(Originally published on OUBS Blog)
Ultimately, there may be no long-term sustainable advantage other than tha ability to organize and manage. – Jay Galbraith and Ed Lawler
The evolution of the corporation
At the end of the 19th century there were only big corporations in plantations, all the rest was personal business with lots of interation between different people. The emergence of factories made the contractor system with market relationships among workers, machine owners and merchants, inefficient.
The markets – firms difference is central here. In markets you have price mechanisms which direct the organization and in firms you have managerial direction. Which version you choose depends on efficiency. The idea is that when the administrative costs would be less than the transaction costs in a market, then firms a the more wise choice.
Railroads and the telegraph system allowed for multiple locations to be managed from one central office. Next came the devisionalised structure, the result of margers that started to happen in the 1920s. These started to not be devided by function but also by product. Here the strategic part of centralised while the operational was localised at a devision level.
In general an organized human activity, as of Mintzberg, needs division of labor into tasks as well as coordinations of these task to the activity. In terms of division of labor, specialization will lead to immense productivity gains, as long as the coordination need as well as detatchment from the product of the individual does not become too big. Things that can be used for coordination are price (e.g. transfer prices between departments), rules and directives, mutual adjustment and routines.
In general, for individuals to work together, they need to see a reason to do so, something that can be called incentives. Different individuals have different goals though, which leads to the so called agency problem. Here the Principal contracts with the agent to act on in the principal’s interest. An example here would be the use of stock options for managers to allign their interest with that of the shareholders.
In the chapter, Bruce Henderson, founder of the Boston Consulting Group is quoted as saying: “Every production man’s dream is a factory that always runs at full capacity making a single product that requires no change… every salesman would like to give every customer whatever he wants immediately.“
Alignement can be achieved by:
- control mechanisms
- reward incentrives
- shared values
Hierarchy in organizational design
Coordination: Modularity will lead to hierarchy, is one belief. If looked at this broadly, hierarchy is adaptable, evolving and decomposable. You can even use loose coupling which enables things to change swiftly with the general architecture staying the same. Hierarchy will also allow coordination with less interaction (5 people either need 10 interactions between each other or one person with 4 interactions with the others).
Control: Bureaucracy, administrative hierarchies, have some principles:
- rational-legal authority
- hierarchical structure
- coordination and control through rules and standards
- standardized employment rules and norms
- separation of jobs and people
Therefor these are often called machine bureaucracies
There are mechanistic and organic forms, in which the organismic form is less formalized, more flexible and multidirectional.
Today we are rethinking hierarchy as the world arround us is changing ever faster which means that it is less predictable and stable, needing less bureaucratic systems.
You need to reconcile specialization with coordination and cooperation, which a solution being the hierarchy. How shall this be designed?
First, units need to be defined based on:
- common tasks (maintenance department, finance office, quality control)
- products (department story)
- geography (Wal-Mart)
A basis can be the intensity of interaction. Whereever the most interaction is needed, there should be a unit grouping. Other factors of influence are:
- economies of scale
- economies of utilization
- standardization of control systems
alternative structural forms
The functional structure is often used with single-business firms, where centralization of functions can lead to scale economics, learning and capability building. With growth in size, the groups build their own values, norms and vocabularies and integration and establishment of semi-autonomous profit centers becomes difficult.
The multidivisional structure started with diversification within companies, as they offer the possibility of decentralized decision making. Matrix structure came about with the realisation that coordination needs to happen across functions, products and geographical areas in the end. The matrix structure was adopted a lot during the 1960s and 1970s and there’s a figure of the Shell Matrix pre-1996 on page 210 of the book. Looks interesting
Nonhierarchical coordination structures are another thing, something that many companies have experimented with. Here are some:
- project-based organizations (e.g. oil exploration with highly differentiated project for limited time)
- adhocracies (innovation-oriented and organic, no standardization)
- shamrock organizations (as of Charles Handy, downsized, first-leaf is the tightly integrated professional core, second-leaf outsourced things from manufacturing to payrole, third-leaf temporary or part-time lowly integrated core support)
- Honeycomb organizations (self-organizing groups, like ants’ nests, complexity theory, example: AES Honeycomb)
Common features of nonhierarchical structures are:
- focus on coordination rather than control
- reliance on mutual adjustment
- individuals have multiple organizational roles
Management System for Coordination and Control
Four are of primary importance:
- information systems: the ability to supervise depends on the flow of information upwards
- strategic planning systems: whether formal or informal, systematic or ad hoc, it is a strong means of coordination. A strategic plan often includes: a statement of goals, a set of assumptions or forecasts, a qualitative statement, specific action steps, a set of financial projections
- financial planning and control system
- capital expenditure budget
- the operating budget
- human resource system
- corporate culture as a control mechanism
- integrating different control mechanisms