Woody Powell Regards Self-organization as the Third Governance Mode

In his article ―Neither Market Nor Hierarchy: Network Forms of Organization” (1990), Woody

Powell also criticized Williamson's position. He believed that self-organization (Powell used

―network‖ instead, talking about the organizational structure rather than the organizational process) was not simply an intermediate structure between markets and hierarchies, but contained some special governance mechanisms – a governance mode built upon trust-based relationships.

He began to take networks as the third governance mode in addition to markets and hierarchies. All these three modes can be taken as the ideal types of governance structure, which in reality is always the hybrid form of the three. In this governance structure, trust-based relationships are built upon the perception that the parties to these relationships need each other, and can never be built upon authority-based or buyer-seller relationships. Trust-based relationships create a transactional environment that is mutually beneficial and open but not bureaucratic and restrictive (e.g., hierarchical) or free but doubtful (e.g. market). He then explained the differences among the three governance structures using the following table.

Forms of Economic Organization

Key features

Market

Hierarchy

Network①

Normative Basis

Contracts-- Property rights

Employment relationship

Complementary strengths

Means of

Communication

Prices

Routines

Relational

Methods of Conflict Resolution

Haggling—Resort to courts for enforcement

Administrative fiats-- Supervision

Norm of

Reciprocity--Reputation concerns

Degree of Flexibility

High

Low

Medium

Amount of

Commitment among parties

Low

Medium to high

Medium to high

Tone or Climate

Precision and /or Suspicion

Formal, Bureaucratic

Open-ended, Mutual benefits

Actor Preference or Choices

Independent

Dependent

Interdependent

Table 6.1 The Modes of Governance—Taking Economic Organizations as an Example (cited from Powell, 1990)

With regard to formal rules, the main governance mechanisms under market structure include information dissemination, prices and contracts; those under hierarchical structure include bureaucratic structure, instruction system and organizational regulations; and those under network-like structure include trust-based relationships and negotiation, according to Powell. Network is not, therefore, a hybrid form of market and hierarchy or a transitional form between market and hierarchy. Instead, it is another governance structure with trust-based relationships at the core.

This position is supported by a large number of real-world managerial examples in China. Outsourcing by Chinese, for example, is a paradigm of governance based on the logic of network. But the most extreme case is what Perrow referred to as ―small-firm networks‖ (SFNs). SFNs in China, especially in Taiwan, the city of Wenzhou, and Yi-Wu, etc., are often believed to be the best examples. In Taiwan, for example, some SFNs form a network with a core, but some others

① The governance mode of self-organization is generally called ―network‖ in organizational sociology, since it has a network-like structure. have no hierarchical structure, and the latter ones are represented by Wufenpu, the largest clothing market in Taipei. A group of small firms partner with each other, without the need for written contracts in a permanent network of suppliers. They needn't make inquiries or bargain like most other market players do; no firm is a focal entity to whose rules other firms are subject. Since every workshop is likely to become an outsourcer, no formal structure exists, let alone any formal instruction system. Since the corresponding governance structure mainly consists of negotiations and benevolent cooperation built upon trust-based relationships, not many written contracts, and no standardized business processes and instruction system, are needed.

 
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