Economist Oliver Williamson offers insight into how organizations can be inefficient in terms of costs.Williamson notes that while a free market system serves to reward efficiency by weeding out those firms that are inefficient, many unnecessary costs still remain.
These costs are related to transactions such as purchasing goods, employing labor, or providing a service. Because managers may lack knowledge about a situation, make mistakes in the securing or delivery of a good, or behave in ways that are not entirely rational, greater costs than necessary will result from the transaction.
These are referred to as transaction costs. Since markets may not always be efficient, hierarchical organizations, or bureaucracies, evolve to reduce transaction costs by establishing rules to regulate exchanges and assigning coordination mechanisms to govern the allocation of goods and services.
A third mechanism, other than markets and hierarchies, to regulate transactions is the clan, which governs transactions through commonly shared values and goals. In clan relationships, mutual trust is high, negating the need for rules and regulations. Clan systems of transaction are often found in Japanese firms.Williamson was given an award for outstanding contribution to the field of management by the Academy of Management in 1988.