Organization, Theory and Design – Week 1 (CH 1 & 3)
Chapter 1
Organization Theory and Design refers to the study of how organizations function and their interrelationship
with the external environment. It examines the process through which managers select and manage aspects of
structure and culture to increase organizational effectiveness.
Organizations are intangible. No one ever touched an organization.
Definition: a tool people use to coordinate their actions to obtain something they desire or value.
Entrepreneurship: the process by which people recognize opportunities to satisfy needs and then gather and
use resources to meet those needs.
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.
Why do organizations exist?
First-order rationales
1. Division of labor = who will do which tasks?
- More productive and efficient to work together
2. Coordination of tasks
- Economize on transaction costs
- The costs associated with negotiating, monitoring and governing exchanges between people.
- It is low when employees know what to do and who should work with whom.
,Second-order rationales
3. Specialization 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. (small car
manufacturerà responsible for designing the whole engine, large car manufacturerà specialize
in one/two tasks
4. Economies of scale and scope
- Scale: cost savings that result when goods and services are produced in large volume on
automated production lines.
- Scope: cost savings that result when an organization is able to use underutilized resources more
effectively because they can be shared across different products or tasks. (producing three car
models instead of one simultaneously)
5. Manage interaction with environment
- 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.
6. Expert power and control
- Pay attention to the organizations’ needs. Organizations can discipline or fire workers who fail to
conform and can reward good performance with promotion and rewards.
Organizational structure and culture are the means the organization uses to achieve its goals; organizational
design is about how and why various means are chosen. An organization’s behavior is the result of its design
and the principles behind its operation. It is a task that requires managers to strike a balance between external
pressures from the organization’s environment and internal pressures from, for example, its choice of
technology.
Organizational change is the process by which organizations move from their present state to some desired
future state to increase their effectiveness. The goal of organizational change is to find new or improved ways
of using resources and capabilities to increase an organization’s ability to create value, and hence its
performance.
Contingency: an event that might occur and must be planned for, such as a changing environment pressure like
rising gas prices 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. For example, an organization’s ability to
attract skilled employees, loyal customers, or government contracts is a function of the degree to which the
way it is designed gives it control over those three environmental factors.
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. Core competences allow a company to develop a
strategy to outperform competitors and produce better products, or produce the same products but at a lower
cost. Strategy is the specific pattern of decisions and actions that managers take to use core competences to
achieve a competitive advantage and outperform competitors.
How Do Managers Measure Organizational Effectiveness?
In this context, control means having control over the external environment and having the ability to attract
resources and customers. Innovation means developing an organization’s skills and capabilities so the
organization can discover new products and processes. It also means designing and creating new organizational
structures and cultures that enhance a company’s ability to change, adapt, and improve the way it functions.
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 manner. It also means introducing
techniques like Internet-based information systems, total quality management, and just-in-time inventory
systems.
External à Control
- Influence stakeholders’ perceptions in its favor and receive positive evaluation
Internal à Innovation
- Structure & Culture
- Flexible in decision making and making products
Technical à Efficiency
, Official goals are guiding principles that the organization formally states in its annual report and in other public
documents. Usually these goals lay out the mission of the organization: They explain why the organization
exists and what it should be doing.
Operative goals are specific long- and short-term goals that guide managers and employees as they perform
the work of the organization. The goals listed in Table 1.1 are operative goals that managers can use to
evaluate organizational effectiveness. Managers can use operative goals to measure how well they are
managing the environment.
Summary Chapter 1:
We have examined what organizations are, why they exist, the purpose of organizational theory, design, and
change, and the different ways in which they can be evaluated. Organizations play a vital role in increasing the
wealth of a society, and the purpose of managing organizational design and change is to enhance their ability
to create value and thus organizational effectiveness. Chapter 1 has made the following main points:
1. An organization is a tool that people use to coordinate their actions to obtain something they desire
or value—to achieve their goals.
2. Organizations are value-creation systems that take inputs from the environment and use skills and
knowledge to transform these inputs into finished goods and services.
3. The use of an organization allows people jointly to increase specialization and the division of labor,
use large-scale technology, manage the organizational environment, economize on transaction
costs, and exert power and control—all of which increase the value the organization can create.
4. Organizational theory is the study of how organizations function and how they affect and are
affected by the environment in which they operate.
5. Organizational structure is the formal system of task and authority relationships that control how
people coordinate their actions and use resources to achieve an organization’s goals.
6. Organizational culture is the set of shared values and norms that control organizational members’
interactions with each other and with suppliers, customers, and other people outside the
organization.
7. 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
design has important implications for a company’s competitive advantage, its ability to deal with
contingencies and manage diversity, its efficiency, its ability to generate new goods and services, its
control of the environment, its coordination and motivation of employees, and its development and
implementation of strategy.
8. Organizational change is the process by which organizations redesign and trans- form their
structures and cultures to move from their present state to some de- sired future state to increase
their effectiveness. The goal of organizational change is to find new or improved ways of using
resources and capabilities to in- crease an organization’s ability to create value and hence
performance.
9. Managers can use three approaches to evaluate organizational effectiveness: the external resource
approach, the internal systems approach, and the technical ap- proach. Each approach is associated
with a set of criteria that can be used to measure effectiveness and a set of organizational goals.
