Alfred Chandler and Oliver Williamson are famous scientists who studied the role of organizations in market economy and modern society. They have analyzed their evolution and its causes. Among others, the scientists explored the conditions under which firms engage in vertical integration. However, there are also a lot of opposite theories to their approach that offer alternative views on the formation of an organization. The aim of this research is to explain Williamson’s and Chandler’s views on organizations and provide several alternative theories that explain the appearance and expansion of an organization.
Taking into account the goals of the paper, the research is going to have the following structure: brief description of the essence and role of organizations in the modern society; characteristic of Chandler’s approach to organizations; characteristic of Williamson’s approach to organizations; criticism of previous approaches and conclusions.
The role of organization in the modern life simply cannot be overestimated
A family is known to be the main cell of society. An organization can be called the second-important cell. Organizations prevail in every sphere of our social life – education, business, health care, government, etc. Any organization is characterized by the following elements: social domain, collective action, purposes, goals and objectives. An organization exists due to being the most efficient form of reaching common goals and getting things done.
Every organization is a difficult mechanism where production processes, legal schemes, the overall tasks, etc are combined with people’s emotions and interests. This organism evolves and lives according to specific principles and laws. Moreover, one can compare an organization to a complex living organism, like a human being. Every person is unique. The same goes for organizations: each of them is characterized by its own structure, culture and behavior.
It is believed that organizational behavior is a factor that defines the character and direction of development and growth of an organization. It is very important to maintain a healthy climate inside an organization and unite people around common goals and values. It can be done by setting an appropriate organizational behavior. It would be reasonable to provide a definition of the term “organizational behavior”. One of the most appropriate definitions is the following:
Organizational behavior is a set of actions and attitudes of individuals and groups toward one another and toward the organization as a whole, and its effect on the organization's functioning and performance (“Organizational behavior definition,” n.d.).
In other words, organizational behavior is the term that describes relations inside an organization –between employees, employees and managers, managers of different rangs, etc. It would also be reasonable to add relations of an organization with all the stakeholders, partners and even competitors to the list.
There is a range of factors that may influence organizational behavior. Among them the following ones can be pointed out:
- The size of an organization. The larger the organization, the greater is the number of its employees. It means that relations between them are multilateral and can be considerably complicated. It is a significant challenge to establish an appropriate organizational behavior in a large organization;
- The results of an organization’s performance. Negative results create unfavorable corporate climate and environment. Respectively, people are not psychologically predisposed to think about some principles of appropriate behavior;
- Organizational structure. Quality of organizational behavior depends on the type and quality of organizational structure. In fact, elaborated organizational structure results in better organizational behavior;
- Industry and a type of performance/business. There are kinds of enterprises where employees experience significant pressure and event stresses. That is why it is quite difficult to talk about the culture of organizational behavior in such conditions;
- The degree of professionalism of employees. Higher professionalism and higher level of education mean better quality of organizational behavior. People are familiar with the required values, respect them and try to implement them in practice;
- Active performance of an organization for the purpose of reaching the required quality of organizational behavior. It is common knowledge that the latter may be established by trainings, motivation and sometimes even punishment. Every organization should accept proactive position in this context.
It is important to provide the channels via which organizational behavior may influence the performance of the enterprise. Among these channels the following ones can be pointed out:
- Productivity –low level of organizational behavior reduces productivity of the employees;
- Corporate climate – inappropriate organizational behavior spoils corporate climate inside an organization. Spoiled relations also decrease productivity;
- Inappropriate organizational behavior damages informational flows inside a company. Because of lack and low quality of information, wrong decisions are made and the whole organization suffers;
- Conflicts often arise between the managers, shareholders and employees. As a result, an organization cannot move to a common goal. This factor slows down the development of an organization;
- Finally, tensed relations and ineffective communication with the external stakeholders of an organization spoil the company’s corporate image and brand. It is equal to death in the world of tough and aggressive competition.
To conclude with this particular part of the research paper, it would be reasonable to summarize some mentioned key points. Organizational behavior is driven by some particular principles and values that are shared by all the members of an organization in order to maintain good relations and move towards a common goal. Organizational behavior is the factor that influences the direction and character of an organization’s development.
As it has already been mentioned, there are a lot of approaches and theories which study organizations and their role in society. At this stage of the research the approaches of Chandler’s and Williamson’s will be mentioned.
Alfred Chandler has devoted a lot of time and efforts to study the principles of performance of organizations in the modern society. He believed that an organization is, probably, the central element of the modern market economy. Moreover, he considered large corporations to be the main drivers of economic and social growth during 19th and 20th centuries. The factor that led to the appearance of large corporations was a combination of mass production and mass distribution. The main function of a corporation was defined as coordination of mass production process. Otherwise it would be a chaotic process.
Chandler analyzed the changing role of an organization in within market economy and capitalism
He claimed that any organization had three possible strategies: horizontal combination, vertical integration and diversification. He believed that organizations had the potential to provide higher efficiency of resources’ usage and make higher profits. Moreover, unlike Williamson and Simon, he saw managers of organizations as pragmatic problem solvers. Thus, Chandler represented a scientific and even somewhat technocratic approach to organizations and their role in society. It was a great challenge to traditional sociological approaches which described organizations from the point of historical evolution and attributed the main role in emergence of organizations to social factors. This opinion can be proved by the following words:
Chandler's challenge for the sociology of organizations was two-fold
First, the concern in constructing a scientific theory of organizations meant that sociologists had given up on the Weberian project of understanding how historical forms, like the corporation emerged and were transformed. This made it hard for sociologists to ask the big questions that both Chandler and Weber asked (Fligstein, 2007).
The other famous Chandler’s theory is the concept of the so-called visible hand. Adam Smith had developed a theory implying that invisible hand of the market directs all the economic agents and provides the highest efficiency. Chandler claimed that the visible hand of organizations’ management replaced the invisible hand of market. Thus, the company’s managers are the leading institute in the modern economy and society. Generally, Chandler believed that the role of organizations simply could not be overestimated in the modern society.
Another scientist who analyzed the problem of organizations and their role in society was Oliver Williamson. He also devoted a lot of time to researches on organizations in the market economy. He mainly specialized in the analysis of firms’ goals and transaction costs. According to Williamson, a firm can have a whole range of goals. Among them the following ones may be pointed out: profit maximization, social and environmental responsibility, higher share of a market, higher shareholders’ value, etc. Williamson believes that profit maximization was the leading goal of any company which defined its strategy and direction of development. He defined the following possible limits of optimization: lack of complete information, cognitive limits of information understanding, inefficient market, etc. In fact, maximization of utility was defined as the main goal of any economic agent in the market economy.
As it has already been mentioned, another significant theory by Williamson is the theory of transaction costs. In fact, Williamson claimed that transaction costs may considerably affect profitability and efficiency of not only a separate organization, but the market economy as a whole.
According to Williamson (1981), a transaction cost occurs "when a good or a service is transferred across a technologically separable interface". Therefore, transaction costs arise every time a product or service is being transferred from one stage to another, where new sets of technological capabilities are needed to make the product or service (“What is transaction cost theory?”, 2010.).
A reasonable conclusion is that in order to increase their efficiency companies must minimize transaction costs, since it is practically impossible to avoid them at all. Williamson believed that one of the ways to reach this goal was the so-called vertical integration of companies. In fact, it was a common opinion of Williamson and Chandler. Both believed that organizations played a key role in the market economy. Apart from that, both scientists were convinced that there was still a way to increase their efficiency. This method is called vertical integration of companies.
First of all, one has to provide a definition of the term “vertical integration”. The most appropriate and comprehensive one is the following:
Vertical integration is the process, when a company expands its business into areas that are at different points on the same production path, such as when a manufacturer owns its supplier and/or distributor. Vertical integration can help companies reduce costs and improve efficiency by decreasing transportation expenses and reducing turnaround time, among other advantages. However, sometimes it is more effective for a company to rely on the expertise and economies of scale of other vendors rather than be vertically integrated (“Vertical integration definition”, n.d.).
In simpler terms, vertical integration is a process when different business stages are united within an activity of a certain organization. For example, a company that produces and sells electronics may own vendors of all the required completing elements as well as the stores. As a result, the whole process, from supplying to distribution of products, is controlled by one company. The main stimulus to vertical integration is to decrease transaction and other costs of doing business.
Generally, any business process consists of different stages
These stages are the following: supplying of raw materials and completing elements, production of products, marketing and advertisement, distribution of products, etc. Usually, the stages are performed by different companies which afterwards exchange the results of their work. It is called a simple market exchange. Companies may cooperate on some more beneficial terms. It would be called vertical cooperation. Finally, the last stage of such cooperation is vertical integration, when all the levels are united in one organization. All the mentioned processes are described on the following graph:
Naturally, vertical integration has its own advantages and disadvantages. The benefits of vertical integration are numerous. First of all, coordination between different participants of business process is enhanced and improved. Secondly, transportation and transaction costs are reduced. In the third place, vertical integration leads to expansion of the so-called core competencies. Finally, a company is able to decrease sales, avoiding price premiums of suppliers, etc.
However, vertical integration also has a lot of disadvantages
First of all, bureaucratic costs are increased. It also becomes more difficult to control and monitor the performance of such a large organizational structure. Thirdly, a company may lose its previous flexibility. Finally, developing of new core competencies may endanger the existence of the current ones.
Therefore, Chandler and Williamson have posed a lot of challenges to traditional social approaches to organizations and their role in society. Traditionally, scientists believed that organizations were created to provide realization of common goals of people. Their role was purely functional. Chandler and Williamson claimed that organizations were the key drivers of progress in the society. That is why it is important to increase efficiency of their performance, since in such a way the overall social efficiency will be increased. Both believed that vertical integration was a way to a more successful organization.
However, a lot of alternative sociological theories were offered by the opponents of such strong emphasis on the role of organizations. Representatives of these approaches believe that the growth of the role of organizations and vertical integration may lead to some negative consequences. For example, they pointed out bureaucracy as one of the most unpleasant ones.
Development of organizations and their growing role in a society leads to the expansion of bureaucracy. The term “bureaucracy” may be defined in the following way:
Bureaucracy is an administrative or social system that relies on a set of rules and procedures, separation of functions and a hierarchical structure in implementing controls over an organization, government or social system. Large administrative staffs are most common in large organizations that need standardized rules and procedures or consistency across a wide range of business activities (“Bureaucracy definition”, n.d.).
A famous scientist Max Weber defined the following features of bureaucracy: goals, rules, hierarchy, specialty, impersonality, expertise, etc. A lot of scientists and common people believe that bureaucracy has a lot of disadvantages. For instance, one of the main disadvantages of bureaucracy is being a system without a human face. Rules and their execution become the main goal of a system, while a person’s interests and feelings are on the second place.
Vertical integration may, undoubtedly, lead to the spread of bureaucracy
Organizations become larger, consequently, their organizational structure aqcuires more complicated forms. It requires standardization and automation of organizational process. It is executed through implementation of rules and standards of performance. An employee as a person is replaced with an element of a large technocratic machine.
Certain opposition to negative manifestations of bureaucracy derives from the so-called scientific management. It is an alternative sociological approach to technocratic theories of organizational performance in the modern society. The essence of the term “scientific management” can be described by the following words:
In 1911, Frederick Winslow Taylor published his work, The Principles of Scientific Management, in which he described how the application of the scientific method to the management of workers could greatly improve productivity. Scientific management methods called for optimizing the way that tasks were performed and simplifying the jobs enough so that workers could be trained to perform their specialized sequence of motions in the one best way (“Frederick Taylor and scientific management,” n.d.).
According to scientific management, every work should be divided into separate simplified tasks. These tasks should be performed by trained and skilled employees. The latter, in their turn, also have a possibility to make their own decisions related to their tasks. The overall efficiency of a company’s performance can be increased in such way. On the one hand, this theory requires standardization of a company’s performance. On the other hand, the concept provides more freedom for a simple employee in the execution of his/her task.
Therefore, the concepts of bureaucracy by Max Weber and scientific management of Frederick Taylor created some opposition to the theories of Chandler and Williamson. Max Weber claimed that the growing role of organizations may lead to bureaucracy, which is not a positive phenomenon. That is why vertical integration cannot be considered to be the only way to facilitate the efficiency of an organization. Taylor believed that limitation of organizational growth can be avoided through the implementation of the so-called scientific management. Thus, a similar feature between these theories reveals that they both provide solutions to the problems associated with organizational growth. However, there are some significant differences between the theories.
The most considerable discrepancy between the theories is connected with the concept of bureaucracy and implies that the latter simply indicates the consequences of the growth of organizations in terms of their size and role in the society. On the other hand, Taylor’s scientific management indicates instruments that are able to eliminate these negative consequences.
Organization resembles a family being an integral cell of the modern society
Organizations exist in all the spheres of social life, for instance, education, health care, and governmental work. That is why their role and functions are truly crucial. Taking into account this role, a lot of theories of organizational growth have been developed. Four of them were considered in this paper. Williamson and Chandler emphasized a key role of an organization in the modern society. Max Weber developed a theory about possible consequences of organizational behavior. Taylor elaborated an instrument to eliminate negative consequences of organizational growth. Generally, one can say that the growing role of organizations may lead to positive and negative consequences. The task of the society is to limit these negative consequences and benefit from the positive outcomes. It should also become an aim of different branches of science, which would contain the following disciplines: sociology, economics, politics, etc.