How organizational structure transforms risky innovations into performance – A computer simulation

Abstract This paper investigates the mutual interdependencies between organizational architectures, decision making and performance. Through applying agency-based Monte-Carlo simulations, we reveal how three types of organizational structure (hierarchical, polyarchical and hybrid) aggregate innovations on the micro level into corporate performance. By considering three different initial project portfolios (incremental innovations, innovations with spillover effects and innovations that have to overcome a critical mass), we analyze which organizational architectures may be superior regarding selecting good projects, avoiding collective myopia and overcoming organizational inertia. Results suggest that in a risky environment, firms with rigid hierarchies can achieve a much higher performance than horizontally organized firms even when the quality of the decision-making by managers is poor. Results also highlight the dangers involved in erecting a more hybrid-type organization because such an organization might become over-challenged and unable to handle risky innovations adequately. Finally, we discuss how firms could be structured to increase performance and to minimize risks.