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GEO2-2218 Organisation Theories Summary
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This summary contains all chapters and additional reading for the course Organization Theories, GEO2-2218, 2020
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Organization TheoriesGEO2-2218
CH 1, Organizations & Organization Effectiveness
An organization is a tool people use to coordinate their actions to obtain something they
desire or value, or their goals. Organizations are intangible. Organizations are created by
individuals or small groups who believe they have the necessary skills and knowledge to
produce certain goods and services, this is called entrepreneurship.
The value created by organizations can be split into three stages:
Input
o Raw materials
o Capital
o Knowledge
Conversion
o Machinery
o Computers
o Skills
Output
o Finished goods
o Services
o Value
Each stage is affected by the 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. Customers, shareholders, suppliers, distributors, governments and
competition all belong to the organizational environment.
Organizations exists because teamwork can create more value than individual work. It can
increase specialization and division of labor, as workers can focus on a narrow set of
activities allowing them to increase skill. Another reason is economies of scale, thus cost
saving. Economies of scope are 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. Another reason for organizations is to manage organizations effectively, as
managing complex environments is usually beyond an individual’s ability. Also, organizations
exist to economize on transaction costs. Transaction costs are the costs of associated with
negotiating, monitoring and governing exchanges between people. Organizations also exert
power and control as their workers are obligated to execute certain tasks and follow specific
rules in favor of the organization’s needs. Organizations do this in the forms of rewards
(employments, promotions, etc.) and punishments (discipline, fire workers).
The organizational structure is the formal system of tasks and authority relationships that
control how people coordinate their actions and use resources to achieve organizational
goals. It controls coordination and motivation and thus shapes behavior of people and the
organizations. It also evolves as an organization grows and can be changed by organizational
design.
Organizational culture is the set of shared values and norms that control organizational
members’ interaction with each other and with its organizational environment. It is shaped
by the people inside the organization, along with ethics and social structure. It also shapes
,the behavior of employees. The culture also evolves as the organization grows and
differentiates, and can be managed and changed by organizational design.
Organizational design is the process by which managers select and manage aspects of
structure and culture so an organization can control the activities necessary to achieve its
goals. Organization structure and culture are means, while organizational design is about
how and why various means are chosen. The design balances the needs. Of the organization
to manage external and internal pressures to survive in the long term. It allows organizations
to continually redesign and transform its structure and culture as global environments
change. In some industries this environment changes faster than others, so flexibility
capabilities are needed accordingly. Organizational change is the process by which
organizations move from their present state to some desired future state to increase their
effectiveness.
Organizational design and change are important because of:
Dealing with contingencies, an event that might occur and must be planned for like
environmental pressures as new competitors, oil prices, etc.
Gaining competitive advantage, ability to outperform competitors as managers can
create more value because of their core competences, the skills for producing, R&D,
etc.
Managing diversity, differences in gender, race, age and nationality. As this can
improve decision making due to multitude of viewpoints.
Promoting efficiency, speed and innovation as environments are highly competitive.
The consequence of poor organizational design or lack of attention to it, is the decline of the
organization as talented employees leave, resources become harder to acquire and value
creation stagnates.
Control, innovation and efficiency can be seen as the most important processes to assess
and measure the effectiveness of organizations. Control indicates having control over the
external environment and the ability to attract resources and customers. Innovations means
developing skills and capabilities to discover new products and processes and creating new
organizational structures and cultures that enhance a company’s ability to change, adapt
and improve. Efficiency means developing modern production facilities using new
information technologies that can produce and distribute a company’s products in a timely
and cost-effective matter. Three approaches can be taken to measure organizational
effectiveness:
External resource approach
o Evaluate ability to secure, manage and control scarce and valued skills and
resources
Lower costs of input
High quality input- raw material and employees
Increase market share and stock price
Support of stakeholders
Internal systems approach
o Evaluate ability to be innovative and function quickly and responsively
Low decision-making time
Rate of product innovation
High coordination and motivation of employees
Reduce conflict
, Reduce time to market
Technical approach
o Evaluate ability to convert skills and resources into goods and services
efficiently
High product quality
Low number of deficits
Low production costs
High customer service
Low delivery time to consumer
Official goals are guiding principles which lay out the mission of the company that the
organization formally states in its public documents. Operative goals are specific long- and
short-term goals that guide managers and employees of an organization.
CH 2, Stakeholders, Managers and Ethics
Stakeholders are people who have an interest, claim or stake in an organization, in what it
does and how well it performs. Inducements are rewards for the stakeholders such as
money, power and organizational status. Contributions of the stakeholders include capital,
skills, knowledge etc.
Inside stakeholders are people closest to an organization and those who have the strongest
or most direct claim on organizational resources. These are the shareholders, managers and
the workforce. Shareholders contribute money and capital, and their inducements are
dividends and stock appreciation. Managers contribute skills and expertise, and their
inducements are salaries, bonusses, power and status. The workforce also contributes skills
and expertise, but their inducements are wages, bonusses, employment and promotion.
Outside shareholders are people who do not own the company or work at the company, but
do have some claim or interest in it. Customers bring in revenue as a contribution, and
receive quality goods and services as inducements. Suppliers contribute with inputs like raw
materials and as inducement they receive revenue. Government facilitates business practice
and rules as contribution, and their inducements are taxes and fair and free competition.
Unions contribute free and collective bargaining and receive an equitable share of
inducements. Communities contribute with social and economic infrastructure and receive
taxes, revenue and employment as inducements. The general public provides customer’s
loyalty and reputation as contribution and receives national pride as inducement.
As the different stakeholders have different goals for the organization, organizations are
often regarded as alliances or coalitions of stakeholder groups that directly and indirectly
bargain with each other and use their power and influence to alter the balance of
inducements and contributions in their favor. To be effective, organizations must at least
minimally satisfy the interest of all stakeholder groups, otherwise they might withdraw their
contributions. An organization’s choice of goals has political and social implications.
Another problem involved is how to allocate rewards. In this situation it should also at least
minimally satisfy every stakeholder group.
Authority is the power to hold people accountable for their actions and to influence directly
what they do and how they do it. Shareholders usually have the most authority which they
delegate to the board of directors, who are their representatives. They monitor corporate
, managers and can hire, fire and reward them. The chair of the board has the most authority
in an organization as he/she is the principal representative of the board. Through the
executive committee, consisting of the most important directors and top managers, the
chair has responsibility for monitoring and evaluating the way corporate managers use
organizational resources. Corporate managers are accountable for the way they use
resources as they have accepted the legal authority and responsibility to use the
organization’s resources to create value.
There are two types of directors. Inside directors are directors who also hold offices in a
company’s formal hierarchy as they are full-time employees. Outside directors are not
employed by the company, they can be employees of other companies as well.
The Chief Executive Officer (CEO) can influence organizational effectiveness in five ways:
Setting goals and designing its structure
Select key executives to occupy highest level of managerial hierarchy
Determines top management’s rewards and incentives
Control allocation of scarce resources
o Money, decision-making power
A CEO’s actions and reputation have major impact on stakeholders’ views and ability
to attract resources
The Chief Operating Officer (COO) is the next most important executive. As the CEO is
primarily responsible for planning long-term objectives, the COO has primary responsibility
for managing the organization’s internal operations to make sure they conform to the
objectives set by the CEO. The Top-management team, existing of the group of managers
who report to the CEO and COO, helps to set the company’s strategy and long-term goals.
Divisional managers only set strategies and goals for only their own division, not the whole
company. Functional managers are responsible for developing skills and capabilities that
collectively provide the core competences that give a company a competitive advantage.
Agency theory offers a useful way of understanding the complex authority relationship
between top management and the board of directors. In delegating authority, an agent
problem, a problem in determining managerial accountability, can arise. Because if you
employ an expert manager, who knows more than a member of the board, how can
question his decisions of these expert managers. Shareholders have an information
disadvantage and thus an agent dilemma will arise and thus a moral hazard as they might
pursue their own interest instead of that of their ‘bosses’, the owners. In the case of self-
dealing, corporate managers take advantage of their position.
The agency problem can be solved by using governance mechanisms. This can be by limiting
power, and/or creating the right incentives. Stock-based compensation scheme is such an
incentive. Managers receive part of their compensation in stocks, so that they are
incentivized to let the company perform well, as they will benefit through its stock price
appreciation. Also, interests are aligned as managers become stockholders.
Developing organizational career paths is also a solution as most managers aspire to become
CEO one day as this has power and high compensation as inducements. This can send out
clear signals to employees.
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