CHAPTER 1
ORGANIZATIONS AND ORGANIZATION THEORY
Introduction
Theory/ˈTHēərē/
Noun: A supposition or a system of ideas intended to explain something, esp. one based on
general principles independent of the thing to be...: "Darwin's theory of evolution"
A set of principles on which the practice of an activity is based: "a theory of education"; "music
theory".
A ‘theory’ is essentially an idea or an explanation which has not yet been universally proved
‘in practice’; it is a conjecture or speculation as opposed to practice; it might be an “ideal”,
or a hypothetical or abstract situation.
These are the topics with which organization theory is concerned. Organization theory concepts
apply to all types of organizations in all industries.
b Organizational theory is a study of how organizations function and how they affect and
are affected by the environment in which they operate.
b OT consists of three parts viz:
• Organizational structure
• Organizational design
• Organizational culture
1.1. ORGANIZATION THEORY IN ACTION
Organization theory gives us the tools to analyze and understand how a huge, powerful firm like
can die and a company can emerge almost overnight as a giant in the industry. It enables us to
comprehend how a band originations, which operates like a highly sophisticated global business
organization, can enjoy phenomenal success for nearly half a century, while some musical
groups with equal or superior talent don’t survive past a couple of hit songs. Organization theory
helps us explain what happened in the past, as well as what may happen in the future, so that we
can manage organizations more effectively.
These are the topics with which organization theory is concerned. Organization theory concepts
apply to all types of organizations in all industries.
CURRENT CHALLENGES
Some specific challenges today’s managers and organizations face are globalization, intense
competition, rigorous ethical scrutiny, the need for rapid response, the digital workplace, and
increasing diversity.
Globalization:-The cliché that the world is getting smaller is dramatically true for today’s
organizations. With rapid advances in technology and communications, the time it takes to exert
influence around the world from even the most remote locations has been reduced from years to
only seconds. Markets, technologies, and organizations are becoming increasingly
interconnected. Today’s successful organizations feel “at home” anywhere in the world.
Companies can locate different parts of the organization wherever it makes the most business
sense: top leadership in one country, technical brainpower and production in other locales.
Intense Competition: - This growing global interdependence creates new advantages, but it also
means that the environment for companies is becoming extremely competitive. Customers want
low prices for goods and services. Companies in all industries are feeling pressure to drive down
costs and keep prices low, yet at the same time they are compelled to invest in research and
development or get left behind in the global drive for innovation.
Ethics and Social Responsibility: - Today’s managers face tremendous pressure from the
government and the public to hold their organizations and employees to high ethical and
professional standards. Following widespread moral lapses and corporate financial scandals,
organizations are under scrutiny as never before.
Speed and Responsiveness: - A third significant challenge for organizations is to respond
quickly and decisively to environmental changes, organizational crises, or shifting customer
expectations. For much of the twentieth century, organizations operated in a relatively stable
environment, so managers could focus on designing structures and systems that kept the
organization running smoothly and efficiently. There was little need to search for new ways to
cope with increased competition, volatile environmental shifts, or changing customer demands.
Today, globalization and advancing technology have accelerated the pace at which organizations
in all industries must roll out new products and services to stay competitive. Today’s customers
want products and services tailored to their exact needs, and they want them now.
The Digital Workplace: - Many traditional managers feel particularly awkward in today’s
technology-driven workplace. Organizations have been engulfed by information technology that
affects how they are designed and managed. In today’s workplace, many employees perform
much of their work on computers and may work in virtual teams, connected electronically to
colleagues around the world. In addition, rather than competing as independent entities,
organizations are becoming enmeshed in electronic networks. More and more of today’s
business takes place by digital processes over a computer network rather than in physical space.
Some companies have taken e-business to very high levels to achieve amazing performance.
Diversity:- As organizations increasingly operate on a global playing field, the workforce—as
well as the customer base—grows increasingly diverse. Many of today’s leading organizations
have an international face. This growing diversity brings a variety of challenges, such as
maintaining a strong corporate culture while supporting diversity, balancing work and family
concerns, and coping with the conflict brought about by varying cultural styles.
1.2. WHAT IS AN ORGANIZATION?
Organizations are hard to see. We see outcroppings, such as a tall building, a computer
workstation, or a friendly employee, but the whole organization is vague and abstract and may be
scattered among several locations, even around the world. We know organizations are there
because they touch us every day. Indeed, they are so common that we take them for granted.
Definition
Organizations as diverse as a bank, a corporate farm, a government agency, and Xerox
Corporation have characteristics in common. The definition used in this book to describe
organizations is as follows: organizations are (1) social entities that (2) are goal-directed, (3) are
designed as deliberately structured and coordinated activity systems, and (4) are linked to the
external environment. The key element of an organization is not a building or a set of policies
and procedures; organizations are made up of people and their relationships with one another. An
organization exists when people interact with one another to perform essential functions that help
attain goals. Recent trends in management recognize the importance of human resources, with
most new approaches designed to empower employees with greater opportunities to learn and
contribute as they work together toward common goals. Managers deliberately structure and
coordinate organizational resources to achieve the organization’s purpose. However, even though
work may be structured into separate departments or sets of activities, most organizations today
are striving for greater horizontal coordination of work activities, often using teams of employees
from different functional areas to work together on projects. Boundaries between departments, as
well as those between organizations, are becoming more flexible and diffuse as companies face
the need to respond to changes in the external environment more rapidly. An organization cannot
exist without interacting with customers, suppliers, competitors, and other elements of the
external environment. Today, some companies are even cooperating with their competitors,
sharing information and technology to their mutual advantage.
Importance of Organizations
Organizations are all around us and shape our lives in many ways. But what contributions do
organizations make? Why are they important? The seven reasons organizations are important to
you and to society.
Organizations exist to do the following:
1. Bring together resources to achieve desired goals and outcomes
2. Produce goods and services efficiently
3. Facilitate innovation
4. Use modern manufacturing and information technologies
5. Adapt to and influence a changing environment
6. Create value for owners, customers, and employees
7. Accommodate ongoing challenges of diversity, ethics, and the motivation and
coordination of employees
1.3. PERSPECTIVES ON ORGANIZATIONS: OPEN SYSTEMS AND
ORGANIZATIONAL CONFIGURATION.
3.1.1 OPEN SYSTEMS
According to open-systems views, organizations constantly interact with their environments. In
fact, they need to structure themselves to deal with forces in the world around them. An open
system is often considered consisting of five basic elements: inputs, a transformation process,
outputs, feedback, and the environment.
1.3.2. ORGANIZATIONAL CONFIGURATION.
Another important insight from organization design researchers is how organizations are
configured—that is, what makes up an organization’s parts and how do the various parts fit
together?
Mintzberg’s Organizational Types
One framework proposed by Henry Mintzberg suggests that every organization has five parts.
These parts, illustrated in Exhibit 1.6, include the technical core, top management, middle
management, technical support, and administrative support.
Technical Core. The technical core includes people who do the basic work of the organization.
This part actually produces the product and service outputs of the organization. This is where the
primary transformation from inputs to outputs takes place. The technical core is the production
department in a manufacturing firm, the teachers and classes in a university, and the medical
activities in a hospital.
Technical Support. The technical support function helps the organization adapt to the
environment. Technical support employees such as engineers, researchers, and information
technology professionals scan the environment for problems, opportunities, and technological
developments. Technical support is responsible for creating innovations in the technical core,
helping the organization change and adapt.
Administrative Support. The administrative support function is responsible for the smooth
operation and upkeep of the organization, including its physical and human elements. This
includes human resource activities such as recruiting and hiring, establishing compensation and
benefits, and employee training and development, as well as maintenance activities such as
cleaning of buildings and service and repair of machines.
Management. Management is a distinct function, responsible for directing and coordinating
other parts of the organization. Top management provides direction, planning, strategy, goals,
and policies for the entire organization or major divisions. Middle management is responsible for
implementation and coordination at the departmental level. In traditional organizations, middle
managers are responsible for mediating between top management and the technical core, such as
implementing rules and passing information up and down the hierarchy.
In real-life organizations, the five parts are interrelated and often serve more than one function.
For example, managers coordinate and direct parts of the organization, but they may also be
involved in administrative and technical support.
Mintzberg proposed that the five parts could fit together in five basic types of organization, as
illustrated in Exhibit 1.7. The five configurations are entrepreneurial structure, machine
bureaucracy, professional bureaucracy, diversified form, and adhocracy. The five organizational
parts vary in size and importance in each type.
This difference is related to the differences in size, goals, and other characteristics of the
organization.
1. Entrepreneurial Structure. The organization with an entrepreneurial structure, as shown in
Exhibit 1.7(a), is typically a new, small start-up company. It consists mainly of a top manager
and workers in the technical core. The organization is managed and coordinated by direct
supervision from the top rather than by middle managers or support departments. Top
management is the key part of the structure. Few support staff are needed. The primary goal of
the organization is to survive and become established in its industry. There is little formalization
or specialization. This form is suited to a dynamic environment because the simplicity and
flexibility enable it to maneuver quickly and compete successfully with larger, less adaptable
organizations.
2. Machine Bureaucracy. The machine bureaucracy in Exhibit 1.7(b) is very large, typically
mature, and the technical core is often oriented to mass production. It has fully elaborated
technical and administrative departments, including engineers, market researchers, and financial
analysts who scrutinize, routinize, and formalize work in the high-volume production center. The
narrow middle management area reflects the tall hierarchy for control. This form reflects
extensive formalization and specialization, with a primary goal of efficiency. This form is suited
to a simple, stable environment. It would not do well in a dynamic environment because the
bureaucracy is not adaptable.
3 Professional Bureaucracy. The distinguishing feature of the professional bureaucracy in
Exhibit 1.7(c) is the size and power of the technical core, which is made up of highly skilled
professionals, such as in hospitals, universities, law firms, and consulting firms. The technical
support staff is small or nonexistent, because professionals make up the bulk of the organization.
A large administrative support staff is needed to support the professionals and handle the
organization’s routine administrative activities. The primary goals are quality and effectiveness,
and although there is some specialization and formalization, professionals in the technical core
have autonomy. Professional organizations typically provide services rather than tangible goods,
and they exist in complex environments.
4. Diversified Form. Organizations with a diversified form are mature firms that are extremely
large and are subdivided into product or market groups, as shown in Exhibit 1.7(d). There is a
relatively small top management and a small technical support group for the top level. There is a
larger administrative support staff to handle paperwork to and from the divisions. In the exhibit,
four independent divisions are shown below the headquarters, and the bulge across the middle
indicates that middle management is key. Each of the independent divisions illustrates a machine
bureaucracy with its own technical and administrative support staff, but on occasion a division
may resemble the entrepreneurial structure, professional bureaucracy, or even adhocracy. The
diversified form helps to solve the problem of inflexibility experienced by a too-large machine
bureaucracy by dividing it into smaller parts.
5. Adhocracy. The adhocracy develops in a complex, rapidly changing environment. The design
goal is frequent innovation and meeting continually changing needs, as in the aerospace and
defense industries. Exhibit 1.7(e) shows the various parts (middle management, technical, and
administrative support) merged together into an amorphous mass in the middle. The main
structure consists of many overlapping teams rather than a vertical hierarchy. Adhocracies are
usually young or middle-aged and can grow quite large. The organization has professional
employees, and the technical and administrative support staffs are part of the mix of ongoing
innovation teams and projects rather than being placed in separate departments. Employees are
engaged in the administration and support of their own teams. The production center, illustrated
with dashed lines, is separate from the fluid and innovative core above it. If standardized
production is done within the organization, it would occur in this operating core quite separate
from the ongoing innovation in the professional center above it. In the professional center, the
adhocracy is decentralized
1.4. DIMENSIONS OF ORGANIZATION DESIGN: STRUCTURAL AND
CONCEPTUAL.
Organizations shape our lives, and well-informed managers can shape organizations. The first
step for understanding organizations is to look at dimensions that describe specific organizational
design traits. These dimensions describe organizations in much the same way that personality
and physical traits describe people.
Organizational dimensions fall into two types: structural and contextual, as illustrated in Exhibit
1.2. Structural dimensions provide labels to describe the internal characteristics of an
organization. They create a basis for measuring and comparing organizations. Contextual
dimensions characterize the whole organization, including its size, technology, environment, and
goals. They describe the organizational setting that influences and shapes the structural
dimensions. Contextual dimensions can be confusing because they represent both the
organization and the environment. Contextual dimensions can be envisioned as a set of
overlapping elements that underlie an organization’s structure and work processes. To
understand and evaluate organizations, one must examine both structural and contextual
dimensions. These dimensions of organization design interact with one another and can
be adjusted to accomplish the purposes listed earlier
.
Structural Dimensions
1. Formalization pertains to the amount of written documentation in the organization.
Documentation includes procedures, job descriptions, regulations, and policy manuals.
These written documents describe behavior and activities. Formalization is often
measured by simply counting the number of pages of documentation within the
organization. Large state universities, for example, tend to be high on formalization
because they have several volumes of written rules for such things as registration,
dropping and adding classes, student associations, dormitory governance, and financial
assistance. A small, family-owned business, in contrast, may have almost no written rules
and would be considered informal.
2. Specialization is the degree to which organizational tasks are subdivided into separate
jobs. If specialization is extensive, each employee performs only a narrow range of tasks.
If specialization is low, employees perform a wide range of tasks in their jobs.
Specialization is sometimes referred to as the division of labor.
3. Hierarchy of authority describes who reports to whom and the span of control for each
manager. The hierarchy is depicted by the vertical lines on an organization chart, as
illustrated in Exhibit 1.3. The hierarchy is related to span of control (the number of
employees reporting to a supervisor). When spans of control are narrow, the hierarchy
tends to be tall. When spans of control are wide, themhierarchy of authority will be
shorter.
4. Centralization refers to the hierarchical level that has authority to make a decision.
When decision making is kept at the top level, the organization is centralized. When
decisions are delegated to lower organizational levels, it is decentralized. Examples of
organizational decisions that might be centralized or decentralized include purchasing
equipment, establishing goals, choosing suppliers, setting prices, hiring employees, and
deciding marketing territories.
5. Professionalism is the level of formal education and training of employees.
Professionalism is considered high when employees require long periods of training to
hold jobs in the organization. Professionalism is generally measured as the average
number of years of education of employees, which could be as high as twenty in a
medical practice and less than ten in a construction company.
6. Personnel ratios refer to the deployment of people to various functions and departments.
Personnel ratios include the administrative ratio, the clerical ratio, the professional staff
ratio, and the ratio of indirect to direct labor employees. A personnel ratio is measured by
dividing the number of employees in a classification by the total number of
organizational employ.
Contextual Dimensions
1. Size can be measured for the organization as a whole or for specific components, such as
a plant or division. Because organizations are social systems, size is typically measured
by the number of employees. Other measures such as total sales or total assets also reflect
magnitude, but they do not indicate the size of the human part of the system.
2. Organizational technology refers to the tools, techniques, and actions used to transform
inputs into outputs. It concerns how the organization actually produces the products and
services it provides for customers and includes such things as flexible manufacturing,
advanced information systems, and the Internet. An automobile assembly line, a college
classroom, and an overnight package delivery system are technologies, although they
differ from one another.
3. The environment includes all elements outside the boundary of the organization. Key
elements include the industry, government, customers, suppliers, and the financial
community. The environmental elements that affect an organization the most are often
other organizations.
4. The organization’s goals and strategy define the purpose and competitive techniques that
set it apart from other organizations. Goals are often written down as an enduring
statement of company intent. A strategy is the plan of action that describes resource
allocation and activities for dealing with the environment and for reaching the
organization’s goals. Goals and strategies define the scope of operations and the
relationship with employees, customers, and competitors.
5. An organization’s culture is the underlying set of key values, beliefs, understandings, and
norms shared by employees. These underlying values and norms may pertain to ethical
behavior, commitment to employees, efficiency, or customer service, and they provide
the glue to hold organization members together. An organization’s culture is unwritten
but can be observed in its stories, slogans, ceremonies, dress, and office layout. The
eleven contextual and structural dimensions discussed here are interdependent. For
example, large organization size, a routine technology, and a stable environment all tend
to create an organization that has greater formalization, specialization, and centralization.
1.5. THE EVOLUTION OF ORGANIZATION THEORY AND DESIGN.
Organization theory is not a collection of facts; it is a way of thinking about organizations.
Organization theory is a way to see and analyze organizations more accurately and deeply than
one otherwise could. The way to see and think about organizations is based on patterns and
regularities in organizational design and behavior. Organization scholars search for these
regularities, define them, measure them, and make them available to the rest of us. The facts
from the research are not as important as the general patterns and insights into organizational
functioning. Insights from organization design research can help managers improve
organizational efficiency and effectiveness, as well as strengthen the quality of organizational
life. One area of insight is how organization design and management practices have varied over
time in response to changes in the larger society.