From Hierarchy to Web

Roger Jones

A HIERARCHY First, we view the salient features of these two kinds of organisational structure.
Some Spectacular Changes Then we note some recent spectacular successes and failures.
A WEB of HIERARCHIES A capitalist economy has typically been a network of hierachically organised corporations.
Some Long Term Business Trends But many long term trends are changing the balance between large and small organisations and the internal organisation of businesses.
A WEB of WEBS So that the economy becomes a free market in which slimmed down corporations internally emulate market mechanisms.
PROBLEMS for INTERNAL MARKETS There are some problems which limit the effectiveness of internal markets, and hence sustain a disadvantage of large organisations.
IMPACT of World Wide Web And the WWW is an electronic newtork which enhances what can be done by small corporations, increasing competitive pressure on large corporations.
THINGS to UNDERSTAND Thoughts about corporate right-sizing and survival in web-world.
CONCLUSIONS Conclusions, dating fast!



Traditionally organisations have control structures operating through one-many superior/subordinate relationships (which also determines employee compensation). In some socialist states hierarchic organisation also appears in the "command economy". Individual agents may not be permitted to exercise their judgment in meeting the needs of their customers, and their compensation may be tenously linked with delivered value.



A free market economy has web or net-like control structures. each node is an agent whose behaviour and economic return is influenced primarily by customer/supplier relationships. These structures encourage more responsive suppliers and better value/price coupling,

Some Spectacular Changes

  • The Collapse of the Soviet System
    • command economies DONT WORK
  • Creation of WWW
    • Webs (or networks) DO WORK
  • Command Structures are INEFFICIENT
  • Free Markets are EFFICIENT
Two startling examples of how centralised command structures can fail and how decentralised free initiatives can work are the collapse of the Soviet Socialist system and the extraordinary explosion of activity on the World Wide Web.

This turns inside out our ideas about order and chaos.



A typical free market economy has been a network of corporations each with internal hierarchic command structures.

However, this picture has been evolving:

Some Long Term Business Trends

  • Downsizing of Businesses
    • Outsourcing
    • Greater use of Contract Staff
    • Professionalisation of Services
    • The Virtual Corporation
  • Restructuring of Businesses
    • flattening of Organisational Structures
    • matrix management
    • Decentralisation and Empowerment
    • Internal Markets
Long term trends have been reducing the place of hierarchic command structures in business.

Businesses have been shrinking by procuring more of the services they need on open markets rather than from employees. This trend ultimately leads to the virtual corporation which has no employees.

The other trend is towards internal forms of organisation which are less hierarchic and more market-like. These may improve an organisations ability to compete with smaller companies.



Downsizing of businesses changes the balance between hierarchy and network by making a web with smaller but more numerous nodes. Small hierarchies work better than large ones.

Restructuring of businesses makes the internal structure of the nodes themselves web-like. The economy is becoming a web of web's.


  • Transaction costs
    • use IT+empowerment to drive them down
  • Compensation / Security
    • no downward flexibility / final salary pensions
  • Communication and knowledge management
    • failure to share knowledge effectively
  • Investment
    • not just in bids
Can internal markets enable corporations to operate as effectively as external open markets?

Positioning in the trade-off between security and compensation is significant, and the security embodied in monotonic pay adjustments is an inhibitor to real value pricing of internally sourced services.

To offset residual disadvantage it is important to fully realise the advantages of the organisation. Effective knowledge sharing and common culture are important in this area.

Internal markets may fail to handle investment decisions effectively, or at all. These decisions may lie outside to the domain of the internal market, or they may be pushed down to units too small to invest for the long term.

IMPACT of World Wide Web

  • None so far
  • Will have dominant impact on external marketplace
    • radically reduced transaction costs
    • radically reduced geographic differentiation
    • demolition of economic frontiers
    • virtual ELECTRONIC corporations
  • Internal markets will have to follow
The 'information superhighway', at present approximated by WWW, will greatly assist small companies and facilitate the downsizing trend.

This will tip the balance further in favour of outsourcing of services and force the internal organisation of companies to move more rapidly to overcome their disadvantages relative to the external global marketplace.

It is not clear how the size advantage of efficient global electronic markets can be resisted. Ultimately we may see virtually all customer/supplier relationships effected by trading over the internet.


  • hire or buy (employ or contract)
  • buy or sell in local or global market
    • and how to close a sale remotely
  • the marginal cost of information is zero
  • the value and price of geographic proximity
  • even "face-to-face" can be remote
These are things to get good at:

Getting the hire/buy/contract decision right is important, and the relative merits of these will be changing rapidly.

Getting good at electronic procurement of remotely sourced products and services is important.

When deciding whether to internally or locally source you need to know the real cost differentials, which are likely to be large in many cases.

The cost differential will be larger for operators who have the necessary skills to use networks effectively, and we will all have to compete with these people. Having contractors physically on-site will become more expensive, and substantial economic value will become attached to the ability to operate an effective globally distributed electronically interworking team.


    • you canít absorb a new culture overnight
  • Learn to Love CHAOS
  • use WWW to learn that it works
  • WWW delivers COTS consultancy
    • it will eat you from below
Anyone whose business is knowledge should think hard about how that knowledge is procured and delivered to the customer.

One-one delivery is extremely expensive relative to any method which permits large numbers to benefit from the knowledge.

A rigid compartmentalisation of service delivery and product development will be economically disadvantageous.

The range of knowledge based services which can be delivered by computers will be continually expanding, and this will effect what human delivered services and consultancy can be sold.

up home © RBJ created 1995/6/12 modified 1996/6/25