What Is Theory of

Organization?
1 Group
st
Basic Definitions
1. Organization – a consciously coordinated social entity with a
relatively identifiable boundary that functions on a relatively
continuous basis to achieve a common goal or set of goals.
2. Organization structure – the degree of complexity, formalization and
centralization in an organization
3. Organization design – the construction and change of an
organization’s structure
4. Organization theory – the discipline that studies the structure and
design of organizations

Robbins and Barnwell, 2nd ed. 2001

Organization Theory vs Organizational Behavior

Organizational Behavior – a micro view, emphasizing individuals and small groups. It focuses on the
behavior in organization and on a narrow set of employee performance and attitude variables such
as:
- employee productivity
- absenteeism
- turnover and job satisfaction

Organization Theory – a macro perspective, focusing on behavior of organizations such as:

- organizational effectiveness
- organization’s ability to adapt and achieve it goals
Why study theory of organization?

Organizations are dominant form of institutions in our society – hospitals where

you were born, schools that educate you, shops where we buy food, companies
that make cars, and people that collect income tax, collect garbage, provide for our
defense, and print daily newspapers.

We study theory of organization because we want to pursue a career in

management, to know how organizations operate, to have knowledge based on
scientific evidence, or use it to construct and change organization structure to
achieve organizational goals.
10 different ways of looking at organizations
1. Rational entities in pursuit of goals – organizations exist to achieve goals, and he behavior or organizational members can be
explained as the rational pursuit of those goals.
2. Coalitions of powerful constituencies – organizations are made up of groups, each of which seeks to satisfy its own self-interest.
These groups use their power to influence the distribution of resources within the organization.
3. Open systems – they are input-output transformation systems that depend on their environment for survival.
4. Meaningful-producing systems – they are artificially created entities. Their goals and purposes are symbolically created and
maintained by management.
5. Loosely coupled systems – they are made up of relatively independent units that can pursue dissimilar or even conflicting goals.
6. Political systems – they are composed of internal constituencies that seek control over the decision process in order to enhance
their position.
7. Instruments of domination – they place in job “boxes” that constrain what they can do and with whom they can interact. Also,
they are given a boss who has authority over them.
8. Information-processing units – they interpret their environment, coordinate activities and facilitate decision making by
processing information horizontally and vertically through a structural hierarchy.
9. Psychic prisons – they constrain members by constructing job descriptions, departments, divisions, and standards of acceptable
and unacceptable behaviors. When accepted by members, they become artificial barriers that limit choices.
10. Social contracts – they are composed of sets of unwritten agreements whereby members perform certain behaviors in return
for compensation.
Life cycle perspective of organization

- Organizations are born, grown and eventually die (though it may take a
hundred years or more)
- New organizations are formed daily at the same hundreds of
organizations close their doors each day never to open again.
- This is the birth and death phenomenon especially among small business.
- This is the biological metaphor or organizations proceeding through life-
cycle stages.
- Like human beings, organizations are born, live and die. Like human
beings, some develop faster than others and some do a better job of
ageing than others.
Review and Discuss (To be answered individually)

1. Are all groups organizations? Discuss.

2. Is a small business with only two or three employees, an
organization? Discuss.
3. Is organizational decline inevitable? Defend your position.
4. Are death rates of public sector organizations lower than those of
their private counterparts? If so, what does this suggest in terms of
organizational life cycles?
2 Group
nd
Evolution of Organization Theory (Pre-20th century)

Type 1 Theorists Type 3 Theorists

- Frederick Taylor and scientific management - Herbert Simon and the principles backlash
- Henri Fayol and principles of organizations - Katz and Kahn’s environmental perspective
- Max Weber and bureaucracy - The case for technology
- Ralph Davis and rational planning - The Aston Group and organization size

Type 2 Theorists Type 4 Theorists

- Elton Mayo and the Hawthorne studies - March and Simon’s cognitive limits to rationality
- Chester Barnard and co-operative systems - Pfeffer’s organizations as political arenas
- Douglas McGregor: Theory X and Theory Y
- Warren Bennis and the death of bureaucracy
 Organizational Effectiveness

• What are the importance of organizational effectiveness

Organizational effectiveness criteria

- overall effectiveness - motivation - Information management and

- morale communication
- productivity - Readiness
- control
- efficiency - conflict/cohesion - utilization of environment
- profit - flexibility/adaptation - evaluation by external entities
- quality - planning and goal setting - stability
- accidents - goal consensus - value of human resources
- growth - international of organizational - participation and shared influence
goals - Training and development emphasis
- absenteeism
- role and norm congruence - Achievement emphasis
- turnover
- managerial interpersonal skills
- job satisfaction

Campbell, John P. On the Nature of

Organizational Effectiveness
Effectiveness dimensions for insurance companies
• Business volume: number and value of policies sold related to size of agency
• Production cost: cost per unit of sales volume
• New-member productivity: productivity of agents having less than 5 years’ tenure
• Youthfulness of members: productivity of members under 35 years of age
• Business mix: combination of three conceptually unrelated performance indices,
interpreted as reflecting the ability of agencies to achieve high overall performance
through any of several strategies
• Workforce growth: relative and absolute change in workforce levels
• Devotion to management: sales commissions earned by agency managers
• Maintenance cost: cost of maintaining accounts
• Member productivity: average new-business volume per agent
• Market penetration: proportion of potential market being exploited
Effective measures of systems for different types of
organizations

Business Firm Hospital College

Return on Investment Total number of patients treated Number of faculty publications
Inventory Turnover Capital investment in medical Cost of information systems
technology

Sales volume Total number of patients treated Number of students graduated

Change in working capital Change in number of patients Change in student enrolment
treated

Evan, William Organization Theory and

Organizational Effectiveness: An exploratory
analysis.
Case 2. The Virtual Corporation (p.1)

Many problems faced by business seem to be depressingly familiar. If you run a big complex company you battle
every day to get things done faster. If you run a small one, you often struggle to find the resources to make a
difference.
In today’s world to global market and fierce competition, the windows of opportunity are often frustratingly brief.
Few companies boast the in-house expertise to quickly launch diverse and complex products in different markets.
These organizational problems have led to the development of what has been termed the virtual corporation – the
corporation which is not a corporation. The virtual corporation is a temporary network of independent companies
– suppliers, customers and even erstwhile -rivals linked by information technology to share skills, costs and access
to one another’s markets. It has neither central office nor organizational chart. It has no hierarchy and no vertical
integration.
The virtual corporation‘s proponents claim that this evolving corporate model will be fluid and flexible. It will
quickly unite participants to exploit a specific opportunity. Once that opportunity is met, most often the group will
disband.
In its purest form, each company that links with others to create a virtual corporation will be stripped to its
essence. It will contribute only what it regards as its core competencies. It will mix and match what it does best
with the best of other companies competencies. A manufacturer will manufacture while relying on a production
design outfit to decide what to make and on marketing company to sell it. Proponents of the virtual corporation
claim that there is just not enough time or talent do to everything any more. Apart from that, technologies are
changing so fast that no one company can keep up with every technology it uses.
Case 2. The Virtual Corporation (p.2)

There is nothing new about the virtual corporation. Firms in such industries as construction, film making,
engineering, consulting and finance have come together for years for specific projects. The difference
now is that the evolving virtual corporation has developed to gain access to new markets and
technologies. The large scale downsizing which has occurred in most large organizations has seen a great
reduction in the number middle managers and management layers; however, it has essentially left the
basic structures intact. The virtual corporation is acting to blur the traditional hierarchical boundaries. It
also involves customers in helping to create and develop new products and services, and even
competitors are embracing each other to enter new markets or make products they cannot produce scale
without mass. Ultimately, it may be difficult to determine where one company begins and another ends.
New communication technology has allowed the development of the virtual corporation. The so-called
national information structure, using fax, computer linkages, video-conferencing and telephone, allow far-
flung units of different companies to quickly locate suppliers, designers and manufacturers through an
information clearing house. One theorist has even suggested that once organizations are connected using
such an infrastructure, they will sign electronic contracts to speed link-ups without legal complications.
New technology will allow teams of people in different companies to routinely work together,
concurrently rather than sequentially, via computer networks in real time. Artificial intelligence and
sensing devices will connect engineers directly to the production line.
Case 2. The Virtual Corporation (page 3)

From a management point of view, new management skills will need to be learned. Managers will have to build relationships, negotiate
“win-win” deals, find the right partners with compatible goals and values and provide the temporary organization with the right
balance of freedom and control. Some commentators are even suggesting that a new senior position be created, called “general
manager for external relations’, to oversee the many link-ups which are envisaged in this type of organization. Among other things, a
person in this position would monitor the outflow of technology to make sure that the company did not inadvertently lose its capacity
to compete.
The virtual corporation has its obvious drawbacks, however. Companies joining such networks lost control of the functions they cede to
their partners, who may not produce as expected. Proprietary information or technology may escape. The structure will also present
difficult new challenges for managers, who must learn to build trust with outsiders and manage beyond their own walls. Others are
wary of the idea because it conjures up ideas of “hollow corporation,” a term coined to describe a company that has increased profits
by abandoning manufacturing ad has sourced production in low-wage countries.
Most of the examples of successful virtual corporations are in what may be loosely termed high-tech industries. Apple computers is an
obvious example. It has used strategic alliances ever since its inception, and that is one reason it has an exceptionally high ratio of sales
to employee. Lacking the capacity to produce the entire line of notebook computers, Apple turned to Sony to manufacture the least
expensive versions. It was an obvious marriage of Apple’s easy-to-use software with Sony’s manufacturing skills in miniaturization.
Corning, a manufacturer or ceramic-based products, has nineteen partnerships along virtual corporation lines. It claims that the
partnerships have allowed it to develop and sell new products faster, providing size and power without the bulk. The managing director
of Corning claims that technology is developing so fast that nobody can be in front in every area any more.
Although there are some strong believers in the concept of virtual corporation amongst practicing business people, much of the
popularization of the concept has come from observers and academics. Implicit in their support in the virtual corporation is criticism of
what they term “obsolete” structures of the bureaucratic kind, deeming them inefficient ways of organizing. The fact is, however, that
strategic alliances of one form or another have been gaining in popularity over the thirty years. Perhaps Adopted
the virtual
from corporation is a
Virtual Corporation,
natural extension of this trend. Business Week, 1993
Questions:

1. What environmental factors have led to the development of the concept of the virtual
corporation?
2. Have the strong points of the virtual corporation been overstated and the weak points
glossed over?
3. Given that the virtual corporation needs some co-ordination, what replaces the
traditional co-ordinating mechanisms which exist in large corporation?
4. What is a better incubator of new organizational structures –business people
attempting to solve problems or academics and other proposing new forms? Support
your answer.
5. How can you apply the population-ecology point of view to assessing the longevity of
the virtual corporation as a concept.
6. Can the virtual corporation be used to advantage in all industries? Why or why not?
3 Group
rd
The acceptance of goals and strategy as determinants of an
organization’s structure was founded on assumptions inherent in
classical ECONOMIC theory:

1. The organization has a goal or goals toward which it drives.

2. It moves towards its goals in a “rational” manner.
3. The organization exists to transform economic inputs to outputs.
4. The environment within which the organization operates is a given.
What is strategy?
Goals refer to end.
Goal-attainment approach states that an organization’s
effectiveness must be appraised in terms of the accomplishments of
ends rather than means.
Strategy refers to both means and ends.
It can be defined as the determinants of the basic long-term goals
and objectives of an enterprise, and the adoption of courses of action
and allocation o fresources for carrying out these goals.
Strategic Dimensions
Chandler’s Strategy – changes in corporate strategy preceded and led
to changes in organization’s structure
Contemporary Strategy of Miles and Snow – on the basis of the rate
they change their products or markets, organizations were classified as:
1) defenders, 2) prospectors, 3) analyzers, 4) reactors
Porter’s competitive Strategy – argues that no firm can successfully
perform at an above-average level by trying to all things to all people
Miller’s integrative framework – involves 4 strategy dimensions 1)
innovation, 2) marketing differentiation, 3) breadth, 4) cost control
Case No. 3
Since the early 1980s, Australian business has undertaken considerable overseas expansion. Until that time virtually no
company had any major overseas operations. In the 1970s, BHP undertook a program of overseas expansion because it
felt that Australia should have at least one company operating internationally. If companies wanted to expand they only
considered expanding within Australia. The normal way to do this was to move horizontally into unrelated or barely
related industries, forming what were called conglomerates. This was inline with the current worldwide fashion for
operations to be diversified, and was also partly imposed by the more rudimentary communications systems of the day.
However, by the end of the 1970s, our own and other economies were starting to open up after years of government
control, protection and regulation. Also the jumbo jet had reduced the cost of cost of travel and large-scale and
inexpensive data transmission because common. Fashions in business also changed. The conglomerate with its unrelated
product range struggled to give an adequate return on the assets. The emphasis was now on identifying competitive
advantage and expertise in a few core products and building extensive businesses around them.
As Australia has a small internal market with a high cost base, this generated particular problems. Large-scale
manufacturing exports at that time were not feasible. Business’s response was to take the expertise in core products into
overseas markets by either buying or setting up subsidiaries in other countries. During the 1980s this lead to the
“Australia model of business.” This model is illustrated by firms such as Boral, which has extensive interests in building
materials in Australia, Europe, US and Asia. The building material industry is characterized by the need to produce close
to the final customer. One of the competitive advantages that the strategy developed by Boral gives is that innovations
developed in one plant an be quickly transferred to another anywhere in Boral’s network of companies. Similarly, if a
company is taken over, one of the first groups of people entering the plant are Boral’s production people, both to look for,
and to impart, more productive ways of doing things. In this way, a competitive advantage in many markets may be
gained over smaller-scale competitors.
Similar strategies have been used by CSR with its building material divisions, Burns Philp with its
yeast manufacturing, TNT and Brambles with their transport system, BHP, CRA and others with
mining and oil extraction technology, Pacific Dunlop with clothing and latex rubber products, Amcor
with packaging and Goodman Fielder with baked products. Fletcher Challenge in New Zealand had
undertaken similar expansion in the pulp and paper industry.
Most of the overseas subsidiaries are run on a decentralized basis in accordance with procedures
and parameters laid down by the head office. There is normally an Australian manager overseeing
the operation, but most of the management team is composed of local staff. There is often a board
of management covering each major geographical area, which is composed of people familiar with
the business systems in the country of operation. The local boards exist mainly to give advice. Each
factory is normally is a profit center, and the profit and loss figures are agglomerated into results for
each country and each product range. Common trademarks, logos and colors are normally
specified. A balance is sought between having too loose a structure, which allows local companies
to deviate from the plans set down by head office, and having too tight a structure, which does hot
allow for local variations in laws and marketing opportunities.
Questions: ( Group 3)

1. In the above case, has strategy followed structure, or has structure followed
strategy? Give evidence supporting your position.
2. Although the overseas expansion of some of the companies mentioned in the
case (e.g. CSR) has not been particularly profitable by most measures, most of
them would be described as successful. What does this tell us of strategy-
structure fit? Have the companies been successful because of their structure
or their strategy? What others factors could influence the success of their
overseas expansion and how can these be managed?
3. What characteristics may be exhibited by organizations which have a mismatch
between their strategy and structure?
4 Group
th
Organization Size and Technology
Size-Structure Relationship
* Size and Complexity
* Size and Formalization
* Size and Centralization