A Conceptual Framework for the Design of Organizational Control Mechanism

1. A Conceptual Framework for the Design of Organizational Control Mechanism William G. Ouchi Management Science, 1979, 25 (9): 833-847 BA 545 Foundations of Strategy Research College of Business University of Illinois at Urbana-Champaign Marleen Rust

2. Overview • Objective: describe three mechanisms through which organizations seek to cope with the problem of evaluation and control • Markets • Bureaucracies • Clans Examine each of these mechanisms by looking at the parts distribution division of a major company

3. Organizational Control Simple-minded view of organizational control stated in the following two questions: 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, and what are the limits of each basic design?

4. Three modes of organizational control • Precisely evaluate and reward each person’s contributions with all of the information necessary for efficient decision-making • Provide a price mechanism for solving the problem of goal incongruity • Permit each individual to pursue non-organizational goals, but at personal loss of reward Markets Markets • Working within a well-defined set of rules and formal authority for monitoring, evaluating, and directing • Partial information rather than complete information (Rule vs. Price) Bureaucracies • High internal commitment to the firm’s objective by Informal social system such as socializing process • Eliminate many costly forms of auditing and monitoring Clans

5. The Control Mechanisms • Markets – prices convey all the information necessary for efficient decision making • Bureaucracies – close personal surveillance and direction of subordinates by superiors • Info for task completion is contained in rules • Differ from price because partial information • Clans – informal social system where manager knows that all are trying for same “right” objective and can eliminate audit/surveillance Markets Bureaucracies Clans

7. Designing Control Mechanisms: Costs and Benefits Two ways an organization can achieve effective people control: Go to the expense of searching for and selecting people who fit its needs exactly or Can take people who do not exactly fit its needs and go to the expense of putting in place a managerial system to instruct, monitor and evaluate them Which of these approaches is best depends on the cost to the organization of each

9. Loose Coupling and the Clan Present (1979) literature has taken on a new view of “organizational rationality” or “loose coupling” – the bureaucratic forms of control are unsuitable for many contemporary organizations Assumption with bureaucratic or market forms of control is we can measure the performance desired To set a production standard with effective controls, we must be able to measure desired output To control through rules, the rules that achieve the desired performance must be known To measure either output or behavior relevant to desired performance is critical to the "rational application of market/bureaucratic forms of control

10. Table 3 the contingencies which determine whether or not measurement is possible Recent (1979) organization theorist have argued that few organizations process underlying rationality for market and bureaucratic forms of control; therefore the forms of control of today may be inappropriate for the future

11. Closing Remarks The design of organizational control mechanisms control must focus on the problem of achieving cooperation from people with partially divergent objectives Market: precisely evaluates person’s contributes permits each to pursue non-organizational goals, but at a personal loss of reward Clan: Select and socializing people to have overlapping objectives Bureaucratic: does little of each of above but evaluates performance to encourage commitment

12. More Closing Remarks Two underlying issues that are central to importance in determining control Clarity with which performance can be assessed Degree of goal incongruence Immediate goal: Balance of socialization and measurement which most efficiently permits a particular organization to achieve cooperation among its members