William G. Ouchi discusses in the article Markets, Bureaucracies, and Clans the importance of evaluating organizational efficiency in order to determine the value of individuals to an organization. He states that a transaction cost framework allows for this type of evaluation of organizational efficiency-the framework is based on two conditions, namely goal incongruence and performance ambiguity. These conditions can combine in several ways to determine the best mechanism for mediation or control in determining value. The three basic mechanisms are markets, bureaucracies, and clans. Once again, the organization chooses the mechanism based on combination of conditions with the organization.
What is a transaction cost?
A transaction cost determines the value of an employee to an organization. It is “any activity which is engaged in to satisfy each party to an exchange that the value given and received is in accorder with his or her expectations” (Ouchi 130). These types of costs arise when it is difficult to determine value of the good or service an employee provides because of its fundamental nature or from lack of trust between the employee and employer.
What is the meaning behind each condition?
Goal Incongruence is when goals are inconsistent across the board. It arises in organizations when members do not “share a selfless devotion to the same objectives” (Ouchi 131). The incongruence causes a lack of cooperation among members to an organizations mission.
Performance Ambiguity is the lack of clarity in how work will be valued. It begs the question “How will the buyer and seller determine a fair price” (Ouchi 131)? It is often difficult to access the value of labor.
What are the control mechanisms, and what conditions are present for each to exist?
The markets mechanism determines the transaction costs through contractual relationships. Each party to a contract is obligated to deliver only what is specified under contract. This mechanism is efficient for organizations to employ when goal incongruence is high and performance ambiguity is low.
The bureaucracies’ mechanism determines the transaction costs through the creation of incomplete contracts. A worker receives his wage by agreeing to have a superior to direct his day to day work activities, and by agreeing to let the superior closely monitor him. An atmosphere of trust can develop through this mechanism because the employee recognizes that if his goals are in line with the organizations, and he performs wells, the superior will reward him. This mechanism is efficient for organizations to employ when performance ambiguity and goal incongruence are relatively high.
The clan mechanism determines the transaction costs through a system of authority but not evaluation. Evaluation instead takes place through subtle signals possible among close coworkers. Strict evaluation is unnecessary because the organization has socialized its members first to accept the goals of an organization (via an apprenticeship, for example). This mechanism is efficient for organizations to employ when goal incongruence is low and performance ambiguity is high.
What problems do I notice?
There is no way to completely determine the level of goal incongruence and performance ambiguity. Additionally, no mechanism can exist in a pure state to 100% effectively determine the value of employees to an organization.