Monday, March 19, 2012

Extension of the Transactional Cost Theory - Clan Control

In the last blog we looked at how TCT is applicable in the case of Multidimensional Organization. In today's blog we look at an extension of the TCT - Ouchi's work on Transaction Cost Framework.

Ouchi classified organizational mechanisms of control into 3 classes:

  • Market based
  • Bureaucracies
  • Clans

Markets coordinate through prices, Bureaucracies through authority and rules, while Clans through a combination of authority with shares belief and values.

Ouchi relies on goal incongruence and performance ambiguity as the crucial dimensions affecting an exchange. If we analyze the 3 classifications on these dimensions, we will find that markets would be an effective mechanism when the goal incongruence of the parties involved is high and performance ambiguity is low. If we move further to a scenario where the ambiguity associated with performance would increase and market based mechanism would not suffice, the need for congruent goal would be felt higher - this is when the bureaucratic governance would be seen as efficient. When the performance ambiguity is extreme, clan governance begins to find its holding - This mechanism requires extreme people processing (ouchi 1979) or socialization (ouchi 1980) to be the means of control.

In many ways the work by Ouchi has had significant bearing on the interest shown by researchers in organizational culture. We would discuss organizational culture as part of organizational behaviour elsewhere.

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