E-Commerce: Markets and Hierarchy the

E-Commerce: Markets and Hierarchy The duality of structures that Malone (1987) defines in market vs. hierarchy organizations leads to an analysis of conditions that favor the development of each of these types of structures. Market structures emerge from transactions, not products themselves, becoming the focal point of the industry. As Malone asserts, markets are characterized by production costs being low, and coordination costs being high. Markets, then, are also characterized by transactions taking precedence over the complexity and customization of products.

Further, markets force organizations to become outward centric and become more adept at the coordination of buyer, supplier, and customer relationships. Industries that have price for example as one of their dominant differentiators between manufacturers in an industry that is purely market based, according to Malone's definition. In contrast, hierarchy-based companies emerge where there is high complexity in product definitions, product structure, production processes, customization, and selling strategies.

Organizations with a strong hierarchical structure realize that in order to contain the high costs of customization both of products and processes, internal procedures for controlling costs must be adhered to. Customization and high product complexity can easily get out of hand from a cost perspective, hence the hierarchical company's focus on becoming inward-centric and more attuned to costs internally, and spending little on external coordination. Highly differentiated, these firms rely on a very small set of customers with highly specific needs to survive.

In Powell (1990), the delineation of markets, hierarchies, and networks is defined throughout his analysis. The table below summarizes the differences between each of these structures.

Market Hierarchy Actor Preferences or Choices Independent Dependent Interdependent Amount of Commitment Among the Parties Medium to High Degrees of Flexibility Means of Communication Prices Routines Relational Method of Conflict Resolution Haggling and Negotiating - resort to courts and lawyers for resolutions Administrative Control through hierarchical authority Norm of reciprocity and trust - reputational context Mixing of Forms Repeat Transactions and Contracts as Hierarchical documents (Geertz, 1978)(Stincombe, 1985) Informal Organization (Dalton, 1957) Status Hierarchies and the growth of private trading exchanges (Columbus 2001) Normative Basis Contract and Property Rights Pervade - the quantifying of trust Employment Relationship Complementary strengths Tone or Climate Precision and suspicion Formal and bureaucratic Open-ended, more democratic and focused on mutual benefits Transactions Fluid and market by velocity Controlled and often monitored closely More reciprocal in nature; focused on growing relationships Trust Medium - Low Medium - High Evaluating an industry The airline industry began as a market-based structure with many competitors and the focus on each airline provider acting as independently as they could, each looking to capture a share of the growing market globally for their services.

Southwest Airlines today exemplifies this positioning of being very market structured in its approach. The company's attributes also reflect Malone (1987) in that the costs of the product, for Southwest due to their foresightful purchase of oil futures, is low, and their costs of coordination are high as they expand across hub cities. Further, Southwest has to this point shunned being listed on websites for comparative shopping including Expedia.com. What is fascinating to watch in the broader airline industry is the progression from market-centric organizational structures to more network-based.

American Airlines and the One World Alliance are a case in point, as is the United Airlines efforts to align with.