organizational theory, design, and change · organizational theory to design and change their...

Copyright © 2010 Pearson Education, Inc.1-11-1

Organizational Theory, Design, and Change

Sixth EditionGareth R. Jones

Chapter 1

Organizations and Organizational Effectiveness

1-Copyright 2010 Pearson Education, Inc. 22

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.)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?Organizations provide goods and servicesOrganizations employ peopleOrganizations bring together people and resources to produce products and services

4


What is an Organization? (cont.)

Organization: a tool used by people to coordinate their actions to obtain something they desire or valueEntrepreneurship: identify 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

Inputs: include human resources, information and knowledge, raw materials, money and capitalConversion: the way the organization uses human resources and technology to transform inputs into outputsOutput: finished products and services that the organization releases to its environment


Figure 1.1: How an Organization Creates Value


Why Do Organizations Exist?To increase specialization and the division of labor

Division of labor allows specialization

Specialization allows individuals to become experts at their job


Why Do Organizations Exist? (cont.)

To use large-scale technology Economies of scale: cost savings that result when goods and services are produced in large volumeEconomies 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

9



To manage the external environmentExternal environment consists of the political, social, economic, and technological factors that affect organizationsOrganizations regularly exchange products and services for needed resourcesOrganizations need to manage their external environment



To exert power and controlOrganizations structure their members to efficiently produce products and services

To economize on transaction costsTransaction costs: the costs associated with negotiating, monitoring, and governing exchanges between people who must cooperate

11


Figure 1.3: Why Organizations Exist


Organizational Theory, Design, and Change: Some Definitions

Organizational theory: the study of how organizations function and how they affect and are affected by the environment in which they operateOrganizational structure: the formal system of task and authority relationships that control how people to coordinate their actions and use resources to achieve organizational goals


Some Definitions (cont.)Organizational culture: is the set of key values, beliefs, and attitudes shared by organizational members and helps shape the behavior within the organizationOrganizational 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


Some Definitions (cont.)Organizational change:

the process by which organizations move from their present state to some desired future state to increase their effectivenessOrganizational redesign and transformation


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


Importance of Organizational Design and ChangeDealing with contingencies

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


Importance of Organizational Design and Change (cont.)

Gaining competitive advantageThe ability to outperform other companies because of the capacity to create more value from resourcesCore competences: skills and abilities in value creation embedded in the organization’s people or structuresStrategy: pattern of decisions and actions involving core competences that produces a competitive advantage to outperform competitors

18



Managing diversityDifferences in the race, gender, and national origin of organizational members have important implications for organizational culture and effectivenessLearning how to effectively utilize a diverse workforce can result in better decision making and more effective workforce



Promoting efficiency, speed, and innovation

The better organizations function, the more value they createThe correct organizational design can lead to faster innovation and quickly get new products to market

20


Consequences of Poor Organizational Design

Decline of the organization’s sales and profitsLayoffs occur and talented employees leave to take positions in growing organizationsResources become harder to acquireResulting crisis may result in organizational failure

1-Copyright 2010 Pearson Education 222222

How Do Managers Measure Organizational Effectiveness?

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


Measuring Effectiveness: Organizational Goals

Official goals: guiding principles that the organization formally states in its annual report and in other public documentsMission: a mission statement explains why the organization exists and what it should be doingOperative 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


Figure 1.5: Plan of the Book(cont.)


Figure 1.5: Plan of the Book (cont.)


Summary

Organizations are a tool people use to achieve their goalsOrganizational theory is the study of how organizations function and how they affect and are affected by their environmentOrganizational effectiveness must be monitored by managers

28

2-Copyright © 2010 Pearson Education, Inc. 11



Chapter 2

Stakeholders, Managers, and Ethics


Learning Objectives1. Identify the various stakeholder

groups and their claims on an organization

2. Understand the choices and problems inherent in distributing the value an organization creates

3. Appreciate who has authority and responsibility at the top of an organization, and distinguish between different levels of management


Learning Objectives (cont.)4. Describe the agency problem that

exists in all authority relationships and the mechanisms available to control illegal and unethical behaviors

5. Discuss the vital role played by ethics in leading managers and employees to pursue goals that lead to long-run organizational effectiveness


Organizational StakeholdersStakeholders: people who have an interest, claim, or stake in an organizationInducements: rewards such as money, power, and organizational statusContributions: the skills, knowledge, and expertise that organizations require of their members during task performance


Inside StakeholdersPeople who are closest to an organization and have the strongest and most direct claim on organizational resources

Shareholders: the owners of the organizationManagers: the employees who are responsible for coordinating organizational resources and ensuring that an organization’s goals are successfully metThe workforce: all non-managerial employees


Outside StakeholdersPeople who do not own the organization, are not employed by it, but do have some interest in it

Customers: an organization’s largest outside stakeholder groupSuppliers: provide reliable raw materials and component parts to organizationsThe government

Wants companies to obey the rules of fair competitionWants companies to obey rules and laws concerning the treatment of employees and other social and economic issues


Outside Stakeholders (cont.)Trade unions: relationships with companies can be one of conflict or cooperationLocal communities: their general economic well-being is strongly affected by the success or failure of local businessesThe general public

Wants local businesses to do well against overseas competitionWants corporations to act in socially responsible way


Table 2.1: Inducements and Contributions of Stakeholders


Organizational Effectiveness: Satisfying Stakeholders’ Goals and Interests

An organization is used simultaneously by various stakeholders to achieve their goalsEach stakeholder group is motivated to contribute to the organizationEach group evaluates the effectiveness of the organization by judging how well it meets the group’s goalsFor an organization to be viable, the dominant coalition of stakeholders has to control sufficient inducements to obtain the contributions required of other stakeholder groups


Stakeholder GoalsShareholders: return on their investmentCustomers: product reliability and product valueEmployees: compensation, working conditions, career prospects

10


Competing GoalsOrganizations exist to satisfy stakeholders’goalsBut which stakeholder group’s goal is most important? In the U.S., the shareholders have first claim in the value created by the organizationHowever, managers control organizations and may further their own interests instead of those of shareholdersGoals of managers and shareholders may be incompatible


Allocating RewardsManagers must decide how to allocate inducements to provide at least minimal satisfaction of the various stakeholder groupsManagers must also determine how to distribute “extra” rewardsInducements offered to shareholders affect their motivation to contribute to the organizationThe allocation of reward is an important component of organizational effectiveness


Top Managers and Organizational Authority

Authority: the power to hold people accountable for their actions and to make decisions concerning the use of organizational resourcesShareholders: the ultimate authority over the use of a corporation’s resources

They own the companyThey exercise control over it through their representatives


Top Managers and Organizational Authority (cont.)

The board of directors: monitors corporate managers’ activities and rewards corporate managers who pursue activities that satisfy stakeholder goals

Inside directors: hold offices in a company’s formal hierarchyOutside directors: not full-time employees

Corporate-level management: the inside stakeholder group that has ultimate responsibility for setting company goals and allocating organizational resources


The Chief Executive Officer’s (CEO) Role in Influencing Effectiveness

Responsible for setting organizational goals and designing its structureSelects key executives to occupy the topmost levels of the managerial hierarchyDetermines top management’s rewards and incentives


The CEO’s Role in Influencing Organizational Effectiveness (cont.)Controls the allocation of scarce resources such as money and decision-making power among the organization’s functional areas or business divisionsThe CEO’s actions and reputation have a major impact on inside and outside stakeholders’ views of the organization and affect the organization’s ability to attract resources from its environment


Top Management RolesCEO—Often has primary responsibility for managing the organization’s relationship with external stakeholdersCOO—Responsible for managing the organization’s internal operationsExec. Vice Presidents—Oversees and manages the company’s most significant line and staff roles

17


The Top-Management TeamLine-role: managers who have direct responsibility for the production of goods and servicesStaff-role: managers who are in charge of a specific organizational function such as sales or research and development (R&D)

Are advisory only


The Top-Management Team (cont.)

Top-management team: a group of managers who report to the CEO and COO and help the CEO set the company’s strategy and its long-term goals and objectivesCorporate managers: the members of top-management team whose responsibility is to set strategy for the corporation as a whole


Other ManagersDivisional managers: managers who set policy only for the division they headFunctional managers: managers who are responsible for developing the functional skills and capabilities that collectively provide the core competences that give the organization its competitive advantage


Figure 2.1: The Top-Management Hierarchy


An Agency Theory Perspective

Agency theory suggests a way to understand the conflict that often arises between shareholder goals and top managers’ goalsAgency relation occurs when one person (the principle, i.e. shareholders) delegates decision-making authority to another (the agent, i.e. managers)


Agency ProblemThere is a problem in determining managerial accountability that arises when delegating authority to managers Shareholders are at information disadvantage compared to top managersIt takes considerable time to see the effectiveness of decisions managers may make

23


The Moral Hazard ProblemA moral hazard problem exists when agents have the opportunity and incentive to pursue their own interests

Very difficult to evaluate how well the agent has performed because the agent possesses an information advantage over the principalSelf-dealing describes the conduct of corporate managers who take advantage of their position in an organization to act in their own interests


Solving the Agency ProblemIn agency theory, the central issue is to overcome the agency problem by using governance mechanisms that align the interests of principles and agentsThe role of the board of directors:

Monitor and question top managers decisionsReinforce and develop a code of ethicsFind the right set of incentives to align the interests of managers and shareholders


Governance Mechanisms

Stock-based compensation schemes that are linked to the company’s performancePromotion tournaments and career paths

26


Top Managers and Organizational Ethics

Ethical dilemma: decisions that involve conflicting interests of partiesEthics: moral principles and beliefs about what is right or wrongThere are no indisputable rules or principles that determine whether an action is ethical


Ethics and the LawLaws specify what people and organizations can and cannot doLaws specify sanctions when laws are brokenEthics and laws are relative

No absolute or unvarying standards exist to determine how people should behave


Models of EthicsUtilitarian model: An ethical decision is one that produces the greatest good for the greatest number of peopleMoral Right Model: An ethical decision is the one that best maintains and protects the fundamental rights and privileges of the people affected by itJustice Model: An ethical decision is a decision that distributes benefits and harms among stakeholders in an impartial way

29


Sources of Organizational Ethics

Societal ethics: codified in a society’s legal system, in its customs and practices, and in the unwritten norms and values that people use to interact with each otherProfessional ethics: the moral rules and values that a group of people uses to control the way they perform a task or use resourcesIndividual ethics: the personal and moral standards used by individuals to structure their interactions with other people


Why Do Ethical Rules Develop?Ethical rules and laws emerge to control self-interested behavior by individuals and organizations that threaten the society’s collective interestsEthical rules reduce transaction costs, that is the costs of monitoring, negotiating, and enforcing agreements between people

Reputation effect: Transaction costs:Are higher for organizations with a reputation for illegalityAre lower for organizations with a reputation for honest dealings


Why Does Unethical Behavior Occur?

Personal ethics: developed as part of the upbringing and educationSelf-interest: weighing our own personal interests against the effects of our actions on othersOutside pressure: pressures from the reward systems, industry, and other forces


Creating an Ethical OrganizationAn organization is ethical if its members behave ethicallyPut in place incentives to encourage ethical behavior and punishments to discourage unethical behaviorsManagers can lead by setting ethical examplesManagers should communicate the ethical values to all inside and outside stakeholders


Designing an Ethical Structure and Control System

Design an organizational structure that reduces incentives to act unethicallyTake steps to encourage whistle-blowing – encourage employees to inform about an organization’s unethical actionsEstablish position of ethics officer and create ethics committee


Creating an Ethical CultureValues, rules, and norms that define an organization’s ethical position are part of its cultureBehaviors of top managers are a strong influence on the corporate cultureCreation of an ethical corporate culture requires commitment from all levels


Supporting the Interests of Stakeholder GroupsFind ways to satisfy the needs of various stakeholder groupsPressure from outside stakeholders can also promote ethical behaviorThe government and its agencies, industry councils, regulatory bodies, and consumer watchdogs all play critical roles in establishing ethical rules




Chapter 3

Organizing in a Changing Global

Environment


Learning Objectives1. List the forces in an organization’s

specific and general environment that give rise to opportunities and threats

2. Identify why uncertainty exists in the environment

3. Describe how and why an organization seeks to adapt to and control these forces to reduce uncertainty


Learning Objectives (cont.)4. Understand how resource

dependence theory and transaction cost explain why organizations choose different kinds of interorganizational strategies to manage their environments to gain the resources needed to achieve their goals and create value for their stakeholders


What is the Organizational Environment?

Environment: the set of forces surrounding an organization that have the potential to affect the way it operates and its access to scarce resourcesOrganizational domain: the particular range of goods and services that the organization produces, and the customers and other stakeholders whom it serves


Figure 3.1: The Organizational Environment


The Specific EnvironmentThe forces from outside stakeholder groups that directly affect an organization’s ability to secure resources

Outside stakeholders include customers, distributors, unions, competitors, suppliers, and the government

The organization must engage in transactions with all outside stakeholders to obtain resources to survive


The General EnvironmentThe forces that shape the specific environment and affect the ability of all organizations in a particular environment to obtain resources


The General Environment (cont.)

Economic forces: factors, such as interest rates, the state of the economy, and the unemployment rate, determine the level of demand for products and the price of inputsTechnological forces: the development of new production techniques and new information-processing equipment influence many aspects of organizations’ operations


The General Environment (cont.)

Political, ethical, and environmental forces: influence government policy toward organizations and their stakeholdersDemographic, cultural, and social forces: the age, education, lifestyle, norms, values, and customs of a nation’s people

Shape organization’s customers, managers, and employees


Uncertainty in the Organizational Environment

All environmental forces cause uncertainty for organizationsGreater uncertainty makes it more difficult for managers to control the flow of resources to protect and enlarge their domains


Figure 3.2: Three Factors Causing Uncertainty


Sources of Uncertainty in the Environment

Environmental complexity: the strength, number, and interconnectedness of the specific and general forces that an organization has to manage

Interconnectedness: increases complexity


Sources of Uncertainty in the Environment (cont.)

Environmental dynamism: the degree to which forces in the specific and general environments change over time

Stable environment: forces that affect the supply of resources are predictableUnstable (dynamic) environment: when an organization cannot predict how the changes in the environment will affect them


Sources of Uncertainty in the Environment (cont.)

Environmental richness: the amount of resources available to support an organization’s domain

Environments may be poor because:The organization is located in a poor country or in a poor region of a countryThere is a high level of competition, and organizations are fighting over available resources


Resource Dependence TheoryThe goal of an organization is to minimize its dependence on other organizations for the supply of scare resources and to find ways of influencing them to make resources available

3-Copyright © 2010 Pearson Education, Inc.

Resource Dependence Theory (cont.)

The strength of one organization’s dependence on another depends on:

How vital the resource is to the organization’s survivalThe extent that other organization’s control these resources

16


Resource Dependence Theory (cont.)

An organization has to manage two aspects of its resource dependence:

It has to exert influence over other organizations so that it can obtain resourcesIt must respond to the needs and demands of the other organizations in its environment


Interorganizational Strategies for Managing Resource Dependencies

Two basic types of interdependencies cause uncertainty

Symbiotic interdependencies:interdependencies that exist between an organization and its suppliers and distributorsCompetitive interdependencies:interdependencies that exist among organizations that compete for scarce inputs and outputs

Organizations aim to choose the interorganizational strategy that offers the most reduction in uncertainty with the least loss of control

3-Copyright © 2010 Pearson Education, Inc.

Linkage MechanismsLinkage mechanisms, while controlling interdependency, require coordinationCoordination reduces each organization’s freedom to actOrganizations should choose the strategy that offers the most reduction in uncertainty for the least loss of control

19


Figure 3.3: Interorganizational Strategies for Managing Symbiotic Interdependencies


Strategies for Managing Symbiotic Resource Interdependencies

Developing a good reputationReputation: a state in which an organization is held in high regard and trusted by other parties because of its fair and honest business practicesReputation and trust are the most common linkage mechanisms for managing symbiotic interdependencies


Strategies for Managing Symbiotic Resource Interdependencies (cont.)

Cooptation: a strategy that manages symbiotic interdependencies by giving them a stake in the organization

Make outside stakeholders inside stakeholdersInterlocking directorate: a linkage that results when a director from one company sits on the board of another company



Strategic alliances: an agreement that commits two or more companies to share their resources to develop joint new business opportunities

An increasingly common mechanism for managing symbiotic (and competitive) interdependenciesThe more formal the alliance, the stronger and more prescribed the linkage and tighter control of joint activities

Greater formality preferred with uncertainty


Types of Strategic AlliancesLong-term contractsNetworks: a cluster of different organizations whose actions are coordinated by contracts and agreements rather than through a formal hierarchy of authorityMinority ownership

Keiretsu: a group of organizations, each of which owns shares in the other organizations in the group, that work together to further the group’s interests


Figure 3.4: Types of Strategic Alliances


Figure 3.5: The Fuyo Keiretsu


Types of Strategic Alliances (cont.)

Joint venture: a strategic alliance among two or more organizations that agree to jointly establish and share the ownership of a new business


Figure 3.6: Joint Venture Formation



Merger and takeover: results in resource exchanges taking place within one organization rather than between organizations

New organization better able to resist powerful suppliers and customersNormally involves great expense and problems managing the new business


Figure 3-7: Interorganizational Strategies for Managing Competitive Interdependencies


Strategies for Managing Competitive Resource Interdependencies

Collusion and cartelsCollusion: a secret agreement among competitors to share information for a deceitful or illegal purpose

May influence industry standardsCartel: an association of firms that explicitly agrees to coordinate their activities

May influence price structure of market


Strategies for Managing Competitive Resource Interdependencies (cont.)

Third-party linkage mechanism: a regulatory body that allows organizations to share information and regulate the way they competeStrategic alliances: can be used to manage both symbiotic and competitive interdependencies Merger and takeover: the ultimate method for managing problematicinterdependencies


Transaction Cost TheoryTransaction costs: the costs of negotiating, monitoring, and governing exchanges between peopleTransaction cost theory: the goal of an organization is to minimize the costs of exchanging resources in the environment and the costs of managing exchanges inside the organization


Sources of Transaction CostsEnvironmental uncertainty and bounded rationality

Bounded rationality: refers to the limited ability people have to process information

Opportunism and small numbersWhen organizations are dependent on a small number for supplies, the potential for exploitation is great

Risk and specific assetsSpecific assets: investments that create value in one particular exchange relationship but have no value in any other exchange relationship


Figure 3.8: Sources of Transaction Costs


Transaction Costs and Linkage Mechanisms

Transaction costs are low when:Organizations are exchanging nonspecific goods and servicesUncertainty is lowThere are many possible exchange partners


Transaction Costs and Linkage Mechanisms (cont.)

Transaction costs are high when:Organizations begin to exchange more specific goods and servicesUncertainty increasesThe number of possible exchange partners falls


Transaction Costs and Linkage Mechanisms (cont.)

Bureaucratic costs: internal transaction costs

Bringing transactions inside the organization minimizes but does not eliminate the costs of managing transactions


Using Transaction Cost Theory to Choose an Interorganizational Strategy

Transaction cost theory can be used to choose an interorganizationalstrategyManagers can weigh the savings in transaction costs of particular linkage mechanisms against the bureaucratic costs


Using Transaction Cost Theory to Choose an Interorganizational Strategy (cont.)

Managers deciding which strategy to pursue must take the following steps:

Locate the sources of transaction costs that may affect an exchange relationship and decide how high the transaction costs are likely to beEstimate the transaction cost savings from using different linkage mechanismsEstimate the bureaucratic costs of operating the linkage mechanismChoose the linkage mechanism that gives the most transaction cost savings at the lowest bureaucratic cost


KeiretsuJapanese system for achieving the benefits of formal linkages without incurring its costs

Example: Toyota has a minority ownership in its suppliers

Affords substantial control over the exchange relationshipAvoids bureaucratic cost of ownership and opportunism


FranchisingA franchise is a business that is authorized to sell a company’s products in a certain areaThe franchiser sells the right to use its resources (name or operating system) in return for a flat fee or share of profits


OutsourcingMoving a value creation that was performed inside the organization to outside companiesDecision is prompted by the weighing the bureaucratic costs of doing the activity against the benefits

Increasingly, organizations are turning to specialized companies to manage their information processing needs

organizational theory, design, and change · organizational theory to design and change their...

Documents