Because resources are finite, companies must fix priorities and coordinate plans, using one of two fundamentally different approaches: centralized, top-down management; or market mechanisms in which individual agents are free to determine the best use of their own resources. While the former appears much more rational, orderly, and “managed,” and the latter appears potentially out of control and chaotic, it has been clearly established that market mechanisms result in much more efficient resource allocation than central planning.
Despite this evidence against the effectiveness of top-down resource management, most companies continue to organize themselves hierarchically, believing that there is a benefit in giving resource-allocation power to people at the top who have an “overview.” And, indeed, the principle of central and top-down hierarchical control has served many corporations well. But the conditions under which this principle is effective may no longer exist for most corporations in the future.
For central control to be effective, the center must have access to all the information in the company; it must be able to obtain the information quickly and without distortion; and it must be able to comprehend and interpret this information. This presumes that the center can be, and is, more intelligent than the rest of the organization.