ORGANIZATION THEORYCHAPTER 1:

Organizations and Organizational Effectiveness

Gareth R. Jones

Learning Objectives1. Explain why organizations exist and the

purposes they serve2. Describe the relationship between

organizational theory and organizational design and change, and differentiate between organizational structure and culture

Learning Objectives (cont.)

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3. Understand how managers can utilize organizational theory to design and change their organizations to increase organizational effectiveness

4. Identify how managers assess and measure organizational effectiveness

5. Appreciate the way contingency factors influence the design of organizations

What is an Organization?

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Organizations provide goods and servicesOrganizations employ peopleOrganizations bring together people and

resources to produce products and services

We think about organizations when they….?

What is an Organization? (cont.)

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Organization: a tool used by people to coordinate their actions to obtain something they desire or value.FE: police force, banks, IBM, Walt Disney

Company… Entrepreneurship: identify opportunities

to satisfy needs, and then gather and use resources to meet those needsAmazon.com story

How Does an Organization Create Value?

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Value creation takes place at three stages: input, conversion, and output

Each stage is affected by environment in which organization operates.

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.

How Does an Organization Create Value? (cont.)Inputs: include human resources,

information and knowledge, raw materials, money and capital

Conversion: the way the organization uses human resources and technology to transform inputs into outputs

Output: finished products and services that the organization releases to its environment General Motors, IBM, McDonald’s ..

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Figure 1.1: How an Organization Creates Value

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Why Do Organizations Exist?

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To increase specialization and the division of labor

People who work in organizations may become more productive and efficient at what they do than people who work alone.Division of labor allows specialization

Specialization allows individuals to become experts at their job

Why Do Organizations Exist? (cont.)

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To use large-scale technology Economies of scale: cost savings that result

when goods and services are produced in large volume

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 tasksThey can be achieved when it is possible to design an

automated production line to produce several different types of products simultaneously:Toyota and Honda

Why Do Organizations Exist? (cont.)

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To manage the external environmentExternal environment consists of the

political, social, economic, and technological factors that affect organizations

Organizations regularly exchange products and services for needed resources

Organizations need to manage their external environment

Ability to respond to changing customer needs.

Why Do Organizations Exist? (cont.)

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To exert power and controlOrganizations structure their members to

efficiently produce products and servicesThe organization’s needs must be taken into

consideration by workersRewards, discipline workers…

To economize on transaction costsTransaction costs: the costs associated

with negotiating, monitoring, and governing exchanges between people who must cooperate

Figure 1.3: Why Organizations Exist

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Organizational Theory, Design, and Change: Some Definitions

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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 to coordinate their actions and use resources to achieve organizational goals

Organizational Theory, Design, and Change: Some DefinitionsThe principle purpose of organizational

structure is one of control: to control the way people coordinate

their actions to achieve organizational goals

to control the means used to motivate people to achieve these goalsFE: at Microsoft Bill Gates' solution to the control

problems in developing innovative products of scientists (teams-rewards)

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Some Definitions (cont.)

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Organizational culture: is the set of key values, beliefs, and attitudes shared by organizational members and helps shape the behavior within the organizationOc is shaped by people in organization,

ethics of the organization, type of structure used by organization. Fe: Coca cola and Pepsi’s different cultures

Some Definitions (cont.)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 structure and culture are the means the organization uses to achieve its goals

Organizational design is about how and why various means are chosen.Organizational designs in flexible and stable

environment Microsoft and Intel – Nucor and Alcoa

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Some Definitions (cont.)

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Organizational change: the process by which organizations move

from their present state to some desired future state to increase their effectiveness

Organizational design and change are highly interrelated

Organizational redesign and transformationThe difference in the way Steve Jobs and Michael

Dell formed structures and cultures of organizations

Figure 1.4: The Relationship Among Organizational Theory, Structure, Culture, Design, and Change

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Importance of Organizational Design and Change

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Dealing with contingenciesContingencies are events that might occur

and must be planned forOrganizations must be designed to be able

to respond to changes in the complex and increasingly difficult environment many organizations face

Globalization and changing IT technologies are just two challenges organizations must be ready to face

Importance of Organizational Design and Change (cont.)

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Gaining competitive advantageThe ability to outperform other companies

because of the capacity to create more value from resources

Core competences: skills and abilities in value creation embedded in the organization’s people or structures

Strategy: pattern of decisions and actions involving core competences that produces a competitive advantage to outperform competitors

Importance of Organizational Design and Change (cont.)

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Managing diversityDifferences in the race, gender, and

national origin of organizational members have important implications for organizational culture and effectiveness

Learning how to effectively utilize a diverse workforce can result in better decision making and more effective workforce

Importance of Organizational Design and Change (cont.)

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Promoting efficiency, speed, and innovationThe better organizations function, the more

value they createThe correct organizational design can lead to

faster innovation and quickly get new products to market

Consequences of Poor Organizational Design

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Decline of the organization’s sales and profits

Layoffs occur and talented employees leave to take positions in growing organizations

Resources become harder to acquireResulting crisis may result in organizational

failure

How Do Managers Measure Organizational Effectiveness?

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Control: external resource approachMonitors how effectively an organization

manages and controls its external environment

Innovation: internal system approachDevelops an organization’s skills and

capabilities to change, adapt, and improve the way it functions

Efficiency: technical approachMeasures how efficiently an organization

converts a fixed amount of resources into finished goods and services

Table 1.1: Approaches to Measuring Effectiveness

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Measuring Effectiveness: Organizational Goals

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Official goals: guiding principles that the organization formally states in its annual report and in other public documents

Mission: a mission statement explains why the organization exists and what it should be doing

Operative goals: specific long- and short-term goals that guide managers and employees as they perform the work of the organization

Figure 1.5: Plan of the Book

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Figure 1.5: Plan of the Book (cont.)

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Figure 1.5: Plan of the Book (cont.)

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Summary

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Organizations are a tool people use to achieve their goals

Organizational theory is the study of how organizations function and how they affect and are affected by their environment

Organizational effectiveness must be monitored by managers