Organizational learning as a change of routines

Rules, aspirations, decision-making, and learning in organizations have been the objects of studies that are based on ”the behavioral theory of the fi rm”. The rep-resentatives of this approach, headed by James March, Richard Cyert, and Her-bert Simon, have criticized the economic theories that presume that organizations behave rationally and that organizational action is based on explicit preferences, expectations about future outcomes, and choices based on expectations (March, 1988, pp. 2–3).

Cyert and March’s book (1963; 2001) A behavioral theory of the Firm has be-come a classic in organization theory. It presents a theory of the business fi rm and the way in which it makes economic decisions. The theory takes the fi rm as its basic unit, the prediction of the fi rm’s behavior as its objective, and the actual deci-sion making as its basic research commitment (Cyert & March, 2001, p. 19).

March’s main research interest over the years has been the pursuit of intelli-gence by individuals and organizations (Augier, 1999, p. 24):

Almost everything I’ve done is concerned one way or another with the pursuit of intelligence by individuals and organizations. Decision-making is one way in which individuals and organizations pursue intelligence; learning is another way – both learning from ones own experience and learning from others;

variation and selection is another way. Theories of adaptation or action might be a broader term than theories of decision-making.

March and Cyert argue that they can analyze the processes of decision – mak-ing in the modern fi rm in terms of three groups of variables: organizational goals, organizational expectations and organizational choice. The organizational goals of a business fi rm are series of independent constraints imposed on it through a process of bargaining among potential coalition members and elaborated over time in response to short-run pressures. Goals arise in such a form because the fi rm is, in fact, a coalition of participants with disparate demands, changing foci of attention and a limited ability to attend to all organizational problems simul-taneously (March & Cyert, 2001, p. 50). According to the theory, organizational expectations are the result of inferences drawn from available information. Organi-zational choice is made in response to a problem by using standard operating rules, which are procedures for solving the kind of problems that the fi rm has managed to solve in the past. As time passes by and experience changes through organiza-tional search and learning, so do the standard operating procedures. The variables that affect choice are those that infl uence the defi nition of a problem within the organization, those that infl uence the standard decision rules and those that affect the order of consideration of alternatives (ibid., p.163).

The general starting point of decision-making is that the fi rm always has to operate ”under uncertainty in an imperfect market” (ibid., p. 162). Uncertainty is a feature of the organizational decision-making with which the organization has to live. In the case of a business fi rm, there are uncertainties with respect to the be-havior of the market, the suppliers, the attitudes of shareholders, and the bebe-havior of competitors. The point is that organizations tend to avoid dealing with these uncertainties.

According to March (1998), organizations and their environment adapt to each other by means of several intertwined processes. Organizational learning means that they exhibit adaptive behavior over time. It has no particular starting point and there are no specifi c phenomena that trigger learning because learning is a sub-process of continuous decision-making (ibid., 1998, p. 176).

The behavioral theory of the fi rm (March, 1981; March, 1999) represents at-tempts to analyze how decisions actually come about in organizations as well as in individuals. Choices are made without much concern for preferences. Decision-making actions refl ect images of behavior, and decision makers routinely ignore their own fully conscious preferences. They act not on the basis of subjective es-timates of consequences and preferences, but on the basis of rules, routines, pro-cedures, practices, identities, and roles. They follow traditions, hunches, cultural norms, and the advice or actions of others (March, 1999, p. 22). The processes of decision-making are more important than the outcomes: ”Decision making is, in part, a performance designed to reassure decision makers and others that things are being done appropriately” (March, 1981, p. 232). This is the reason why

orga-nizational learning that deals with knowledge does not always lead to improve-ment in performance or to growth in organizational intelligence.

According to the behavioral theory of the fi rm, organizational learning is count-ed among organizational routines. Simon and March (1958, p. 142) defi ne routines as a set of activities in which the making of choices has been simplifi ed by the devel-opment of a fi xed response to defi ned stimuli. ”If search has been eliminated, but a choice remains in the form of a clearly defi ned and systematic computing routine, we will still say that activities are routinized”. Routines are not automatic responses, but rather resemble grammars that allow fl exible response patterns.

The generic term ”routines” includes the forms, rules, procedures, conventions, strategies, and technologies around which organizations are constructed and through which they operate. It also includes the structure of beliefs, frameworks, paradigms, codes, cultures, and knowledge that buttress, elaborate, and contradict formal routines. Routines are independent of the individual actors who execute them and are capable of surviving considerable actor turnover (Levitt & March, 1988, p. 320).

Routines are transmitted to the organization and its members through so- cialization, education, imitation, professionalization, personnel movement, merg-ers, and acquisitions, and they are recorded in its collective memory ”that is of-ten coherent but sometimes jumbled, that ofof-ten endures but is sometimes lost (ibid.).

Routines are based on interpretations of the past more than on anticipations of the future. Interpretations of earlier experiences provide more or less valid infor-mation about the organization’s history. The ”experiential lessons of history” are captured in routines in a way that makes the lessons accessible to organizations and individuals who have not themselves experienced the history. They occur through trials and errors and the conscious search for better solutions (ibid.).

By translating experience into rules and using these rules as a basis for action, an organization modifi es its behavior in a coherent way. Within this framework, Levitt and March see organizational learning as ”the encoding of inferences from history into routines that guide behavior”. Organizational learning is, in this re-spect, the continuous refi nement of rules and routines.

Although advocates of the behavioral theory of the fi rm have explained rou-tines and rules as the basis of organizational learning, they have not been interest-ed in how the routines in organizational practices evolve over time (Zhou, 1993).

The defi nition of ”routine” in the theory is so wide that it is diffi cult to operation-alize it for empirical research.

Organizational learning, according to March, consists of two main, partly op-posite processes: exploitation – the use and adaptation of knowledge already at hand (routinization, selection, risk aversion, execution) - and exploration – the

search for new knowledge (experimentation, variation, risk taking, search). An organization that engages only in exploitation will improve its knowledge in an increasingly obsolete technology or strategy while one that engages only in explo-ration will never gain any return from its discoveries. The achievement of an ef-fective mixing of continuity and change is possible by developing intellectual and social structures that sustain a tension between the delights of exploration and the delights of exploitation (March, 1991, p. 87).

Intelligence, on the one hand, calls for a mix of these processes, but on the other hand learning also tendso to eliminate one the another. Where success is diffi cult to achieve or sustain, it is easy for an organization to fall into the trap of changing strategies too rapidly to achieve competence in any one of them. This cycle of failure and experimentation produces an organization that under-invests in exploitation. The successes of exploration are systematically less certain, more distant in time, and more distant in space than the success of exploitation. Learn-ing, which tends to be especially responsive to successes in the temporal and spa-tial neighbourhood of action, tends to favor exploitation and leads the organiza-tion to under-invest in exploraorganiza-tion. Using the idea of these two modes of learning, March developed the argument that adaptive processes, by refi ning exploitation more rapidly than exploration, are likely to become effective in the short run but self destructive in the long run of organizational development.

Initially, March and Cyert assumed that the rules by which an organization adapts its self in the environment may be decision rules, attention rules, or goal-formulation rules. In the introduction of The Pursuit of organizational Intelligence (1999), March identifi es four types of rule development: 1) contractual, in which rules are chosen consciously by actors who have calculated the expected conse-quences of their actions; 2) experientially learned, when the organization modifi es rules for action incrementally on the basis of environmental feedback; 3) imita-tive, when decision makers copy them from other organizations; and 4) the evolv-ing collection of invariant rules.

March also discusses how organizations implement rules. In their fi rst model of learning, Cyert and March assumed that the search for better solutions is stimu-lated as soon as existing programs no longer guarantee the achievement of the organization’s goals, which are formulated as aspiration levels. This conceptual-ization proved to be limited because it neglected the link between individual and organizational learning. March and Olsen (1975) solved the problem by changing the unit of analysis from the organization to the individual. They presented a new model of the cycle of organizational learning.

In this model (see Figure 2.1), the cycle of adopting a new rule consists of four stages: (a) individual actions based on certain beliefs of the individual; (b) these individual actions lead to organizational actions that produce certain outcomes;

Learning under ambiquity

Superstitious learning Audience

learning

Role-constrained learning Individual

action

Individual beliefs

Organization action

Environment response 1

2

3

4

(c) these outcomes are interpreted as an environmental response, with success be-ing distbe-inguished from failure, and a link is drawn between actions and perceived outcomes; (d) this reasoning leads to new beliefs. March and Olsen also point out some barriers that can interrupt this cycle. These are indicated by boldface type and pairs of parallel bar lines in Figure 1 (March & Olsen, 1975, p. 158).

Figure 2.1 The cycle of organizational learning (March and Olsen, 1975, p. 158)

The fi rst type of rupture occurs when individual members of a fi rm are prevented by certain organizational conditions from adapting their behavior to their beliefs.

Prevailing role defi nitions or standard operational procedures, for example, may create these conditions (ibid.). ”Role-constrained experiential learning” occurs when members of an organization are convinced that new actions have to be initi-ated because environmental conditions have changed but the individuals are not able to change their actions. ”Audience experiential learning” occurs when indi-viduals are able to change their own behavior but they are unable to affect the rule-guided actions of others (Rupture 2 in Figure 1). The third type of rupture in the learning cycle is caused by misinterpretation of the consequences of organi-zational actions. The members of the organization cannot accurately assess what effects the executed organizational actions will have on the environment and on the results. They tend to interpret data as justifying the actions taken in response to certain problems that were identifi ed. ”Learning under ambiguity” occurs when the changes in the environment cannot be correctly identifi ed. The organizational

members are not able to make sense of the environment or to explain why certain changes happened (rupture 4 in Figure 1) (ibid.).

The creation and modifi cation of the rules that make up this action cycle are, according to March and Olsen, the results of experimentation. They see organi-zational learning as consisting of three steps: variation through experimentation, selection based on inferences drawn from experiments and retention through the formulation of rules that produce successful actions and that can be passed on to the other members of the organization (ibid.). Rule creation is based on conscious experiments, while implementation is based on experience.

The answers to my questions below summarize the theory:

1. What is organizational learning?

Organizational learning is the continuous refi nement of corporate routines; to be more exact, it is the ”encoding of inferences from history into routines that guide behavior”.

2. What triggers organizational learning?

Organizational learning and decision-making are continuous processes. They have no specifi c end or beginning. Dissatisfaction is more important from the point of view of learning than satisfaction, however.

3. What are the main forms of organizational learning?

The main types of organizational learning are exploration and exploitation. The knowledge at hand is learned through exploitation and the knowledge that has not yet been applied or created is learned through exploration. Organizational learn-ing is based mainly on experience, but also on experiment.

4. How does the theory conceptualize the relationship between individual and collective learning?

The relationship between individual and collective learning is ambivalent in their theory. March and Levitt state that organizational learning is ”more than indi-vidual learning”. On the other hand, March and Olsen present a learning circle in which organizational learning is seen from the point of view of individual adapta-tion. Individual learning affects organizational learning when an individual can change the beliefs of other individuals or change the organizational routines.

5. How does the theory conceptualize the relationship between organizational learning and historical change in the form of production?

Although organizational routines change over time incrementally, the process of organizational learning is understood in this theory to be independent of the his-torical changes in the form of production.