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The value of organization

October 19, 2009

 Abstract: In his 1975 book ‘Markets and Hierarchies’, Oliver Williamson (recipient of the 2009 Nobel Prize for Economics) distinguished between activities that should be carried out within the organizational boundaries and those that ought to be procured through market transactions. If something is generic and can be easily obtained from a number of sellers, the situation is ideal for market transactions. But, if the organization’s requirements are so specific that they reduce the number of potential suppliers and entail specific investments by them, it is more efficient to internalise the transaction within the organisation. This insight is relevant for contemporary Indian issues including when a re-drawing of organisational boundaries is necessary to externalise certain transactions; why CEO compensation should be based on her ability to strike a balance between internal and external transactions; and how internalisation of certain contractual obligations within a single organisation would help better organise the 2010 Commonwealth Games.

 Keywords: Nobel prize; Oliver Williamson; markets; organisational boundaries; transactions; CEO compensation; Commonwealth Games; outsourcing; asset specificity

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