The Disaggregation of Corporations: Selective Intervention, High-Powered Incentives, and Molecular Units

Abstract

A vast array of organizational innovations and changes are transforming US corporations. Large firms have dramatically downsized, refocused, and vertically disaggregated. They increasingly obtain goods and services, pursue complex development efforts, and exploit horizontal synergies without the aid of formal hierarchy. Large firms are also internally disaggregating into smaller, more autonomous units that are treated much like external subcontractors. The authors argue that these organizational innovations share an important underlying commonalty: economic activity is converging toward exchange involving either internal (within-firm) or external (between-firm) networks of small, autonomous production or service units. Small units and small firms have become the basic building block, the molecular units, of these new forms. Further, exchange among the small, autonomous units is commonly a mix of both market-like and hierarchical features. The authors develop a theoretical explanation for these trends. They argue that disaggregation is motivated by the powerful performance incentives that accompany small size. They further argue that disaggregation is facilitated by recent innovations in information technology, organizational design, and performance measurement that permit the selective intervention of market elements in hierarchy and hierarchical elements in markets. The enhanced ability to intervene selectively necessitates a rethinking of traditional assumptions about the discreteness of governance choices. Innovations in organization, measurement, and technology shift decisions about optimal governance from simple market versus hierarchy choices to choices of an optimal mix of hierarchical and market elements. Consequently, managers and scholars must increasingly view organizations as complex webs of governance arrangements rather than as entities with definable boundaries.

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