Monday, October 1, 2012

Which organizational forms can best adapt to change?

One of the themes in this blog is that it is not necessarily the strongest firms that survive, but the most adaptable.  Kodak once dominated the film industry but now it is bankrupt.  How did this happen?

Part of the fault lies with Kodak's centralized structure which was slow to react to the expiration of its patents, and the advent of digital photography.  Colby Chandler, former CEO of Kodak, admitted as much at the 1984 annual meeting:
Like many companies, we are not used to working in an environment where there is rapid technological transfer from laboratory to the marketplace. But we know that will be important in our future.
In 1984, in the hopes of encouraging innovation, Kodak decentralized decision making to 17 different business units with profit and loss responsibility.  However, the decentralized decision making was not accompanied by incentive pay.  Instead, small bonuses were doled out by officious bureaucrats, according to office politics. 

As a result, Kodak continued its slow decline, and in 1993 the board of directors fired its CEO for not holding its managers accountable for failure.  This year, Kodak entered bankruptcy.

The moral of the story seems clear to me:   decentralized decision making is better for adapting to technological change, but only if accompanied by strong incentive pay.  This may be the reason that much of certain types of innovation is done by small firms:  owner/operators have the strongest incentives to perform. 

4 comments:

  1. No place demonstrates this better than government. There is a dimension missing from government that exists in business: profit. Governments and their bureaucracies operate under the presumption that funding comes from a magical place and is a constant, regardless of productivity. Government offices cannot get employees to turn off lights, economize the use of water and toilet paper, and many other cost-saving behaviors. People are not evil, but they act with their own self-interests in mind. once satisfied, they will certainly consider their closest family/friends and eventually the collective, too. However, without incentives to guide behavior, all you can count on from the average person are decisions that have the individual's short-term interests in mind at the expense of everything else.

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