Introduction to
Organization Theory
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 Cont..
• Two things:
– Knowledge
• Knowledge generated by practical experience and
scientific research
– Solving problems & managing resources
(Kast&Rosenzweig1970).
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
1890
1900
1910
1920
Administrative
management
Systematic
management
Scientific
management
Bureaucracy
Contemporary Approaches
1930
Quantitative
management
Human
relations
1940
Systems
theory
Organizational
behavior
1950
Contingency
theory
1960
1970
Current and
future revolutions
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 its environment
Ignored differences in managers’ and workers’ views
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
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
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
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
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
Entrants
Suppliers
Buyers
Organization
Rivals
Economy
Technology
Competitive
Macroenvironment
Environment
Substitutes
Social
values
Demographics
The Macroenvironment
•
•
The macroenvironment
– most general elements in the external environment that can potentially
influence strategic decisions
– all organizations are affected by the general components of the
macroenvironment
Laws and regulations
– impose strategic constraints and provide 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
Substitutes
Customers
Competitive Environment (cont.)
• Competitors
– competitors within an industry must deal with one another
– organizations must:
• identify their competitors
• analyze how competitors compete
• react to and anticipate competitors’ actions
– competition is most intense:
• where there are many competitors
• when industry growth is slow
• 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
– 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 suppliers