There is a broad consensus among CEOs that the interconnected processes of globalization and rapid technological change — particularly, the emergence of technologies related to social media, platforms and big data — have profoundly disrupted traditional forms of organization and created new business models, as well as opportunities. A great deal of energy — both in traditional media outlets, but also online — has been devoted to understanding these trends.
A recurring theme in this discussion is the suggestion that an important recent development is a contraction in the size of business firms and a concomitant reliance on an extended “network” that is facilitated by new computer technologies. Smaller, more agile firms — think Uber or Airbnb — now employ software platforms and algorithms to provide a global service that eliminates the need for many jobs. In this way, these new companies have been extremely successful in disrupting traditional business models. This kind of observation has led some commentators to talk of the irrelevance of the firm in the 21st century.
These discussions can be explained by employing a perspective derived from Ronald Coase’s account of the origins of the firm. Coase’s idea was that firms exist because repeatedly going back to the market imposes high transaction costs. In the absence of a firm, workers need to be hired, prices need to be negotiated and contracts enforced, and this whole process needs to be constantly repeated. Such repeat transactions can be enormously costly and the firm — by formalizing relationships in a hierarchical setting — offers a simple and effective way of circumventing this “failure” in the ability of the market to deliver a less expensive alternative.
The End of the Firm?
It is this aspect of Coase’s story that is attracting interest (again) today. The suggestion is that new technologies — and particularly network-based technologies — have disrupted markets by facilitating a significant reduction in transaction costs across multiple sectors of the economy.
As such, we are entering a world of smaller, leaner firms that build their business model on a combination of software platforms, network technologies and market-based transactions outside the framework of the firm. In consequence, traditional firms are being driven into extinction by the emergence of more agile competitors that take advantage of these low cost opportunities.
Tracking this discussion on the “end of the traditional firm” is a parallel debate about the current state and likely future trends of the employer-employee relationships within the firm. In a world where companies increasingly attempt to become more agile, innovative and responsive by restructuring the way they are organized, lifetime employment is no longer feasible or even desirable. The result is that CEOs can no longer rely on traditional forms of coordination, which were oriented around hierarchy and command and control.
Indeed, individuals, in particular the millennials, are uncomfortable with the idea of thirty years working (as anonymous cogs in a corporate machine or the obedient “company man”) in one place and being constantly told what to do. In the past, this provided comfort (since the corporate firm took care of its employees by offering them job security and lifetime employment), but now it merely frustrates or irritates.
Instead, individuals are looking to maximize their personal potential by building a lifestyle and a sense of identity that revolves around doing something that they care passionately about. It involves actively cooperating with others to create something larger and more meaningful than ever could be achieved alone. As such, organizations — and especially business firms — continue to be a powerful means for the individual to accumulate experience, develop capacities and express their self-potential in an on-going quest to construct their own unique identity.
The Evolution of the Firm
So, the firm will not disappear. However, the current way of thinking about work necessarily involves a re-framing of the relationship between an individual and the firm. How then should a 21st century firm organize itself in order to offer a meaningful and relevant environment for its stakeholders? There are no easy answers to this question, but the best option is to embrace a combination of what my co-author Mark Fenwick and I characterize as “flat-hierarchy” and “visionary leadership”.
The most innovative firms today are characterized by a ”best-idea-wins” culture in which the seniority of the person making a proposal does not matter and in which on-going debate and more collective forms of decision-making are fostered. Elon Musk, the CEO of Tesla Motors and the founder of SpaceX describes this sort of work environment as a “flat-hierarchy”.
In order to succeed, a flat-hierarchy depends on the active participation of everyone inside the firm. Without the cooperation and input of all actors within a firm this approach will not succeed. As such, an additional advantage of such an open working culture is that it provides greater opportunities for personal expression and this ensures that the firm remains relevant. In this way, a flat hierarchy works to retain the relevancy of the firm for the employees and other company insiders, such as investors and consumers who benefit from the higher quality products or services that such a “flat” corporate culture can deliver.
This recognition of the importance of flat-hierarchies in delivering innovation should not be taken to mean that all hierarchy is to be eradicated. An anarchic “Wild West” or “kitchen table” approach to corporate organization in which anything goes is not the solution. “Pure flat” can legitimately be criticized on the grounds that it simply will not work and will merely result in chaos and, ultimately, the disintegration of the firm. Clearly, some sort of structure needs to be imposed. If we think of a continuum with the classical hierarchical firm at one extreme and a free-for-all at the other, then flat-hierarchy exists somewhere in between.
For instance, the best firms recognize the importance of allowing an individual to preserve its own identity, whilst also allowing him or her to become part of a larger ecosystem where growth potential and strategic possibilities are greater than if the individual was to remain independent. In this way, the individual is not absorbed into a classical corporate environment, but becomes integrated into an open “ecosystem” that allows him or her to preserve his/her own identity, whilst enjoying the benefits of being associated with a firm (i.e., increasing the career possibilities).
the best firms recognize the importance of allowing an individual to preserve its own identity, whilst also allowing him or her to become part of a larger ecosystem where growth potential and strategic possibilities are greater than if the individual was to remain independent
The more fluid and inclusive relationships that we describe here presupposes a high degree of cooperation, loyalty and mutual trust, at least when compared to more control-oriented, directed and horizontal organizational forms. Particularly important in this context is the need for open communication between the various participants. Open communication provides a mechanism by which coordinating of different stakeholders takes place. Most obviously, open communication involves a different style of information dissemination and exchange that characterizes relationships between all actors/individuals in the firm. Such an approach involves acknowledging the potential benefits that accrue from a much freer flow of information inside an organization, but also between the organization and those on the “outside”. In particular, open communication is characterized by a more personalized approach to communication.
But open communication is not only about sharing information (the one-way dissemination of information from one part of the company to another, or from the company to external actors). Open communication is about building an on-going and constructive dialogue among the actors in the firm and the market that can then have a significant impact on the future performance of that company. Open communication is about creating interdisciplinary teams that work “cheek-by-jowl” to identify relevant solutions to particular problems and by making innovative problem-solving — “improving things” — the basis of the film’s existence. In this way, a healthy firm culture can be facilitated.