The Disaggregation of Organizations: Selective Intervention, High-Powered Incentives, and Molecular Units

Abstract

A vast array of organizational innovations and changes are transforming US corporations. This paper argues that these organizational innovations share an important underlying commonality: economic activity is converging towards exchange involving either internal (within-firm) or external (between- firm) networks of small, autonomous production or service units. The enhanced ability to selectively infuse the measurement of markets into hierarchy and the coordination of hierarchy into markets necessitates a rethinking of traditional assumptions about the discreetness of governance choices. Transactions cost scholars and managers have commonly assumed that optimal organization involves a dichotomous choice between hierarchies that contain a set of complementary elements largely incompatible with markets and markets that contain elements largely incompatible with hierarchy. Innovations in organization, measurement, and technology shift decisions about optimal governance from simple market vs. hierarchy choices, to choices of an optimal mix of hierarchical and market elements. Managers have an expanded ability to both infuse powerful incentives characteristic of disaggregated, market-dominated systems of exchange into hierarchies and infuse the coordination and monitoring characteristic of hierarchy into market exchanges. Consequently, managers and scholars, must increasingly view organizations as complex webs of governance arrangements rather than as entities with definable boundaries.

JEL Classification: G31, G32