Matrix companies such as Procter & Gamble, Eli Lilly, General Electric, or PepsiCo are more likely to enter into complex alliances with other companies, because their structure and experience working in a matrix give managers more confidence to collaborate in challenging situations.
Our research shows, however, that the stock market often penalizes these companies for such collaborations because companies take on “double complexity”; that is managing complexity both within the organization and in its alliances.
The matrix organizational structure is designed with multiple links across the company’s customer, functional, geographic, and product groups. You work in a matrix organization if you have more than one boss; for example, you report to both a regional leader and a product leader. Account manager positions and cross-functional teams are typical elements of the matrix design.
The increased prevalence of the matrix organization design largely tracks the increasing complexity of organizational environments and customer needs. For example, the drive to deliver holistic portfolios of the company’s products or services to customers, often across geographic boundaries, typically necessitates the introduction of matrix structures.
Much of the collaboration in matrix structures occurs at the intersection of workflows from different organizational units. An example of such collaboration is when several service-centric units of a commercial real estate company coordinate the integrated delivery of construction, financing, and property maintenance to a large global customer across its offices in Asia, Europe, and North America.
Another illustration of a matrixed organization would be a commercial bank offering a seamlessly integrated portfolio of a checking account, savings products, credit cards, and wealth management through a single point of contact at the bank.
As these examples show, customers often benefit greatly from matrix management. Executing it internally, however, requires matrix managers to deal with significant levels of complexity. Specifically, matrix organizations must continually coordinate interdependencies in workflows across organizational units or geographic boundaries; seek and share diverse knowledge across these boundaries; and manage the inevitable conflict and power struggles.
Imagine a situation when you must determine customer needs, learn how the features of existing products best meet those needs and then influence and coordinate across several units to seamlessly deliver an integrated offering to the customer. For matrix managers, dealing with such challenges is a way of life, and they become skilled in dealing with them.
The central conjecture of our research was that managers of matrix organizations may effectively apply these skills beyond organizational boundaries when forming and managing complex interorganizational alliances.
Interorganizational alliances are multiyear contractual agreements among companies that focus on research and development, co-manufacturing, or co-marketing. Some alliances are particularly complex: they engender severe coordination demands, knowledge-sharing challenges, and conflicts among competing interests.
These alliances involve multiple organizations working under the same contractual agreement; alliances with new partners with which the focal organization has never worked; alliances comprised of partners from multiple industries; and alliances that involve multiple functions such as an R&D and a marketing function in the same alliance.
We anticipated that matrix organizations would be both more likely to enter into such complex alliances and to excel in them.
To see if that would be the case, we collected data on the organizational design of the 500 largest U.S. companies across different industries using corporate annual reports, direct contact with company representatives, and secondary data. In addition, we tracked more than 21,000 alliances these companies formed during the study period. To evaluate how successful these alliances were expected to be, we calculated abnormal stock market returns when the alliances were announced.
Abnormal returns are a common forward-looking performance measure of organizational actions. To calculate this measure, we first modeled the expected performance of a stock using relevant market indices. We then estimated the extent to which the stock fluctuated abnormally—beyond the expected trend—on and around the date of an alliance’s announcement.
As expected, we found matrix organizations are more likely to enter into complex alliances, such as those that include partners from different industries and incorporate various functions within the alliance, such as R&D, manufacturing, or marketing. The second set of results, however, surprised us: the stock market generally responded negatively to such endeavors.
Managers of matrix firms are indeed less intimidated than managers of non-matrix firms when entering into complex alliances. The anticipated governance and relational challenges in such alliances largely reflect the managers’ daily challenges within their matrix organizations.
Yet matrix firms incur a discount for entering into such alliances: overlaying internal, intraorganizational complexity with additional external complexity in interorganizational collaboration provokes a stock penalty. This double-complexity discount, as we call it, is especially pronounced when the market anticipates high coordination costs both internally (within a matrix firm) and externally (across multiple alliance functions).
Scholars and practitioners have frequently emphasized that decision-making in matrix organizations can be slow and onerous, in part because problems that occur at a matrix junction can ripple through functional, geographic, and product units.
Such dysfunctional decision-making can also affect alliance-related decisions: prolonged deliberations among internal stakeholders in the matrix firm can limit partners’ ability to align effectively across functional domains, especially in complex alliances, and to respond swiftly to unanticipated challenges. These dynamics, in turn, can jeopardize the partnership’s success. In addition, the demands of an internal matrix structure alongside complex inter-organizational collaborations are likely to stretch managers’ finite information processing capacity, making them particularly prone to relying on cognitive heuristics.
In situations characterized by extreme internal and external complexity, experience often substitutes for broad, deliberate, and methodical analysis of managerial interventions. This can limit both search behavior and managerial practices to well-known alternatives, often leading managers to settle into areas of perceived competence, also known as competency traps.
This work raises two central implications for organizational leaders. First, it focuses attention on the difference between managerial confidence and competence in the context of complex collaboration challenges. Feeling confident about approaching a particular organizational challenge does not need to indicate a corresponding level of competence. Think about this the next time you or your colleagues are driving for a quick managerial decision with supreme confidence.
Second, the present research leads us to carefully analyze and not overestimate the relatedness of different domains of knowledge and experience. In this case, the transferability of knowledge and experience from intraorganizational to interorganizational collaboration seems to be far from straightforward. How often in discussions do you hear phrases such as, “In my experience,”? And yet, how often do you pause a discussion to try to understand the nature of those experiences and how they relate to the situation at hand?
Maxim Sytch, Franz Wohlgezogen, & Ed J Zajac, “Collaborative by Design? How Matrix Organizations See/Do Alliances,” Organization Science 2018.
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