Changes in the structures of U.S. companies: action implications for executives and researchers

Dynamic networks of contractors evolved in the 1970s and were described in 1986 (Miles and Snow, 1986) as a distinct organizational form. “Dynamic” implied fluidity in multiple features of a network, but principally its membership, contrasting it with a fixed network. The locus of authority may vary, but a network with a prime contractor with authority to add or delete members is most common. A prime contractor network is the organization structure chosen by many entrepreneurs, as it minimizes the capital required by the prime contractor to initiate production of goods or services. A network of contractors is also often the structure that remains after a traditionally organized company contracts out many components of its value chain and generally all of its components that are not part of its value chain. The network form enacts the idea that “companies should do just one thing really well – design, manufacturing, marketing, whatever – and collaborate with others for the rest” (Davis 2016a, p.70). Nike, the largest sneaker and athletic wear company in the world, “was a pioneer in recognizing that their value added was in design and marketing, not assembly” (Davis 2016a, p.2). Nike held on to the high value-added tasks. Davis refers to this process and its resultant structure as “Nikefication”. “Thanks to the Web and the increasing availability of contractors, vertical disintegration has spread to nearly every corner of the American economy . . . . Nikefication is now standard practice across corporate America” (Davis 2016a, p.77). Early in their evolution, in the 1970s, network organizations varied in the extent of their centralization of authority. Today it appears that networks with a prime contractor such as Nike are the most common. For the interested reader, I note that in his 2014 book, Galbraith first explores the network strategies and industry structures that influence which capabilities the prime contractor should own and build and then focuses on network design (see Galbraith 2014a, p.149-183). What features contribute to the increasing pervasiveness of contractor networks? There are three: (1) Nikefication enables a prime contractor’s top management to focus its attention on the business function in which the company has its competitive advantage, rather than focusing on a variety of business functions; (2) subordinate contractors gain the advantages of specialization (e.g., focused R&D) and often serve multiple prime-contractor companies, thus enabling the subordinate contractors to produce and sell their goods and services at prices lower than their prime-contractor customers could achieve themselves; and (3) prime contractors, by adding and/or deleting subordinate contractors, can adapt more rapidly to changing markets, changing technologies, and other changes in the business environment than can traditionally organized companies.

Another organizational form, relatively new in terms of its pervasiveness, is a platform facilitated enterprise, often designed to maximize the speed of customer service and/or to minimize labor costs. In America, Uber is currently the most conspicuous example of a platform-facilitated company. A platform is a specific combination of information and communication technology that connects different groups of people and allows them to engage in mutually beneficial exchanges (such as do Uber’s drive-partners and their customers). Uber’s “drive-partners are not employees (absolutely not!) but independent micro-entrepreneurs. They do not work for Uber: They work for themselves. . . . Such organizations provide the platform for a market that matches those who have tasks to do with self-starters willing to do them” (Davis 2016a, p.124, see also Davis 2016a, p.145) (parentheses enclosed phrase in this quotation is Davis’). “Amazon’s Mechanical Turk (MTurk) is another platform that offers ‘Turkers’ the chance to engage in ‘Human Intelligence Tasks’ (HITS) for a piece rate determined by how much they bid” (Davis, 2016a, p.124). It is important to note that not only do these platform structures reduce labor costs; they also exploit the capabilities of modern information and communication technologies to maximize the speed of customer service.

The generally flat and/or relatively simple structures of Nike-like and Uber-like companies provide a level of agility beyond that of traditional multi-tiered organizational forms. This feature, along with earlier-mentioned lower labor costs and fast service, is enabling such companies to contribute to the numerical decline of America’s corporations and other multi-tiered companies. (Such companies may have many employees, but Nike-like companies do not have nearly as many as they would have if they did not use subcontractors and Uber-like companies do not have nearly as many as they would have if they hired all of their partners as employees).

Specifically, the current business environment is, and will become, even more complex, more dynamic, and more dangerous than ever before. Why more complexity, dynamism, and danger? The growth in scientific findings that occurred in the past few decades prompted and facilitated considerable growth in product development, the effectiveness of engineering technologies, and the variety and capabilities of manufacturing, transportation, and information and communication technologies. These phenomena in turn have led to availability of many new products and services. These new products and services have prompted, via entrepreneurship and intrapreneurship, increases in the number and variety of companies producing goods and services. These companies compete with each other. As a consequence of the increased effectiveness of transportation and communication technologies, companies are more able to take markets away from each other. In sum, today’s business environment is more complex (increased number and variety of competitors), more dynamic (faster rate of arrival of new products and services and increased effectiveness of transportation and communication technologies), and more dangerous (increased capabilities of competitors following from increased effectiveness of transportation and communication technologies). These phenomena will almost certainly continue to increase (Huber 2004, p.15-44).

It is not only companies with traditional multi-tiered structures that are endangered by the increasing number of contractor networks and platform structures. Business organizations of all forms must be capable of adjusting quickly because the environments of all business organizations now contain an increasing number of very agile potential competitors armed with the weapons of fast customer service, low labor costs, and new or improved products. If an invader’s move is not quickly identified and correctly interpreted, the associated delay – added to the time needed for decision making and decision implementation – can result in the loss of a market and perhaps the failure of the executive’s enterprise. The implication that I draw from the above, and that dominates all others, is that today’s and tomorrow’s executives must create and formally maintain proactive processes that anticipate, identify, and interpret changes in their company’s environment (Huber 2004, p.45-76). Of course deciding how to choose responses to externally generated threats and how to enact the associated remedial structural or process changes are also important and time absorbing. But these important procedures already exist in the repertoire of any experienced CEO or Executive Office. What will distinguish survivor companies from non-survivors will be their creation of, and attention to, early warning systems. These systems will be most effective if their manager is, or reports to, a high-level executive.

Burton et al. (2015); D’Aveni (1994); Davis (2016a,b); Eisenhardt et al. (2010); Evans et al. (2006); Galbraith (2012); Galbraith (2014a,b); Gawer and Cusumano (2002); Gilad (2003); Huber (2004); Miles and Snow (1986); The Economist (2016); Wooldridge (2016).

In addition to its rich articulation and discussion of the changing mix of structural forms of U.S. business enterprises, i.e. fewer large multi-tiered companies, more contractor networks, and more businesses using platforms, Davis’ 2016 book contains a second major contribution. Davis describes and explains at considerable length three important and negative societal outcomes of the decline in the number of large multi-tiered companies: (1) disappearance of the social safety net; (2) rising economic inequality, and (3) declining upward mobility. The existence of these adverse outcomes prompts my suggestions for studies by organization scientists, psychologists, and economists.

The contractors in network structures generally have few hierarchical levels compared to the number of levels in traditionally organized multi-tiered companies. Thus few career ladders are available, resulting in less opportunity to move upward and improve one’s status and income. What are the psychological and behavioral effects of these conditions? For example, what are the differences in employee productivity, absenteeism, and turnover, perhaps especially among professionals? What are the costs of such differences, if differences exist, to employers? Further, there is the issue of job stability. In contractor networks, are the prime contractors of the network more prone to delete organizational components than are traditionally organized multi-level companies? Put differently, is employment stability less for workers in contract networks than in complex organizations? Such seems likely, as prime contractors’ experience and structure may enable them to replace the deleted functional component with a more suitable component more quickly and with less frictional cost than can a more complex multi-tiered company. If employment security is less for employees in contractor companies, what are the consequences in terms of mental health of employees or in terms of worker-initiated employer change? Regarding worker-initiated employer change, what are the consequences for employees who choose to manage their own career progression across employers?

The partners of an Uber-like platform company are not employees, have no physical workplace in the company’s property, and are generally in competition with other partners at all times. They have no jobs, only tasks. What are the consequences of these conditions in terms of partner turnover and mental health? For many partners, it would seem that there would be a low sense of affiliation with the company or with their peers, and perhaps a low sense of alignment with a collective goal possessed by either of these entities. What are the effects of such conditions? High turnover? Poor mental health? A positive sense of control and independence?

I suggested above that job loss might be more likely for employees of contractor companies. If so, a social consequence is unemployment, at least for a period of time. As network organizations become more common, it appears likely that society will encounter multiple financial and social costs associated with increased unemployment. Returning to the matter of the loss of career ladders, Davis convincingly explains (2016a, p.127-149) how the decline in the number of multi-tiered companies has contributed to rising inequality and declining upward mobility. These three conditions are outcomes of a variety of broad economic and societal factors, as explained by economists and other social science scholars (e.g., Thomas Piketty, Robert Reich, Jeremy Rifkin). Here we’ve seen, thanks to Davis (2016a), that changes in the nature, and in the mix, of organizational forms are also factors that contribute to increased unemployment, rising inequality, and declining upward mobility.

Bird (1994); Evans et al. (2006); Frankel and Reid (2008); Ocasio (2011); O’Mahony and Bechky (2006); Schreyogg and Sydow (2010).