A Conceptual Framework for A Conceptual Framework for the Design of Organizational the Design of Organizational Control MechanismsControl Mechanisms

William G. Ouchi, 1979

Management Science. 25 (9): 833-847

Group 1:

Meredith, Barclay, Woo-Je, and Kumar

Organizational ControlOrganizational Control

Meanings and InterpretationsMeanings and Interpretations

Control equivalent to powerControl as a problem in information flows

Ouchi’s ViewWhat are the mechanisms through which an organization can be managed so that it moves towards its objectives?How can the design of these mechanisms be improved and what are the limits?

Example: Parts Supply DivisionExample: Parts Supply Division

Problem: Purchasing department buys 100,000 different items/year from 3,000 different manufacturers

Accomplishes the work with 22 employees, of whom 3 are at the managerial level

Warehousing stores the product, fills the orders and ships the product using 1,400 employees, of whom 150 are managers

Analysis of Parts Supply DivisionAnalysis of Parts Supply Division

Three Mechanisms involved:

MarketPurchasing division

BureaucraticWarehouse division

Informal Social Concept of The Clan

Market MechanismsMarket Mechanisms

Purchasing AgentSimply puts each part out for competitive bids and permits the competitive price to define the fair price

Managers of Purchasing AgentsOnly needs to check decisions against simple criterion of cost minimization rather than observing all the steps

Market as a Pure ModelMarket as a Pure Model

Efficient Mechanism

Prices convey relevant information for decision makerArbitrary rules such as those found in warehousing unnecessaryProvides a mechanism for solving problem of goal incongruityRewards employees in direct proportion to their level of contribution

But the fact that purchasing takes place in a corporate framework suggests market defects exist

Purchasing: Mixture of Market Purchasing: Mixture of Market and Bureaucratic Mechanismsand Bureaucratic Mechanisms

Work of purchasing agent is controlled through process of bureaucratic surveillance (manager) rather than price mechanisms

Director of Purchasing does not determine market price

Instead, agrees upon an employment contract at some price and resorts to hierarchical order giving and performance evaluation.

Bureaucratic Mechanisms (Warehousing)Bureaucratic Mechanisms (Warehousing)

Fundamental mechanism of control involves close personal surveillance and direction of subordinates by superiors

Task completion governed by RULES: an arbitrary standard against which a comparison is yet to be made

Rules vs. PriceRules are only partial bundles of informationPrice is a complete bundle of information

Why does Warehouse use Why does Warehouse use Bureaucratic Mechanisms?Bureaucratic Mechanisms?

Impossible to set prices for each task in warehouseNo corresponding inexpensive way to determine performanceWill have to establish performance standards and systems of hierarchical superiorsThe Bureaucratic Mechanism!

Original DilemmaOriginal Dilemma

Purchasing participates in a market mechanism which is more efficient

Warehousing uses a bureaucratic mechanism because market is not frictionless

Both Bureaucratic and Market mechanisms are directed towards the same objectives

Which is more efficient depends on the particulars of the transactions

Clan MechanismsClan MechanismsInformal social structures that are properties of a unique organization

Examples of others industries: DoctorsCertified with respect to technical skills but also integrity and purity of values

Once the Manager knows that the Foremen are trying to achieve the “right” objectives he can eliminate many costly forms of auditing and surveillance methodsOnly recently has the Clan mechanism been considered the subject of analysis central to the problem of organization

Social & Informal Prerequisites of ControlSocial & Informal Prerequisites of Control

Type of Control

Social Requirements

Informal Requirements

Market Norm of Reciprocity Price

Bureaucracy Norm of ReciprocityLegitimate Authority

Rules

Clan Norm of ReciprocityLegitimate AuthorityShared Values, Beliefs

Traditions

Informal Prerequisites of ControlInformal Prerequisites of Control

Implicit informationEx. Traditions of the US Senate“grows up” as a natural by product of social interactionThe Clan

Explicit informationMust be created and maintained intentionally at some costEx. Accounting division

Designing Control Mechanisms: Costs and BenefitsDesigning Control Mechanisms: Costs and Benefits

Two methods to achieve effective people Two methods to achieve effective people control:control:

1. Search for and select people who fit your needs exactly

• Cost of Search: High Wages• Benefit: Perform tasks without instruction, work hard

2. Take people who don’t fit your needs exactly and put in a system to instruct, monitor, and evaluate them

• Cost: training unskilled workers, indifferent to learn organization skills and values, developing & running supervisory system.

• Benefit: System can take heterogeneous assortment of people and effectively control them, withstand high rates of turnover

Organizational Control: People TreatmentOrganizational Control: People Treatment

People Treatment Form of Commitment

Corresponding Control Type

Totally Unselective Internalization Market

Selection/Screening Identification Clan

Training Identification Bureaucracy

Monitoring Compliance Bureaucracy

Taken from Kelman, 1958 (20)

Loose Coupling and The ClanLoose Coupling and The Clan

Imperfect

Output Measurement

(Women’s Boutique)

Perfect

Behavior or Output Measurement

(Apollo Program)

Ritual and Ceremony,“Clan Control”(Research Laboratory)

Behavior Measurement(Tin Can Plant)

High

Low

Ability toMeasure Outputs

Knowledge of the Transformation ProcessKnowledge of the Transformation Process

Loose CouplingLoose Coupling

Fashionable ViewsMost hierarchies fail to transmit control from top to bottomMost organizations do not have a single or an integrated set of goals or objectivesSubunits within are only loosely joined to each other

Under conditions of ambiguity or loose coupling, measurement with precision is not possible.A control system based on this will lead to organizational decline.Under these circumstance clan control is preferable

Closing Observations

Organizations vary in the degree to which they are coupledControl mechanisms of Market and/or Bureaucratic can be designed for relatively stable manufacturing industriesOrganizations in public sector, services, and technologies may be better served by clan forms of controlThe problem of organization design is to discover that balance of socialization and measurement which most effectively permits a particular organization to achieve cooperation among its members.

ConclusionsConclusions

Design of organizational control mechanisms must focus on the problems achieving coordination and cooperation among individuals

Problem is to understand how, as society changes, do the control methods of organizations change with it.