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Design of Organizational Control Mechanisms Essay

Problem:

When a team of individuals produce a single output the problem arises on how to contribute the reward so that every individual is equally rewarded. This article examines three different mechanisms to deal with this issue:

1.Markets
Markets deals with the control problem through precise measurement and reward of individual contributions.

2.Bureaucrats
Bureaucrats rely on a mixture of close evaluation with socialized acceptance of common objectives.

3.Clans
Clans rely on a relatively complete socialization process which effectively eliminates goal incongruence between individuals.

Introduction:

Controls (by Tannenbaum)=sum of interpersonal influence relations in an organization Controls (Ezioni)= control is equivalent to power
Controls (Weber)= a problem in creating and monitoring rules through a hierarchical authority system

Main questions in article:
1) What are the mechanisms through which an organization can be managed so that it moves towards its objectives? 2) How can the design of these mechanisms be improved, what are the limits of each design?

An example: The parts supply division

Purchasing department: buys 100.000 items (p.a.) from 3.000 suppliers purchased by 22 employees on 3 management levels. ”
•Purchasing officer
– send out request to 3 manufacturers and adds information on reliability,… and the order
•Supervisor
– Consults agents if they need help and reminds workers that they are not allowed to accept presents Warehousing operations: 1.400 employees (incl. 150 manager)
•Pickers and packers (worker)
•Supervisor (manager)
– Formal authority (written rules)
– Informal authority (personality)

Three mechanisms:
1.Market mechanism –> purchasing function
Agents and supervisory employ market mechanism: to minimize cost for the company by picking the best price on the markets. In a market prices convey all of the information necessary for efficient decision-making. Frictionless market: Prices represent exactly the value of good or service. Therefore reward can be contributed in direct proportion to contribution of employee!

Agents and supervisory are subject to bureaucratic mechanisms: Their work is controlled by a set of bureaucratic surveillance controls (performance evaluation, hierarchical oder-giving)

2.Bureaucratic mechanism –> warehousing function
Warehousing is subject to routines of monitoring and directing. This is done by close personal surveillance and direction of subordinates by superiors, based on a set of rules.

Rules vs. price: Rules are arbitrary (beliebige) standards without comparison, based on assigned values of (successful) actions. Prices imply that a comparison has already taken place. Prices are far more efficient means of controlling transactions than are rules. However, the conditions necessary for frictionless prices can rarely be met, and in such conditions the bureaucratic form, despite its inadequacies, is preferred.

3.Informal social / clan mechanism
Supervisors can rely on bureaucratic mechanisms but this requires surveillance which is associated with costs. But when the supervisor knows that his workers achieve the “right” objectives, he can eliminate many of the costly forms of audition and surveillance.

Social and informational prerequisites of control

The three models can be arranged along two dimensions:

1.Informational requirements
=prerequisite to successful operation
2.Social underpinnings
= Set of agreements between people, as a bare minimum, is basis for control
Type of controlSocial requirementsInformational requirements MarketsNorm of Reciprocity (Wechselwirkung)
Prices
BureaucracyNorm of Reciprocity
Legitimate authorityRules
ClanNorm of Reciprocity
Legitimate authority
Shared values, beliefsTraditions

The informational prerequisite of control:
While a Clan is the most demanding and the Market the least demanding with respect to social underpinnings, the opposite is true when it comes to information. Within large organizations departments tend to develop own jargon in which complex information is easily transported. Each system carries information on how to behave: •Explicit system: accounting system – easily accessible by newcomer (system is created) •Implicit system: is far less complete in its ability to convey information. e.g. US Senate – need years to understand flow of information (systems “grow up”)

Companies attempting to control the organization through a price (=market) mechanism use “transfer prices” to represent prices of internal performances. The advantage should be obtained by using the best prices within the firm.

Organizations can also create an explicit set of rules (behavior as well as production and output) that will cover every situation and therefore cut the information problem down by using rules that will cover 90% of all events and depending upon hierarchical authority to settle the remaining 10%. Again legitimate authority is critical to bureaucracy.

In a Clan the information is contained in the rituals, stories and ceremonies. So to say the information system does not require a information system, it’s just there. For example Chinese-American Hui: conducts business as venture capital lender but they also enter risky businesses and even the repayments are left open. Entry is only granted by birthright, a practice that guarantees that every member is part in the same social network and therefore behave to the same rules and principles.

While the Market and Clan are both specialized approaches it is the Bureaucratic which is the system that is most flexible. Of course, under certain circumstance both the Market and Clan approach will deliver better results but the Bureaucratic can withstand high rates of turnover, a high degree of heterogeneity and it does not have very demanding informational needs.

Designing Control Mechanisms: Costs and Benefits

Two ways of effective people control:
1. Find people that fit needs exactely
2. find people that don’t fit exactly but use a managerial system to instruct, monitor and evaluate them
Best approach depends on costs. Ad 1. is associated with costs and search and acquisitions but their skills will help to reduce costs in the long-run. Ad 2. includes trainings costs and a the costs for the supervisory system but reduces high turnover. Search and select ‘clan-type’ people:

Cost of Search and Acquisition: High Wages
Benefit: Perform tasks without instruction, work hard
Instruct people into the ‘clan’ system:
Cost of training: instruct, monitor, and evaluate unskilled workers (who are likely to be indifferent to learn organization skills and values). High rates of turnover. Costs of monitoring: developing rules, supervising.

Benefit: heterogeneous system of people that can be controlled. Explicit rules (codified knowledge) offset turnover costs.

Loose coupling and The Clan as a Form of Control

New view with impact on designing control mechanisms. The ability to measure either output or behavior which is relevant to the desired performance is critical to the “rational” application of market or bureaucratic forms of control.

Knowledge of transformation process:

Tin Can plant: If we understand the technology (e.g. production process and what it takes for a successful production) perfectly, we can achieve effective control by setting rules that lead to behavior and processes that lead to our desired transformation steps. Thus, we can create an effective bureaucratic control mechanism. Women’s boutique: On the other hand, if we don’t understand what is needed (e.g. control system for women’s boutique) to be a successful buyer or merchandiser, we can’t create rules. But we can measure output (turnover per buyer, salex volumes,…). So we can use the output control mechanism to monitor various indicators and set actions accordingly. Apollo Program: Each step of the transformation (assembling) is crystal clear and we have a output measure (it comes back or not).

Thus we have the choice and the lower cost alternative will be preferred: clearly as the cost of failure would be prohibitive (untragbar) and more elaborate behavior control system will be installed. Reseach Lab: We have the ability to define the rules of behavior and we can measure the output which will be some 10 years in the future. Certainly a strong output control system will be used but effectively this cannot guarantee success – so neither behavior nor output measurement will be sufficient, leaving us with no rational form of control. Therefore such organizations rely on ritualized, ceremonial forms of controls. This approach only works with the recruitment of a selected few individuals, with the same schooling and professionalization process. Another organizations using this form: Hospitals, Investement banks, … Whereas output and behavior control can be implemented through a market or bureaucracy, ceremonial forms of control can be implemented through a clan.

Closing observations

Depending on the organization and its requirements it has to be choosen which control systems works best. E.g.: manufacturing: behavior and output control vs. service org.: cultural or clan controls. Nevertheless every control system is directed at achieving cooperation by: •Market mechanism: each person’s contribution is evaluated; combined with a personal loss of reward •Clan mechanism: attain cooperation by selecting and sozialising individuals such that their objectives overlap with the organization’s objectives •Bureaucratic mechanism: does a little of each, partly evaluates performance and partly engenders feelings of commitment to the idea of legitimate authority in hierarchies Two main questions:

1. Clarity with which the performance can be assessed
2. Degree of goal incongruence (either trust each other or control each other)


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