Nobel Prize in Economics was given to scientists arguing that there are no simple solutions ensuring effectiveness of companies. Managers cannot thoughtlessly copy solutions from their competitors, and the state should create conditions giving them the freedom of action.
This year, in October, the Nobel Committee awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for the 41st time. It is only for the sixth time that the research on particular companies and not the whole economic systems has been awarded. Oliver Williamson was awarded the price for research on transactions within and between organizations and Elinor Ostrom for her conclusions on the methods of rule enforcement in an organization.
The dominance of a macro-scale view in the previous years resulted in treating the prize as an argument in the discussion on economic policy of the state. News journalist anticipated a commentary on the ongoing global crisis. The committee, however, did not look for those giving answers to current questions. Such people, of course, could be found, as many economic analyses deemed crisis as inevitable. The jury decided to give recognition to the conclusions on company functioning, which have already managed to settle for good in our worldview. We are, however, sometimes unaware of this fact.
Managers are, in general, looking for answers on how to increase the effectiveness of their organizations. Efficiency can be measured differently, e.g. with financial results, effective use of resources, sometimes with the reaction on outside stimuli or with the level of employee motivation. Whichever approach we will take to gain full answer on our own achievements, very often we compare ourselves with others, those similar to ourselves. We check how others are doing and what are their achievements. And when we conclude that they are better than us, we start seeking the sources of their advantages. Assuming that we will indeed find the reasons, we will tend to imitate our rivals. It is very popular in business to copy those solutions which work in other companies and trying to apply them in our own. But scientists argue that simple solutions do not suffice to be successful. A complex, multi-factor view on management is necessary.
Aspects which should be included are multiple – from outside conditions (e.g. stability level, the nature of legal regulations, social and cultural norms or available technology) to inside (e.g. development strategies, psychological needs of managers, political interests, employee conduct, ownership structure and the age and size of the organization.)
Transactions
A company can function in three parallel types of structure: internal hierarchy, capital connections and contractual agreements. In other words, there exists a structure organizing the relations between employees and particular units, a system of dependencies within the capital group and the relationships with contractors. In all of these areas, transactions take place between their elements. The greatest challenge is to decide to what extent we want to act and which of these structures. For instance, a company needs someone to execute advertising campaign for one of its products. It can establish an advertising department within its company, it can purchase shares in advertising agency or it can solely base on contracts with a chosen advertising agency.
O. Williamson developed a line of thought of a previous Nobel Prize winner, R.H. Coase, who was awarded the prize in 1991 for a general indication, that there must be some benefits from realizing tasks within the company, when compared to realizing them with market transactions. He showed that “the main reason for which setting up a company is profitable, is the fact that there exist a cost of prize mechanism. The most obvious cost of organizing production with the use of prize mechanism, is the cost of discovering, which prises are appropriate.” He proposed that the essence of the company and the determinant of its size and scope is the higher cost of organizing transactions through the market, when compared to inner relations. So which functions are realized within company structure stems from economic calculations of assuring this function through outside company purchase. Transactional costs depend on the “form of access, chosen by the decision-makers, to the resources needed, i.e. the market, hierarchy or some intermediate form: a long-term contract between the partners”. O.E. Williamson pointed to three rules of forming activity structure:
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the more specific assets are being used for a repetitive transaction, the lesser will be the tendency to base it on the market (asset specificity principle)
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the more control is needed over a given function, e.g. in the scope of distribution, the lesser the need for the market (externality principle),
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within the internal structure: the lower the frequency of transactions, the higher the level on which decisions can be made (strategic decisions), the higher the frequency, the lower the lever of competencies (operational decisions) (hierarchical decomposition).
So, depending on various conditions, firms will tend to form their activity structure differently. The theory of transactional costs explains e.g. why a vertical integration takes place. If one company is a supplier of important resources for the second, conditions may arise for one of the companies to take over the other. And it is not because of the need to dominate on the market – but because of effective management of resources. Having the freedom of competition in mind, the state should not limit such actions of companies.
It can also be seen as a challenge to define the organizational boundary – what belongs to the organization, to associated network and to the environment with which we have market relations. Companies may define themselves differently and, what is more, a lot is dependent on the managers’ interpretation, and those can be different as well. The inside of an organization is where hierarchy mechanisms can be applied. Capital relations, networks, different forms of collaboration, but also market relations raise a lot of doubt. The question of whether students are a part of a university might be seen as an illustration of this problem. They can be treated as an inseparable part or a part of network relations, or even purely in market terms – as consumers buying access to education. Other organizations, including businesses, pose a similar problem – their boundaries and structure are a puzzle. Literature on this topic does not assume one, advisable approach, and current research undermines a clear division between structural attributes of a company, its boundaries and the environment in which it functions.
Enforcing the rules
Reality shows that an organization might use three basic forms of supervision, stemming from its ownership structure: private, public or cooperative. In Poland, due to historic experience, we have negative associations with the latter two, and the dominant discourse (as a post-modernist would call it) both in business literature as well as among the managers points to the fact that it is best to use private ownership. In Western societies it is more widely accepted that a state might be effective, but the animosity towards cooperative ownership is also visible.
E. Ostrom in her works showed that we are too quick to assume that cooperative ownership must be poorly managed. Analyzing numerous case studies, she compared the conditions which are necessary to ensure success – which would, at the same time, lead to better results in a cooperative ownership, compared to other forms of ownership. Management system should have the following characteristics:
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there should be clear rules stating who has a right to what,
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there should exist mechanisms to resolve conflicts,
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the obligation to sustain resources imposed on members of the organization should be proportional to their benefit,
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supervision and imposing sanctions should be carried out by the users or someone who answers to the users,
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sanctions should be gradual,
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the decision making process should be democratic,
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outside authorities should acknowledge the right to self-management.
It must be noted that the subjects of the study were mainly the so called common pool resources, i.e. resources which are used by many different people and there is a risk of over-exploitation. They should not be confused with public goods, such as the air or public safety, where using them by one person does not limit the availability to another. Ostrom analyzed organizations managing ponds, pastures, lakes and forests, which where run by their users. She proved that we do not face the choice of either privatization or nationalization – there exist a third way, and a more effective one. The conclusions do not only pertain to managing natural resources, but they help in understanding the process of cooperation between people. For an average citizen, on the other hand, they are applicable to cases of condominium.
Conclusions
A short presentation of the scope of both Nobel Prize winners research clearly shows that not everything must center around the global economic crisis. Journalists are mistaken in trying to find a simple correlation between these conclusion and current journalistic discussion (what to do with the crisis and whether to privatize or not). The awarded research has a long term value. We should not think conventionally and in accordance with the current discourse – maybe there are alternatives which will ensure effectiveness. Managers should not copy solutions, but should adjust managing systems to specific characteristics of their own activity and their resources. State authorities, on the other hand, should not limit the scope of possibilities in managers decisions – legal regulations should give them the necessary tools for action.
Translation: Jadwiga Bogucka
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