CHAPTER ONE

ORGANIZATION AND ORGANIZATION THEORY

1.1 Organizational Theory in Action
Did you ever notice that how a small business like McDonalds emerged as one of the most
popular company in a short time span and Nokia, being one of the top most mobile selling brand
collapsed gradually? The answer to this question lies under the subject of organizational theory.
It enables us to comprehend and analyses the success stories of organizations vis-a-vis radical
downfall of others. The penultimate objective of organizational theory is to take a look at
organization and its environment to improve efficiency – examining its past and projecting what
may happen in future.
The entire process of managing organizations effectively requires a serious reflection on few
important questions. These questions are mainly related but not limited to organization’s external
and internal environment, its structural and strategic changes, ethical and financial controls,
bureaucracy and power politics, conflict management and corporate culture. These questions lay
out practical application of organizational theory of which we know as organizational theory in
action.
The following section begins with the concept of organization itself succeeded by an
introduction to organizational design with its various dimensions. Subsequently, it covers
evolution of organizational theory and design and an overview of organizational configuration.
In the end, the chapter differentiates between efficient performance and learning organization to
develop better understanding of organizational theory.
Activity: With your classmates, recall any two organizations that come to your mind and
discuss:
 The possible reasons of downfall of the first
 The important factors that influenced the advancement of the other
1.2. WHAT IS AN ORGANISATION?
Think of an organization for a while. What do you visualize – a squared office, a skyscraper, few
cubicles with computers, a courteous employee or a group at large? Well, it may be all or none,
but the notion of ‘organization’ is discrete and abstract as it is very difficult to visualize an
organization. In our daily lives, we experience several activities originating from several
different sources. A restaurant for example from where you take your breakfast every day, a
college or a university, a grocery store, a clinic or a hospital, a bank and a real estate agency are
all organizations of different kind.
Some organizations are large while some operate at a very micro level. However, all possess one
thing in common – a group of people working for a common objective(s). These objectives may
differ depending upon the purpose and nature of each organization which forms the basis of
organizational design. According to Bratton, Sawchuk, Forshaw, Callinan, and Corbett (2010) an
organization can be defined as an accumulative sum of people who gather on a point and time for

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a common purpose. The focal point of an organization is not a building or certain principles and
procedures, it lies under social relationships and their success in achieving common goals
(Huczynski & Buchanan, 2010). Some of the definitions of organizations are as follows:
Organization is the arrangement of work, with the division of activities and responsibilities.
Organization is the process of combining the work which individuals or groups have to perform
with the facilities necessary for its execution that the duties so performed provide the best
channels for the efficient, systematic, positive and coordinated application of the available effort.
Organization as the arrangement of functions deemed necessary for the attainment of the
objective and is an indication of the authority and responsibility assigned to individuals charged
with the execution of their respective functions.
[Link]. The Nature and Characteristics of Organization
Organization has the following characteristics.
 Organization is a compositions of group of individuals;
 Organization is a work activities under the direction of executive leadership;
 Organization is subjected to dynamic process;
 Organizational outputs are the results of collective efforts of the group; and
 Organization is established to accomplish specific objectives.
The following points are identified as common features of all organizations. These are: a)
Structure, b) Process; c) Relationship; d) Authority and responsibility; e) Performance; and f)
Group behavior;
A).Structure: Organizational structure is a technique used to bring together people and different
work activities. Naturally, structure is viewed as a skeleton around which an organization arms
people with specific relations and authority in order to achieve the desired objectives.
B) Process: In terms of organizational features, process is viewed as a function of management
that operates within the structure. With regard to process, organizational functions are considered
as various organs of the human body which helps to have a means to an end. It breaks down the
entire activities into small and manageable parts and corporate resources in order to achieve
organizational goals.
C) Relationships: is one feature of an organization that enables workers to perform their jobs in
harmony. Organizational relationship is being presented through its structure. The relationship
that exists within the organizational structure can be viewed from different angles. These are;
superior-subordinate relationship (vertical relationship), and superior-superior relationship and
subordinate- subordinate relationship (horizontal relationship).
D) Authority and Responsibility: Organization’s relationships can be effective when there is
proper allocation of authority and responsibility within organizational functions. Authority and
responsibility are ultimately vested on executive and line managers. Authority and responsibility

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are vested on line managers because top managers cannot perform all the jobs at a time.
However, the delegation of authority and responsibility to the lower managers requires the
decision of executive or top managers.
E) Performance: Organizations achieve their goals and objectives through performance.
Effective organizational development programs more achieved when workers are motivated and
encouraged to increase their creativity. Job satisfaction can also be achieved through
organizational performance. Hence, effective organizational performance better achieved when
there is harmonious relationship between members of the organization, and when authority and
responsibility are properly delegated.
F) Group Behavior: Team work within the organization is expressed through group behavior.
As a result group behavior is viewed as team spirit, motivation and performance that help to
achieve new dimensions for organizational development.
Types of organization
There are two different manners, through which the members of the organization form
communication linkage in their personal and group performance, these, manners / types of
organization are called formal organization and informal organization.
1. Formal Organization:
It is characterized by planned structure and represents the patterns of relationship that exists
among components of the organization. Deliberately/ intentional formed by Management.
Formal organization has the following unique features that differentiate it from the informal
organization. Some of these features are:
a. Objectives: Formal organization has defined objectives that facilitates for systematic
achievement of organizational goals.
b. Formal Structure: Formal organization is characterized by hierarchical structure that has
been represented by organizational chart.
c. Perpetual and Specialized Functions: Formal organization has continuous functions that
constantly involve individuals in various activities to be performed. Individuals in an
organization employ their knowledge, skills and experiences in order to carry out their duties and
responsibilities.
2. Informal Organization
Informal organization represents those aspects of organizational system without preplanned and
predetermined objectives.
Major characteristics of formal and informal organizations can be summarized in table one
bellow.

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Table 1: Formal and informal organization: differences and similarities

Aspects Formal Organization Informal Organization

Origin Groups are formed in a Planned Groups have come to being casually
Manner to achieve defined objective and voluntarily

Objectives Groups are formed for Predetermined Groups are formed just to satisfy the
purpose social and psychological needs

Nature Groups are relatively permanent and the groups relatively lack permanency
long lasting in nature and stability
of groups

Authority Delegation goes from top to bottom Every group member has equal rights
or empowered and one may be
accorded with special Position on the
basis of his/her competence or
knowledge

Communication Communication goes from top to Every channel of communication goes

bottom through informal and non-legal basis

Leadership Provided by the Comes out within the members

organization in formal way themselves.

Source: - Kumar & Mittal: Organizational behavior (2001:38).

1.3. Perspectives on organizations: Open Systems and organizational configuration

A. Open system theory was initially developed by Ludwig von Bertanlanffy (1956), a biologist,
but it was immediately applicable across all disciplines. It defines the concept of a system, where
"all systems are characterized by an assemblage or combination of parts whose relations make
them interdependent" (Scott p. 77). As one moves from mechanical to organic and social
systems, the interactions between parts in the system become more complex and variable. The
systems approach was quickly applied to the study of organizations, and with it an
acknowledgment that the environment surrounding and permeating organizations had important
effects on organizational behavior and structure (and vice versa).

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Various "schools" adopted the open systems perspective starting in the 1950's: Selected Schools
Contingency Theory -- optimal organizational structures are contingent on the type of
environments they exist within.

Systems Design -- use modeling and simulation to examine organizational processes and
information flows.

Weick's Theory of Organizing -- organizations exist to reduce uncertainty through information

flows, and the organization is enact through the interpreted meaning of individual actions.

Open system perspectives see organizations both as hierarchical systems and as loosely coupled
systems. Open systems tend to have some semblance of clustering and levels -- multiple
subsystems that specialize in certain system activities. Interdependencies and connections within
a subsystem tend to be tighter than between subsystems. These "stable subassemblies" give a
distinct survival advantage to the entire system.

However, most organizations do not function as tightly run cybernetic systems. Often normative
structures are only loosely connected to actual behavior, at both the individual and group level.
Pfeffer and Salancik note that "The organization is a coalition of groups and interests, each
attempting to obtain something from the collectivity by interacting with others, and each with its
own preferences and objectives "(Pfeffer and Salancik, 1978 p. 36). This loose coupling can be
useful in itself (Weick, 1976) by improving adaptability.
Criticism of Open System
Within open systems thinking there is a strong tendency to think by analogy, which can create
misconceptions and errors as well as insights. It tends to be more abstract as well, and often
merely relables old ideas with a new vocabulary.

B. organizational configuration: There is no one right organizational configuration for all

businesses. The best way to arrange one business could be completely wrong for another, based
on a variety of factors.

The main successful organizational structures that Mintzberg identifies are as follows:

 The Entrepreneurial Organization: This type of organization has a simple, flat structure. It
consists of one large unit with one or a few top managers. The organization is relatively
unstructured and informal compared with other types of organization, and the lack of
standardized systems allows the organization to be flexible.

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A young company that's tightly controlled by the owner is the most common example of this
type of organization. However, a particularly strong leader may be able to sustain an
entrepreneurial organization as it grows, and when large companies face hostile conditions, they
can revert to this structure to keep strict control from the top.

The entrepreneurial organization is fast, flexible, and lean, and it's a model that many companies
want to copy. However, as organizations grow, this structure can be inadequate as decision-
makers can become so overwhelmed that they start making bad decisions. This is when they
need to start sharing power and decision-making. Also, when a company's success depends on
one or two individuals, there's significant risk if they sell up, move on to new entrepreneurial
ventures, or retire.

Decentralization—Mintzberg suggests that the strategy an organization adopts and the extent to
which it practices that strategy result in five structural configurations:

 Simple structure,
 The machine organization (bureaucracy).
 The professional organization.
 The divisional (diversified) organization.
 The innovative organization ("adhocracy").

1.4 Dimensions of Organization Design

Organizations are moldable, more or less, as their size and structure allows. The initial step into
understanding them is to study their features that describe their design characteristics. In this way
you can understand organizations much like you would understand an individual’s personality
and physical abilities. Organizations have two interdependent features: structural dimensions and
contingency factors. Structural dimensions describe those internal organizational characteristics
than help define and measure that which exist by comparison with other organizations. For
instance, a structural dimension would be “size” of, employees, sales, volume, etc. On the other
hand, Contingency factors embrace larger elements that inspire structural dimensions. They are
products of the organizational landscape that effects and shapes structural dimensions. For
instance, the extent in which an organization is centralized could directly affect an organizations
size by limiting or encouraging their manufacturing global presence. In order to understand
organizations and assess their abilities, it is important to study structural dimensions and
contingency factors in detail. Both represent the organization as well as their business landscape.
Further, they overlap because their interdependencies create internal processes and their

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associated structures connect them in order to operate those processes as indicated in Figure 1.

Structural Dimensions in Organizations

Formalization is about the documentation in the organization that serves to provide written
guidance on important matters related to job descriptions, policy manuals, procedures, and the
regulations intended to guide behavior, internal activities, and expectations. Formalization is
easily measured by counting the number of policies and number of pages in them. Obviously the
more written material, the more formalization exists in the organization.
Specialization is simply the ratio of the number of people involved to complete one task. If one
person completes a task there is less specialization, if ten people are needed to complete a task,
there is more narrow specialization. Consider an insurance company that has one person for
assessment, one for submitting reports, one for data entry of the reports into the computer, one
person to validate a claim, one person to decide on action for the claim, one person to pay the
claim. We have six areas of specialization involved in order to complete one task, process a
claim. The competitor might use three people creating less specialization in the name of speedier
customer service.
Hierarchy of Authority is directly related to how flat and fast the organization is designed. A
flatter organization will have a shorter hierarchy and a wider span of control whereas a taller
more layered organization with more management levels will have a narrow span of control as a
result of higher levels of authority.

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Centralization is about where decisions are made. When decision are made only at the top of
the organization the organization in centralized. When decisions are made by empowering lower
levels to make those decisions, the organization is decentralized.

The organization needs to be organized efficiently in order to provide the products and services
that they were intended to provide. For this reason, organizations are important to society at large
and to each of us as individuals depending upon our needs to the services they provide. Take a
look at Figure 2, think about why an organization exists in relation to a favorite product or
service you use, a stock you own, or a utility you rely on. Chances are there are several or
possibly all of the topics surrounding the center you will find of importance.

For instance, perhaps you might think of your favorite tablet you use every day, and find the
tablet maker exists for to deliver the best product for you by: bringing together the best
resources, producing efficiently, being innovative, and using modern manufacturing technology.
However, if you owned their stock, you might add the remaining topics as well because you
might believe that these in summation, might bring the stock price higher and increase value in
your portfolio. Now consider how your customer thinks about your organization. What is
important to them? How does your organization deliver to meet their expectations? Is your
organization owning enough of these seven reasons to attempt to exceed customer expectations?
Is that even important?

I hope that your organization is one that settles for nothing less than dedicated service to exceed
those expectations for your customers. Whatever your line of business may be. Proverbs 22:1
states, “A good name is to be chosen rather than great riches, and favor is better than silver
or gold” (ESV). But really, if your business is working to exceed expectations making the
organization name better by building reputation, creating better services, developing better
products and fulfilling each of the seven reasons in Figure 1 to the fullest, your business is doing

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everything to set itself up for success. I recall a business owner I talked to once who left me with
this simple thought and so I leave it to you. He said, “If you are doing the right things for the
right reasons God will bless your business and it will succeed”.

Organizational structure determines, organizes, and coordinates all organizational activities

(9). ... These dimensions create a basis for measuring and comparing organizations. On the other
hand, contextual dimensions are composed of goals, strategies, environment, culture, size, and
technology.
Classification of Contextual Dimensions
Contextual dimensions Classification
Goals and strategies well-defined goals-goals not defined
Environment unstable environment-stable environment
Organizational culture clear norms and values-ambiguous norms and values
Technology high effect of technology-low effect of technology
Size large size-small size
Contextual dimensions characterize the whole organization and describe the organizational
setting.
Size is the organization's magnitude as reflected in the number of people in the organization;
Organizational technology refers to the tools, techniques, and actions used to produce the
organization's products or services;
Environment includes all elements outside the boundary of the organization;
Goals and strategy define the purpose and competitive techniques that set it apart from other
organizations;
Organizational Culture is the underlying set of key values, beliefs, understandings, and norms
shared by employees.
NB: Please identify an organization you have worked for and discuss the 5 contextual
dimensions of the organization.
1.5. The evolution of organization theory
Early contributions
Ideas about organizational structure go back as far as the Bible and the Roman Empire. For a
long time, the largest organizations were associated with the church and the army: Induction of
embers  Socializing  Discipline & Conformance  Ranking according to level of responsibility
 Pyramid-shaped organizations.
18th century: division of labor
Adam Smith: economic advantages of division of labor / specialization.
19th century: emergence of mass production and introduction of railways  massive implications
for organization theory. Both required revolutionary management systems.
From 1900 to the 1930s – early management theories
Need to reduce production costs leading to improving efficiency. Achievement of rational goals
with closed system perspective. Focus of analysis was work practices. Social factors complicated

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the management of organizations, such as industrial unrest, political change, wars and
depressions.
Frederick Taylor: mechanical engineer by training.
Scientific management: achieve production efficiencies by systematizing and standardizing jobs
to achieve the ‘one best way’ they should be done.
Four principles of scientific management:
1. Replacement of inexact methods for determining each element of a worker’s job with
scientific determination.
2. Scientific selection and training of workers.
3. Cooperation of management and labor to accomplish work objectives, in accordance with the
scientific method.
4. More equal division of responsibility between managers (planning and supervising) and
workers (execution).
Workers’ criticism: shift in power from worker to manager
Scientific criticism: limited focus. He merely focused on the lowest level of the organization.
HENRY FAYOL PRINCIPLES
Principles of organization: 14 universally applicable principles a manager should perform
Fayol focuses more on the problems of management, whereas Taylor focused on improving
efficiency.
1. Division of Work
Dividing the full work of the organization among individuals and creating departments is called
the division of work. Division of work leads to specialization, and specialization helps to
increase efficiency and efficiency, which results in improvements in the productivity and
profitability of the organization.
2. Balancing Authority and Responsibility

Authority must be equal to responsibility. According to Henri Fayol, there should be a balance
between Authority (Power) and Responsibility (Duties). The right to give orders should not be
considered without reference to responsibility. If the authority is more than responsibility, then a
manager may misuse it. If responsibility is more than authority, then he may feel frustrated.

3. Discipline
Outward marks of respect in accordance with formal or informal agreements between a firm and
its employees. Discipline means respect for the rules and regulations of the organization.
Discipline may be Self-discipline, or it may be Enforced discipline. No slacking or bending of

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rules, not allowed in any organization. The workers must respect the rules that run the
organization. To establish discipline, good supervision and impartial judgment are needed.
4. Unity of Command
According to this principle, a subordinate (employee) must have and receive orders from only
one superior (boss or manager). To put it another way, a subordinate must report to only one
superior. This decreases the possibility of “Dual subordination,” which creates a problem in
managers’ functions. It helps in preventing dual subordination.
5. Unity of Direction

One head and one plan for a group of activities with the same objective. One manager must
direct all activities which have the same objective, and he must use one plan. This is called the
Unity of Direction. For example, all marketing activities, such as advertising, sales promotion,
pricing policy, etc., must be directed by only one manager. He must use only one plan for all the
marketing activities. Unity of direction means activities aimed at the same objective should be
organized so that there are one plan and one person in charge.

6. Subordination of Individual Interests to the General Interest

The interest of one individual or one group should not prevail over the general good. The
individual interest should be given less importance, while the general interest should be given the
most importance. If not, the organization will collapse. The interest of the organizational goal
should not be sabotaged by the interest of an individual or of the group.

7. Remuneration

Remuneration is the price for services received. Pay should be fair to both the employee and the
firm. If an organization wants efficient employees and the best performance, then it should have
a good remuneration policy. This policy should give maximum satisfaction to both employers
and employees. It should include both financial and non-financial incentives. Compensation
should be based on a systematic attempt to reward good performance.

8. Centralization

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It is always present to a greater or lesser extent, depending on the size of the company and the
quality of its managers. In centralization, the authority is concentrated only in a few hands.
However, in decentralization, the authority is distributed to all levels of management. No
organization can be completely centralized or decentralized. If there is complete centralization,
the subordinates will have no authority (power) to carry out their responsibilities (duties).
Similarly, if there is complete decentralization, the superior will have no authority to control the
organization. Therefore, there should be a balance between centralization and decentralization.
The degree to which centralization or decentralization should be adopted depends on the specific
organization, but managers should retain final responsibility but should give subordinates enough
authority to do the tasks successfully.
9. Scalar Chain
The chain of command, sometimes called the scalar chain, is the formal line of authority,
communication, and responsibility within an organization. The chain of command is usually
depicted on an organizational chart, which identifies the superior and subordinate relationships in
the organizational structure. Or it is the line of authority from top to bottom of the organization.
This chain implements the unity-of-command principle and allows the orderly flow of
information. Under the unity of command principle, the instructions flow downward along the
chain of command, and accountability flows upward. More clear-cut the chain of command,
the more effective the decision-making process and the greater the efficiency.
10. Order
A place for everything’s and, everything’s in its place and the right man in the right place. There
should be an Order for materials/things and people in the organization. Order for things is called
Material Order, and order for people is called ‘Social Order. Material Order refers to “a place for
everything and everything in its place.” Social Order refers to the selection of the “right man in
the right place.” Human and material resources must be in the right place at the right time. There
must be an orderly placement of the resources such as men and women, money, materials, etc.
Misplacement will lead to misuse and disorder.
11. Equity

While dealing with the employees, a manager should use kindliness and justice towards
employees equally. Equity is a combination of kindness and justice. It creates loyalty and

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devotion in the employees toward the organization. The equity principle suggests that managers
must be kind as well as equally fair to their subordinates.

12. Stability of Tenure of Personnel

Although it could take a lot of time, employees must be given fair enough time to settle into their
jobs. An employee needs time to learn his job and to become efficient. The employees should
have job security because instability leads to inefficiency. Successful firms usually have a stable
group of employees.
13. Initiative

Without limits of authority and discipline, all levels of staff should be encouraged to show
initiative. Management should encourage initiative. That is, they should encourage the
employees to make their own plans and execute these plans. This is because an initiative gives
satisfaction to the employees and brings success to the organization. It allows the subordinates to
think out a plan and do what it takes to make it happen.
14. Esprit De Corps
Esprit de Corps means “Team Spirit.” Therefore, the management should create unity,
cooperation, and team spirit among the employees. They should avoid dividing and rule policy.
Harmony and cohesion among personnel. It’s a great source of strength in the organization. It is
a quality in every successful business.
BUREAUCRATIC ORGANIZATION THEORY-(MAX WEBER)
Bureaucracy: an organization form characterized by division of labor, clear authority hierarchy,
formal selection procedures, detailed rules and regulations, impersonality and distinct separation
of members’ organizational and personal lives

 German sociologist.
 Weber first describes the concept of bureaucracy – an ideal form of organizational structure.
 Most logical and rational structure for large organizations.

 Characteristics of bureaucratic organizations:

 Clear division of labor
 Clear hierarchy of authority
 Formal rules and procedures
 Impersonality
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  Careers based on merit
2. BEHAVIORAL/HUMAN RELATIONS THEORY
1. Hawthorne studies 2 Maslow’s theory 3 McGregor’s Theory X and Y
A. Hawthorne studies
 Initial study examined how economic incentives and physical conditions affected worker
output.
 No consistent relationship found.
 “Psychological factors” influenced results
B. Maslow’s theory of human needs/Abraham Maslow

A need is a physiological or psychological deficiency a person feels compelled to satisfy. Need

levels: Physiological, Social, Safety, Esteem and, Self-actualization

McGregor’s Theory X and Y : McGregor’s Theory Y

McGregor’s Theory X assumes that workers Theory Y assumes that workers
are:
 Dislike work Willing to work
 Lack ambition Capable of self-control

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  Are irresponsible Willing to accept
responsibility
 Resist change Imaginative and creative
 Prefer to be led Capable of self-direction
3. MODERN MANAGEMENT THEORY
A. Management science or Operations Research
 Quantitative Analysis and Tools
 Analytics – the use of large data bases and mathematics tools to solve
problems and make decisions using systematic analysis.
 Typical quantitative approach to managerial problem-solving.
 Linear programming
 Transportation model
 Assignment model…etc
B. Organizations as Systems
 System is Collection of interrelated parts that function together to achieve a common
purpose
 Subsystem is A smaller component of a larger system
 Open systems
 Organizations that interact with their environments in the continual process of transforming
resource inputs into outputs.
C. Contingency Theory
 Tries to match managerial responses with problems and opportunities unique to different
situations
 No “one best way” to manage
 Appropriate way to manage depends on the situation
D. Quality Management
 Managers and workers in progressive organizations are quality conscious
 Quality and competitive advantage are linked
 Total quality management (TQM)
 Comprehensive approach to continuous quality improvement for a total organization
 Creates context for the value chain
Continuous Improvement
Continual search for new ways to improve quality
Something always can and should be improved

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