Introduction toOrganization Theory

What is Theory?

• Theory is: “a plan or scheme existing in the mind only, but based on principles verifiable by experiment or observation” (Funk & Wagnalls page 1302

• ).

What is an Organization?

• “Organizations are social entities that are goal-oriented; are designed as deliberately structured and coordinated activity systems, and are linked to the external environment” (Daft, 2004).

Definition of Organization Theory

• Organization theory: is the set of propositions (body of knowledge) stemming from a definable field of study which can be termed organizations science (Kast&Rosenzweig1970).

• The study of organizations: is an applied science because the resulting knowledge is relevent to problem solving or decision making in ongoing enterprises or institutions (Kast&Rosenzweig1970).

Definition of Organization Theory Cont..

• Two things: – Knowledge

• Knowledge generated by practical experience and scientific research

– Solving problems & managing resources (Kast&Rosenzweig1970).

Definition of Organization Theory Cont..

• “It is the application of scientific knowledge in engineering and other forms of technology that has brought such spectacular changes in the material context of our lives over the past century” (Kast&Rosenzweig1970).

Organization theory and Management

• “Management technology stems from organization theory and even more applied in the sense that it focuses on the practice of management in ongoing organizations” (Kast&Rosenzweig1970).

Micro Perspective of Organizations

• Simplifying Assumptions:– Firms viewed as an individual entrepreneur– Profit maximization– Rationality in achieving firm goals– Firms function is to transform inputs into outputs– Staple environment in which firm operates– Concerned only with changes in prices and

quantities of inputs and outputs

Organization Theory from a Historical Perspective

• Throughout history most managers operated strictly on a trial-and-error basis

• The management profession as we know it today is relatively new– wide swings in management approaches over the

last 100 years– parts of each approach have survived and been

incorporated into modern perspectives on management

Evolution Of Management Thought

1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Systematicmanagement

Administrativemanagement

Quantitativemanagement

Systemstheory

Current andfuture revolutions

Scientificmanagement

Humanrelations

Organizationalbehavior

Bureaucracy

Classical Approaches Contemporary Approaches

Contingencytheory

Early Management Concepts And Influences

• Industrial revolution– minor improvements in management tactics produced

impressive increases in production quantity and quality– economies of scale - reductions in the average cost of a unit

of production as the total volume produced increases– opportunities for mass production created by the industrial

revolution spawned intense and systematic thought about management problems and issues

• efficiency• production processes• cost savings

Systematic Management

Systematized manufacturing operations

Coordination of procedures and processes built into internal operations

Emphasis on economical operations, inventory management, and cost control

Beginning of formal management in the United States

Promotion of efficient, uninterrupted production

Ignored relationship between an organization and it environment

Ignored differences in managers’ and workers’ views

Key concepts

Limitations

Contributions

Scientific Management (The Classical Organization Theory)

• Advocated the application of scientific methods to analyze work and to determine how to complete production tasks efficiently

• Four principles– develop a scientific approach for each element of one’s work– scientifically select, train, teach and develop each worker– cooperate with workers to ensure that jobs match plans and principles– ensure appropriate division of labor

• Personalities– Frederick W. Taylor– Frank and Lillian Gilbreth– Henry Gantt

Scientific Management (cont.)

Used scientific methods to determine the “one best way’

Emphasized study of tasks, selection and training of workers, and cooperation between workers and management

Improved factory productivity and efficiency

Introduced scientific analysis to the workplace

Piecerate system equated worker rewards and performance

Simplistic motivational assumptions

Workers viewed as parts of a machine

Potential for exploitation of labor

Excluded senior management tasks

Key concepts

Limitations

Contributions

Administrative Management

• Emphasized the perspective of senior managers• Five management functions

– planning– organizing– commanding– coordinating– controlling

• Fourteen principles of management• Personalities

– Henri Fayol– Chester Barnard– Mary Parker Follet

Administrative Management (cont.)

Fayol’s five functions and 14 principles of management

Executives formulate the organization’s purpose, secure employees, and maintain communications

Managers must respond to changing developments

Viewed management as a profession that can be trained and developed

Emphasized the broad policy aspects of top-level managers

Offered universal managerial prescriptions

Universal prescriptions need qualifications for environmental, technological, and personnel factors

Key concepts

Limitations

Contributions

Human Relations

• Aimed to understand how psychological and social processes interact with the work situation to influence performance

• Hawthorne Studies– Hawthorne Effect - workers perform and react differently

when researchers observe them

• Argued that managers should stress primarily employee welfare, motivation, and communication

• Personalities– Abraham Maslow

Human Relations (cont.)

Productivity and employee behavior are influenced by the informal work group

Cohesion, status, and group norms determine output

Social needs have precedence over economic needs

Psychological and social processes influence performance

Maslow’s hierarchy of need

Ignored workers’ rational side and the formal organization’s contributions to productivity

Research overturned the simplistic belief that happy workers are more productive

Key concepts

Limitations

Contributions

Bureaucracy

• Bureaucratic structures can eliminate the variability that results when managers in the same organization have different skills, experiences, and goals

• Allows large organizations to perform the many routine activities necessary for their survival

• People should be treated in unbiased manner

• Personalities– Max Weber

Bureaucracy (cont.)

Structured network of relationships among specialized positions

Rules and regulations standardize behavior

Jobs staffed by trained specialists who follow rules

Hierarchy defines the relationship among jobs

Promotes efficient performance of routine operations

Eliminates subjective judgment by employees and management

Emphasizes position rather than the person

Limited organizational flexibility and slowed decision making

Ignores the importance of people and interpersonal relationships

Rules may become ends in themselves

Key concepts

Limitations

Contributions

Quantitative Management

• Teams of quantitative experts tackle complex issues facing large organizations

• Helps management make a decision by developing formal mathematical models of the problem

• Personalities– military planners in World War II

Quantitative Management (cont.)

Application of quantitative analysis to management decisions

Developed specific mathematical methods of problem analysis

Helped managers select the best alternative among a set

Models neglect nonquantifiable factors

Managers not trained in these techniques may not trust or understand the techniques’ outcomes

Not suited for nonroutine or unpredictable management decisions

Key concepts

Limitations

Contributions

Organizational Behavior

• Studies management activities that promote employee effectiveness – investigates the complex nature of individual, group, and

organizational processes– Theory X

• managers assume that workers are lazy, irresponsible, and require constant supervision

– Theory Y • managers assume employees want to work and control themselves

• Personalities– Douglas McGregor

Organizational Behavior (cont.)

Promotes employee effectiveness through understanding of individual, group, and organizational processes

Stresses relationships among employees, managers, and work performed

Assumes employees want to work and can control themselves

Increased participation, greater autonomy, individual challenge and initiative, and enriched jobs may increase participation

Recognized the importance of developing human resources

Some approaches ignored situational factors, such as the environment and technology

Key concepts

Limitations

Contributions

Systems Theory

Organization is viewed as a managed system

Management must interact with the environment

Organizational goals must address effectiveness and efficiency

Organizations contain a series of subsystems

There are many avenues to the same outcome

Synergies enable the whole to be more than the sum of the parts

Recognized the importance of the relationship between the organization and the environment

Does not provide specific guidance on the functions of managers

Key concepts

Limitations

Contributions

Contingency Perspective

Situational contingencies influence the strategies, structures, and processes that result in high performance

There is more than one way to reach a goal

Managers may adapt their organizations to the situation

Identified major contingencies

Argued against universal principles of management

Not all important contingencies have been identified

Theory may not be applicable to all managerial issues

Key concepts

Limitations

Contributions

Organizing For Environmental Response (cont.)

• Organizing for customer responsiveness (cont.)– Total Quality Management (TQM) - comprehensive

approach to improving quality and customer satisfaction• characterized by a strong orientation toward internal and external

customers

• involves people across departments in improving all aspects of the business

• requires integrative mechanisms that facilitate group problem solving, information sharing, and cooperation across business functions

– Baldrige award - given to U.S. companies that achieve quality excellence

W. Edwards Deming’s “14 Points” Of Quality

• Create constancy of purpose• Don’t tolerate delays or mistakes• Cease dependencies on mass inspection• Don’t award business on price tag alone• Constantly and forever improve the system of production or service• Institute training and retraining• Institute leadership• Drive out fear• Breakdown barriers among departments• Eliminate slogans, exhortations, and arbitrary targets• Eliminate numerical quotas• Remove barriers to pride in workmanship• Educate your people who should be viewed as assets, not commodities• Provide a structure that enables quality

Organizing For Environmental Response (cont.)

• Organizing for customer responsiveness (cont.)– ISO 9000 - a series of quality standards developed by a

committee working under the International Organization for Standardization

• intended to improve total quality in all businesses• companies that comply with standards entitled to certification

– reengineering - revolutionizes key organizational systems and processes

• based on a vision for how the organization should run• completely overhauls the operation in revolutionary ways

A Dynamic Network

DistributorsSuppliers

Brokers

ProducersDesigners

Macro Perspective of Organizations

• Organizations are open systems– affected by, and in turn affect, their external

environments

• External environment– all relevant forces outside a firm’s boundaries

• relevant - factors to which managers must pay attention

– two elements comprise the external environment• competitive environment - immediate environment

surrounding a firm

• macroenvironment - fundamental factors that generally affect all organizations

Laws andpolitics

Economy

Technology

DemographicsSocialvalues

MacroenvironmentCompetitiveEnvironment

OrganizationSuppliers

NewEntrants

SubstitutesRivals

Buyers

The External Environment

The Macroenvironment• The macroenvironment

– most general elements in the external environment that can potentially influence strategic decisions

– all organizations are affected by the general components of the macroenvironment

• Laws and regulations– impose strategic constraints and provide opportunities– regulators - specific government organizations in a

firm’s more immediate task environment• have the power to investigate company practices and take

legal action to ensure compliance with the laws

The Macroenvironment (cont.)• The economy

– created by complex interconnections among economies of different countries

– important elements include interest rates, inflation rates, unemployment rates, and the stock market

– economic conditions change and are difficult to predict

• Technology– creates new products, advanced production techniques, and

improved methods of managing and communicating– strategies that ignore or lag behind competitors in

considering technology lead to obsolescence and extinction

The Macroenvironment (cont.)

• Demographics– measures of various characteristics of the people comprising

groups or other social units• age, gender, family size, income, education, occupation

– workforce demographics must be considered in formulating human resources strategies

• population growth influences the size and composition of the labor force

– immigration also is a significant factor• increasing diversity of the labor force has both advantages and

disadvantages– must assure equal employment opportunity

The Macroenvironment (cont.)

• Social issues and the natural environment– management must be aware of how people

think and behave• the role of women in the workplace

• providing benefits for domestic partners of employees

• protection of the natural environment

Competitive Environment

• Competitive environment– comprises the specific organizations with

which the organization interacts• Michael Porter - defined the competitive

environment

– successful managers:• react to the competitive environment; and

• act in ways that actually shape or change the competitive environment

Rival firms

Newentrants

Suppliers Customers

Substitutes

Competitive Environment

Competitive Environment (cont.)

• Competitors– competitors within an industry must deal with one another– organizations must:

• identify their competitors• analyze how competitors compete• react to and anticipate competitors’ actions

– competition is most intense:• where there are many competitors• when industry growth is slow• when the product or service cannot be differentiated

Competitive Environment (cont.)

• Threat of new entrants– barriers to entry - influence the degree of threat

• conditions that prevent new companies from entering an industry• include government policy, capital requirements, and brand

identification, cost disadvantages, and distribution channels

• Threat of substitutes– technological advances and economic efficiencies may

result in substitutes for existing products– substitutes can limit another industry’s revenue potential– companies need to think about potentially viable substitutes

Competitive Environment (cont.)

• Suppliers– provide the resources needed for production– powerful suppliers can reduce an organization’s profits

• international labor unions are noteworthy suppliers

– dependence on powerful suppliers is a competitive disadvantage

• power of supplier determined by:– availability of other suppliers from whom to buy

– the number of customers for the supplier’s products

• switching costs - fixed costs buyers face if they change suppliers

– close supplier relationship is the new model for organizations

Competitive Environment (cont.)

• Customers– purchase the products or services the organization offers

• final consumers - purchase products in their final form• intermediate consumers - buy raw materials or wholesale

products before selling them to final consumers

– customer service - giving customers what they want, the way they want it, the first time

– disadvantageous to depend too heavily on powerful customers

• powerful customers make large purchases and/or have other suppliers