An organization, by its most basic definition, is an assembly of people working together to achieve common objectives through a division of labor. People form organizations because individuals have limited abilities. An organization provides a means of using individual strengths within a group to achieve more than can be accomplished by the aggregate efforts of group members working individually. Business organizations (in market economies) are formed to profit by delivering a good or service to consumers.
Over the years there have been countless theories and models of how business organizations function and what their essential characteristics are. One widely held view, for example, is that at their core organizations are information processing systems, where information includes knowledge about products, markets, production methods, management techniques, finance, laws, and the many other factors involved in running a business. A successful organization, the theory goes, acts on relevant information and ignores the irrelevant. Ultimately, the organization that excels at processing information facilitates learning and the development of new knowledge. Other models of organizations focus on traits such as power and subordination, culture and adaptation, and efficiency.
Organization theory is examined here primarily from a historical perspective that briefly summarizes its evolution. The open-systems theory—the dominant school of thought throughout most of the 20th century—is examined in greatest detail, while organizational characteristics and structures are also reviewed.
Modem organization theory is rooted in concepts developed during the Industrial Revolution in the late 19th and early 20th centuries. Of import during that period was the research of Max Weber (1864-1920), a German sociologist. Weber believed that bureaucracies, staffed by bureaucrats, represented the ideal organizational form. Weber based his model bureaucracy on legal and absolute authority, logic, and order. In it, responsibilities for workers are clearly defined and behavior is tightly controlled by rules, policies, and procedures. In effect, Weber's bureaucracy was designed to function like a machine; the organization was arranged into specific functions, or parts, each of which worked in concert with the other parts to form a streamlined process.
Weber's theories of organizations, like others of the period, reflected an indifferent and impersonal attitude toward the people in the organization. Indeed, personal aspects of human behavior were considered unreliable and were viewed as a potential detriment to the efficiency of any system. Humans were likened to a bundle of skills that could be inserted into the system like a cog in a machine. Although his theories are now considered mechanistic and outdated, Weber's views on bureaucracy provided important insight into process efficiency, division of labor, and hierarchy of authority.
Another important contributor to organization theory in the early 1900s was Henri Fayol. He is credited with identifying four basic managerial functions that characterize successful organizations:
Weber's and Fayol's theories found broad application in the early and mid-20th century, largely as a result of the work of Frederick W. Taylor (1856-1915). In a 1911 book entitled Principles of Scientific Management, Taylor outlined his theories and eventually implemented them on American factory floors. Taylor's theory of scientific management mimicked the four basic managerial functions identified by Fayol, and adopted the same basic attitudes about process efficiency championed by Weber. Although elements of Taylor's research and findings have been criticized, he is credited with helping to define the role of training, wage incentives, employee selection, and work standards in organizational performance.
Researchers began to adopt a less mechanical view of organizations and to pay more attention to human influences in the 1930s. This development was motivated by several studies, particularly the Hawthorne experiments, that shed light on the function of human fulfillment in organizations. Primarily under the direction of Harvard University researcher Elton Mayo, the Hawthorne Experiments were conducted in the mid 1920s and 1930s at a Western Electric Company plant known as the Hawthorne Works. The company wanted to determine the degree to which working conditions affected output.
Surprisingly, the studies failed to show any significant positive correlations between workplace conditions and productivity. In one study, for example, worker productivity escalated when lighting was increased, but it also increased when illumination was decreased. The results of the studies demonstrated that innate forces of human behavior may have a greater influence on organizations than do mechanistic incentive systems. The legacy of the Hawthorne studies and other organizational research efforts of that period was an emphasis on the importance of individual and group interaction, humanistic management skills, and social relationships in the workplace.
The focus on human influences in organizations was reflected most noticeably by the integration of Abraham Maslow's "hierarchy of human needs" into organization theory. Maslow's theories had two important implications for organization theory: (1) people have different needs and are therefore motivated by different incentives to achieve organizational objectives; and (2) people's needs change predictably over time, meaning that as the needs of people lower in the hierarchy are met, new needs arise. These assumptions led to the recognition, for example, that assembly-line workers could be more productive if more of their personal needs were met, whereas past theories suggested that monetary rewards were the sole, or primary, motivators.
Douglas McGregor contrasted the organization theory that emerged during the middle of the 20th century with previous views. In the 1950s, McGregor offered his renowned Theory X and Theory Y to explain the differences. In a nutshell, Theory X depicts the old, repressive, pessimistic view of workers. It assumes that people are lazy and have to be coerced to produce with tangible rewards. In fact, McGregor argued that the old view assumed that workers preferred to be directed, wanted to avoid responsibility, and cherished financial security (i.e., jobs) above all else.
McGregor believed that organizations that embraced Theory Y were generally more productive. Theory Y adopted a more optimistic view of human nature. Among other things, it theorized that (1) humans can learn to accept and seek responsibility; (2) most people possess a high degree of imaginative and problem-solving ability; (3) employees will selfgovern, or direct themselves toward goals to which they are committed; and, importantly, (4) satisfaction of ego and self-actualization are among the most important needs that have to be met by (profit-maximizing) organizations.
Traditional theories regarded organizations as closed systems—autonomous and isolated from the outside world. In the 1960s, these mechanistic organization theories, such as scientific management, were spurned in favor of more holistic and humanistic ideologies. Recognizing that traditional theory had failed to take into account many environmental influences that affected the efficiency of organizations, most theorists and researchers embraced an open-systems view of organizations.
The term "open systems" reflected the newfound belief that all organizations are unique and should therefore be structured to accommodate unique problems and opportunities. For example, research during the 1960s showed that traditional bureaucratic organizations generally failed to succeed in environments where technologies or markets were rapidly changing. They also failed to realize the importance of regional cultural influences in motivating workers.
Environmental influences that affect open systems can be described as either specific or general. The specific environment is a network of suppliers, distributors, government agencies, and competitors. An organization is simply one element of that network. To succeed, or profit, the organization must interact with these influences. They use suppliers, for example, when they purchase materials from other producers, hire workers from the labor force, or secure credit from banks or other companies.
The general environment encompasses four influences that emanate from the geographic area in which the organization operates. The first is cultural values, which determine views about what is right or wrong, good or bad, and important or trivial. Companies in the United States will likely be influenced by the values of individualism, democracy, individual rights and freedoms, and a puritan work ethic, among many others. In addition, regional and local values will affect organizations. For instance, workers and consumers in southern and northwestern states are more likely to be ideologically conservative.
Economic conditions make up the second cluster of general environmental influences on open systems. These influences include economic upswings, recessions, regional unemployment, and many other factors that affect a company's ability to grow and prosper. Economic influences may also partially dictate an organization's role in the economy. For example, as the economy grows the organization will likely become not only larger but more specialized.
A third influence on organizations is the legal/political environment, which effectively helps to allocate power within a society and to enforce laws. The legal and political system in which an open system operates determines, most importantly, the long-term stability and security of the organization's future. For instance, a national government can add stability by maintaining a strong defense force. But legal and political mechanisms can also hamper a company's success by burdening it with regulations, taxes, employee rights laws, and other rules. In general, the larger and more powerful the local, regional, or national government, the less attractive will be the general environment to nongovernment organizations.
The fourth general environmental influence on open systems is educational conditions. For example, businesses that operate in countries or regions with a high education level will have a better chance of staffing a complex organization that requires specialized skills and a precise division of labor.
Daniel Katz and Robert L. Kahn developed a framework for open-systems theory that encompasses: (1) energic inputs into the organizations; (2) the transformation of those inputs within the system; (3) energic outputs; and (4) recycling. Energic inputs, or external influences, include familiar resources like employees, raw materials, and capital. However, they also include intangible external influences, such as status, recognition, satisfaction, or other personal rewards.
The transformation process involves using energies, or inputs, to (in the business context) create products or services. Energic outputs are simply the products or services that are distributed to consumers. Finally, recycling refers to the fact that outputs are indirectly recycled back into the organization. For instance, when a company sells a toaster the revenue becomes an input into the organization that is used, for example, to pay workers or buy materials.
In addition to identifying the four phases of an open system, Katz and Kahn cataloged several other organizational characteristics that support the opensystems theory and have implications for the design of successful organizations. For example, they recognized the universal law of entropy, which holds that all organizations move toward disorganization or death. However, an open system can continue to thrive by importing more energy from the environment than it expends, thus achieving negative entropy. For example, a failing company might be able to revitalize itself by bringing in a new chief executive who improves the way the company transforms energic inputs.
Another characteristic of organizations is dynamic homeostasis, which infers that all successful organizations must be able to achieve balance between subsystems. For example, a sales department might grow very quickly if it is very successful or demand for its products jumps. But if the manufacturing arm of the company is unable to keep pace with sales activity, the entire organization could break down. Thus, subgroups must maintain a rough state of balance as they adapt to external influences.
Katz and Kahn also characterize open systems by equifiniality. This concept suggests that organizations can reach the same final state by a number of different paths. In fact, the course is not fixed and may develop organically as both internal and external influences intervene.
Open-systems theory assumes that all large organizations are comprised of multiple subsystems, each of which receives inputs from other subsystems and turns them into outputs for use by other subsystems. The subsystems are not necessarily represented by departments in an organization, but might instead resemble patterns of activity.
An important distinction between open-systems theory and traditional organization theory is that the former assumes a subsystem hierarchy, meaning that not all of the subsystems are equally essential. Furthermore, a failure in one subsystem will not necessarily thwart the entire system. By contrast, traditional mechanistic theories imply that a malfunction in any part of a system would have an equally quashing effect. This could be likened to pulling one cotter pin from the wheel of a go-cart; doing so would make the entire vehicle inoperable.
At least five subsystems identified by Katz and Kahn are important to the success of any business organization. Each of these subsystems may also be comprised of subsystems. For example, production subsystems are the components that transform inputs into outputs. In a manufacturing company this subsystem would be represented by activities related to production. In most business organizations, all other subsystems are built around the production subsystem.
Maintenance subsystems maintain the social involvement of employees in an organization. Activities in this group include providing benefits and compensations that motivate workers, creating favorable work conditions, empowering employees, and fulfilling other employee needs.
Adaptive subsystems serve to gather information about problems and opportunities in the environment and then respond with innovations that allow the organization to adapt. A firm's research lab or a product development department would both be part of an adaptive subsystem.
Supportive subsystems perform acquisition and distribution functions within an organization. Acquisition activities include securing resources, such as employees and raw materials, from the external environment. Human resources and purchasing divisions are typically included in this group. Distribution, or disposal, activities encompass efforts to transfer the product or service outside of the organization. Supportive subsystems of this type include sales and marketing divisions, public relations departments, and lobbying efforts.
Managerial subsystems direct the activities of other subsystems in the organization. These managerial functions set goals and policies, allocate resources, settle disputes, and generally work to facilitate the efficiency of the organization.
Organizations differ greatly in size, function, and makeup. Nevertheless, three characteristics of nearly all organizations with more than a few members are: (1) a division of labor; (2) a decision-making structure; and (3) formal rules and policies.
Organizations practice division of labor both vertically and horizontally. Vertical division includes three basic levels—top, middle, and bottom. The chief function of top managers, or executives, typically is to plan long-term strategy and oversee middle managers. Middle managers generally guide the day-to-day activities of the organization and administer top level strategy. Low-level managers and laborers put strategy into action and perform the specific tasks necessary to keep the organization operating.
Organizations also divide labor horizontally by defining task groups, or departments, and assigning workers with applicable skills to those groups. Line units perform the basic functions of the business, while staff units support line units with expertise and services. For instance, the marketing department (line unit) might be supported by the accounting department (staff unit). In general, line units focus on supply, production, and distribution, while staff units deal mostly with internal operations and controls or public relations efforts.
Decision-making structures, the second basic organizational characteristic, are used to organize authority. They vary in their degree of centralization and decentralization. Centralized decision structures are referred to as "tall" organizations because important decisions usually emanate from a high level and are passed down through several channels until they reach the lower end of the hierarchy. Bosses at all levels have relatively few employees reporting directly to them.
In contrast, flat organizations, which have decentralized decision making structures, employ only a few hierarchical levels. The few bosses or authority figures have many employees reporting directly to them. Such organizations, however, usually practice some form of employee empowerment whereby individuals make decisions autonomously. Decentralized structures are more representative of humanistic organization theories, while traditional tall organizational structures are more mechanistic. Besides meeting human needs, flat structures yield faster response times to internal and external influences.
Formalized rules and policies is the third standard organizational characteristic. Rules, policies, and procedures serve as substitutes for managerial guidance. For example, they may indicate the most efficient means of accomplishing a task or provide standards for rewarding workers. The benefit of formalized rules is that managers have more time to spend on other problems and opportunities. The disadvantage of rules is that they sometimes stifle workers' creativity and autonomy, thereby reducing their satisfaction and effectiveness.
Thus, organizations can be categorized as informal or formal, depending on the degree of formalization of rules. In general, formal organizations are goal-oriented and rational, and the relationship between individuals and the organization is comparatively impersonal. Subordinates have less influence over the process in which they participate, with their duties more clearly defined. The extreme case of a formal organization would resemble Weber's ideal bureaucracy.
Informal organizations are those that have relatively few written rules or policies. Instead, individuals are more likely to adopt patterns of behavior that are influenced by a number of social and personal factors. Changes in the organization are less often the result of authoritative dictates and more often an outcome of collective agreement by members. Informal organizations tend to be more flexible and more reactive to outside influences. But they may also diminish the ability of top managers to effect rapid change.
In addition to the three root characteristics of business organizations, there are two main types of structures: functional and divisional. Most companies represent an amalgam of both, and many variations exist. Functional organizational structures are more traditional. They departmentalize the company based on key functions. For example, activities related to production, marketing, and finance might be grouped into three respective departments. Within each, moreover, activities would be departmentalized into subdepartments. Within the marketing department, for example, might be the sales, advertising, and promotions departments.
The advantage of functionally structured organizations is that they typically achieve an efficient specialization of labor because people with specific skills can follow a career path within their department. In addition, this type of structure is relatively easy for employees to comprehend. Therefore, they are more likely to identify with their group and enjoy a sense of accomplishment through the gains of the department. Finally, functional structures reduce duplication of work because responsibilities are clearly defined.
On the other hand, functional structures are often divisive, causing departments to become adversarial and employees to engage in behavior that benefits their department at the expense of the overall organization. Furthermore, employees in departments often become myopic, losing sight of the goals of the entire organization. In addition, functional structures typically fail to make full use of the talents of workers and they are often less reactive to environmental influences.
Companies that employ a more divisional structure break the organization down into semiautonomous units and profit centers based on activities related to products, customers, or geography. Regardless of the activity group used to segment the company, each unit operates as a separate business. For example, a company might be broken down into southern, western, and eastern divisions. Or, it might create separate divisions for consumer, industrial, and institutional products. Again, within each division are subdivisions.
One benefit of a divisional structure is that it facilitates expansion because the company can easily add a new division to focus on a new profit opportunity without having to significantly alter exiting systems. In addition, accountability is increased because divisional performance can be measured more easily. Furthermore, divisional structures permit decentralized decision making, which allows managers with specific expertise to make key decisions in their area.
The potential drawbacks to divisional structures include duplication of efforts and a lack of communication. For example, separate consumer and industrial divisions of the same air-conditioner company may both be trying to develop a better compressor. In addition, divisional organizations, like functionally structured companies, may have trouble keeping all departments focused on an overall company goal. A corollary is that top management sometimes loses touch with the goals and inner-workings of each division.
A variation on the divisional structure is known as the sector structure. This is employed typically by very large and diversified companies. One of the best known examples is General Electric Co., which pioneered the format in the mid-1970s. Sectors are usually broad market-defined operating areas and they may combine several conventional divisions that produce related goods or services. For instance, some of GE's sectors include aircraft engines, lighting, and capital services. The logic behind the sector structure is to strike a medium between extreme centralization and extreme decentralization. If a company has dozens of divisions it might be impractical to have all the division heads report directly to the CEO. On the other hand, because the company is so large, it may not be possible or desirable to merge divisions and centralize it more. By grouping similar divisions into coherent sectors, the sector approach attempts to make large organizations more focused and manageable.
A less traditional (and less common) approach is the matrix structure, which emphasizes collaborative relationships between different parts of an organization. Under a matrix structure, individuals or departments have multiple reporting relationships, or at least multiple consulting relationships. This is particularly useful on large projects that require inputs from many different functional areas of the organization. For example, a company may have a product manager for each of its product lines, and these individuals may work both with marketing staff and with production staff in order to fulfill their role. In addition, each may collaborate periodically with other product managers in order to maintain a unified product strategy. If drawn on paper, this structure would appear as a grid with reporting or consulting lines connecting the product managers to the marketing department, the manufacturing or production department, and each other.
Since the late 1980s, companies have been paying greater attention to how their activities are organized across national borders. Interest in such international management issues has grown as global market strategies increasingly dominate corporate objectives. The primary issues in international structures are local autonomy/uniqueness and how international units relate to each other and to the headquarters.
Christopher Bartlett and Sumantra Ghoshal have done important work in this area, summarizing their findings in the 1989 book Managing Across Cultures, which was updated and re-released in 1998. They argue that the oldest—and least effective—form of international structure is the "global" structure, in which international divisions or subsidiaries follow detailed and relatively inflexible supervision from the corporate headquarters. As a result, the company tends to operate in a similar manner in all places following a centrally determined formula. At the other end of the continuum, Bartlett and Ghoshal cited the "transnational" organization, which allows local conditions and strengths to influence both local practices and, if appropriate, worldwide practices. In essence, the transnational enterprise tries to use all of its resources to their fullest potential, regardless of their country of origin.
For example, if a company opens or acquires a new research facility in another country and finds that the labor and legal conditions in that country are ideal for research and development activities (e.g., access to a highly skilled workforce, minimal government intervention), the company may decide to do all of its R&D at that location. At the same time, regional marketing units in a transnational organization have the flexibility to tailor products or marketing to the local audience in order to ensure relevancy. Both of these scenarios would be unlikely under the so-called global structure.
[ Dave Mote ]
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