The IT revolution and the future of hierarchies

Jacek Sojka


In this paper I would like to concentrate on the widespread conviction that the IT revolution has as its consequence the dismantling of all hierarchies. Does it mean that only markets will remain? Direct transactions between millions of buyers and sellers? Can we really do without hierarchies? (Also: without nation states which have always required political, hierarchical structures?)

Despite many philosophical hesitations concerning the impact of IT on culture and society, the role of IT is indisputable and crucial in the world of business. Within seconds one is able to gather all information about prices of a given product or securities in all different places and choose the best one. Electronic orders from all around the world can reach a seller immediately. Both buyer and seller can operate globally without leaving their offices. Information about legal regulations in different countries is available without special efforts and makes life of foreign investors more comfortable. It is often said that the IT revolution can strengthen or revive the spirit of entrepreneurship and ability to compete. The improvement of the organisational decision making process is one of the most obvious benefits of this revolution.

The advocates of the vision of the bright future caused by the computer networks regard as one of the main characteristics of a (future) global world the breakdown of all hierarchies: economic, social, political. According to this opinion the hierarchy serves as a means of controlling an access to information and as basis of power of those who have that control. New possibilities opened by the wide use of computer as well as other communication technologies constitute a threat to all those who would be inclined to monopolise information whether they are political dictators or business leaders. Information technology becomes then a major factor of all decentralising and democratising processes.

The most telling example of this process is supposed to be the emergence of the so-called virtual corporation: a network of small companies or even individuals instantaneously producing a specific, customised product and “organising” itself accordingly, i.e. spontaneously, without building any hierarchy or permanent structure. “To the outside observer, it will appear almost edgeless, with permeable and continuously changing interfaces between company, supplier, and customers. From inside the firm the view will be no less amorphous, with traditional offices, departments, and operating divisions constantly reforming according to need.” The future belongs – according to the IT enthusiasts – to this type of flat, edgeless, constantly changing organisations. And even the most respectable economists and organisational theorists admit that they have real doubts about their basic concepts. “For example, organizational scholars are now questioning the concept of the hierarchy as the main mechanism for organizing commercial, non-market transactions, at least in large global firms. In pointing to MNEs such as IBM, SKF and ICI, in which key resources and capabilities are geographically dispersed, cross-border flows of knowledge, information and ideas are multidimensional, communication is lateral, and there is a strong sense of shared values and mission among the different parts of the organization, the interplay of decision taking is better described as a heterarchy.”

The concept of a form of interactions which might be classified as something between hierarchy (with all its tyrannical predilections) and market (with all its failures). This question was raised some time ago in connection with the nature of the firm and types of production co-ordination: through price mechanism in the open market or within organisation. All depends on the costs of transactions. “The most obvious cost of ‘organizing’ production through the price mechanism is that of discovering what the relevant prices are.” In the thirties there was no debate on the use of computers; rather the telephone was the most modern device which can influence the speed of the information transfer and thus reduce the costs of making such discoveries about prices. As a matter of fact the reduction of costs might have occurred on both sides and the deciding comparison was between both rates of reduction. On the one hand if the reduction of costs relating to price mechanism was bigger then the reduction of the cost of organising (within a firm), the size of firms tend to decrease. This possibility can be considered an equivalent of today’s forecasts about the breakdown of all hierarchies due to global electronic information transfer. On the other hand however, this does not need to happen at every instance. The calculation of costs may show that the reduction on the side of organisations (hierarchies) is bigger and suggests something else. “Changes like the telephone and the telegraph, which tend to reduce the cost of organizing spatially, will tend to increase the size of the firm. All changes which improve managerial technique will tend to increase the size of the firm.”

Today this question is being debated within the so called transaction cost economics. From this perspective any development of new technologies does not necessarily entail the diminishing of the role of hierarchy of an organisation. “While the relation of technology to organization remains important, it is scarcely determinative. I argue in this connection that, but for a few conspicuous exceptions, neither the indivisibilities nor technological nonseparabilities on which received theory relies to explain nonmarket organization are sufficient to explain any but very simple types of hierarchy. Rather I contend that transactional considerations, not technology, are typically decisive in determining which mode of organization will obtain in what circumstances and why.” Same opinion was expressed by Fukuyama who cannot agree with the “end of hierarchies” statement. What is good for the computer industry (small, flexible networks) will not do for other industries, “from building airliners and automobiles to fabricating silicon wafers.”

In other words the technological possibilities will not decide by themselves about the type and size of organisation. Instead of being fascinated by the technological achievements one should have a closer look at the costs associated with any new form of business organisation. What obtains in one industry, may not be viable in the other. Traditionally computer manufacturing has provided us with the examples of diminishing the size of a firm and of introducing new forms of co-operation between companies. But even in this field the reverse might be true as recent plans for co-operation between Microsoft and Apple show. In sum we need more empirical studies on the size of multinational corporations and on the impact of information technology on their structure. But one thing remains obvious: the speed of information flow cannot revolutionise by itself the world of big organisations. Accordingly the nation states will not disintegrate due to the impact of only one factor: the Internet. One cannot expect any “revolution” in this field.