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Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Teams, Hierarchies, and Employee Ownership

Karen F Bernhardt-Walther

University of Chicago Booth School of Business

February 25th, 2011

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Employee participation is not just profit-sharing.

Care about sharing not only

• Profit

but also

• Information
• Control
• Decision rights

Understand firm’s internal environment and organization.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Illustration

Design Surgery Production

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Contribution

• Rich baseline model of organizational design, driven by

what the firm does.

• Complexity of tasks matters.
• Predictability of tasks matters.
• Organizational design & managerial expertise required are

affected.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Model: Knowledge, Problems, and the Firm

Knowledge (Agents)

• 2 discrete units, 3 knowledge sets: {A}, {B}, {A, B}.
• Cost: cA, cB, cAB.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Model: Knowledge, Problems, and the Firm

Knowledge (Agents)

• 2 discrete units, 3 knowledge sets: {A}, {B}, {A, B}.
• Cost: cA, cB, cAB.

Problem (Task, project)

• 3 problems: a, b, ab.
• revenue if solved: va, vb, vab
• can be attempted multiple times

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Model: Knowledge, Problems, and the Firm

Knowledge (Agents)

• 2 discrete units, 3 knowledge sets: {A}, {B}, {A, B}.
• Cost: cA, cB, cAB.

Problem (Task, project)

• 3 problems: a, b, ab.
• revenue if solved: va, vb, vab
• can be attempted multiple times

Firm

• Owns problem distribution: (pa, pb, pab).
• Generates revenue by solving problems. Knowledge only input.
• Buys access to knowledge. (Hires agents.)

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Firm’s Optimization Problem

Question Which knowledge sets should attempt to solve the problems in which order given the distribution of problems? Notation A knowledge sequence of the form K1 → K2 → ... → Kl. Firm Optimization Problem max

{K1,...,Kl},l

• value of problems solved

−

• cost of knowledge sets.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

The protocol of a knowledge sequence ... corresponds to an organizational form

Organization Knowledge sequence AB A B AB A AB

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

The protocol of a knowledge sequence ... corresponds to an organizational form

Organization Knowledge sequence Firm owns 6 urns with problem distribution (pa, pb, pab) = (2/3, 1/6,1/6) AB A B AB A AB

? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?

Π = Π = Π =

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

The protocol of a knowledge sequence ... corresponds to an organizational form

A A A A A A Organization Knowledge sequence Firm owns 6 urns with problem distribution (pa, pb, pab) = (2/3, 1/6,1/6) AB A B AB A AB

a a ? a a ? ? ? ? ? ? ? ? ? ? ? ? ?

Π =

• cA

pavA

Π = Π =

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

The protocol of a knowledge sequence ... corresponds to an organizational form

A A A A A A A A A Organization Knowledge sequence Firm owns 6 urns with problem distribution (pa, pb, pab) = (2/3, 1/6,1/6) AB A B AB A AB A A A

a a ? a a ? ? ? ? ? ? ? a a ? a a ?

Π =

• cA

pavA

Π =

• cA

pavA

Π =

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

The protocol of a knowledge sequence ... corresponds to an organizational form

A A A A A A A A A AB Organization Knowledge sequence Firm owns 6 urns with problem distribution (pa, pb, pab) = (2/3, 1/6,1/6) AB A B AB A AB A A A AB AB AB AB AB

a a ? a a ? a a b a a ab a a ? a a ?

Π =

• cA

pavA

Π =

• cA

pavA

Π =

• cAB

pavA +pbvB + pabvAB

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

The protocol of a knowledge sequence ... corresponds to an organizational form

A A A B A A A A A A AB Organization Knowledge sequence Firm owns 6 urns with problem distribution (pa, pb, pab) = (2/3, 1/6,1/6) AB A B AB A AB B A A A AB AB AB AB AB

a a b a a ? a a b a a ab a a ? a a ?

Π =

• cA - (1- pa)cB

pavA +pbvB

Π =

• cA

pavA

Π =

• cAB

pavA +pbvB + pabvAB

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

The protocol of a knowledge sequence ... corresponds to an organizational form

A A A B A A A A A A AB AB Organization Knowledge sequence Firm owns 6 urns with problem distribution (pa, pb, pab) = (2/3, 1/6,1/6) AB A B AB A AB B A A A AB AB AB AB AB AB

a a b a a ? a a b a a ab a a b a a ab

Π =

• cA - (1- pa)cB

pavA +pbvB

Π =

• cA - (1- pa)cAB

pavA +pbvB + pabvAB

Π =

• cAB

pavA +pbvB + pabvAB

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

The protocol of a knowledge sequence ... corresponds to an organizational form

A A A B A A A AB A A A AB AB Organization Knowledge sequence Firm owns 6 urns with problem distribution (pa, pb, pab) = (2/3, 1/6,1/6) AB A B AB A AB B A A A AB AB AB AB AB AB

a a b a a ab a a b a a ab a a b a a ab

Π =

• cA - (1- pa)cB - pabcAB

pavA +pbvB + pabvAB

Π =

• cA - (1- pa)cAB

pavA +pbvB + pabvAB

Π =

• cAB

pavA +pbvB + pabvAB

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

The protocol of a knowledge sequence ... corresponds to an organizational form

A A A B A A A AB A A A AB AB Organization Knowledge sequence Firm owns 6 urns with problem distribution (pa, pb, pab) = (2/3, 1/6,1/6) AB A B AB A AB B A A A AB AB AB AB AB AB Multilayer Hierarchy Flat Hierarchy Team/Expert

? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?

Skip to results

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production A B

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production A B A → B B → A

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production A B A → B B → A AB

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production A B A → B B → A AB A → AB B → AB

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production A B A → B B → A AB A → AB B → AB A → B → AB B → A → AB

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production 0 − 0 A B A → B B → A AB A → AB B → AB A → B → AB B → A → AB

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production 0 − 0 A pava B A → B B → A AB A → AB B → AB A → B → AB B → A → AB

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production 0 − 0 A pava − cA B A → B B → A AB A → AB B → AB A → B → AB B → A → AB

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production 0 − 0 A pava − cA B pbvb − cB A → B B → A AB A → AB B → AB A → B → AB B → A → AB

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production 0 − 0 A pava − cA B pbvb − cB A → B pava + pbvb B → A AB A → AB B → AB A → B → AB B → A → AB

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production 0 − 0 A pava − cA B pbvb − cB A → B pava + pbvb − cA B → A AB A → AB B → AB A → B → AB B → A → AB

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production 0 − 0 A pava − cA B pbvb − cB A → B pava + pbvb − cA−(1 − pa)cB B → A AB A → AB B → AB A → B → AB B → A → AB

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production 0 − 0 A pava − cA B pbvb − cB A → B pava + pbvb − cA−(1 − pa)cB B → A pava + pbvb − cB − (1 − pb)cA AB A → AB B → AB A → B → AB B → A → AB

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production 0 − 0 A pava − cA B pbvb − cB A → B pava + pbvb − cA−(1 − pa)cB B → A pava + pbvb − cB − (1 − pb)cA AB V A → AB V B → AB V A → B → AB V B → A → AB V V = pava + pbvb + pabvab

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production 0 − 0 A pava − cA B pbvb − cB A → B pava + pbvb − cA−(1 − pa)cB B → A pava + pbvb − cB − (1 − pb)cA AB V − cAB A → AB V B → AB V A → B → AB V B → A → AB V V = pava + pbvb + pabvab

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production 0 − 0 A pava − cA B pbvb − cB A → B pava + pbvb − cA−(1 − pa)cB B → A pava + pbvb − cB − (1 − pb)cA AB V − cAB A → AB V − cA − (1 − pa)cAB B → AB V A → B → AB V B → A → AB V V = pava + pbvb + pabvab

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production 0 − 0 A pava − cA B pbvb − cB A → B pava + pbvb − cA−(1 − pa)cB B → A pava + pbvb − cB − (1 − pb)cA AB V − cAB A → AB V − cA − (1 − pa)cAB B → AB V − cB − (1 − pb)cAB A → B → AB V B → A → AB V V = pava + pbvb + pabvab

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production 0 − 0 A pava − cA B pbvb − cB A → B pava + pbvb − cA−(1 − pa)cB B → A pava + pbvb − cB − (1 − pb)cA AB V − cAB A → AB V − cA − (1 − pa)cAB B → AB V − cB − (1 − pb)cAB A → B → AB V − cA − (1 − pa)cB − (1 − pa − pb)cAB B → A → AB V V = pava + pbvb + pabvab

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Potentially Optimal Knowledge Arrangements ...

Contingency Sequence Revenue - Cost no production 0 − 0 A pava − cA B pbvb − cB A → B pava + pbvb − cA−(1 − pa)cB B → A pava + pbvb − cB − (1 − pb)cA AB V − cAB A → AB V − cA − (1 − pa)cAB B → AB V − cB − (1 − pb)cAB A → B → AB V − cA − (1 − pa)cB − (1 − pa − pb)cAB B → A → AB V − cB − (1 − pb)cA − (1 − pa − pb)cAB V = pava + pbvb + pabvab

Strategy for firm with (pa, pb, pab): Compute all potential profits, choose maximum.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results

Organizational Results Managerial Results

Conclusion

Optimal Organizational Forms

ab

(,,)

a

(,,)

b

(,,)

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results

Organizational Results Managerial Results

Conclusion

Optimal Organizational Forms

ab

(,,)

a

(,,)

b

(,,)

AB

cA = cB, cAB = cA+ cB

pa = cA/cAB A AB pa = cA/cAB Π (AB) > Π(A AB) V - cAB > V - cA - (1- pa) cAB pa < cA/cAB

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results

Organizational Results Managerial Results

Conclusion

Optimal Organizational Forms

ab

(,,)

a

(,,)

b

(,,)

AB

cA = cB, cAB = cA+ cB

pa = cA/cAB pb = cB/cAB pa = cA/cA+ cB A AB B AB

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results

Organizational Results Managerial Results

Conclusion

Optimal Organizational Forms

ab

(,,)

a

(,,)

b

(,,)

AB

cA = cB, cAB = cA+ cB

pa = cA/cAB pb = cB/cAB pa = cA/cA+ cB A AB B AB A B AB

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results

Organizational Results Managerial Results

Conclusion

Optimal Organizational Forms

ab

(,,)

a

(,,)

b

(,,)

AB

cA = cB, cAB = cA+ cB

pa = cA/cAB pb = cB/cAB pa = cA/cA+ cB A AB B AB A B AB B A AB

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results

Organizational Results Managerial Results

Conclusion

Optimal Organizational Forms

ab

(,,)

a

(,,)

b

(,,)

Team Flat Hierarchy Flat Hierarchy Multilayer Hierarchy

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results

Organizational Results Managerial Results

Conclusion

Optimal Organizational Forms

ab (,,) a (,,) b (,,) AB A -> AB B -> AB A -> B -> AB B -> A -> AB A B no production

pa =

vab - cAB vab - va

pb =

vab - cAB vab - vb

pa =

vab - cAB (vab - va ) - (cAB - cA)

pb =

vab - cAB (vab - vb ) - (cAB - cB)

pa = va

cA

pb = vb

cB cA = cB, cAB = cA+ cB

Team Flat Hierarchy Multilayer Hierarchy Multilayer Hierarchy Flat Hierarchy

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results

Organizational Results Managerial Results

Conclusion

Task Specific Tools

Task-specific tools: Decrease cost or increase value for some particular task. Example: Dentist’s hand-probes, emergency response team trains a practice particular scenario.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results

Organizational Results Managerial Results

Conclusion

Task Specific Tools

Task-specific tools: Decrease cost or increase value for some particular task. Example: Dentist’s hand-probes, emergency response team trains a practice particular scenario. Investment timing: Before or after task is known? Ex-ante Investment is cheaper. Ex-post Know which tool is required.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results

Organizational Results Managerial Results

Conclusion

Distribution Drives Managerial Decision Making

A Straightforward Result: Firms are more likely to make investments in task-specific tools ex-ante if there is less uncertainty about which tasks it will face.

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Complexity and Uncertainty Driven Teams Differ

ab

(,,)

a

(,,)

b

(,,)

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Complexity and Uncertainty Driven Teams Differ

ab

(,,)

a

(,,)

b

(,,) teams optimal

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Complexity and Uncertainty Driven Teams Differ

ab

(,,)

a

(,,)

b

(,,) complex problems frequently repeated teams optimal

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Complexity and Uncertainty Driven Teams Differ

ab

(,,)

a

(,,)

b

(,,) complex problems frequently repeated invest ex-ante in task specific tools teams optimal

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Complexity and Uncertainty Driven Teams Differ

ab

(,,)

a

(,,)

b

(,,) complex problems frequently repeated teams optimal invest ex-ante in task specific tools teams optimal

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Complexity and Uncertainty Driven Teams Differ

ab

(,,)

a

(,,)

b

(,,) complex problems frequently repeated no problems frequently repeated teams optimal invest ex-ante in task specific tools teams optimal

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Complexity and Uncertainty Driven Teams Differ

ab

(,,)

a

(,,)

b

(,,) complex problems frequently repeated no problems frequently repeated teams optimal invest ex-post in task specific tools invest ex-ante in task specific tools teams optimal

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Complexity and Uncertainty Driven Teams Differ

ab

(,,)

a

(,,)

b

(,,) complex problems frequently repeated no problems frequently repeated teams optimal invest ex-post in task specific tools invest ex-ante in task specific tools hierarchies optimal teams optimal

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Complexity and Uncertainty Driven Teams Differ

ab

(,,)

a

(,,)

b

(,,) complex problems frequently repeated simple problems frequently repeated no problems frequently repeated teams optimal invest ex-post in task specific tools invest ex-ante in task specific tools hierarchies optimal teams optimal

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Complexity and Uncertainty Driven Teams Differ

ab

(,,)

a

(,,)

b

(,,) complex problems frequently repeated simple problems frequently repeated no problems frequently repeated teams optimal invest ex-post in task specific tools invest ex-ante in task specific tools hierarchies optimal invest ex-ante in task specific tools teams optimal

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Conclusion

ab

(,,)

a

(,,)

b

(,,)

Surgery

simple problems frequently repeated no problems frequently repeated teams optimal invest ex-post in task specific tools hierarchies optimal invest ex-ante in task specific tools

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Conclusion

simple problems frequently repeated hierarchies optimal invest ex-ante in task specific tools

ab

(,,)

a

(,,)

b

(,,)

Surgery Design

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Conclusion

ab

(,,)

a

(,,)

b

(,,)

Surgery Design Production

Teams, Hierarchies, and Employee Ownership Karen F Bernhardt- Walther Introduction Model Results Conclusion

Thank you.