CHAPTER ONE ORGANIZATIONS ORGANIZATIONS AND ORGANIZATION THEORY

CHAPTER OVERVIEW This chapter introduces students to characteristics of organizations and organizations as systems. Definitions and examples are given to provide students an understanding of organization theory and its value in becoming better managers in a rapidly changing world. You may wish to refer back throughout the semester to the Xerox case that opens the chapter, and to update the case regularly from current business analyses. Organization theory is defined and shown to have practical applications for managers. A framework for the remainder of the book is also provided which will be useful as an introductory overview, and as a frame of reference throughout the course. CHAPTER OUTLINE A LOOK INSIDE Xerox Corporation The rise and fall and rise of Xerox over its almost 100-year life is a classic illustration of organizational decline. Xerox began as a photographic supply house in 1906 and developed the worlds firs xerographic copier in 1959. Both Joseph C. Wilson and David Kearns created a positive, people-oriented culture at Xerox. They emphasized fairness, respect, risk-taking, and employee involvement. However, it is said that Xerox became a victim of its own success. Its copiers were so successful that the company was blinded to the potential of innovations its own research unit came up with. A strong bureaucracy, or Burox as it became to be known, developed. CEO Kearns had rejuvenated the company by 1990, by diversifying into insurance and financial services but this led to billions of dollars in insurance liabilities. When Paul Allaire took over in 1990 he began withdrawing from these businesses while cutting cost and introducing new products. However, the company was slow getting to the market with desktop printers cue to the Burox and the increased use of the Internet and email hurt the sales of copiers. Most outsiders blame the problems at Xerox on the failure of its culture to adapt. After Richard Thoman was unable to change the company he was replaced by Anne Mulcahy, whom Alliare promoted from within the company. She promptly divested the inkjet printers that were losing money and took action to make the company more ethical in its business practices. She has introduced new products and services that hold promise and has gained respect and admiration from the stakeholders of Xerox. Xerox still has problems, but is no longer on the critical list.

Organization Theory in Action Topics The Xerox case which opens the chapter illustrates organization theory topics such as failure to respond to external elements such as customers, suppliers, and competitors, inability to achieve internal efficiency, slow decision making, ineffectively dealing with its large size and extensive bureaucracy, ethical lapses, and having an outmoded corporate culture. Current Challenges Global competition Ethics and Social Responsibility Speed of Responsiveness The Digital Workplace Diversity LEADING BY DESIGN The Rolling Stones One reason the Rolling Stones were recently cited as one of the worlds ten most enduring organizations is that the band operates like an effective global business organization. They have set up a solid organizational structure, with different divisions to run different aspects of the business, such as touring or merchandising. The Rolling Stones also recognize the importance of interorganizational partnerships which allow them to cut sponsorship deals.

Purpose of This Chapter This chapter explores the nature of organizations and organization theory as it has developed from the systematic study of organizations by scholars. What Is an Organization? Definition Organizations are social entities that are goal directed, with deliberately structured activity systems, and with a link to the external environment. Types of Organizations We will study both large and small organizations. We will also look at manufacturing and service organizations, for- profit and nonprofit organizations. Importance of Organizations Organizations create value for owners, customers, and employees by their activities. They bring together resources to accomplish specific goals, whether those goals are putting on the Olympics or planting new trees in the city. Organizations produce goods and services, using innovative techniques and modern manufacturing technology, for competitive pricing. Organizations adapt to and influence the environment and its globalization while accommodating the challenges of diversity, ethics, and the motivation and coordination of employees.

BOOK MARK The Company: A Short History of Revolutionary Ideas by John Micklethwait and Adrian Wooldridge The limited liability corporation is the greatest single discovery of modern times and is a relatively recent innovation. The idea of a limited liability corporation started in 1856 by the Joint Stock Companies Act enacted by the London Board of Trade. Although often seemingly at conflict with societies interests, the authors argue that LLCs force has been overwhelmingly for the cumulative social and economic good.

Perspectives on Organizations Open Systems A closed system does not depend on its environment, but focuses on running things efficiently. Open systems must interact with the environment to survive, and managers realize they must pay close attention to what is going on with their customers, suppliers, and competitors. A system, in general, is a set of interrelated elements that acquires inputs from the environment, transforms them, and discharges outputs to the external environment. Subsystems perform functions such as production, boundary spanning, maintenance, adaptation, and management. Organizational Configuration Henry Mintzberg says that every organization has five interrelated parts: technical core of people who do the basic work of the organization; technical support creates innovations in the technical core with employees such as engineers and researchers; administrative support is responsible for smooth operation and upkeep of the organization, including its human resources; top management provides direction, strategy, goals, and policies for the organization; and middle management is responsible for implementation and coordination at the departmental level.

Dimensions of Organization Design Structural Dimensions Structural dimensions provide labels to describe an organizations internal characteristics. Formalization pertains to the amount of written documentation in the organization; Specialization is the degree to which organizational tasks are subdivided into separate jobs; Hierarchy of authority describes who reports to whom and the span of control; Centralization refers to the hierarchical level that has authority to make a decision; Professionalism is the level of formal education and training of employees; Personnel ratios refer to the deployment of people to various functions and departments. Contextual Dimensions Contextual dimensions characterize the whole organization and describe the organizational setting. Size is the organization's magnitude as reflected in the number of people in the organization; Organizational technology refers to the tools, techniques, and actions used to produce the organizations products or services; Environment includes all elements outside the boundary of the organization; Goals and strategy define the purpose and competitive techniques that set it apart from other organizations; Culture is the underlying set of key values, beliefs, understandings, and norms shared by employees. IN PRACTICE W. L. Gore & Associates W. L. Gore & Associates, Wal-Mart, and a state arts agency are described in terms of their respective dimensions. Gore is medium-sized and is low in formalization and centralization, using a few professionals for product development, and maintaining a culture which values self-determination. Wal-Mart and its 1,600 discount stores, plus 1,100 supercenters, 500 Sams Clubs, and 1,000 international stores, is more formalized and centralized than Gore, but not as high in those characteristics as is the state arts agency. Wal-Mart is high in specialization, and its culture encourages efficiency. The state art agency is especially formalized and centralized, and is frustrated with the paperwork, rules and regulations it has to deal with. Performance and Effectiveness Outcomes The organization must learn to be efficientusing the least amount of resources to achieve its goals, as well as effectivethe degree to which an organization actually achieves its goals. In doing this, the company must consider its stakeholder who are any group within or outside the organization that has a stake in the organizations performance. Typical stakeholders include employees, customers, creditors, management, government, unions, the community, suppliers, and owners and stockholders.

IN PRACTICE Federal Bureau of Investigation With an increased focus on homeland security and battling terrorism, FBI resources are not as readily available to police departments and other law enforcement agencies, putting a heavy burden on those organizations resources. The Evolution of Organization Theory and Design Historical Perspectives Organization design has varied over time in response to societal changes. The classical perspective remains the basis of management theory today. One classical subfield, pioneered by Frederick Taylor, was the closed system approaches of scientific management. Through scientific procedures in 1898, Taylor identified correct movements and tools for loading four times as much iron or steel for the Bethlehem Steel plant. Administrative principles focused on the total organization based on insights of practitioners such as Fayol. Bureaucracy was an effective approach for the needs of the Industrial Age, calling for clearly defined authority and responsibility, formal recordkeeping, and uniform application of standard rules. It remained the primary approach to organization design through the 1980s. The Hawthorne Studies led to a revolution in worker treatment from findings that positive treatment improved motivation and productivity. Contingency theory means that one thing depends upon other things, and for organizations to be effective, there must be a fit between the structure and the conditions in the external environment. There is not one best way to manage, and instead, the correct management approach varies for an Internet firm versus a large processing plant. Contemporary Organization Design Before the Industrial Revolution, when most organizations were involved in agriculture or craft work, communication was primarily face-to-face, and structures were simple. In the industrial age, however, a different paradigm emerged, focusing on stable environment, routine technology, large organization size, growth and efficiency goals, and a culture in which employees were taken for granted. Challenges presented by todays environment including global competitiveness, diversity, rise of e-commerce, a shift to knowledge and information as organizations most important form of capital, and worker expectations for meaningful work and opportunities for personal and professional growth. Efficient Performance versus the Learning Organization The learning organization promotes collaboration so everyone is engaged in identifying and solving problems, enabling the organization to continuously experiment, improve, and increase capability. A comparison of the five elements of design in the organization designed for efficient performance versus one designed for continuous learning shows contrast: structure moves from vertical to horizontal; tasks move from routine to empowered roles; systems move from being formal and controlled to sharing of information;

culture changes from rigid to adaptive; and strategy moves from competitive to collaborative. IN PRACTICE Cementos Mexicanos This cement firm, known as Cemex, specializes in developing areas of the world. With a product that spoils in 90 minutes, customer chaos was the rule with customers changing or canceling more than half of all orders, difficult traffic conditions, spontaneous labor disputes, and arbitrary government inspections of construction sites. To learn to live with chaos, Cemex changed both its technology and its organization. Cemex developed a complex information technology system in which last-minute changes and unexpected problems are handled routinely. Drivers became deliverers, not just of cement, but of customer service. Cemex as an example of a firm which is following a key rule for survival in the new economy. Cemex transformation of the industry by using extensive networking technology and giving drivers and dispatchers the information and authority they needed to make decisions quickly is one of the authors illustrations of effectively living with chaos. Framework for the Book Levels of Analysis The concept of levels of analysis explains the difference between a course in organizational behavior and a course in organization theory. Organizational theory emphasizes the whole organization as a unit, but also focuses on groups or departments and the environment. Contrast organization theory which is a macro examination of organizations analyzing the whole organization as a unit with organization behavior which is a micro approach focusing on individuals within organizations. Meso theory, or the integration of both micro and macro levels of analysis, is a new approach to organization studies. This is based on the idea that to thrive in organizations, managers must understand how structure and context (organization theory) are related to employee interactions (organization behavior). Plan of the Book Chapters unfold major ideas in a logical sequence, beginning with the basic idea of organizations as social systems, and then moving to the role of top management in goal-setting, effectiveness, and responding to the external environment. The next major part of the book describes how to design organization structure, as related to factors such as organizational technology and size. The final two parts of the book look at processes inside the organization, including how structure can be designed to influence internal systems, and how behavioral processes such as conflict, decision making, power and politics, leadership, and culture, exist between departments. Plan of Each Chapter Organizational case

Theoretical concepts in the body of the chapter In Practice segments Book Marks Leading by Design examples Briefcase items to highlight key points Summary and interpretation

LECTURE ENHANCEMENT ORGANIZATIONAL TYPOLOGIES To understand and conceptualize the world of organizations, researchers have developed typologies by which organizations can be classified. A typology is a set of categories, with each category including certain characteristics which differentiate the organizations in it from those in other categories. Just as artists portray the same person or scene in different ways, researchers have based their typologies on different underlying dimensions that they see as important in differentiating between organizations. Typologies are methods of organizing information. The characteristics of the organizations in each cell indicate the nature of the organizations. One typology, for example, which influenced organizational research, was developed by Talcot Parsons in 1960. Parsons maintained that organizations had different functions in society and that these functions could be the basis for typing organizations. Parsons' four functions and examples of organizations are: Type of Organization Adaptation Goal attainment Government agencies Integration Latency or pattern and religious maintenance Functions Examples

Acquire resources Businesses Set and implement goals Maintain and coordinate system Transmit culture and values Courts Educational organizations

Because organization theory involves the use of models to describe important dimensions of an organization, we will study several typologies in this course. For example, in chapter 3, a typology based on Duncans classification of perceived environmental uncertainty has been developed. In chapter 4, Thompson's typology on technological interdependence is discussed in terms of its influence on organizational structure. Typologies lend some insight into understanding organizations and serve as a good basis upon which to analyze cases. Typologies must be relatively simple, yet complete enough to enable distinct categorization and development of understanding and comparison among types of organizations. Because of a typologys simplicity, a difficulty to some is in placing organizations in just one categories. Look for dominant characteristics as you classify an organization, acknowledging that there are overlapping areas, but not getting hung up on them. When studying conglomerates, each product division may be

categorized separately on the typology. DISCUSSION QUESTIONS 1. What is the definition of organization ? Briefly explain each part of the definition. ANSWER: An organization is a (l) social entity that is a (2) goal directed, (3) deliberately structured activity system, with a (4) link to the external environment. Social entity means that organizations consist of people; the human being is the basic building block of organizations, which makes it different from other types of systems. Goal directed means that organizations exist for a purpose. They are created to achieve some end. Deliberately structured activity system means that organizations are deliberately subdivided into distinct sets of activities. These activities use the knowledge and technology needed to do the work. The link to the environment includes interactions with customers, suppliers, competitors, the government, and other elements of the external environment. 2. What is the difference between an open system and a closed system? Can you give an example of a closed system? How is the stakeholder approach related to this concept? ANSWER: The difference is in the relationship with the external environment. An open system has an exchange relationship with the environment and must import energy from the environment to survive. A closed system would be completely autonomous and would not need external resources. In a sense, there is no such thing as a closed system, although some managers in organizations that are insufficiently tuned in to their environments act as if they were in a closed system. However, any system which is completely closed off would eventually die. Some machine systems, such as a satellite with a nuclear reactor, come close to being closed systems because they will last for years without energy from the environment. The stakeholder approach illustrates that organizations are open systems and are influenced by external stakeholder groups interacting with the internal stakeholder groups. 3. Explain how Mintzbergs five basic parts of the organization perform the subsystem functions. If an organization had to give up one of these five parts, which one could it survive the longest without? Discuss. ANSWER: The students job is to relate the subsystems: boundary spanning, production, maintenance, adaption, and management to the five parts of Mintzbergs framework technical core, top management, middle management, technical support, and administrative support . Because the technical core includes people who actually produce the organizations product or service, this part of the organization is performing the subsystem function of production. Top management and middle management both contribute to the management subsystem to direct and coordinate all parts of organizational activity. Top management is especially active in boundary spanning, although all levels of the organization must interrelate with environmental functions relevant to their charge. Technical support assists in the adaptation subsystem. Administrative support

contributes to maintenance subsystems by supporting activities such as human resources, organizational development, and maintenance staff. Because all subsystems are interdependent, there is not one correct answer to the last question; however, the discussion will ensure that students understand each subsystems interactive relationship to all others. 4. A handful of companies on the Fortune 500 list are more than 100 years old, which is rare. What organizational characteristics do you think might explain 100 year longevity? ANSWER: Companies that maintain longevity must be flexible. This includes flexibility with organizational structures and ongoing relationships with employees and the external environment. The ability of organizations to offer competitive pricing and bring together resources in an innovative manner and over time contributes to its success. Scientific management played a role in this and the Hawthorne studies contributed the understanding that positive treatment of workers contributed to their longevity with the organization which decreased turnover and maximized expertise among the labor pool. 5. What is the difference between formalization and specialization? Do you think an organization high on one of these dimensions would also be high on the other? Discuss. ANSWER: Formalization pertains to the amount of written documentation used to direct the organization, including procedures, job descriptions, and policy manuals. Specialization pertains to the extent to which tasks are subdivided so that each employee performs only a narrow set of activities. Generally, these characteristics are associated so that an organization would tend to be high or low on both. As an organization becomes large, for example, tasks would become more specialized. Formalization would then be required to provide rules and regulations to specify specialization. A few organizations may deviate from this relationship, but generally an organization high on one characteristic will tend to be high on the other. 6. What does contingency mean? What are the implications of contingency theories for managers? ANSWER: Contingency means that one thing depends on other things, and therefore for an organization to be effective there must be a good fit between its internal structure and its external environment. There are no universal principles that apply to every organization in every situation. There is not one best way. Contingency means that "it depends." Thus, managers should diagnose their unique situation before deciding on the management approach to take. 7. What are the primary differences between an organization designed for efficient performance and one designed for learning and change? Which type of organization do you think would be easier to manage? Discuss.

ANSWER: The organization designed for efficient performance is more traditional in its top-down orientation as opposed to the one designed for learning that is geared to collaboration so that everyone is engaged in identifying and solving problems. Major differences can be seen in the chart that follows. In the discussion on which type of organization is easier to manage, point out that differences in perspective may reflect differences in natural style preferences. For example, a student who would truly enjoy the challenge of an environment known to be turbulent and of managing with high levels of ambiguity might find the learning organization to be easier to manage.

Efficient Performance Vertical, functional groupings Tasks are routine and narrowly defined Formal control systems to manage complex information Top management strategy is competitive

Learning Organization Structure around horizontal workflows or processes Empowered roles are emphasized Widespread sharing of information with open channels of communication Collaborative strategy emerges from employee relationships with customers, suppliers, etc. Culture adaptative to external environment

Culture may become rigid from having being successful in stable environment

8. Why is shared information so important in a learning organization as compared to an efficient performance organization? Discuss how an organizations approach to information-sharing might be related to other elements of organization design, such as structure, tasks, strategy, and culture. ANSWER: Shared information and collaboration is the basis for horizontal workflow between employees and from employees to customers, suppliers, and others in the environment. By sharing information, all employees become the eyes and ears which prevent rigidity in culture that might otherwise lure management into complacency. The chart shown in the preceding question can be used to emphasize effects on various elements of organization design (bold font). 9. What are some differences one might expect among stakeholder expectations for a nonprofit organization versus a for-profit business? Do you think nonprofit managers have to pay more attention to stakeholders than do business managers? Discuss ANSWER: Stakeholders in a for-profit business want the company to be successful and to make a profit. While they are concerned with social responsibility, this will most likely be a secondary consideration. Managers in a nonprofit are expected to direct their efforts toward generating some kind of social impact. They are expected to keep costs low and be highly efficient to demonstrate to supporters that they are serving the public. They must pay more attention to stakeholders because they determine funding and direction of the organization. 10. Early management theorists believed that organizations should strive to be logical and rational, with a place for everything and everything in its place. Discuss the pros and cons of this approach for today's organizations.

ANSWER: Early management theorists thought in terms of machine system efficiency. The external environment may have been more stable and the technology more simple so that an orderly organization system was possible. This approach to management will not work today. Organizations must adapt to the external environment, cope with differences in goals and commitment of employees, survive in a chaotic world, and try to cope with the enormous complexity of social systems. Managers can try to increase the logic, rationality and efficiency of organizations, but they will not achieve a system of perfect order, and should not feel that they are failures when they cannot do so. WORKBOOK ~ MEASURING DIMENSIONS OF ORGANIZATIONS This activity allows students to begin a preliminary consideration of different organizations dimensions. Ask students what clues made them rate one organization as having, for example, many written rules, while they rated another as having few rules. For a meaningful discussion of the interrelationship of dimensions, you may pick out a particular dimension that interests the class, and find out what other dimensions tend to go along with it. For example, if the class was interested in contrasting the modern with postmodern organization, ask the students who rated an organization as postmodern (7, 8, 9, or 10) on the organizational paradigm scale to look at that organizations other variables. How many rated the postmodern organization as having few rules (7, 8, 9, or 10)? How many rated the postmodern organization 7-10 as having a flat hierarchy of authority? Then ask similar questions regarding a modern organization (rated a 1, 2, 3, or 4). How many rated the modern organization a 7, 8, 9, or 10 as having few rules? How many rated the modern organization a 7, 8, 9, or 10 as having a flat hierarchy of authority? Record results on transparency or PowerPoint slide . ORGANIZATIONAL DIMENSIONS 1-4 5,6 7-10 High formalization Low formalization High specialization Low specialization Tall hierarchy Flat hierarchy Product technology Service technology Stable environment Unstable environment Strong culture Weak culture High professionalism Low professionalism Well-defined goals Goals not defined Small size Large size Modern Postmodern Caution students not to consider any relationships between dimensions as cause-andeffect or dependent. Relationships between dimensions, at this point, are to be regarded only as a basis for discussion. The textbook will present findings on relationships between dimensions in subsequent chapters. As a summary of chapter highlights, ask students to reflect back on the opening Xerox case. Rate Xerox twice on the organizational dimensions--first, during the period 1959 to

1990, and second, 1990-present. Record results on transparency or PowerPoint slide. Students will clearly see the shifts in Xerox structural dimensions as the company met its challenge of adapting to the environment.

Xerox Use to indicate 1959 to 1990, and use " to indicate 1990-present. 1-4 5,6 7-10 High formalization Low formalization High specialization Low specialization Tall hierarchy Flat hierarchy Product technology Service technology Stable environment Unstable environment Strong culture Weak culture High professionalism Low professionalism Well-defined goals Goals not defined Small size Large size Postmodern Modern