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In 1960, when Lou Groen ran a McDonalds franchise, he invented the flatfish burger (by adding pancake mix into halibut and baking it) and offered this idea to headquarters. He hoped that his groundbreaking burger would be an international sensation but it was rejected. Groen naturally thought McDonald’s bureaucratized organizational structure rebuffed his amazing idea.
He was mistaken. The reality was completely different. It was McDonald’s centralized and bureaucratic organization that actually steered the company away from trouble. If Groen’s burger had been released, McDonald’s would have been in serious trouble because there wasn’t sufficient supply of flatfish for widespread distribution. McDonald’s chose to be conservative and this paid off well. After years of research, it replaced halibut with cod and the updated Filet-O-Fish became a great hit. In order to supply over 30,000 franchises, McDonald’s cannot rely on brilliant ideas alone. Instead, it needs systematic organizational evaluation and risk management. Nowadays, Mcdonald’s no longer receives new ideas from its franchises. It contains its inspirations in a R&D center, centralizing innovation within its headquarters.
Most people would dismiss McDonald’s organization as rigid, inefficient, and suffocating. However, an organization is a tricky subject. It is a love-hate relationship in which people whose lives depend on it, yearn to break away. Some who really cannot stand it may escape by quitting and starting their own business. However the moment they do this, they realize that they also require an organization.
Is an organization a necessary evil? Columbia Business School’s Professor Raymond Fisman argues a fresh perspective on the subject. He claims that since organizations appear to be bureaucratic and oppressive, innovation is able to germinate into actual performance.
During his interview with Daily Economy’s MBA team he said, “An organization is a catalyst for innovation and efficiency. A highly skilled designer or developer cannot prosper without a proper mid-level manager.” The following is a transcript from a Q and A session with Professor Fisman.
Q: There are many people who perceive organizations cynically
A: In our history, there were always some negative sentiment towards organizations. Organizations still continue to exist. They have several disadvantages but people generally acknowledge that organizations are necessary. Even swift purpose-driven terrorist organizations rely on organizational structure. There are managers and head auditors. In 2008 we intercepted a memo from an Al-Qaeda leader, Mohammed Atef. In his memo, he denounced his subordinate for not billing the cost of transportation for transporting a family. Even a terrorist organization like Al-Qaeda operates in a manner that is not too different from an ordinary business.
Q: That might be true but in today’s businesses, departments like general affairs, HR and compliance can hinder operations.
A: How do you expect a company with over 10,000 employees to run smoothly without various supporting departments? A company needs an accounting department to ensure that employees don’t steal from the company. There are other rules that are necessary to carry out different but necessary functions. You should never think that people doing operations are actually the only ones doing work for the company. It is an extremely hard task for supporting departments to make sure that 10,000 employees are heading towards the right direction.
Q: What happens when there are no proper supporting organizational departments or not enough managers?
A:The president would have to control everything. One president who runs a textile company in India is famous for wearing the only key to the warehouse around his neck all the time because he cannot trust anybody. This problem arises because there are no organizational departments for checking inventory or tracking progress. He needs to do everything by himself. His employees have to call him to use the warehouse. Even if the business was doing well, he cannot dream of expanding his business.
Q: You don’t necessarily need to do everything in-house. Through contract negotiations, you can always outsource to make your own organization light and nimble.
A: Outsourcing is not a solution for everything. If you look at companies like Apple, you will see contracts of over 1,000 pages that detail countless number of cases and responsibilities for outsourced companies. The minute details that characterize micromanagement prove how difficult outsourcing actually is. If you consider transaction costs, it might actually be better to internalize. Currently in America, “insourcing,” which controls resources internally, has become more popular.
Q: New companies often fear that as they grow and expand, they will lose their flexibility and innovation.
A: One popular case where a company lost its growth engine as it grew bigger is Hewlett Packard. However don’t you think it will be difficult for a company comprised of two people - the founder Bill Hewlett and David Packard - to stick to their old ways when it grows into a multi-national corporation of 130,000 employees? Daily operations of a startup of two founders in a garage in Silicon Valley cannot pass in a public company like HP.
Q: Even if that is the case, there are companies that risk everything for innovation.
A: One way to succeed is to create an innovation center in an organization. Many companies create such centers to escape from bureaucratic pressures. Xerox Lab is the quintessential example. However this experimental lab failed to deliver from a business perspective. They created many ideas but none of them were practical enough for Xerox to market.
Q: As Information Technology continuously improves, do you think that an organization can be more horizontal and flexible? Won’t there be new forms of organizations like network organizations?
A: Previously, organizations ran mostly top down. These organizations were strict by nature. Now as managers are able to control more groups via ever improving IT, organizations are becoming more horizontal. As communication became easy through internet access, people started to work at home or freelance.
Nevertheless, organizations are still growing. I view this phenomenon as proof that organizations are unavoidable. It makes perfect sense to grow organizations because it would be more costly to work with external resources which can result in hefty transaction costs.
Q: One criticism of organizations is that there are much more conservative people than innovative people
A: It is not necessary to choose between them. Obviously, you would ideally need an able scientist, creative designer, and a capable salesman. However behind these so called “Star Players,” you would need a “Bean Counter” who works behind the scenes to hedge against risk. (The term “bean counters” was coined by GM’s former CEO, Bob Lutz, to describe GM’s corporate financiers and accountants. It describes those who are not responsible for future visions or new products and solely care about short term profitability.) If these risk managers tries to become the Star Players, they will start another financial crises because they will be blinded by high profits and delve into risky investments like high risk mortgages.
Managers can also directly impact profitability. Stanford Professor Nick Bloom, conducted a study that found that the rate of heart attack patients and patient wait times were significantly lower in successfully managed hospitals. A study of video game companies found that project managers rather than game designers played a bigger impact on sales.
Q: There are concerns about the mechanics of compensation. Some people argue that CEOs earn too much money regardless of their actual output.
A: The crises in 2008 makes it seem like anybody can be a CEO. However, if you consider how CEO’s minute actions can considerably impact profitability, you can see that his compensation is not too outlandish. Compare Citigroup, whose company value dwindled to 1/10 of its previous size, with J.P. Morgan Chase, whose value shrunk only 20. JP Morgan’s CEO Jamie Dimon played a huge role with his crises management skills and discretion. This case shows exactly why shareholders and the board of directors pay CEOs a lot of money - they rely on CEOs to play a role that no one else is able to do.
Argument and Rebuttal associated with Organizations
Who is he?
Raymond Fisman is the Lambert Family Professor of Social Enterprise and director of the Social Enterprise Program at the Columbia Business School. Professor Fisman received his PhD in Business Economics at Harvard University. He worked as a consultant in the Africa Division of the World Bank before joining Columbia Business School in 1999. His research covers a range of topics, including the impact of corporate social responsibility, the determinants of altruism and global corruption. His work has been published in leading economics journals, including the American Economic Review, Journal of Political Economy, and Quarterly Journal of Economics and has been covered widely in the popular press, from Maureen Dowd's column in the New York Times to al Jazeera to the Shanghai Daily. He also writes a monthly column for the online magazine Slate, where he's tackled issues including teacher evaluation in public schools, women and leadership, and the economics of civil war. Professor Fisman's first book, Economic Gangsters: Violence, Corruption, and the Poverty of Nations (coauthored with Edward Miguel), was published by Princeton University Press, and he is currently working on a book about the economics of office life, to be published by Twelve in 2012. He has taught nonprofit governance in an Executive Education program for leaders in the arts and teaches the Private Sector and International Development and Managerial Economics courses for EMBA and MBA students.
Translation by Hyukjoon (John) Ryu '15