Why do organizations exist?

October 5, 2022

Hard to envision a world without organizations!

All dimensions of our lives revolve around some sort of organization – from churches to governments. And that is something positive to society. At the same time, it is hard to imagine an absolutely stable organizational moment. Organizations also evolve naturally – at times, with jumps and starts – in search of survival and relevance.

A little bit more order (Coordination)

Organizations – especially, private companies – are important because they create management mechanisms and structures capable of processing information and coordinating several economic agents at scale. In the face of chaotic and hostile environments, the capacity for organizational coordination is a major differential.

It is a fact that, over time, different coordination models have been implemented and perfected. Others have been discarded. Currently, the organizational reconfiguration agendas also challenge that primordial aspect: how to optimize companies’ capacity for coordination?

In the contemporary environment, the transformations are countless. All of them combine as challenges to the capacity for organizational coordination.

More with less, always (Efficiency)

A true nexus of contracts. So can an organization be defined in economists’ academic viewpoint. With the goal of coordinating countless activities performed by different agents, an organization manages endless transactions, each with their respective costs.

As such, minimizing transaction costs means maximizing organizational efficiency. The transaction costs include the very onus of coordinating productive activities and their tracking system, as well as the observance of property rights and contract negotiation.

Therefore, not only is the organizational complexity related to the very uncertainty and hostility of the external conditions, but to the very dynamic of the contracts underlying the existence of an enterprise. Hence, the search for efficiency is a never-ending journey.

Technology, processes, systems, people and facilities may all be optimized in their combinations as to maximize the productive output against the capital employed. Once the external environment is constantly changing, maximizing efficiency is always a new challenge. Particularly, in the current context of transformations, not only new productive paradigms and new operational models, but also new levels of performance are being ventured into.

A little something else (Well-Being)

It is a fact an organization does not exist solely to maximize the generation of its own results. It is always surrounded by multiple stakeholders, with their diverse agendas of interests, different bargaining powers, and influence networks. It is precisely that tension of forces that defines the potential return on the capital employed adjusted to the degree of risk of an undertaking.

It may be argued that the very existence of an organization is, in a way, a concession of society on behalf of its own well-being. In the case of a private enterprise, for instance, the price system and the cost of capital will define its own financial feasibility.

Therefore, organizations exist to optimize the social well-being of the stakeholders surrounding them. And, exactly for that reason, they bend over backwards to perpetually maximize financial returns to their shareholders, provide a favorable working environment to their associates, delight their customers, establish their value chain, meet society’s overall expectations.

The contemporary lexicon has been emphasizing expressions such as ESG, Diversity and Inclusion, Stakeholders, Customer-Centricity, and Impact. Those and other concepts are not original. Their relevance has simply gained traction in the organizational agenda set in this dynamic force field.

Sides of the same coin (Ambition and Potency)

Coordination. Efficiency. Well-Being.

These are the primordial functions of organizations. The ambition is then drawn from that essential tripod, combining purpose, vision and strategy. Here, strategy is understood as the integration of positioning, business model, and guidelines. Yet, every ambition requires realization.

The degree of organizational potency concerns the critical convergence between culture, design, and capabilities. Therefore, the business success lies just in the exact adjustment between ambition and potency. Something difficult to realize, both for the successive external challenges continually impacting the different layers, and for the internal idiosyncrasies that prevent the perfect alignment of the potency levers.

The constant organizational reconfiguration occurs in both ambition and potency. From the purpose to the very capabilities. Everything is in check in the face of transformational movements.


Daniel Augusto Motta é Managing Partner e CEO da BMI Blue Management Institute. Doutor em Economia pela USP, Mestre em Economia pela FGV-EAESP e Bacharel em Economia pela USP. É Alumni OPM Harvard Business School. Atua também como Managing Partner da corporate venture capital WhiteFox sediada em San Francisco (EUA), como Senior Tupinambá Maverick na content tech Bossa.etc e com Membro do Conselho de Administração da Afferolab. Também atua como Diretor de Planejamento Estratégico da UNIBES e Membro do Conselho Deliberativo do MASP. Foi Membro-Fundador da Sociedade Brasileira de Finanças. Foi Professor nos MBAs da Fundação Dom Cabral, Insper, FGV, ESPM e PUC-SP. É autor de diversos artigos publicados por Valor Econômico, EXAME, VocêSA e Folha de São Paulo, e também tem três artigos publicados pela Harvard Business Review Brasil. É autor dos livros best-sellers A Liderança Essencial, Anthesis e Data Insights.