Organizational Theory, Design and Change
Chapter 1: Organizations and
Organizational Effectiveness
What is an organization?
People have a causal attitude toward organizations because organizations are intangible. Even
though most people in the world today are born, work, and die in organizations, nobody has
ever seen or touched an organization. We see the products or services that an organization
provides, and sometimes we see the people the organization employs.
An organization is a tool people use to coordinate their actions to obtain something they
desire or value – that is, to achieve their goals. For example, people who value entertainment
create organizations such as the Walt Disney Company, CBS, or a local club. In general,
entrepreneurship is 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.
How does an organization create value?
Value creation takes place at three stages: input, conversion, and output. The organizational
environment is 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. Inputs includes
resources such as raw materials, machinery, information and knowledge, human resources,
and money and capital.
Figure 1.1: How an organization creates
Figure 1.1: How an Organization Creates Value Figure 1.2: How McDonald's Creates Value
value
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 amount of value
,the organization creates is a function of quality of its skills, including its ability to learn from
and respond to the environment. 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 customers to satisfy their needs – such as delivered books. The
organization uses the money to earned from the sale of its output to obtain new supplies of
inputs, and the cycle begins again.
In the conversion stage, service organizations create value by applying their skills to yield an
output: satisfied hunger, a cured patient, etc.
Why do organizations exist?
Figure 1.3: Why Organizations Exists
To increase specialization and the division of labor
The collective nature of organizations allows individuals to focus on a narrow area of
expertise, which allows them to become more skilled or specialized at what they do.
To use large-scale technology
Economies of scale are cost savings that result when goods and services are produced in large
volume on automated production lines. 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. Economies of scope (as well as of scale) can
be achieved, for example, when it is possible to design an automated production line to
produce several different types of products simultaneously.
To manage the organizational environment
An organization’s environment is the source of valuable input resources and is the
marketplace into which it releases outputs. It is also the source of economic, social, and
political pressures that affect an organization’s ability to obtain these resources. Managing
complex environments is a task beyond the abilities of most individuals, but an organization
has the resources to develop specialists to anticipate or attempt to influence the many
pressures from the environment. This specialization allows the organization to create more
value for the organization, its members, and its customers.
,To economize on transaction costs
As they learn what to do and how to work with others to perform a task effectively, people
jointly have to decide who will do which tasks (the division of labor), who will get paid what
amounts, and how to decide if each coworker is doing his or her share of the work. The costs
associated with negotiating, monitoring, and governing exchanges between people, to solve
these kinds of transaction difficulties are called transaction costs. Stability reduces transaction
costs and increases productivity.
The exert power and control
Employment, promotion and increased rewards are important and often scarce and therefore
organizations can use them to exert power over individuals.
Organizational theory, design, and change
Organizational theory is the study of how organizations function and how they affect and are
affected by the environment in which the operate.
Figure 1.4: The Relationship among Organizational Theory and Organizational Structure, Culture, and Design, and Change
Organizational Structure
Organizational structure is the formal system of task and authority relationships that control
how people coordinate their actions and use resources to achieve organizational goals.
Organizational Culture
Organizational culture is 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. An organization’s culture is shaped by the people inside the
organization, by the ethics of the organization, by the employment rights given to employees,
, and by the type of structure used by the organization. Like organizational structure,
organizational culture shapes and controls behavior within the organization.
Organizational Design and Change
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. Organizational structure and culture are means the organization uses to achieve it goals;
organizational design is about how and why various means are chosen. Organizational change
is the process by which organizations move from their present state to some desired future
state to increase their effectiveness. The goals of organizational change is to find new or
improved ways using resources and capabilities to increase an organization’s ability to create
value, and hence its performance.
The importance of organizational design and change
Organizational design and change have important implications for a company’s ability to deal
with contingencies, achieve a competitive advantage, manage diversity effectively, and
increase its efficiency and ability to innovate.
Dealing with Contingencies
A contingency is an event that might occur and must be planned for, such as changing
environment pressure like rising gas pricing or the emergence of a new competitor like
Amazon.com that decides to use new technology in an innovative way. The design of an
organization determines how effectively an organization is able to respond to various
pressures in its environment and so obtain scarce resources.
An organization can design its structure in many ways to increase control over its
environment. An organization might change employee task relationships so that employees
are more aware of the environment, or it might change the way the organization relates to
other organizations by establishing new contracts or joint ventures.
As pressure from competitors, consumers, and the government increase, the environment
facing all organizations is becoming increasingly complex and difficult to respond to, and more
effective types of structure and culture are continually being developed and tried.
Changing technology is another contingency to which organizations must respond.
Gaining competitive advantage
Competitive advantage is 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, managers’ skills and abilities in value-creation
activities such as manufacturing, R&D, managing new technology, or organizational design
and change. Strategy is the specific pattern of decisions and actions that managers take to use
core competences to achieve a competitive advantage and outperform competitors.
The way managers design and change organizational structure is an important determinant of
how much value the organization creates because this affects how it implements strategy.
An organization’s strategy is always changing in response to changes in the environment;
organizational design must be a continuously evolving managerial activity for a company to
stay ahead of the competition.
