Why Organisations Form
There are many, many theories of why organisations form and how they should be best organised, and the serious student of culture will recognise that they lack universality: most of the theories reflect the mores and subconscious programming of the culture from which they originate, rather than an underlying truth.
Take something basic - Mazlow’s “Hierarchy of Needs”. Mazlow’s belief that the highest form of fulfilment is self-actualisation (“the instinctual need of a human to make the most of their unique abilities”) is a product of Western thinking. In the cultures which contain the majority of the human race (as opposed to the cultures with the majority of the business schools!) self-actualisation is a downright transgression, in that it places personal wishes above group needs.
Other Anglo-Saxon theories on organisation models – most of which emphasise flat hierarchies, or matrix structures, or horrible hybrids – reflect the cultures they come from. The ‘flat’ organisation won’t work in Spain or the Far East, and their ‘enlightened patriarchy’ won’t work in the USA.
I could talk for days on this topic (s) - see the page on culture and organisation if you are interested - but instead I’m going to present three simple reasons for being part of an organisation that I think are valid in any culture:
1) the need to belong to a group;
2) the need to protect knowledge; and
3) the need to do things as efficiently as possible.
Let’s take those one at a time, looking at how the organisations form, where they work and what limits their size. I think you’ll find the results surprising!
Tribes - a Sense of Belonging
Apart from sociopaths like me, most humans need to feel that they belong to a group. The oldest form of organisation, and one which is common to all primates, is the tribe.
What defines tribal organisations is a shared goal/vision and a commitment to mutual support. They range from extremely ‘flat’ to hierarchical (but always have a clear leader), they are very non-bureaucratic and they are very, very efficient in terms of cooperation and internal communication. Tribal organisations are also extremely stable, barring catastrophes, and can last for hundreds of years (as opposed to a modern corporation, which is doing damned well if it reaches its 10th birthday).
The tribe appears everywhere in modern business: the Commune, the Kibbutz, the Start-up, the Management Buy Out, most small businesses. They are wonderful organisations to work for (the shared vision and mutual support guarantee that) but tend to be woefully limited in scope. Researchers, software shops, creatives, charities etc, are ideal for these small, internally supportive networks.
So why haven’t tribal structures taken over the world?
The reason is to do with the size of our brains, as it seems that we simply cannot maintain relationships with more than about 150 people at a time. This is known as Dunbar’s number after a British anthropologist. The concept of a limit on the number of people we can form relationships with has been also been charmingly described as the ‘monkeysphere’, a term which is starting to appear widely in business literature.
Organisational growth beyond the point where we can biologically cope entails timesheets, appraisals, middle management, business units and other excrescences of the modern corporation. Growing from 50-200 seems to be particularly hard and many small companies find that the overhead becomes impossible to bear. So if you are doing business with very small organisations, be very sceptical of aggressive growth plans.
Of course, we need to retain some of our cranial capacity for family and friends, so the maximum size of efficient, non-bureaucratic organisations will remain at well below 150…at least, until we evolve bigger brains!
The Medieval Guild in Today’s World
The Guild system is a far newer idea than the tribe, arising as the dominant organisational structure only around the time the first cities were built.
Unlike a tribal structure, guilds have no common vision or purpose, but exist to protect the mutual interests of people of the same trade or pursuits. Guilds help their members by codifying and protecting knowledge, by educating members and actively excluding non-members, by building customer trust through a code of ethics or standards, and by pooling utilisation to get members through temporary hard times.
Although the economic revolution started by Jean-Jacques Rousseau and Adam Smith in the late 18th Century ended the predominance of the Guilds, most professional services organisations are still structured this way. Law firms, accountancies and management consultancies all retain the old ideas of apprentices, journeymen and master craftsmen (although with different names) and some professions retain their historic legal status. The structure continues to exist because knowledge codification and utilisation pooling remain good sense, and because the customers need the reassurance of quality and ethical behaviour (e.g. the ‘Chartered’ status).
Of course, protectionism and strong regulation isn’t all good news for the customer. Guilds are famously bad at creating new ideas that might change existing practices, and what innovation we do see tends to come from the ‘cowboy’ end of the market (management consultants, take a bow).
What limits the size of the Guilds? Purely the market’s willingness to pay. If you look at optional purchases like management consulting or investment banking, as opposed to mandatory purchases like accountancy, you will see that the market is strongly linked to the economic cycle, leading to boom-and-bust cycles for these kinds of firms (remembering that some industries - e.g. insolvency practitioners - are counter-cyclical).
As Adam Smith pointed out, since guilds are inherently a restraint of trade, we should not be surprised that guild-based industries maintain artificially high prices (did you ever see a poor lawyer?). When you are negotiating with them, have Porter’s Five Forces in the back of your mind, and always feed their fear of competition or outright substitution.
The Modern Corporation
So you want to expand beyond the limits of the monkeysphere and the guild structure isn’t right for you? Welcome to the modern corporation, the dominant form of the pre-information age.
As we mentioned earlier, once an organisation starts to grow, all sorts of management structures have to be put in place to simulate an effective monkeysphere – business units, geographical models, reporting frameworks – and all of these structures inevitably decrease information flow and efficiency, and politics always raises its ugly head. The amount of value added (time that we spend doing whatever it is the organisation is there to do) decreases as we have to expend effort to make the organisation work.
For very large organisations, the amount of value added [tends to zero. Of course, innovation, agility, cost efficiency and customer intimacy also tend to zero. Some types of organisation need to be big, such as asset-based industries, but on the whole big is not beautiful and size and diversification is a Bad Thing.
If you read my piece on outsourcing in the Journal of Corporate Real Estate, you will remember that I talked about a small town in the heart of the Brazilian rain forest: Fordlândia. In 1928, Henry Ford had trouble obtaining the rubber he needed for his automobile tyres: his response was to create an extensive plantation of his own to sit alongside his iron ore mines, steel mills, forests and railroads. Why? Because three-quarters of a century ago, the best means of ensuring that your corporation had access to the supplies it needed was to own them outright. With modern communications, such wholesale vertical integration looks silly.
I could talk about transaction cost economics and its effects on corporate size until the cows come home (let me know if you would like to know more), but for now trust me when I say that organisations grow until the cost of doing something internally is equal to the cost of getting someone else to do it. The mechanism which actually limits the size are a series of make-or-buy decisions.
As the economy has become more efficient, external transaction costs have continued to fall, which means that the monolithic corporation of 70 years ago need no longer exist. I believe the rate of decrease is accelerating, and that corporate sizes are going to continue to shrink at a noticeable rate.
Of course, if there is no regulating system in the sense of a market, there are no external transaction costs, and there is nothing to stop organisations growing until they consume the whole economy. What Gobachev didn’t realise (the punk didn’t return my calls) is that the effect of introducing even tiny elements of the market is inevitably catastrophic . The perestroika phenomenon – where unreformable monoliths go from stagnation straight to collapse – is not unknown in capitalist economies. The example that comes to mind is Pan-Am (let me know of your favourites).
So let’s wrap up by looking at a SWOT for the Modern Corporation.