For good or evil, one of our greatest legacies will be global governance: Our institutions of global governance may grow, follow us as we expand, and entrench themselves forever. On the downside, they might perpetuate themselves even if they hurt our descendants on net. On the upside, we might use them to overcome key coordination failures.
"Employees often have a hard time understanding the purpose of corporate activities, as well as the small contribution each of them makes to the whole. "
You could pair that with it being too easy for management to make rules that don't make sense as the organization gets larger.
Excellent post. This is vastly easier to observe than to explain. If you work in a large organization you will surely notice what Robin (and Williamson) is talking about. This becomes much easier to see if you have any business/management training. Easier still if your company is poorly run.
To me the reason for the problem is the disconnect between the work and what it is to be human. When you forget that people naturally want to do a good job and feel involved and be a part of something larger then themselves -- then you get stuck. Thinking about it in the context of: people are...well...humans, filled with emotions, social desires/aspirations, and other feelings this becomes very easy to see. There are always a few bitter holdouts though!Compare what it is like for: (A) a creative, artist-type to see their efforts made into something and have a real sense of importance in the world (people love to create and improve things don't they?) with; (B) a cog who knows they are replaceable, who can't see the importance of what they do (usually because, let's be honest, it's not that important, mostly uncreative and boring, simply pushing paper around).
Nobody wants to ever be, or feel like, (B).
You can just ask the (B) people and they are more than willing to tell you once you get them going. Most recognize how they are one technological innovation or policy change away from becoming obsolete. Bad companies do little to actually develop their employees so that they can change with the corporation. Most large corporations though generally do a bad job of changing with the times so this is a near-impossible dream.
I think this is why CEO's do so much to entrench themselves; they know how little value they bring to organizations and how much good/bad luck can impact performance and overall survival of their company. They can very easily be replaced - just like their employees -- and this is scary.
This really isn't anything new and, I agree, quite intuitive. Shame is how long it's been going on for and how long it will continue. We should all be thankful when companies (are allowed to!) fail, when recessions occur, and small companies can sprout from this creatively destructive process.
They wouldn't remain a single firm with many self-competing divisions. The company would reorganize into one division with several plants and one overall management.
It's easier to analyze a single management making large purchases than it is to analyze a large number of smaller purchasers. If a company is big enough, its customers and speculators can profit at its expense by predicting its actions and their effect on the market.
As the company gets bigger, this opportunity increases. Its impact on the market is greater, leading to larger profit opportunities. Its size makes in slower to reach a decision. Bigger buyers means less likelihood that a large buy somewhere will be cancelled out by a smaller-than-normal buy somewhere else (or vice versa), raising overall volatility in the market.
A firm in this position might consider buying one of its suppliers, but that has its own risks.
That was my point-- incentives shouldn't be on the list of possible factors.
Also, Hard Facts may be of interest to any contrarian.
Sorry, that makes little sense. If the many firms together are a large part of the demand for some input, they won't be worse off buying that input together as a single firm with many divisions.
But that difficulty should apply to both scenarios, firms and divisions.
The division model seems stronger in Japan than in the US. Sony would be a particularly interesting example, as their content and electronics divisions are constantly at odds over what capabilities Sony hardware should have when handling Sony intellectual property.
One other cause of scale diseconomies is macroeconomic factors. A firm that is large relative to its input markets finds that it _is_ the demand curve for its inputs. When its needs increase, unit prices go up. When its needs decrease, unit prices go down. It's always moving the markets against itself.
The military sees it all the time. E.g. there are basically two suppliers for military jets, and the government won't let either go out of business (since that would make the problem worse). They both have to get the same amount of business, year in and year out, just to keep their factories viable. There's enough knowhow in each that, if one died, replacing it would be practically impossible. And you'll notice that "how many planes we need" is not a factor in these equations...
I certainly am not saying that management and institutional factors aren't serious causes of diseconomy in their own rights, of course.
Incentives large firms offer employees is limited by … large bonus payments may threaten senior managers. … [and] performance-related bonuses may encourage less-than-optimal employee behaviour. …
Hard Facts, Dangerous Half-Truths And Total Nonsense: Profiting From Evidence-Based Management has it that it's extremely hard to develop incentive plans which don't damage cooperation.
Some of the papers aren't out yet, but you can get the drift of sociologist and economists watching negotiation within the organization over pricing and other matters which have conflict dimensions:
Zbaracki, Mark J., and Mark Bergen. Forthcoming. “When Truces Collapse: A longitudinal study of price adjustment routines,” Organization Science. Zbaracki, Mark J., 2007, “A sociological view of costs of price adjustment: Contributions from grounded theory methods.” Managerial and Decision Economics 28: 553-567. Zbaracki, Mark J., 2006, “Success, Failure, and ‘The Race of Truth,’” Journal of Management Inquiry 15(3): 336-339.
Bill, I'd be interested to cites to those "fly on wall" studies.
Robert, we are asking why divisions are so constrained.
Pietro, there are liability advantages to having smaller firms.
Valter, I agree with the reviewer that that paper didn't add much.
Anon, keiretsu suggest the division scenario is feasible.
What about business conglomerates, i.e. keiretsu and chaebol? These are single firms from an equity perspective (often controlled by banks which have loaned money to the firm) but their divisions seem to be managed independently.
What will determine the breadth and strength of future global governance? Ideology and public opinion will play a part, but more important is probably organizational innovation; we’ll need better mechanisms to make it work.
First question: people
I am uncertain what you are referring to when you mention mechanisms. If you are referring to just "mechanisms" then forget about getting it "right". If you are referring to "complex mechanisms", you may have a chance of getting it "right".
In these posts I have noticed a lack of distinction between metaphor and surreal. Not all abstractions are metaphors. This is a very important distinction because only metaphor contains a mechanism for shaping value.
Governments and corporations are surreal abstractions, mutating aggregates, which lack the mechanisms to shape value. The mechanisms that are used are there to restrain or constrain the behaviour of people. Ultimately, people as complex mechanisms, shape the value to give rise to the "final" abstraction.
When we talk of governments or corporations shaping value to give rise to an abstraction, "the future", we are talking about a cross-hierarchal violation. This refers to fact that we find it efficient to acknowledge surrealism in order to get along with each other. We "sacrifice" our personal freedom for the "greater good".
May I suggest a rethink as to efficiency and effectiveness?
Another "can't" explanation (apparently not listed in the review linked in the post) is given in te paper "Bargaining Costs, Influence Costs and the Organization of Economic Activity" by Paul Milgrom and John Roberts in Perspectives on Positive Political Economy (James E. Alt and Kenneth A. Shepsle, eds., Cambridge University Press, 1990, pp.57-89; available here.(http://www.stanford.edu/~mi...
Roughly speaking, adding an extra top layer to an organization introduces rent-seeking games at that level that may cost more than what can be gained from the "rare chances to gain value by coordinating division activities."
Are there tax-advantages to a large firm with subdivision vs. several smaller firms?
A division is generally constrained to advance in accordance with the overall vision of the larger company. A truly independent company is not constrained in that manner.