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Organizational Theory
Organizational Theory:
Determinants of Structure
The objective here is to understand why organizations have the structure that they do.
By "structure" I mean things like degree and type of horizontal differentiation,
vertical differentiation, mechanisms of coordination and control, formalization, and
centralization of power. See handouts page for more information
on organizational structure.
According to Taylor, Fayol, Weber and other classical theorists, there is a single best
way for organization to be structured. Yet organizations vary considerably on structural
attributes. The objective of much research has been to understand what determines these
variations. Is it random or systematic? Are some organizations simply less perfect than
others, or are different designs better for different situations?
Contingency Theory
In contrast to the classical scholars, most theorists today believe that there is no
one best way to organize. What is important is that there be a fit between the
organization's structure, its size, its technology, and the requirements of its
environment. This perspective is known as "contingency theory" and contrasts
with the perspective of classical theorists like Weber, Taylor, Fayol, etc. who thought
that there probably was one way to run organizations that was the best.
Size
This refers to capacity, number of personnel, outputs (customers, sales), resources
(wealth).
Blau's studies show that differentiation (# of levels, departments, job titles)
increases with size, but at a decreasing rate. In contrast, the % of the organization that
is involved in administrative overhead declines with size, leading to economies of scale.
Increasing size is also related to increased structuring of organizations activities
but decreased concentration of power.
Managerial practices, such as flexibility in personnel assignments, extent of
delegation of authority, and emphasis on results rather than procedures, are related to
the size of the unit managed.
Technology/Task
Consider check processing at a bank. This activity is usually performed by a business
unit that is highly formalized, has a great deal of specialization and division of labor,
and high centralization of decision-making. In contrast, the creative section of an ad
agency is usually not formalized at all, the division of labor is often blurry, and it is
highly decentralized.
It appears that certain activities naturally "go with" certain structures.
Joan Woodward found that by knowing an organization's primary system of production, you
could predict their structure:
Unit production/small batch. Companies that make one-of-a-kind custom
products, or small quantities of products (e.g., ship building, aircraft manufacture,
furniture maker, tailors, printers of engraved wedding invitation, surgical teams).
In these companies, typically, people's skills and knowledge is more important than the
the machines used.
Relatively expensive to operate: work process is unpredictable, hard to pre-program or
automate.
Flat organization (few levels of hierarchy).
Ceo has low span of control (direct reports).
Relatively low percentage of managers
Organic structure (see handout)
Mass production/large batch. Companies that sell huge volumes of
identical products (e.g., cars, razor blades, aluminum cans, toasters). Make heavy use of
automation and assembly lines. Typically,
bigger than small batch
Taller hierarchies
bottom level is huge (supervisor span of control is 48)
Relatively greater number of managers (because hierarchy is so tall)
Mechanistic, bureaucratic structure
Relatively cheap to operate
Continuous Production. Primarily companies that refine liquids and
powders (e.g., chemical companies, oil refineries, bakeries, dairies,
distilleries/breweries, electric power plants). Machines do everything, humans just
monitor the machines and plan changes.
These organizations are tall and thin or even inverted pyramid: almost nobody at the
bottom
At the very top there is an organic structure
Lower levels more mechanistic, but because machines do everything, there is not much
paper work, low level supervision, etc.
Chick Perrow '67 looked at how the frequency and type of exceptions that occurred
during production affected structure. Two types of exceptions: (a) can be solved via
orderly, analytic search process (like mechanic fixing car), (b) no analytic framework,
rely on intuition, guesswork (like advertising, film-making, fusion research).
Few Exceptions
Many Exceptions
Un-analyzable
pottery, specialty glass, motel room artwork; plumbing; computer technical
support (craftwork)
routine work, but when problems crop up, it is hard
to figure what to do
film making; aerospace; (non routine research)
tasks that no one really knows how to do: work on intuition, implicit knowledge
Analyzable
routine, like screws; (routine manufacturing)
the few problems that occur are usually easy to understand
custom machinery, building dams; (engineering production)
the application of well-known principles and technologies to lots of new and different
situations
It turns out that bottom left organizations (analyzable and few exceptions) tend to be
highly centralized and formalized -- in short, bureaucracies. Bureaucracies are the best
possible organizational form when the task is well-understood, and how to best execute it
can be specified in advance.
At the other extreme, the top right organizations (unanalyzable and many exceptions)
are not well handled by bureaucracies. There are so many exceptions and new situations
that having a set of formal procedures which specify how to handle every situation is out
of the question. Organizations in this box tend to be highly decentralized and use
informal means of coordination and control. The reasons have to do with human bounded
rationality. (Bounded rationality refers to the fact that since humans have limited brain
capacity, we cannot always find the absolute optimal solution to a given problem -- we
only have the time and capacity to consider a few possible solutions, and choose the best
among those. But we can't consider all possible solutions.) Really complex systems are
difficult to pre-plan: there are too many contingencies. We simply can't figure it all
out. Need to allow for real-time, flexible adjustment.
Environment
Adaptation
Organizations actively adapt to their environments. For example, organizations facing
complex, highly uncertain environments typically differentiate so that each organizational
unit is facing a smaller, more certain problem. for example, if Japanese tastes in cars
are quite different from American tastes, it is really hard to make a single car that
appeals to both markets. It is easier to create two separate business units, one that
makes cars for the Japanese market, and the other that makes cars for the US market.
Natural Selection
Organizations whose structures are not fitted to the environment (which includes other
organizations, communities, customers, governments, etc.) will not perform well and will
fail. Most new organizations fail within the first few years.
If the environment is stable, this selection process will lead to most organizations
being well-adapted to the environment, not because they all changed themselves, but
because those that were not well-adapted will have died off.
Dependence
The economy is a giant network of organizations linked by buying and selling
relationships. Every company has suppliers (inputs) and customers (outputs). Every company
is dependent on both their suppliers and their customers for resources and money. To the
extent that a company needs it's suppliers less than they need it, the company has power.
That is, power is a function of asymmetric mutual dependence. Dependence is itself a
function of the availability of alternative supply. A depends on B to the extent that
there are few alternatives to B that are available to A. Dependence is also a function of
how much A needs what B has got. If the Post It's company starts to play hardball with
you, and there are no good alternatives, it's still not a big deal because Post It's are
just not that important.
Organizations that have power over others are able to impose elements of structure on
them. For example, GM is famous for imposing accounting systems, cost controls,
manufacturing techniques on their suppliers.
The sets of entities in an organization's environment that play a role in the
organization's health and performance, or which are affected by the organization, are
called stakeholders. Stakeholders have interests in what the organization does, and
may or may not have the power to influence the organization to protect their interests.
Stakeholders are varied and their interests may coincide on some issues and not others.
Therefore you find stakeholders both cooperating with each other in alliances, and
competing with each other.
Figure 1. Unconnected stakeholders.
When stakeholders are unconnected to each other (as in Figure 1), the organization
usually has an easier time of playing the different parties off one another. For example,
it can represent its goals and needs differently to each stakeholder, without fear of
being found out. Or, such competitive stakeholders into outbidding each other (e.g., a
university can tel one alumnus that another alumnus is about to give a huge donation).
Furthermore, when the stakeholders are unconnected, they cannot coordinate their efforts,
and so have trouble controlling the organization.
Figure 2. Well-connected stakeholders.
In contrast, when the stakeholders are well-connected (as in Figure 2), the
organization cannot represent itself differently to each one, or it will be found out.
Furthermore, if the bonds among the stakeholders are closer than the bonds with the
organization, the stakeholders may side with each other against the organization, and
won't act in ways that negatively affect other stakeholders.
Institutionalization
Under conditions of uncertainty, organizations imitate others that appear to be
successful. In other words, if nobody really knows what makes a movie successful, and then
somebody has a blockbuster hit, everybody else copies the movie, and the organizational
structure that produced the movie, hoping that they will get the same results. This can
cause whole industries to adopt similar structural features.
One reason why this happens is the fear of litigation or simply blame. If several
well-known, successful companies start adopting some new management style -- say,
self-governing teams -- and you don't because you know its not appropriate for your
company, and then things start to go wrong for your company, people will say 'see? you
should have adopted self-governing teams. we told you so'. So to avoid that, if the top
companies in a field all adopt some new style, then all the others do to to avoid being
blamed.
In addition, diffusion of ideas due to personnel transfer and professional school
training can create uniformity as well.
Copyright ©1996 Stephen P. Borgatti
Revised: October 08, 2001
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