Rank and Distance in Organizations

Abstract

A formal theory of organizations is developed from the requirement of supervision (in lieu of voluntary exchange). This leads to relationships of authority, chains of command, rank, span of control etc. and generates a metric of internal distance. Distance impinges on the frequency, accuracy and reliability of communication and diminishes the effectiveness of command and control. In principle, this phenomenon, known as loss of control can generate diminishing returns to organizational scale.
Another area of contact between organization theory and spatial economics arises in territorially extended organizations. The spatial characteristics of the region administered rather than purely managerial considerations will then determine spans of control. Depending on how market (or supply) areas are joined, separate locations for different managerial ranks may be needed, or the higher ranks will be placed in office locations of their subordinates (as in a strictly hierarchical Central Place System). The objectives of the organization rather than spatial factors determine which system is preferable.