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Introduction to

Organization 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
• 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
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”
Organization theory and
• “Management technology stems from
organization theory and even more applied
in the sense that it focuses on the practice of
management in ongoing organizations”
Micro Perspective of
• Simplifying Assumptions:
– Firms viewed as an individual entrepreneur
– Profit maximization
– Rationality in achieving firm goals
– Firms function is to transform inputs into
– 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
Evolution Of Management Thought

Classical Approaches Contemporary Approaches

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990

Systematic Administrative Quantitative Systems Contingency Current and

management management management theory theory future revolutions

Scientific Human Organizational

management relations behavior

Early Management Concepts And
• 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
Systematic Management
Key concepts
Systematized manufacturing operations
Coordination of procedures and processes built into internal operations
Emphasis on economical operations, inventory management, and cost

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
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
– cooperate with workers to ensure that jobs match
plans and principles
– ensure appropriate division of labor
Scientific Management (cont.)
Key concepts
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
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
Administrative Management (cont.)
Key concepts
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
Human Relations

• Aimed to understand how psychological and social

processes interact with the work situation to influence
• 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.)
Key concepts
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
• 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.)

Key concepts
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
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.)

Key concepts
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
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
• Personalities
Organizational Behavior (cont.)

Key concepts
Promotes employee effectiveness through understanding of individual,
group, and organizational processes
Stresses relationships among employees, managers, and work
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
Systems Theory
Key concepts
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
Contingency Perspective

Key concepts
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
Organizing For Environmental
Response (cont.)
• Organizing for customer responsiveness (cont.)
– Total Quality Management (TQM) - comprehensive
approach to improving quality and customer
• 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
W. Edwards Deming’s “14 Points”
Of Quality
e constancy of purpose
t tolerate delays or mistakes
e dependencies on mass inspection
t award business on price tag alone
tantly and forever improve the system of production or s
ute training and retraining
ute leadership
e out fear
kdown barriers among departments
inate slogans, exhortations, and arbitrary targets
inate numerical quotas
Organizing For Environmental
Response (cont.)

• Organizing for customer responsiveness

– 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
– reengineering - revolutionizes key
organizational systems and processes
A Dynamic Network

Designers Producers


Suppliers Distributors
Macro Perspective of Organizations
• Organizations are open systems
– affected by, and in turn affect, their external
• 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
The External Environment
Laws and
New Economy
Entrants Buyers

Suppliers Technology
Organization Competitive

Rivals Substitutes Demographics

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
– regulators - specific government
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
• Technology
– creates new products, advanced production
techniques, and improved methods of managing and
The Macroenvironment (cont.)

• Demographics
– measures of various characteristics of the
people comprising groups or other social units
• age, gender, family size, income, education,
– 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
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
• protection of the natural environment
Competitive Environment

• Competitive environment
– comprises the specific organizations with
which the organization interacts
• Michael Porter - defined the competitive
– successful managers:
• react to the competitive environment; and
• act in ways that actually shape or change the
competitive environment
Competitive Environment

Suppliers Rival firms Customers

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
Competitive Environment (cont.)

• Threat of new entrants

– barriers to entry - influence the degree of
• 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
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
Competitive Environment (cont.)
• Customers
– purchase the products or services the organization
• 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
• powerful customers make large purchases and/or have