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Summary Organization Theory & Design
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Summary Organization Theory & Design. (Passed with a 8.7). Includes all the important figures and tables.
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Summary Organizational theory, Design and Change§1 Organizations and Organizational Effectiveness
1.1 What is an organization?
An organization is a tool people use to coordinate their actions to obtain something they desire or
value – that is, to achieve their goals. An organization is a response to and a means of satisfying some
human need. New organizations are spawned when new technologies become available and new
needs are discovered. Organizations die or are transformed when the needs they satisfied are no
longer important.
Entrepreneurship → the term used to describe the process by which people recognize opportunities
to satisfy needs and then gather and use resources to meet those needs.
The way an organization creates value is depicted in figure 1.1 (page 25).
Value creation takes place at three stages: input,
conversion and output. Each stage is affected by the
environment in which the organization operates.
Organizational environment → the set of forces and
conditions that operate beyond an organization’s
boundaries but affect its ability to acquire and use
resources to create value.
Input includes resources such as raw materials,
machinery, information and knowledge, human
resources, and money and capital. They way an
organization chooses and obtains from its
environment the inputs it needs to produce goods
and services determines how much value the
organization creates at the input stage.
The way the organization uses human resources and
technology to transform inputs into outputs
determines how much value is created at the
conversion stage.
The result of the conversion process is an output of
finished goods and services that the organization
releases to its environment, where they are
purchased and used by customer to satisfy their
needs. Hungry people who go to MacDonald are the input, in the conversion stage, MacDonalds
apply their skills to yield an output: satisfied hunger (see figure 1.2, page 27, to see MacDonalds
value model).
1.2 Why do organizations exist?
the production of goods and services often takes place in an organizational setting because people
working together usually creates more value than people working separately. Figure 1.3 (page 28)
summarizes five reasons for the existence of organizations. We’re discuss those now.
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, 1. To increase specialization and the
division of labour:
For many kinds of productive
work the use of an organization
allows the development of
specialization and a division of
labour.
2. To use Large-Scale Technology:
Organizations are able to take
advantage of the economies of
scale and scope. Economies of
scale → cost savings that result
when goods and services are
produced in large volume on
automated production lines.
Economies of scope → cost
savings that result when an organization is able to use underutilized resources more
effectively because they can be shared across several different products or tasks.
3. To manage the organizational environment
Managing complex environments is a task beyond the abilities of individuals. An organization
has the resources to develop specialists to anticipate or attempt to influence many pressures
from the environment.
4. To economize on transaction costs
Transaction costs → the costs associated with negotiating, monitoring and governing
exchanges between people. This is hard to do for individuals alone.
5. To exert power and control
Organizations can exert great pressure on individuals to conform to task and production
requirements in order to increase production efficiency. Individuals who work for themselves
address their own needs, in a company, they address the needs of just the company.
1.3 Organizational theory, design and change
Organizational theory → the study of how organizations function and how they affect and are
affected by the environment in which they operate.
Organizational structure → the formal system of task and authority relationships that control how
people coordinate their actions and use resources to achieve organizational goals. Can be managed
and changed through the process of organizational design.
Organizational culture → The set of shared values and norms that controls organizational members’
interactions with each other and with suppliers, customers, and other people outside the
organization. Is shaped by people, ethics and organizational structure.
Organizational design → the process by which managers select and manage aspects of structure and
culture so that an organization can control the activities necessary to achieve its goals.
Organizational change → The process by which organizations redesign their structures and cultures
to move from their present state to some desired future state to increase their effectiveness.
Contingency → An event that might occur and must be planned for (e.g. changing gas prices).
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,Organizations are discovering that organizational design, change and redesign are a source of
sustained competitive advantage. Competitive advantage → the ability of one company to
outperform another because its managers are able to create more value from the resources at their
disposal. Competitive advantage springs from core competences. Core competences → Managers’
skills and abilities in value-creating activities. Core competences allow a company to develop a
strategy. Strategy → the specific pattern of decisions and actions that managers take to use core
competences to achieve a competitive advantage and outperform competitors.
Diversity is important. The quality of organizational decision making is a function of the diversity in
viewpoints that get considered and of the kind of analysis that takes place. An organization needs to
design a structure and control system to make optimal use of the talents of a diverse workforce and
to develop an organizational culture encourages employees to work together. An organization’s
structure and culture determine how effectively managers are able to coordinate and motivate
workers.
1.4 How do managers measure organizational effectiveness?
The external resource approach (control) allows managers to evaluate how effectively an
organization manages and controls its external environment (e.g. to influence the external
stakeholders). To measure the effectiveness of their control over the environment, managers use
indicators such as stock price, ROI, profitability, etc.
The internal system approach (innovation) allows managers to evaluate how effectively an
organization functions and operates. To be effective, an organization needs a structure and a culture
that foster adaptability and quick responses to changing conditions in the environment. This can
often be measured objectively, for example by the ability to redesign and improve its products much
more quickly than its rivals (Indicators: e.g. time for making decisions).
The technical approach (efficiency) allows managers the evaluate how efficiently an organization can
convert some fixed amount of organizational skills and resources into finished goods and services
(indicators: productivity (like faulty products or waste material) and ratio between output and input.
For measuring effectiveness, there are organizational goals. Managers create goals that they use to
access how well the organization is performing. There are two types of goals:
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, - Official goals: guiding principles that the organization formally states in its annual report and
in other public documents;
- Mission: goals that explain why the organization exists and what it should be doing.
There are also operative goals. Operative goals are specific long- and short-term goals that guide
managers and employees as they perform the work of the organization. Managers can use operative
goals to measure how well they are managing the environment (is market share increasing or
decreasing? Is the cost of the input rising of falling?)
§2 Stakeholders, managers and ethics
2.1 Organizational stakeholders
Inside stakeholders
Organizations exist because of their ability to create value and acceptable outcomes for various
groups of stakeholders, people who have an interest, claim or stake in an organization, in what it
does, and how well it performs.
Inducements include rewards such as money, power, and organizational status. Contributions
include skills, knowledge, and expertise that organizations require of their members during task
performance.
Inside stakeholders are people who are closest to an organization and have the strongest of most
direct claim on organizational resources: shareholders, managers, and the workforce.
Shareholders are the owners of the organization, and as such, their claim on organizational resources
is often considered superior to the claims or other inside shareholders (their inducements is
prospective money in the form of dividends and increased stock prices).
Managers are the employees responsible for coordinating organizational resources and ensuring that
an organization’s goals are met successfully. Top managers are responsible for investing shareholder
money in resources to maximise the value of an organization’s future output of goods and services.
And organization’s workforce consists of all the nonmanagerial employees.
Outside stakeholders
Outside stakeholders are people who do not own the organization and are not employed by it, but
they do have some claim on or interest in it: customers, suppliers, the government, trade unions,
local communities and the general public.
Customers are usually an organization’s largest stakeholder group. Their contribution to the
organization is the revenue from purchase of goods and services. Customers are induced by the
company’s quality and prices of goods and services.
Suppliers contribute by providing reliable raw materials and component parts that allow the
organization to reduce uncertainty in its technical or production operations and thus reduce
production costs. Their inducements to contribute are the revenues from purchase of inputs.
The government wants companies to compete in a fair manner and obey the rules of free
competition, wants companies to obey agreed-on rules and laws concerning the payment and
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