What is your understanding of ARC framework? Are the elements in this framework (A, R and C) substitutes or complements?

Topic: What is your understanding of ARC framework? Are the elements in this framework (A, R and C) substitutes or complements?

ARC framework often appears in an effective organisation design. This framework is made up of three main components, architecture, routines, and culture and it intends to address the coordination and incentive problems that plague many potentially successful organisations today. To unleash the full potential of these organisations, it is imperative to build a better understanding on this framework. So, this essay will examine the three components and their relationships in this framework.

There are infinitely many ways for firms to tackle coordination and incentive problems. However, without any form of order, they are more confusing than helpful to the organisation designers. So, to make the framework more assessable, the designers categorised them into three main groups; Architecture, Routines and Culture. And, this framework has since then been named: ARC framework.

The architecture component of this framework can essentially be divided into two sub-groups; the architectural structure and the compensation system. The former is used specifically to target the coordination problem; while the latter the incentive problem within the organisations. The challenges that come under the ‘structure’ subgroup include issues like, 1) the basic division of labours, 2) the reporting relationships among them, 3) the formal and informal mechanisms that link them, and 4) the hierarchical structure that governs them. And, the goals of taking into consideration these issues during any organisation design are 1) to encourage effective communication and resource sharing both vertically and horizontally, and 2) to easily provide those with the decision rights with timely and appropriate information. A classic example of coordination problem would be the subunits for desktop printers and the replaceable ink cartridges at Hewlett-Packard (HP)*. Those in the printer group initially failed to recognise that the prices they charged for the printers would affect the demand for replacement cartridges and vice versa. So, they lost the opportunity to be more competitive while their competitors were more price-sensitive in the rapidly changing electronic industry. However, once they realised this, HP created linking mechanisms that allow the groups’ decisions to be more coordinated and therefore become more consistent within the larger HP’s strategy context.

While the architectural structure aims to tackle the coordination problem, the compensation system is designed to solve the incentive problem within an organisation. Even within a large organisation, it is almost impossible to find two employees who have the same agenda. So, the challenge to the organisation designers is to induce the behaviours the firm desires by providing the proper incentives. A common example is the financial incentives that are tied to the employees’ individual performance. To be more specific, a firm that wants to compete on prices will naturally want to be the lowest cost producer; and to ...

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In a stable environment, much of the daily activities within a firm are highly mundane and routine. So, it is possible for firms to be operationally more efficient by establishing a standard protocol in these daily engagements. Usually, the parties involve in these engagements are expected to know what will flow across them and the procedures in the process. In this way, routines help reduce much unnecessary communication and therefore, allow the employees to be more specialised in their daily tasks. Besides, routines also help in the incentive problem because they create many standardised interfaces which are highly measurable and therefore, become good indicators of performance.

On the other hand, in a dynamic and complex environment, culture also plays a vital role in resolving the two problems within an organisation. In this context, culture means the commonly held values and beliefs of an organisation both constrain and enable the actions firms can take. So, when the problems a firm faces are not repetitive, a strong culture across the firm that will foster common understanding; will help in the firm’s decision making. This is true because employees who have fully internalised the firm’s views and goals are much more likely to behave in the firm’s interests in the absence of fiduciary rewards. For example, a technology company like HP will tend to associate itself with highly sophisticated products. So, it will desire an innovative workforce which continues to innovate even without the artificial fiduciary rewards.

So, in short, the ARC framework, with its three interdependent components, is a framework to address the coordination and incentive problems that the firms face. These components are interdependent because a firm’s organisation design usually incorporates all three components in a harmonious and consistent mix. For example, many companies combine all the three elements to elicit better interdivisional communication and information sharing. So, the firms may specifically create many horizontal linkages to facilitate information sharing. However, this architectural design will be less effective if: 1) the units have no financial incentives to work together, 2) the suggested routines to work together are hard to follow, or 3) there is no culture of sharing in the firm. So, in other words, all these three elements are complements to one another. An example would be that all airlines have been trying to follow the Southwest Airlines’ model, but most failed disastrously because every part of Southwest is complementary. And, so, by copying only part of it will be risky. This shows that the ARC elements are complementary.

Some have argued that these components are just different ways to achieve the firm’s goals. So, since the firms effectively do not need all three components in the organisation design to become efficient, the components are, in fact, just substitutes to one another. This might be true but in reality, the many activities at the firm should rely on more than just one mechanism to be successful. For example, routines may seem to render the need for structural linking mechanisms unnecessary in an organisation. However, while the linking mechanisms will function better for infrequent coordination, routines are excellent devices for repeated coordination. So, in reality, both components are more about complementing than about substituting to each other. In fact, this relationship will only be more entrenched because of the shorter product cycle and the more competitive business environment today. These phenomena require firms to continuously explore new markets while exploit its competitive advantages in its old markets simultaneously. To pursue these completely different market segments, these firms are more likely to have organisation designs that are consist of these complementary components.

In short, the ARC framework is a framework which relies on the architectural designs, the compensation systems, routines and culture of the firm, to tackle its coordination and incentive problems. Since these components are interdependent of one another, they act like complements in this framework.

Reference:

**Strategic Management, SSP, Chapter 4, pg 79