How Does Organizational Design Influence the Risk-Taking Perceptions of Managers?
[We’re pleased to welcome Devaki Rau of Northern Illinois University. Dr. Rau recently collaborated with Thorvald Haerem of BI Norwegian Business School and Elisa Fredericks of Northern Illinois University on their article “The Influence of Centralization and Extent of Cross-Functional Team Usage on Senior Managers’ Risk-Related Perceptions” from Group and Organization Management.]
Though we know a great deal about why organizations and managers take risks, we know little about how the structure of an organization influences how decision makers perceive risk. This research examines how two fundamental organizational design variables interact to influence senior managers’ perceptions about the extent to which the organization supports risk taking. We study this in a new product development context.
The study argues that the use of cross-functional teams, a type of horizontal control system, makes managers perceive a higher degree of organizational support for risk taking. The centralization of decision making authority, a type of vertical control system, reduces the strength of the positive relation between cross-functional team use and risk perceptions. These vertical and horizontal control mechanisms interact to influence managers’ perceptions of organizational support for risk taking.
Based on a survey of 102 senior managers from a variety of organizations in the U.S. and Norway, the study finds that the extent of cross-functional team use does indeed positively relate to senior managers’ perceptions of organizational support for risk taking. Interestingly however, there is a ceiling effect to this relation. An extensive use of cross-functional teams positively relates to a perceived organizational support for risk taking at the senior manager level, but only when the senior managers have low to moderate levels of decision-making authority. At high levels of senior manager authority, risk related perceptions are more positive, but also largely independent of the extent to which the organization uses cross-functional teams.
This study points to the importance of balancing an organization’s horizontal and vertical control systems, given their effects on managers’ perceptions of support for risk taking. From a practical perspective, the results of the study imply that the widespread use of cross-functional teams (a commonly used tool for new product development) alone is not sufficient to guarantee the greater risk taking needed for successful new product development; senior managers simultaneously need to have some decision making authority. At high levels of senior manager decision making authority, however, perceived support for organizational risk taking is high and independent of the use of cross functional teams.
The question for organizations is, does cross-functional team use generate a sufficiently high return to compensate for these changed perceptions of senior managers? Organizations may be able to use cross-functional teams as a true “best practice” for new product development only when they are able to recognize and manage the more positive risk-related perceptions that accompany extensive cross-functional team use, by vesting senior managers with an appropriate degree of authority.
You can read “The Influence of Centralization and Extent of Cross-Functional Team Usage on Senior Managers’ Risk-Related Perceptions” from Group and Organization Management for free by clicking here. Did you know you can have all the latest research from Group and Organization Management sent directly to your inbox? Just click here to sign up for e-alerts!
Devaki Rau is an Associate Professor of Management at Northern Illinois University. Her research interests include strategic decision making, top management teams, and organizational learning. Her research has been published in journals such as the Strategic Management Journal, Journal of Management, Journal of Applied Psychology, Small Group Research, and Journal of Business Research. She earned her PhD from the University of Minnesota.
Thorvald Haerem is an Associate Professor at Norwegian Business School. His research interests include organizational and individual routines, decision making, and information processing. He has published research in journals such as the Journal of Applied Psychology, Organizational Studies, Organization Science, Journal of Behavioral Decision Making, and Academy of Management Review. He earned his PhD from Copenhagen Business School.
Elisa Fredericks has published on the development of new products in Industrial Marketing Management, Journal of Product Innovation Management, Journal of Qualitative Research and Journal of Nonprofit and Public Sector Marketing as well as being an active conference participant. She is an Associate Professor of Marketing at Northern Illinois University. Her research and teaching includes product development and management and cross functional integration. She earned her PhD at the University of Illinois at Chicago and has a BS and MBA from New York University.
