Hierarchy and Misalignments in Complex New Product Development Projects

Abstract

Developing complex new products requires firms to break down the product into subsystems and create an organizational structure which ideally mirrors the product architecture. However, empirical evidence on the mirroring hypothesis is mixed and misalignments occur in the product and the corresponding organizational architectures. Misalignments take two general forms: (1) a missing link between two teams responsible for two interacting subsystems results in an unmatched interface and (2) two teams interacting without a link between their respective subsystems cause an unmatched interaction. In a model of product design as a search on a rugged landscape, we model misalignments as design teams searching on a “perceived” rather than “real” landscape. As a consequence, type-I or type-II errors are likely whereby the former causes the teams to reject superior designs and the latter to accept inferior designs. We study the performance deterioration by two measures: the magnitude and frequency of errors. We show that unmatched interactions cause a higher type-I error both in magnitude and frequency. Unmatched interactions and interfaces cause the same magnitude of type-II error but unmatched interfaces cause a higher frequency of type-II error. We further study how misalignments affect the convergence behavior of the search process, i.e., the time to converge and the quality of the final design. We find that misalignments affect, though not necessarily increase, the convergence time significantly but they are not a critical factor in the final design quality. We discuss the managerial implications of our results for the new product development projects.