What is organizational theory and why is it important to understanding the
complexity of ... Classical organization theory was the first theory of organizations
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Understanding the Complexity of Organizations 1
Organizational Theory: Understanding the Complexity of Organizations Scott Thor
Understanding the Complexity of Organizations 2 Abstract What is organizational theory and why is it important to understanding the complexity of organizations today? Within this paper I discuss the answer to this question by analyzing the emergence of the modern organization and the theories that have been used to describe them. Organizations of the 21st century are significantly more advanced than they were in the early part of the 20th century, and likewise, so to are the theories used to describe them. As scientists and scholars began to study and learn more about organizations and the groups of individuals they are comprised of, our understanding of them has also increased. Organizational theory has led us from a bureaucratic viewpoint deeply rooted in a military command and control perspective carried into private business, to a focus on the needs of the people working within the organization and the outside environment and its influence on an organization. By studying the history of organizational theory the modern day manager will be better prepared in the understanding of organizations and how best to deal with the circumstances they are challenged with as they strive for achieving results.
Understanding the Complexity of Organizations 3 Understanding the Complexity of Organizations Organizations are complex entities made up of individuals working toward a common goal. The modern day manager is challenged with dealing with these complexities in the pursuit of efficiency and effectiveness. Organizational theory is one method of gaining insight into how organizations function, and how best to deal with making them successful. Understanding how organizations work has been the focus of scientists and scholars since the early part of the 20th century. Just as organizations have evolved, so to have the theories describing them. These theories can be divided into nine different “schools” of thought (Shafritz, Ott, Jang, 2005): •
Classical Organization Theory
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Neoclassical Organization Theory
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Human Resource Theory, or the Organizational Behavior Perspective
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“Modern” Structural Organization Theory
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Organizational Economics Theory
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Power and Politics Organization Theory
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Organizational Culture Theory
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Reform Though Changes in Organizational Culture
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Theories of Organizations and Environments
Before discussing each of these theories it’s important to understand what organizational theory is. Shafritz, Ott, and Jang (2005) define organizational theory as “how groups and individuals behave in varying organizational structures and circumstances” (p. 1). The study of organizations attempts to discover how people interact within organizations and the environment in which they exist. By gaining insight into an organization’s structure and behaviors, theorists
Understanding the Complexity of Organizations 4 believe that the knowledge gained can be used to achieve greater effectiveness in achieving organizational objectives. Classical Organization Theory Classical organization theory was the first theory of organizations. The classical theory found itself in the industries of the 1930’s and still has great influence today (Merkle, 1980). The classical theory is based in the professions of mechanical and industrial engineering and economics (Shafritz, Ott, Jang, 2005). The theory is based upon: •
Organizations solely exist to accomplish production related and financial goals.
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Through scientific study, there is only one best method for production.
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Specialization and division of labor leads to maximum production.
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People and organizations act based on rational economic principles.
As one would expect, people are seen as a means to an end under this theory. Very little thought is put into how workers feel about doing a job or the ideas they may have for improving them. The sole focus is on maximizing efficiency in order to meet financial goals. For each job there is thought to be one best way for achieving the goal. Specialization also defines this theory. The production worker, who is a specialist in only one or two steps of the process, is quickly replacing the craftsman, who in the past would perform a series of tasks to produce a product. One of the most influential leaders of this time was Frederick Winslow Taylor. Taylor’s scientific management consisted of four key elements: •
Gathering of knowledge about the work (time and motion studies)
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Selection of the workman
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Bringing of the workman and the science together
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Division of work
Understanding the Complexity of Organizations 5 The knowledge Taylor spoke of gathering began by studying workers and breaking down the work they were doing into its simplest form. Time and motion studies were also conducted to understand how long it took for a particular task to be completed. The first element gave Taylor the basis for improvement by providing a baseline of performance. With an understanding of the work, Taylor believed the selection of the workman was of great importance to achieving maximum efficiency. He believed it was management’s job to select the workers best suited for the work. If workers were not matched with the jobs they were doing he believed productivity would suffer. The third element of scientific management involves bringing the worker and science together. Without bringing the two together companies using the scientific management principles cannot realize the benefits they offer. In order to bring the two together Taylor suggested management should offer the workman something he felt is worthwhile of working under the conditions, essentially an incentive to make the workman want to work under the scientific management principles. The final aspect of scientific management is the division of work. As Taylor (1916) described, under the old system of management most of the work was done by the workman, but with the new system work is divided into two parts. One component of the work is now given to management leaving the other for the workman. Taylor (1916) argued by dividing the work it created an atmosphere of teamwork between management and the workman because each group is dependant on the other. Taylor’s scientific management formed the basis for the classical organization theory. Many aspects of the theory are still in use today. Taylor’s work benefited the workman greatly increasing his earning and also lowering the cost of goods produced. An argument could be
Understanding the Complexity of Organizations 6 made that the work he did helped increase the standard of living for those living in that era. The classical organizational theory does have its faults in that it tends to treat the worker as simply a means to an end. Little focus is put on the workman and his thoughts and ideas for improvement. Neoclassical Organization Theory The neoclassical theorist didn’t develop a new body of knowledge, but instead added to and modified the classical theory. They also created a foundation upon which future theories were based upon. One of the major themes of the neoclassical organizational theorists is that organizations do not and could not exist as self-contained islands isolated from their environments (Shafritz, Ott, Jang, 2005). Also, for the first time sociological considerations were being discussed. One sociologist, Philip Selznik (1948), argued that despite what classical organization theorist believed about designing organizations based on the thought that they operate in a rational manner, such thought could never hope to deal with the non-rational aspects of organizations. Selznick believed that organizations were not simply made up of a number of positions for management to control, but of individuals, whose goals and aspirations may not necessarily be the same goals and aspirations as the organization. The neoclassical school was important in the evolution of organizational theory. The theorists of this school began to move beyond the classical school’s simple view of organizations by expanding into sociological considerations. Human Resources Theory, or the Organizational Behavior Perspective With the human resources theory came a significant change in organizational behavior research. The focus of this theory is on the people, groups, and relationships among them and
Understanding the Complexity of Organizations 7 the organizational environment (Shafritz, Ott, Jang, 2005). The human resources theory is based on the following assumptions (Shafritz, Ott, Jang): •
Organizations exist to serve human needs.
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Organizations and people need each other.
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When the fit between the organization and the individual is a poor one both will suffer.
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A good fit between the organization and individual benefits both.
The Hawthorne experiments are one of the best illustrations of the human resources theory. Completed from 1927-1932 at the Western Electric Hawthorne plant in Illinois, researchers conducted several studies. In one of the experiments the researchers studied the effects of illumination on productivity and were surprised to discover that regardless of the illumination level, productivity went up in both the test and control groups. Nothing positive related to illumination and industrial efficiency was learned through the experiments (Roethlisberger, 1941). By simply showing attention to the workers and consulting with them on changes, increases in productivity occurred. Before the era of the human resources theory the needs of workers was never considered. Abraham Maslow was also influential during this period publishing an article in a 1943 edition of Psychological Review titled A Theory of Human Motivation, in which he described the progression of needs humans have. The needs Maslow (1943) described are comprised of five levels: •
Physiological-food, shelter, clothing
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Safety-sense of security
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Love-sense of belonging, both giving and receiving love
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Esteem-achievement, respect from others, self confidence
Understanding the Complexity of Organizations 8 •
Self-Actualization-becoming all that one is capable of
As humans satisfy the needs at one level they begin working on the next, moving up the hierarchy. Maslow (1943) described “normal” members of our society as those who are partially satisfied in all their basic needs and partially unsatisfied in all their basic needs. Maslow’s work helped describe the need to address human motivation. Douglas McGregor (1957) added to Maslow’s work on motivation with “Theory X” and “Theory Y”. Theory X stated that management is responsible for organizing all elements of production, directing and controlling all worker activities, and that all workers need to be persuaded, rewarded, and punished to follow orders. The theory also assumes that the average man is lazy, unmotivated, self-centered and focused solely on his needs and not the organization’s, resistant to change, and is easily coerced into doing what management wants (McGregor, 1957). Theory Y, what McGregor called a new theory of management, stated that management is responsible for organizing the elements of production in the interest of economic success, people are not resistant to organizational needs, they’ve simply become so as a result of their experiences with organizations, all people have the potential and capacity for assumption of responsibilities leading to organizational results, it’s management’s responsibility to make it possible for people to recognize and develop their capabilities, and finally, the essential task of management is to create the conditions by which people can achieve their own goals by directing their efforts toward achieving the organization’s goals (McGregor, 1957). The human resources school transformed the way in which organizations were viewed. Whereas the classical and neoclassical school’s focus is almost entirely on the mechanics of an organization, the human resources theory is focused on the people within the organization and
Understanding the Complexity of Organizations 9 understanding what motivates them. This theory represents an optimistic viewpoint that people and organizations will grow together. “Modern” Structural Organizational Theory The structural theory’s focus is on the positions, departments, and processes that define an organization (Shafritz, Ott, Jang, 2005). Bolman and Deal (1997) have defined the basic assumptions of the structural theorists as: •
Organizations are rational institutions with the primary goal of accomplishing an established set of objectives.
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There is one best structure for each organization based on their objectives and the environment in which it exists.
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Specialization and the division of labor improve quality and efficiency.
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Most issues faced by an organization are the result of structural deficiencies that can be solved by changing the structure.
If we assume organizations are rational institutions, structural theorists argue formal structure will achieve the best results. These results will come from having a system of welldefined rules and authorities. Having this control is essential to maintaining rationality (Bolman, Deal, 1997). Structural theorists also believe the composition of the structure is also critical to organizational performance. Based on the environment of the organization, structural theorists argue that there is a “best” structure leading to optimal results. For example, a manufacturing company will likely have a different optimal structure than a retail company (Bolman, Deal, 1997).
Understanding the Complexity of Organizations 10 Structure naturally leads to specialization and division of labor based on skill sets of employees. The structural theorists believe this division of labor leads to a high level of quality and efficiency, especially in highly technical positions (Bolman, Deal, 1997). A final assumption Bolman and Deal (1997) identify as a basic assumption of the structural theorists is that most problems in an organization are due to having the wrong structure in place. Their belief that organizations behave in a rational manner strengthens the argument that unless an organization is operating under its optimal structure there is likely to be problems within the organization. An organization chart defines not all structure in an organization. Blau and Scott (1962) contend that all organizations have both a formal and informal element. The formal part of the organization resides on the organizational chart dividing a company into departments, teams, etc., but an informal part of an organization also exists. This part of the organization is based on the formal structure and supports it by establishing the norms for how the organization operates, most of which is not dictated by rules and policies. To truly understand an organization’s formal structure it’s also essential to understand how the informal structure functions (Blau, Scott, 1962). Hierarchy can sometimes lead to bureaucracy, which many believe kills creativity and innovation. To the contrast, Elliott Jaques (1990) believes that after 35 years of research, properly structured hierarchies can release the energy to foster an environment of creativity, innovation, productivity, and high morale. Jaques (1990) argues that the problem is not the idea of hierarchy, but the design of it. He contends that the problem with hierarchies is that they are made up of individuals who belong to groups doing the work together, but as soon as the work is complete individuals look for recognition and advancement in their careers, and that
Understanding the Complexity of Organizations 11 organizations hold individuals accountable, not groups. To address the issue groups have to be made accountable, but also have the authority to be functional. Jaques (1990) contends that the reason the search for alternative methods of organization has not been successful is based on two factors. First, the tasks completed by employees are complex and become even more complex as they divide into discrete categories. Second, the same is true for mental activities that become more complex as they are broken into separate categories. Because of these complexities, a hierarchy meets what Jaques (1990) defines as the four fundamental needs of an organization that include, adding value to work as it passes through the organization, to identify and define accountability at each value added stage, to ensure people with the required abilities are at each organizational level, and finally to build a consensus and acceptance of the management structure that achieves these objectives. The structural theory has a “one best” element consistent with the classical theory. Where the classical theory is based on the work being done, the same structured focus on the organizational chart has been the focus of the structural theory. It’s evident that this theory has had an enormous influence on business. The organizational chart is a common element found in nearly every company worldwide. Organizational Economics Theory Organizational economics theorists use economic tools to study processes and structures of a firm. They answer questions relating to why companies exists, what determines the size, scope, and structure of an organization, why some workers are paid by the hour and others are salaried, and what factors determine a company’s growth and survival (Shafritz, Ott, Jang, 2005). Three theories form the basis of the organizational economics theory. They include: •
Transaction cost theory
Understanding the Complexity of Organizations 12 •
Agency theory
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Theory of property rights
Oliver Williamson (1975) describes the relationships between employees and employers as being similar to a business transaction and utilizes economic market analysis to analyze the possibility of alternative internal labor market and contractual models, forming the basis for the transaction cost theory. Agency theory likens managers and employees to agents working for a company. This theory links price theory, which revolves around how to structure companies for the free interplay of markets made up of agents and owners, and hierarchy mechanisms such as monitoring. These theorists believe that agents will not always act in the best interest of the owners. Agents tend to act based on what’s best for them. This theory examines the use of price theory mechanisms, such as incentives, and hierarchy mechanisms like monitoring that owners can use to ensure the activities of the agents are in the best interest of the organization (Shafritz, Ott, Jang, 2005). The final theory component of the organizational economic theory is the theory of property rights. This theory addresses the distribution of costs and incentives divided amongst the members of an organization (Shafritz, Ott, Jang, 2005). The overall theme of the economics theory is on costs and how to influence managers and employees to act in the best interest of the company even though they have no stake in it. Power and Politics Organization Theory Power, defined by Salancik and Pfeffer (1977), is the ability to get things done through others by using ones ability to influence. The power and politics organizational theory is based on the belief that organizations are complex systems made up of people and groups, sometimes
Understanding the Complexity of Organizations 13 forming coalitions, each of which have their own areas of interest, values, beliefs, preferences, and perspectives (Shafritz, Ott, Jang, 2005). There is constant competition between individuals and groups for access to the limited organizational resources according to this theory, and conflict is likely to result because of the ongoing battle for power. Under this theory it is believed that organizational goals are rarely set by those who are in positions of formal authority; they result from ongoing negotiations between individuals and coalitions that shift just as the issues facing an organization shift (Shafritz, Ott, Jang, 2005). John French and Bertram Raven (1959) believe that power and influence involve the relationship between two agents, of which focus on the recipient agent is most useful in understanding influence and power. French and Raven (1959) identify five bases for social power that include: •
Reward power
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Coercive power
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Legitimate power
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Referent power
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Expert power
Reward power is based on ones ability to reward another person. As the size of the reward increases in the eyes of the receiver, so to does the power to the person or group giving it. An example of this type of power is a subordinate’s perception in the ability of his superior to increase his earnings. As long as the subordinate believes his superior has the ability to reward him, the superior will be able to use reward power to influence his behavior. Coercive power is similar to reward power. The superior’s ability to punish his subordinate if certain behaviors are not exhibited creates a coercive power. As French and
Understanding the Complexity of Organizations 14 Raven (1959) describe, reward power may end up creating an independent system, whereas coercive power will continue to be dependent. They also contend that reward power will strengthen the attraction between the superior and his subordinate, but coercive power will lower the attraction. Legitimate power is that power stemming from internalized values a person has that dictate that a social agent has legitimate power to influence the person and the person has the responsibility to accept the influence (French, Raven, 1959). There are several examples in society of legitimate power that include judges, police officers, managers, and military rank. Referent power is based on a person’s relationship with another person or group. This type of power is best described as a person wanting to be like someone else, who has referent power in this situation. The stronger the attraction the higher the degree of referent power. Referent power can also be linked to a specific area of influence. For example, someone may have great referent power in matters pertaining to scholarly research, but less or no power for other subjects. The final type of power described by French and Raven is expert power. This type of power is based on the belief that knowledge of a certain subject matter gives a person expert power. A simple example of this type of power is a management consultant. The consultant, hired by a company to help improve performance, will have a great degree of expert power over those he works with on a project. This type of power, however, can quickly be lost if the results don’t materialize as expected. Organizational Culture Theory Organizational culture theory is based on the cultures that exist in organizations. Culture includes the values, beliefs, behavioral norms, perceptions, and patterns of behavior existing
Understanding the Complexity of Organizations 15 within an organization or society. Shafritz, Ott, and Jang (2005) state that, “The organizational culture perspective challenges the basic views of these more rational perspectives about, for example, how organizations make decisions and how and why organizations-and people in organization-act as they do” (p. 352). The basic question organizational culture theorists focus on is how to best design an organization to be efficient and effective. Unlike some of the other organizational theories, the organizational culture theory assumes that most behavior in organizations and the decisions made within them are predetermined by the patterns of basic assumptions held by the people within the organization (Shafritz, Ott, Jang, 2005). Decisions in these organizations are many times based on the attitude, “that’s what we’ve always done”. Rules, regulations, and policies don’t influence people in organizations under this theory. They are instead influenced by the values, beliefs, and norms contained within the organization. The organizational culture theory is a relatively new theory having most of its literature published in the last twenty-five years. Reform through Changes in Organizational Culture This theory has similarities to the organizational culture theory. Increasing organizational effectiveness, competitiveness, flexibility, and the ability to respond to a changing organizational culture describe the focus of this theory (Shafritz, Ott, Jang, 2005). The 1980’s and 1990’s were a time of reform in many US companies. Several initiatives were launched to improve the competitiveness with Japanese competitors including employee empowerment and Total Quality Management (TQM). Employee empowerment ushered in a new era of management giving power to the people doing the work. The traditional hierarchy is replaced with self-directed work teams making daily
Understanding the Complexity of Organizations 16 decision on how best to meet the expectations of the company under this theory. The accountability to managers is replaced with accountability to the customer (Shafritz, Ott, Jang, 2005). TQM is focused on continuous improvement in all aspects of the business. The improvement comes through empowering people within the organization to get involved with the improvement process, focusing on data based improvement initiatives. TQM is a continuous cycle that never ends. Once improvement is achieved the process for the “next level” begins again, repeating over and over until the cost-benefit ratio of making an improvement is no longer economically feasible. This theory represents a significant change from previous theories in that its primary focus is on employee participation and empowerment, minimizing the bureaucratic structure of management making all the decisions for the company. Theories of Organizations and Environments Research on theories has shifted from the internal environment to the external environment under this perspective. The organizations as open systems perspective views organizations as systems of interdependent activities rooted in, and dependant upon, a larger environment (Shafritz, Ott, Jang, 2005). This perspective has focused less on the internal aspects of an organization, and instead turned to how organizations are a series of elements including inputs, processes, outputs, and feed back mechanisms linking the internal aspects of an organization with the external environment. Systems theorists see organizations as a series of ever changing interactions between an organization and the environment in which it exists.
Understanding the Complexity of Organizations 17 The system theorists have similarities to Frederick Taylor’s scientific management, searching for one best way using scientific methods, but instead focus more on using quantitative scientific methods to find solutions through the analysis of cause and effect relationships (Shafritz, Ott, Jang, 2005). Resource dependency theory is another open system theory suggesting that organizations exchanges resources with their environment in order to survive. Organizations have to depend on their environment and the resources available within that environment. How important and the scarcity of the resource dictate the level of dependency of the organization on the environment. This theory offers a unique perspective compared to the other theories by combining both internal and external factors affecting organizational performance. The Need to Understand Organizational Theory The modern day manager is challenged with the complexities of organization, and understanding the evolution of organizational theory will no doubt lead to better performance. Key aspects from each of the schools provide managers with a basis of understanding toward improving organizations. The classical school teaches us that “best practices” will lead to better results, as Taylor proved in the 1920’s. The human resources theory highlights the need to take a human perspective in understanding the motivation of people within an organization. Structural theory has similarities to the classical school in that a “best” organizational structure will contribute to optimal performance. The power and politics theory emphasizes the use of power within organizations and that power is not always synonymous with authority. In summary, there is much to be gained by understanding organizational theory, and the manager of the 21st
Understanding the Complexity of Organizations 18 century will no doubt benefit from a greater understanding of the evolution that has taken place in the study of organizations.
Understanding the Complexity of Organizations 19 References Blau, P. M., & Scott, W. R. (1962). Formal organizations: A comparative approach. San Francisco: Jossey-Bass. Bolman, L. G., & Deal, T. E. (1997). Reframing organizations: Artistry, choice, and leadership (2nd ed.). San Francisco: Jossey-Bass. French, J. R. P., Jr., & Raven, B. (1959). The bases of social power. In D. P. Cartwright, ed., Studies in social power (pp. 150-167). Ann Arbor, MI: University of Michigan, Institute for Social Research. Jaques, E. (1990, January-February). In praise of hierarchy. Harvard Business Review, 68(1), 127-133. Maslow, A. H. (1943). A Theory of Human Motivation. Psychological Review, 50, 370-396. McGregor, D. (1957, November). The human side of enterprise, Management Review, 46, 22-28, 88-92. Merkle, J. A. (1980). Management and ideology: The legacy of the international scientific management movement. Berkley, CA: University of CA Press. Roethlisberger, F. (1941). The Hawthorne experiments. Management and Moral, 7-26. Salancik, G. R., & Pfeffer, J. (1977). Who gets power-and how they hold on to it: A strategiccontingency model of power. Organizational Dynamics, 5, 2-21. Selznick, P. (1948). Foundations of the theory of organization. American Sociological Review, 13, 25-35. Shafritz, J. M., Ott, J. S., & Jang, Y. S. (2005). Classics of Organization Theory (6th ed.). Belmont, CA: Wadsworth. References
Understanding the Complexity of Organizations 20 Taylor, F. W. (1916, December). The principles of scientific management: Bulletin of the Taylor Society. An abstract of an address given by the late Dr. Taylor before the Cleveland Advertising Club, March 3, 1915. Williamson, O. E. (1975). Markets and hierarchies. New York: Free Press.
