In my last post in this series, I suggested that there might be a problem with the pyramid-shaped organization chart.

You know, those strange organizational diagrams that look something like this:That flaw, I furthermore hinted, lies not so much in what’s on the chart, as what (or who) is perhaps conspicuously absent.

So this week, a closer look at this diagram – what that omission might be, and why it’s important.

 

Show me the money

If you’re wondering why the decades old organization chart is at all relevant today, it’s because these diagrams remain an influential, if not entirely respected “mental model” of sorts for managers and workers alike.

How we think about the work environment, and how we act towards our colleagues and co-workers is profoundly shaped by the organizational principles and precepts that these diagrams have come to symbolize. And this is true whether you realize it or not – and whether the organization you work for uses one of these charts or not.

What it represents, of course, is a way of organizing perhaps best described as management by hierarchy.

Management by hierarchy is the top-down, command-and-control, “manager-in-charge” way of managing with which you are probably familiar, and even take for granted. According to management by hierarchy, managers do the telling, and employees do the listening (and then the doing). It is a way of organizing that is all but universal in today’s working world – and it is a way of running a business believed to be both effective and efficient. Indeed, for most of us it would be difficult to conceive of managing in any other way.

But is it really the best way to run a business?

To address this question—much less offer some sort of meaningful answer to it—it will be necessary to take a step back for a moment. How, for instance, should we define “best” in this context? What, in other words, would make one way of managing/running a business “better” than another? And to get at these questions, we’ll need to first answer an even more important/fundamental question:

What is the primary purpose of a business?

Fortunately the answer here is obvious enough. The purpose of any business is to make money. This is their primary function, and the reason for their existence:

To turn a profit.

Of course, businesses serve other important functions as well. They supply needed goods and/or services to the communities in which they operate. They provide jobs (and therefore income) to the members of those same communities that they employ. The workplace is also an environment in which an individual might experience the sense accomplishment that comes from producing something of value, or the satisfaction derived from cooperating with others to achieve a common goal. These might be considered some of the “purposes” of a business too.

But at the end of the day businesses still need to make a buck – for themselves, and for their employees. If they don’t do this at a bare minimum, obviously they won’t be able to fulfill any of those other purposes either. And no doubt few of us would show up for work tomorrow if we knew we weren’t going to be paid for it. That’s probably true no matter how satisfying your job might be.

So if profit and revenue is what it’s all about, where (or who) those profits come from is perhaps equally obvious:

Customers.

To be sure, it’s the customer’s willingness to purchase its products and/or services that determines whether a business succeeds or not. Enterprises that satisfy a particular consumer need, and are able to turn a profit doing so, live to see (and sell) another day. Those that don’t are not likely to be long for this world. Consumer demand (or anticipation of that demand) is therefore not simply the force that “creates” a business in the first place. The degree to which an enterprise is able to satisfy that demand determines its ultimate fate.

Again, if this seems at all obvious or familiar to you, it should. This is all wrapped up with the idea of consumer sovereignty – that foundational economic principle which recognizes that it is consumers who determine which products and services are produced in the marketplace, not anyone else. Individual consumers in effect “vote” with their dollars for the goods and services they want, and the marketplace responds.

And yet just as important, although not nearly as widely acknowledged, is the corollary of consumer sovereignty that I just alluded to:

Consumers also determine which organizations succeed, and which ones will fail by virtue of the purchasing decisions they make.

So one more time – the fate of any for-profit enterprise lies in the hands of consumers. Those businesses that are able to provide needed goods/services to the market at prices consumers are willing to pay (and still turn a profit), succeed. Those that don’t, or can’t, are destined to fail.

 

Know your place

Again, none of this is apt to surprise to you. Managers and businesspeople of all stripes have come to recognize this basic economic truth. Consider this quote attributed to Sam Walton, the former CEO of Wal-Mart:

“There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”

A simple statement, and undoubtedly true.

But what of its ramifications? Especially with respect to management and organizational theory? If customers are truly the “one boss,” where is the acknowledgement/recognition of this fact? On most organization charts (like the one above), the customer/consumer is typically nowhere to be found. But why, given their authority?

Why are customers/consumers routinely left off of these diagrams?

To be sure, putting the customer on the org chart probably seems counter-intuitive. Think of it: To somehow include consumers in the organizational hierarchy is to suggest that they are “part” of the organizations they patronize. And that would seem to be a pretty questionable assumption.

Never mind, however, that this very suggestion was made nearly a century ago by the former president of The New Jersey Bell Telephone Company (and pioneering organizational theorist) Chester I. Barnard.

In The Functions of the Executive (1938), Barnard defined an organization as “a system of consciously coordinated activities or forces of two or more persons.”[1] He furthermore posited that “the actions which are evidence of organizational forces include all actions (my emphasis] of contribution and receipt of energies…”[2] And then he wrote:

“…it appears necessary to regard as part of an organization certain efforts of many persons not commonly considered ‘members,’ for example, customers [my emphasis in both instances]…”[3]

So customers are “members” of the businesses at which they purchase goods? In Barnard’s eyes at least, this does not seem so very unreasonable.

Nevertheless, he never took the next logical step. So far as I can tell, Barnard never then tried to include the customer on his company’s organization chart. Nor did he attempt to more formally incorporate the consumer’s “energies” into the organizational hierarchy.

Two reasons stand out as to why he may have been reluctant to do this:

(1) Us vs. Them

Putting the customer on the organization chart is counter-intuitive primarily because it is generally assumed that the members of any organization share some common goal. A shared purpose unites them – and in the case of a business, this goal is to turn a profit.

The motivations of a business and it’s patrons, however, would appear to be fundamentally at odds with each other. On the one hand, customers are looking to get the best deal (that is, the best possible product/service for the lowest possible price) while on the other, the suppliers of those goods and services hope to charge as much as they can. So their motivations are mutually exclusive and inherently adversarial. Therefore it would seem inappropriate and inaccurate to suggest that customers are “members” of the businesses they frequent.

(2) Short-term vs. Long-term

Businesses and their customers also appear to have divergent interests when it comes to the long-term sustainability of that enterprise.

A consumer’s main focus is typically the short-term goal of getting what they need at the best price. Once a transaction has been completed, there would seem to be little concern on the part of that customer regarding the business’ ultimate fate. And so long as they get what they came for, why should customers care? Businesses, on the other hand, are very much invested in their own long-term success. Satisfying one consumer in the moment means nothing if it does not also move the organization towards sustainable profitability in some way.

 

You need me as much as I need you?

For these two reasons then, the claim that customers are somehow “part” of the businesses they patronize would seem to be baseless. Barnard, it appears, miscalculated.

But not so fast.

Consider again that first argument for excluding customers from the organizational construct: Yes – consumers and businesses have what might be described as competing interests. Customers hope to pay as little as possible, and merchants hope to charge as much as they can.

And yet the same can be said of employees and their employers.

Just as consumers hope to get the best possible products/services (for the lowest possible price), employees hope to get the best possible wages or salary in exchange for their efforts. Likewise, just as businesses hope to charge customers as much as possible for their products/services, they aim to get as much effort from their employees as they can for the lowest possible wage. So the idea that customers can be excluded from the org chart based on a “conflicting interests”-rationale doesn’t hold up. Indeed, this very same argument could just as easily be invoked to exclude employees from these diagrams as well.

The “short- vs. long-term interests”-justification is similarly weak. While customers might appear to be solely focused on obtaining the best possible deal in the moment, with no real interest in a business’ eventual success, this is not always true. For instance, what if a satisfied customer foresees a need for that good or service in the future? Having a reliable, low-cost supplier nearby is to their advantage – not only in terms of convenience, but it also eliminates the need to comparison shop every time that good or service is desired. Therefore a buyer might very much hope to see a particular merchant succeed in the long run – and even be willing to pay a little more to see that they do.

Meanwhile, it also goes without saying that employees don’t always act in their own employer’s best long-term interests either. And this goes beyond taking long lunches and stealing office supplies on occasion, or cutting out early on Fridays. For example, consider the salesperson who discounts a product just to make a monthly quota – or who pushes especially hard to make a sale for the same reason, and in the process alienates a customer. Such actions are motivated by short-term interests, and yet may cost the organization in the long-term.

 

Why not the customer?

Still, it’s understandable if you are perhaps less than convinced.

Maybe these arguments strike you as a bit too involved…or overly theoretical. Instead, you may be saying to yourself:

The reason we don’t include customers on the org chart is because…well, we just don’t.

Not the strongest of arguments, to be sure, but also hard to argue with. Management by hierarchy has been the preferred mode of organizing since the industrial revolution (if not for far longer). And businesses seem to be doing okay, nevertheless.

(Although there’s certainly still a lot of bad management going on out there).

So let’s approach this question from another angle: Why not put the customer on the organization chart?

If customers are in fact “the boss,” as Mr. Walton asserts, what would be the harm in considering them “part” of the organization, as Barnard suggests? If consumer sovereignty is as fundamental an economic principle as it has been made out to be, why not acknowledge this fact in some way when it comes to the organizational form and how we organize?

And even if management by hierarchy is in many respects “good enough,” perhaps there’s an even better way..?

So for the next post in this series, I’ll engage in an exercise that Chester Barnard seemed reluctant to take on back in the day. I’ll draw an organization chart that includes the customer.

Which, it turns out, is right where they belong.

 

 

Next in the series: Customers on top

 

Endnotes:

[1] Barnard, Chester I. The Functions of the Executive. (Harvard University Press: Cambridge, MA), 30th Anniversary Edition, 1968. (Originally published 1938), p. 81.

[2] Ibid., p. 77.

[3] Ibid., p. 71.