Market and hierarchy: organization and coordination mechanisms

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.