An Organizational Failures Framework

By William G. Ouchi
1978| Working Paper No. 461

The paper begins with an explication of Oliver Williamsons market failures framework, which describes the conditions under which market transactions will be replaced by formal organizations. It then applies the central ideas of that framework to two research traditions within organization theory, suggesting that they can be understood as an organizational fai1ures” framework. These two traditions, that of humanistic organizational psychology and of open systems theory, each specify conditions under which formal organizations will not operate effectively. The paper then distinguishes between formal organizations and bureaucracies and points out that it is the bureaucratic form, rather than the device of formal organization, which will fail. The paper next considers the conditions under which both markets and bureaucracies will fail and contends that they may be replaced by a third form, the clan. The properties of markets, bureaucracies, and clans are compared, and the conditions for failure of each are briefly reviewed. The paper concludes that the application of the transaction cost approach and of Williamsons market failures framework enables us to see old issues in some productive new ways.