adherence to rules, policies and dominance by authority in a hierarchical order (Burns & Stalker, 1961). Burns and Stalker (1961) were compelled to conclude in their study of the relationship between formal structure and organizational performance that organizations are able to respond and adapt to the changing environmental conditions if they allow organic structure within which employees can experience greater autonomy and work in loose net work. Similar arguments are also made in the studies carried out by Glisson & Martin (1980) and Baum & Wally (2003) as they highlighted a negative correlation between formalization of duties and firm’s ability to perform in dynamic environments. Mintzberg (1981) referred to non-bureaucratic organizations as “adhocratic” which are viewed to be best for allowing innovation to be internally generated. He states that To innovate means to break away from established patterns. Thus, the innovative organization cannot rely on any form of standardization for coordination. In other words, it must avoid all the trappings of bureaucratic structure, notably sharp divisions of labor, extensive unit differentiation, highly formalized behaviors and an emphasis on planning and control systems. Above all it must remain flexible” (1981). However, the literature lacks supporting evidence where adhocratic management systems are successful compared to the bureaucratic nature of firms. The success results are commonly observed at micro levels of organizations and therefore the generalizations of results relationship of adhocratic organizations and innovation is somewhat difficult. This argument led to another study which was based on a hypothesis that adhocratic cannot be considered as a complete alternative to organizational bureaucracy (Autier, 2001). Extending the research providing comparison between bureaucratic and adhocratic organizations based in France Autier (2001) made important finding that adhocratic organizations does not exist in isolation and have characteristics which are common to bureaucracies. In this it could be concluded that adhocracy is a form of bureaucracy where certain level of autonomy and flexibility could be observed at particular or for a particular decision where innovation is deemed crucial for survival. There is little evidence on how bureaucratic organizations delimit the process of development of innovativeness. In a research conducted by Dougherty & Corse (1995) they underlined factors such as control, hierarchical structure, industry and information systems which systematically affects the process of “defining, organizing, evaluating and staffing the innovation effort” (1995). However, as Wilson (1989) made an argument “We should not be surprised that organizations resist innovation. They are supposed to resist it”. He further implied that the purpose of organization is to achieve stability and certain tasks need to be routined. However due to the biasness of bureaucratic organizations towards maintaining the older version of tasks leads them to adapt hard technologies without acknowledging their difficulties and outcome and in fact they get into bigger problems. Another prominent contribution to the literature pertaining to the effects of bureaucracy of firm’s ability to steer innovation within the organization is that by Bennis W. G. (1966). He is of the opinion that bureaucratic nature of organizations reflects lesser opportunities for lower ranks to be innovative. The management under mechanistic regimes within organization does not allow employees to break barriers which hinder their ability to grow and be innovative. Zaltman & Holbek (1973) suggested that organizations are receptive or resistant to the innovation depending upon their size, maturity, internal and external communication system and the industry profile including the competition they face. They are of the opinion that bureaucratic organizations are receptive of innovation and allow implementation of innovation which is not internally generated. Thus, this implies that such organizations are poor developers of innovation and does not provide grounding for employees to share knowledge and ideas. Delbecq & Pierce (1979) describing the hierarchies in management found in different organizations highlighted different elements of the organizational structure which could be considered necessary for promoting innovativeness within organizations. These elements included differentiation which stems from the environment in which the business operates and its changing nature. Differentiation initiates innovation whereas decentralization that is another element of the organizational structure which improvise greater opportunities for individuals to develop skills and demonstrate their abilities. They proposed that larger hierarchies and older hierarchies have more innovation opportunities however they retain a great deal of control over the activities of employees. These findings are similar to those presented by Zaltman, Duncan, and Holbek (1973). Much of the research provided above was conducted based on the experiences of mature firms however a contrasting view has been proposed for new ventures which are characterized by weak structure and lack of definite job descriptions. In such cases it is argued that lack of control and formalization could lead to ambiguity in roles assigned to employees. This role ambiguity could lead to confusion amongst individuals leading to disruptions in the work flow and decision making could be affected. With formalizations of roles each individual within organizations can be assigned a particular role with an established authority level allowing them to take certain timely decisions which if delayed could results in missed opportunities. This in turns lowers the cost of decision making while speeding it up enhancing the ability of firms to respond to the volatile conditions of the market (Eisenhardt & Schoonhoven, 1990) A recent research by Sine, Mitsuhashi & Kirsch (2006) based on empirical testing of Burns and Stalker (1961) organic view of organizations evaluated the effects of formalized organizations on the performance of new ventures in the internet sector during the period 1996-2001. They concluded from their research that the challenges faced by new ventures in times of turbulent changing environment are different from mature firms. They formed an opinion that Burns and Stalker (1961) view of organic organizations does not hold for new ventures as they face greater uncertainties and risks and those companies which are able to display higher levels of formalization, specialization and administrative control can actually transcend above their competitors in facing challenges of the tougher and changing markets. This is in line with the argument made by Lumpkin & Dess (1997) who suggested that stronger entrepreneurial orientation in new ventures in fact leads to greater performance and allows innovation and autonomy within organizations. This in fact allows companies to identify external opportunities and seek out better ways of responding to them. New ventures facing higher levels of risks are likely to be more innovative than matured firms. Entrepreneurship within these organizations is surely responsible for allowing employees to generate ideas which assist them in achieving higher growth rates (Fang, Yuli, & Hongzhi, 2009). Thomson (1969) identified bureaucratic organization as “a particular kind of ordered human social system”. He explored the ways in which bureaucracy affects innovativeness suggesting that creativity in bureaucratic organizations is aimless with poor commitment from employees and their reluctance to make quick and responsive decisions. He identified factors contributing to the innovativeness of individuals in organizations suggesting conditions such as psychological security and freedom, authority to make certain risky decisions and access to diverse inputs along with some level of competition all together motivates individuals to adopt an innovative approach to their work. Bureaucratic organizations limit individuals’ ability to be innovative and create anxiety and require conformity. They are characterized by limited access to resources, hierarchal structure and intense competition amongst workers for limited work benefits such as promotion and salary increments. He further suggested that governmental bureaucracies do not allow path of innovativeness. He concluded that “most organizations in government and business are a bit under innovative” as bureaucracy hinders ways in which employees can actually develop skills and successful make better decisions. The degree of bureaucracy in any organization affects its ability to respond to changes in the external environment. Thompson (1965) provided a very crucial definition for innovative organizations which is deemed necessary for formulating basis for the current research: “The innovative organization will be characterized by structural looseness generally, with less emphasis on narrow, non-duplicating, non-overlapping definitions of duties and responsibilities. (..) Communications will be freer and legitimate in all directions. Assignment and resource decisions will be much more decentralized than is customary. The innovative organization will not be as highly stratified as existing ones (..) Group processes will be more, and more openly, used than at present. The freer communication system, the broader work assignment, the lack of preoccupation with overlap and duplication, the lessened emphasis upon authority will all work in the direction of a greater amount of interpersonal communication and multiple group membership” (1965). Colin Hales (2001) in his book clearly established the impact of bureaucratic organizations on employee behavior by suggesting that the appropriate employee behavior in such organizations is ensured by adoption of ‘formalized reward and disciplinary system’ (p. 77). Employees are given periodic increments and promotions which are based on the expertise and appraisals by the top management. Furthermore, employee behavior could also be influenced by providing necessary training in technical and administrative fields. The bureaucratic organizations tend to emphasize on the role of loyal employees who are characterized by their willingness to accept and comply with organizational regulations. Also strategies and organizational decisions are made by the senior management, which are then imposed upon lower ranks through top-down approach which mainly pertain to operational activities (Rueschmeyer, 1986). La Porta, Lopez-de-Silanes, & Shleifer (2000) in their study of government ownership of banks in 92 countries including Bahrain suggested that ownership of banks by government is a common phenomenon in those countries which low per capita income and the financial systems and property rights are relatively weak. The research concluded that the government ownership of firms including banks is in fact the reason for politicization of the resource allocation process and negative effects on the efficiency. Banks in Middle East are viewed as bureaucratic where formalization of roles is common and stakes in banks are controlled majorly by the government and members of royal families in these countries (Arabian Business, 2010). A research by Chung & Haddad (2001) encapsulating characteristics of corporate culture in Bahraini firms including banks concluded that there is a positive relationship between corporate culture and performance. Those firms which allowed greater involvement of employees and knowledge sharing between them are expected to perform better than others. Al-Alawi, Al-Marzooqi, & Mohammed (2007) found out that governmental organizations in Bahrain has limited knowledge sharing because of organizational politics. Their research concluded that innovation which is very much dependent on factors such as trust, communication, information systemsm rewards and organizational structure do lead to greater knowledge sharing. The obstacles of knowledge sharing can be removed by managers by seeking out ways to provide for conditions in organizations supporting these factors. Robert L. Young (1981) provided four factors affecting innovativeness in banks. These factors included size, growth, departmentalization and competition. He is of the opinion that departmentalization which is based on strict hierarchies tends to affect the behavior employees and eventually they become less innovative. The access of employees is restricted and they are involved in allocated day to day to routine work. A research by Sapienza (2004) highlighted the trends in bank lending by state owned banks and suggested that these banks tend to charge lower interest rates than private banks however they prefer to extend loans to larger firms and in those areas which have lower economic status. The electoral outcome on parties affiliated with banks has also impact on the bank’s operations. Higher interaction with customers in bank requires greater employee empowerment enabling them to develop a sense of commitment and to be able to make decisions which are best suited for meeting their customer needs. A research carried out by Papasolomou focused on internal marketing which presents a way of dealing with both employees’ satisfaction and customers’ needs (Papasolomou, 2006). This approach allows people orientation which assists financial institutions to cater to their customers’ needs efficiently and at the same time increases employee retention, increased performance and achievement of overall corporate objectives (Drake, Gulman, & Roberts, 2005). Matt Dickinson (2009) reported in Independent, a leading UK newspaper, that banks in Middle East must make efforts to cut bureaucracy that is plaguing the banking industry in these countries. Without reducing the impact of bureaucracy Arabian banks will not able to meet the changing needs of customers which may result in these banks falling behind global competition. Summary: The above literature review provides important theoretical framework characterizing bureaucratic nature of organizations. Along with important definitions and concepts of bureaucratic or mechanistic structures the relationship between bureaucracy and innovation has been highlighted referring to previous studies and researches. The relationship between bureaucracy and innovation from the provided literature suggests that bureaucratic organizations do not motivate individuals to be innovative and instead their performance is evaluated for conformity with tasks delegated to them. Individuals do not have time to think creatively and their access to information pertaining to the objectives of companies is limited which keeps them restricted to their daily routine and it does not invoke any regard for innovativeness in them. Most important the decision making remains institutionalized and individuals working at lower ranks are blinded by the high boundaries set up by the management of firms. The organization structure and control of organizations play an important role in ascertaining the extent of innovation within organizations. However, results from researches have been limited to support the theoretical claim that bureaucracy in facts is the sole reasons responsible for not allowing innovation to flourish within organizations. References Adler, P. S., & Borys, B. (1996). Two Types of Bureaucracy: Enabling and Coercive. The Journal of High Technology Management Research, 41, 149-173. Adler, P. S., & Borys, B. (1996). Two Types of Bureaucracy: Enabling and Coercive. Administrative Science Quarterly, 41 (1), pp. 61-89. Al-Alawi, A. I., Al-Marzooqi, N. Y., & Mohammed, Y. F. (2007). Organizational culture and knowledge sharing: critical success factors. Journal of Knowledge Management , 11 (2), 22-41. Arabian Business. (2010). Bahrain Power List - Abdulla Ali Kanoo . Retrieved February 12, 2010, from Arabian Business: http://www.arabianbusiness.com/bahrain-power-list/profile/1710?clr= Autier, F. (2001). Bureaucracy vs. Adhocracy: a case of overdramatisation? 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