“Organizations are the building blocks of economic and social life and yet frequently the bane of those who work in them,” writes Trevor Butterworth in a Wall Street Journal review of The Org, by Ray Fisman and Tim Sullivan (1/12/13). Given this, why “do firms exist — why isn’t everyone directly involved in the market?” It was a question first asked — and answered — in the 1930s by economist Ronald Coase, who studied big companies like Ford and General Electric and concluded that it was because “the transaction costs of business were lower” in a firm. That may sound obvious now, but it was a breakthrough insight back then.
As a concept, it works well, when it works. Apple, for instance, has “a smart workforce, empowered and yet sufficiently controlled so that it does the work you want it to do … The problem is that the more businesses expand to deal with growth (and then to maintain it), the more complexity increases organizational costs. Competence is diluted when orgs diversify; complexity increases when orgs expand. The frequent result: Efficient governance, which can give a firm leverage over the market, dissipates.” Hewlett-Packard offers a case in point.
“HP started with Bill Hewlett and Dave Packard doing everything in their garage and expanded with the mantra that management should not interfere with ‘the natural desire of employees to do their jobs well’.” HP “eventually grew into an industrial behemoth employing 300,000 people,” but in the process “turned into a monster, a caricature of management dysfunction and employee dissatisfaction.” One key, the authors say, is to understand “that many of the things we all loathe about working for an org are there to stop making things even worse.” Sometimes, they argue, an innovation much be squelched or a CEO given a golden parachute to keep transaction costs in line.