Internal Disaggregation in Oticon: Interpreting and Learning from the Rise and Decline of the Spaghetti Organization

Infusing coordination mechanisms that are characteristic of market organization in hierarchies has become a much-used way of simultaneously increasing entrepreneurialism and motivation in firms. However, such "internal hybrids" are inherently problematic, because of fundamental credibility problems related to managerial promises to not intervene in delegated decision-making. This theme is developed using the case of the Danish hearing aids producer, Oticon. In the beginning of the 1990s, Oticon became famous for its radical delegation experiment the "spaghetti organization." Recent work has interpreted the spaghetti experiment as a radical attempt to foster dynamic capabilities by imposing loose coupling on the organization (Lovas and Ghoshal 2000; Verona and Ravasi 1999; Ravasi and Verona 2000), neglecting, however, that about a decade later, many of the more radical elements of the spaghetti organization have been left. This paper presents an organizational economics interpretation of the spaghetti organization and its subsequent transformation. In such an interpretation, the spaghetti organization imposed significant organizational costs that could be tolerated as long as the benefits produced by the spaghetti organization dominated the costs. One source of organizational costs that the paper focuses on turn on the potential contradiction involved in combining a strong manager who possesses ultimate decision rights with widespread delegation. A number of implications are developed, both for the understanding of internal hybrids, and for the more general issue of the distinction between firms and markets.