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Are you stifling innovation and creativity by trying to micromanage? Or are you operating your organization as many autonomous fiefdoms and missing the benefits of being one company? Should you give more autonomy to the people who work for you? Or perhaps you feel you should take more control and show “real” leadership?
Nagging questions like these indicate that some of the most difficult problems for managers are those of exercising control. A central issue for organizations in the twenty-first century will be how to balance top-down control with bottom-up empowerment.1 For example, recent business rhetoric has focused so much on the importance of “empowering” workers that the term has become an almost meaningless cliché. Is the talk of empowerment just a fad? Or are fundamental changes making decentralized control increasingly desirable?
Our research suggests that the dramatically decreasing costs of information technology (IT) are changing the economics of organizational decision making, with the result that decentralized control is becoming more desirable in many situations. Moreover, our very notions of centralization and decentralization may be incomplete. When most people talk about decentralized organizations and empowerment, they mean relatively timid shifts of power within a fairly conventional, hierarchical structure. But these forms of empowerment go only halfway toward what is possible. To fully exploit the possibilities of new information technologies, we need to expand our thinking and see radically decentralized organizations — the Internet, all kinds of markets, and scientific communities, for example — as new models for organizing work in the twenty-first century.
Our research also suggests that a simple pattern underlies many future changes. As improvements in technology reduce communication and coordination costs, the most desirable way to make decisions moves through three stages. In the first stage, when communication costs are high, the best way to make decisions is via independent, decentralized decision makers. In the course of history, most economic decisions have been made this way — by people in largely independent tribes, villages, and towns.
As communication costs fall, however, it becomes desirable in many situations to bring remote information together, where centralized decision makers can have a broad perspective and therefore make better decisions than isolated, local decision makers can. The economic history of the twentieth century has been largely the story of this centralizing of decision making in large, global corporations.
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1. See, for example:
B. Johansen, A. Saveri, and G. Schmid, 21st Century Organizations: Reconciling Control and Empowerment (Menlo Park, California: Institute for the Future, 1995).
2. See, for example:
P.J. DiMaggio and W.W. Powell, “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Field,” American Sociological Review, volume 48, April 1983, pp. 147–160;
J.R. Galbraith, Organization Design (Reading, Massachusetts: Addison-Wesley, 1977);
V. Gurbaxani and S. Whang, “The Impact of Information Systems on Organizations and Markets,” Communications of the ACM, volume 34, January 1991, pp. 59–73;
G.P. Huber and R.R. McDaniel, “The Decision-Making Paradigm of Organizational Design,” Management Science, volume 32, May 1986, pp. 572–589;
M.L. Markus, “Power, Politics, and MIS Implementation,” Communications of the ACM, volume 26, June 1983, pp. 430–444;
E.H. Schein, Organizational Culture and Leadership (San Francisco: Jossey-Bass, 1985);
W.R. Scott, Organizations: Rational, Natural, and Open Systems, 3rd ed. (Englewood Cliffs, New Jersey: Prentice-Hall, 1992); and
J.D. Thompson, Organizations in Action (New York: McGraw-Hill, 1967).
3. Our model is particularly intriguing in this regard because, unlike previous models (for example, Gurbaxani and Whang ), ours shows how a simple model can explain changes in both directions while nevertheless predicting a broad change in one direction in the long run.
4. H.J. Leavitt and T.L. Whisler, “Management in the 1980s,” Harvard Business Review, volume 36, November–December 1958, pp. 41–48.
5. For summaries of previous research, see, for example:
P. Attewell and J. Rule, “Computing and Organizations: What We Know and What We Don’t Know,” Communications of the ACM, volume 17, December 1984, pp. 1184–1192; and
J.F. George and J.L. King, “Examining the Computing and Centralization Debate,” Communications of the ACM, volume 34, July 1991, pp. 63–72.
6. For a previous paper that makes this distinction, see:
K.S. Anand and H. Mendelson, “Information and Organization for Horizontal Multimarket Coordination” (Stanford, California: Stanford University, Graduate School of Business, research paper 1359, October 1995).
7. See, for example, A.D. Chandler, The Visible Hand (Cambridge, Massachusetts: Belknap Press, 1977).
8. M. Stevenson, “The Store to End All Stores,” Canadian Business Review, volume 67, May 1994, pp. 20–29. See also:
Anand and Mendelson (1995).
9. B. Fox, “Staying on Top at Wal-Mart,” Chain Store Age Executive, volume 70, April 1994, p. 47.
10. S. Walton with J. Huey, Sam Walton: Made in America (New York: Bantam Books, 1993).
11. R. Dvorak, D. Dean, and M. Singer, “Accelerating IT Innovation,” McKinsey Quarterly, number 4, 1994, pp. 123–135.
12. W. Keenan, Jr., “Death of the Sales Manager,” Sales and Marketing Management, volume 146, October 1994, p. 66.
14. L. Denend, “3Com Corp.,” quoted in A. Saxenian, Regional Advantage: Culture and Competition in Silicon Valley and Route 128 (Cambridge, Massachusetts: Harvard University Press, 1994), p. 114.
15. J. Kalb, quoted in Saxenian (1994), p. x.
16. See T.W. Malone, J. Yates, and R.I. Benjamin, “Electronic Markets and Electronic Hierarchies,” Communications of the ACM, volume 30, June 1987, pp. 484–497.
17. E. von Hippel, “Sticky Information and the Locus of Problem Solving: Implications for Innovation,” Management Science, volume 40, April 1994, pp. 429–439.
18. For useful discussions of these issues, see, for example:
M.C. Jensen and W.H. Meckling, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,” Journal of Financial Economics, volume 3, October 1973, pp. 305–360; and
Gurbaxani and Whang (1991).
19. T. Richman, “Mrs. Fields’ Secret Ingredient,” Inc., volume 9, October 1987, pp. 65–72.
20. D. Stoddard, “Otisline” (Boston: Harvard Business School, Case 9-186-304, 1986). See also:
W.J. Bruns and F.W. McFarlan, “Information Technology Puts Power in Control Systems,” Harvard Business Review, volume 65, September–October 1987, pp. 89–94.
21. Keenan (1994).
22. For a description of how electronic and other communications media are used in different ways, see:
R.L. Daft and R.H. Lengel, “Organizational Information Requirements, Media Richness and Structural Design,” Management Science, volume 32, May 1986, pp. 554–571.
23. See, for example:
J.R. Hackman and G. Oldham, Work Redesign (Reading, Massachusetts: Addison-Wesley, 1980).
24. The mathematical proof of this result is given in:
G.M. Wyner and T.W. Malone, “Cowboys or Commanders: Does Information Technology Lead to Decentralization?” (Cleveland, Ohio: Proceedings of the International Conference on Information Systems, 15–18 December 1996).
25. D. Sullivan, “On the Road Again,” CIO Magazine, volume 8, 15 January 1995, pp. 50–52.
26. See, for example:
C. Handy, “Balancing Corporate Power: A New Federalist Paper,” Harvard Business Review, volume 70, November–December 1992, pp. 59–73.
27. Interestingly, even military organizations are now moving away from this extreme form of centralization. See, for example:
L. Smith, “New Ideas from the Army (Really),” Fortune, volume 13, 19 September 1994, pp. 203–212.
28. See E.F. Breuner, “Complexity and Organizational Structure: Internet and Visa International as Prototypes for the Corporation of the Future” (Cambridge, Massachusetts: MIT Sloan School of Management, unpublished master’s thesis, May 1995); and
J. Nocera, A Piece of the Action (New York: Simon & Schuster, 1994).