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
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

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

Bureaucracy
 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
Key concepts
Systematized manufacturing operations
Coordination of procedures and processes built into internal operations
Emphasis on economical operations, inventory management, and cost
control

Contributions
Beginning of formal management in the United States
Promotion of efficient, uninterrupted production

Limitations
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 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.)
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

Contributions
Improved factory productivity and efficiency
Introduced scientific analysis to the workplace
Piecerate system equated worker rewards and performance

Limitations
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
– Mary Parker Follet
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

Contributions
Viewed management as a profession that can be trained and developed
Emphasized the broad policy aspects of top-level managers
Offered universal managerial prescriptions

Limitations
Universal prescriptions need qualifications for environmental,
technological, and personnel factors
 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.)
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

Contributions
Psychological and social processes influence performance
Maslow’s hierarchy of need

Limitations
Ignored workers’ rational side and the formal organization’s contributions to
productivity
Research overturned the simplistic belief that happy workers are more
productive
 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.)

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

Contributions
Promotes efficient performance of routine operations
Eliminates subjective judgment by employees and management
Emphasizes position rather than the person

Limitations
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

Contributions
Developed specific mathematical methods of problem analysis
Helped managers select the best alternative among a set

Limitations
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 themselves
• Personalities
– Douglas McGregor
 Organizational Behavior (cont.)

Key concepts
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

Contributions
Increased participation, greater autonomy, individual challenge and
initiative, and enriched jobs may increase participation
Recognized the importance of developing human resources

Limitations
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

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

Limitations
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

Contributions
Identified major contingencies
Argued against universal principles of management
Limitations
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 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

Designers Producers

Brokers

Suppliers Distributors
 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
 The External Environment
Laws and
politics
New Economy
Entrants Buyers

Suppliers Technology
Organization Competitive
Macroenvironment
Environment

Rivals Substitutes Demographics

Social
values
 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
 Competitive Environment
New
entrants

Suppliers Rival firms Customers

Substitutes
 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 supplie rs