MGT504 - Organization Theory and Design - Lecture Handout 01

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Organization theory is not a collection of facts: it is a way of thinking about organization. Organization theory is a way to see and analyze organizations more accurately and deeply than one otherwise could. The way to see and think about organizations is based on patterns and regularities, define them, measure them, and make them available to the rest of us. The facts from the research are not as important as the general patterns and insights into organizational functioning.


Organization design and management practices have varied over time in response to change in the larger society you may recall from an earlier management course that modern era of management theory began with the classical management perspective in the late nineteenth and early twentieth century. The earlier of the factory system during the Industrial Revolution posed problems that earlier organizations had not encountered. As work was performed on a much larger scale by a larger number of workers, people began thinking about how to design and manage work in order to increase productivity and help organizations attain maximum efficiency. The classical perspective, which sought to make organizations run like efficient, well-oiled machines, is associated with the development of hierarchy and bureaucratic organizations and remains the basis of much of modern management theory and practice. Two subfields of the classical perspective are scientific management and administrative principles.

Scientific Management: Pioneered by Frederick Winslow Taylor, scientific management postulates that decisions about organizations and job design should be based on precise, scientific study of individual situations. To use this approach, managers develop precise, standard procedures for doing each job, select workers with appropriate abilities, train workers in the standard procedures, carefully plan work, and provide wage incentives to increase output. Taylor’s approach was used in the unloading of iron from rail cars and reloading finished steel for the Bethlehem Steel plant in 1898. Taylor calculated that with correct movements, tool, and sequencing, each man was capable of loading 47.5 tons per day instead of the typical 12.5 tons. He also worked out an incentive system that paid each man $1.85 per day for meeting the new standard, and increase from the previous rate of $1.15. Productivity at Bethlehem Steel shoots up overnight. These insights helped to establish organizational assumptions that the role of management is to maintain stability and efficiency, with top managers doing the thinking and workers doing what they are told.

Administrative Principles: Whereas scientific management focused primarily on the technical core on work performed on the shop floor administrative principles looked at the design and functioning of the organization as whole. For example, Henri Fayol proposed fourteen principles of management, such as “each subordinate receives orders from only one superior” (unity of command) and “similar activities in an organization should be grouped together under one manager” (unity of direction). These principles formed the foundation for modern management practice and organization design. Fayol believed these principles could be applied in any organizational setting. The scientific management and administrative principles approaches were very powerful and gave organizations fundamental new ideas for establishing high productivity and increasing prosperity. Administrative principles in particular contributed to the development of bureaucratic organizations, which emphasized designing and managing organizations on an impersonal, rational basis through such elements as clearly defined authority and responsibility, formal recordkeeping, and uniform application of standard rules. Although the term bureaucracy has taken on negative connotations in today’s organizations, bureaucratic characteristics worked extremely well for the needs of the Industrial Age. Following classical management theory, other academic approaches emerged to address issues such as the social context and workers’ needs.

The Hawthorne Studies: Early work on industrial psychology and human relations received little attention because of the prominence of scientific management. However, a major breakthrough occurred with a series of experiments at a Chicago electric company, which came to be known as the Hawthorne Studies. Interpretations of these studies concluded that positive treatment of employees improved their motivation and productivity. The publication of these findings led to a revolution in worker treatment and laid the groundwork for subsequent work examining treatment of workers, leadership, motivation, and human resource management. These human relations and behavioral approaches added new and important contributions to the study of management and organizations.

However, the hierarchical system and bureaucratic approaches that developed during the Industrial Revolution remained the primary approach to organization design and functioning well into the 1970s and 1980s. In general, this approach has worked well for most organizations until the past few decades.

However, during the 1980s, it began to lead to problems. Increased competition, especially on a global scale, changed the playing field. Many North American companies were saddled with bloated administrative ratios and professional staff ratio. International competition from Europe and Japan provided the rude awakening. For example, Xerox discovered it was using 1.3 overhead workers for every direct worker, while its Japanese affiliate needed only 0.6 overhead workers. By the 1980s North American companies had to find a better way. AT&T cut thirty thousand managers during the 1980s. The manager of Chevron and Gulf led to the dismissal of eighteen thousand employees, many of whom were managers.

The 1980s produced new corporate cultures that valued lean staff, flexibility, rapid response to the customer, motivated employees, caring for customer, and quality products. The world was changing fast because corporate boundaries were altered by waves of merger activity, much of it international, and increased international competition. Today, the world and thus the world of business are undergoing a change more profound and farreaching than any experienced since the dawn of the modern age and the scientific revolution. Just as civilization was altered irrevocably in the transition from the agrarian to the industrial age, emerging events are changing the way in which we interact with one another in our personal and professional lives. Old organization forms and management methods are inadequate to cope with new problems in the emerging postmodern world.29 the net effect of the evolving business environment and the evolving study of organization theory is the use of contingency theory to describe and convey organizational concepts, as well as a new, more flexible approach to management and organizational design.

Contingency Theory: Organizations are not all alike. Many problems occur when all organizations are treated as similar, which was the case with scientific management and administrative principles approaches that attempted to design all organizations alike. However, the structures and systems that work in the retail division of a conglomerate will not be appropriate for the manufacturing division. The organization charts and financial procedures that are best for a new entrepreneurial Internet firm like MaMaMedia will not work for a large food processing plant.

Contingency means that one thing depends on other things, and for organizations to effective, there must be a “goodness of fit” between their structure and the conditions in their external environment. What works in one setting many not work in another setting. There is not one best way. Contingency theory means “it depends” For example, some organizations may experience a certain environment, use a routine technology, and desire efficiency. In this situation, a management approach that uses bureaucratic control procedures, a functional structure, and formal communication would be appropriate. Likewise, free-flowing management processes work best in an uncertain environment with a non-routine technology. The correct management approach is contingent on the organization’s situation.

Today, almost all organizations operate in highly uncertain environments. Thus, we are involved in a significant period of transition, in which the dominant paradigm of organization theory and design is changing as dramatically as it was changed with the dawning of the Industrial Revolution.


Research into hundreds of Organizations provides the knowledge base to make IBM and other organizations more effective. For example, challenges facing organizations at the beginning of the twenty-first century are quite different from those of 1970’s and 1980’s, and thus the concept of organizations and organization theory is evolving. For one thing, the world is changing more rapidly than ever before. In a survey of top executives, coping with rapid change emerged as the most common problem facing managers and organizations today. Some specific challenges facing IBM and other organizations are competing globally, embracing changes, competing through ecommerce, managing knowledge and information, supporting diversity and maintaining high standards of ethics and social responsibility.

Global Competition

“The cliché that the works is getting smaller” is dramatically true for today’s organizations. With rapid advances in technology and communications, the time it takes to set influence around the world from even the most remote locations has been reduced from years to only seconds. Business is becoming a unified global field as trade barriers fall, communication becomes faster and heaper,, and consumer tastes in everything from clothing to cellular phones coverage. Thomas Middelhoff of Germany’s Bertelsmann AG, which bought US Publishers Random House, put it this way. “There are no German and American companies. There are only successful and unsuccessful companies.” In the twenty-first century, organization will have to feel “at home” anywhere in the world. Companies can locate different parts of the organization where it makes the most business sense; top leadership in one country, technical brainpower and production in other locales. For example, Canada’s Northern Telecom selected a site in the southwest of England as its world manufacturing center for a new fixed access radio product. Siemens of Germany MTS electronic ultrasound division to the United States, while the U.S Company Dupont shifted its electronics operation headquarters to Japan.

Although this growing interdependence brings many advantages, it also means that the environment for companies is becoming extremely complex and extremely competitive. Organizations have to learn to cross lines of time, culture, and geography in order to survive. Every company, large and small, faces international competition on its home turf at the same time it confronts the need to be more competitive in international markets. Rising managers today need to know a second or third language and develop cross-cultural understanding. Large structures to remain competitive internationally, while even the smallest companies such as IBM and Ford are working to globalize their management structures to remain competitive internationally, while even the smallest companies are searching for structures and processes that help them reap the advantages of global interdependences and minimize the disadvantages.

Organizational Turbulence

For much of the twentieth century, organizations operated in a relatively stable business environment, so managers could focus on designing structures and systems that kept the organization running smoothly and efficiently. There was little need to search for new ways to cope with increased competition or shifting customer demands. All that began to change in the 1980s; a today’s organizations are struggling to catch up with the changes that have proliferated since then. Advances in computers and information technology are driving many of these changes at the same time they provide ways to cope with them. Customers expect new products and services developed more often and delivered more rapidly, and they often want them customized to their exact needs. Mass production and distribution systems that can produce one-of-the-kind variations and streamlined distribution systems that deliver products directly from manufacturer to the customer. Another shift brought about by technology is that the financial basis of today’s economy is information rather then the tangible assets of land, building, and capital. In this new era, the primary factor of production becomes knowledge rather then machines, increasing the power of employees. Today’s knowledge workers want more than a paycheck; they expect interesting work and opportunities to participate and learn.

The mindset needed by organizational leaders is to expect the unexpected and be preparing for constant change. One of the hottest renders in recent years us the use of enterprise resource planning (ERP). These complex information systems collect process and provide information about an organizations entire enterprise, including identification of customer need, orders, product design, and production, purchasing, inventory, distribution, human resources, receipt of payments, and forecasting of future demand. These and other new types of information systems have a profound impact on the design of organization. In addition, because ERP systems integrate the whole organization, managers and employees can use the information to adjust plans and respond to opportunities at a moment’s notice.

The challenge for managers and organization in most countries is not just to cope with change bit to embrace it, even create it. The organizational forms and partner of behavior that were once successful no long work, yet new patterns are just emerging. As stated in one management article, “Most managers today have the feeling that they are flying the airplane at the same time they are building”.


One area in which many traditional mangers feel particularly awkward is the new world of e-business or ecommerce. Within just a few years the internet has been transformed from s “toy” used by a few computer nerds to a broad communications and trade center where more than 90 million people exchange information or close deals around the world8.Most executives know that the internet could, over the next few years, change almost everything in every industry, but more of them don’t know how to transform their organizations to fit into this new world. IBM, as discussed in the opening case, is thriving again by using its know-how to help other organizations compete in the e-business era. Although business on the internet is booming, the United States and Canada are barely in the infancy of this trend, while countries in Europe, Latin America, and Asia are still in the embryonic stage. One organization that has made the transition to an internet-based, thoroughly digitalized business is Dell Computer Corporation. Dell has pioneered the use of end-to-end digital networks to keep in touch with customers, take orders, pull together components from suppliers, and ship customized products directly to consumers. This trend towards disintermediation eliminating the middleman – will ultimately affects every industry. In a meeting of executives, consultants and professors at Harvard University, participants concluded that business today must either“Dell or be Delled.”

Companies embracing the new world of e-business, whether to sell products, streamline operations, or improve communications with customers and partners, are thriving. Those that ignore the trend do so at their own peril. Even today’s industry leaders will not survive if they can’t compete in an Internet-driven economy. The Internet tears down boundaries of time and space, enabling-organizations to create entirely new business and reach markets they never could have before.

For example, Byers Chrysler Plymouth Dodge in Columbus, Ohio, hooked up with, a Net car-buying service and is now selling twelve more cars per month including some to buyers hundred of mule away. By enabling business to link directly to suppliers, factories, distributors, and customers, the Internet breaks down boundaries between organizations and enables partnership and collaboration on a previously un-heard of scale. As one ecommerce entrepreneur put it, “If you remain insular in this business, you’ll get eaten alive.”

Managing Knowledge and Information

Technology also plays a key role in the trend toward knowledge management and the sharing of information across and between organizations – recognizing that intellectual capital. What employees know-matters more than any other assets today, companies seek to manage knowledge just as they manage cash flow, human resources, or raw materials. New positions such as chide information officer, chief knowledge officer, director of knowledge management, and chief learning officer reflect the importance of information and knowledge in today’s organizations. Daniel Holtshouse, director of knowledge initiatives at Xerox, estimates that about a fifth of fortune 500 companies have someone who serves in the capacity of a chief knowledge officer, and the number is growing. Information technology, including the internet, supports knowledge management and the broad sharing of information and is generally related to changes in how organizations are designed and managed. In the past, organizational hierarchies developed in part to move information up and down the system. The guiding assumption of many companies was that they ideas and decisions originated at the top and were channeled downward. Competitive companies today, though, are guided by the assumption that the organization needs idea from everyone, and that the role of manager is to find ways to open channel of communication to allow ideas, information, end knowledge to flow though-out the organization. Thus, an emphasis on knowledge management and information sharing often leads to a flattening of organization structures and greater empowerment and involvement of employees. In addition, some thriving companies, including Andersen Windows, Chevron, and Spring Field Remanufacturing, share knowledge such as best practices not only across function but also with other companies, including partners, suppliers, and even competitors, based on the belief that a mutual sharing of good ideas is the best way to keep their organizations competitive.


Diversity is a fact of life that now organization can afford to ignore. The workforce- as well as the customer basedis changing in terms or age, gender, race, national origin, sexual orientation, and physical ability. The average worker is older now, and many more women, people of color, and immigrants are entering the work force. Immigration accounted for nearly half of the increase in the US labor force in the 1990s, immigrants will likely constitute a growing share of workers in the twenty first century. By the year 2020, it is estimated that women will comprise fully half of the total US workforce and the Asian American, African American, and Hispanics, will make up more than 30%. People of Asia, Africa, and Hispanics, descent are expected to comprise about 35% of the US population by 2020.

The growing diversity of the workforce brings a variety of challenges, such as maintaining a strong corporate culture while supporting diversity, balancing work and family concerns, and coping with the conflict brought about by varying cultural styles. For example, add the DaimlerChrysler plant in western Alabama, managers have struggles to blend German and American worker’s cultural styles. While the Germans consider most of their Alabama colleague lax, two talkative and some what superficial, the America worker find the Germans to be rigid, former, and even humorless. “The Germans are very blunt,” said one worker. ” You don’t get politeness out of them about worked”. People from diverse ethnic and cultural background offers wearing style and organizations must learn to welcome and incorporate this diversity into the upper ranks. For e example, recent research indicated that women’s style of doing business may hold important lesson for success in the emerging world of the twenty-first century. Yet the glass ceiling persists, keeping women from reaching positions of top leadership.

Ethics and Social Responsibility:

Ethics and social responsibility have become how topics in corporate America. Companies of all sizes are rushing to adopt codes of ethics, and most are also developing other policies and structures that encourage ethical conduct. Organizations get into trouble when they fail to pay attention to ethical issues in the blind pursuit of making money. In recent years, numerous companies, including Archer-Daniel-Midland, Baker & Taylor Books, Prudential Insurance, and Columbia/HCA, have been charged with serious breaches of ethical or legal standards and the problem is not limited to US companies, to joint pharmaceutical companies, Hoffman-LaRoche, a Swiss firm, and Germany’s BASF-AG, recently pleaded guilty to charges that they polluted to race and fix the prices of vitamins used in virtually every American home and edit to bread, milk, and breakfast cereal for their role in the conspiracy, BASG-AG will pay off $225 million fine, and Hoffman-Laroche will pay $500 million, the largest federal criminal fine, ever imposed over a company.
On the other hand, a growing no of companies are demonstrating their commitments to high standards of ethics and social responsibilities. Marriott corporation tries to help build healthy community to its” pathways to independence program,” which target welfare recipients. Programs candidates go through dozens of hours of rigorous training “Graduates” to a job in the company. Micro boar processing inc. frequently high-risk workers, from welfare recipients to felons and farmer drug addicts, based on the belief that the every one deserves a chance to turn their lives around. The gap’s community action program allows headquarters employees to take paid time of to become involved in volunteer activates.

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