ORGANIZATIONAL STRATEGIES FOR OBTAINING BOUNDED RATIONALITY:

Notes on J. D. Thompson, Organizations in Action, NY: McGraw Hill, 1967.Chap 2 and 3 &
J. G. March & H. A. Simon Organizations, NY: Wiley, 1958, Chap. 6
Notes by Prof. Andy Van de Ven
Carlson School of Management, Univ. of Minnesota

The Bounds of Organizational Rationality

Instrumental action is rooted on the one hand in desired outcomes and on the other hand in
beliefs about case/effect relationships. To the extent that people have desired outcomes and the
activities performed are believed or judged to produce the desired outcomes, we can speak of
rational behavior.
Thus, Rational behavior = Clarity of Desired X Certainty of Cause-effect
Outcomes
relations for each outcome

For an organization,
Rationality is influenced by:

Goal Consensus
Internal Control
Decision Strategies of task/means

External Control
of Necessary
Resources (Means)

Div. of Labor
Task Uncertainty Env. Dependence
& Program
& Restrictiveness
Unit Specialiation Heterogeneity
& Interdependence Responses:
Coordination
Change Org.
& Control
Change Env.

Rationality can be evaluated by two criteria:

1. Instrumental:

whether specified actions do in fact produce the desired outcomes. This

gives rise to strategies to control actions to achieve desired outcomes.

2. Economic:

whether the results are obtained with the least necessary expenditure of
resources. This gives rise to concern over costs of make (hierarchy) or
buy (market) decision to achieve desired results.

For an organization, there are three major component areas of rationality:

1. Obtaining inputs from the factor markets (i.e., the organizations input
environment).
2. Transforming inputs into outputs with technologies available within the
organization.

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3. Distributing outputs to the product markets (i.e., the organizations output
environment).
a. From an instrumental point of view, since these component activities are
interdependent, organizational rationality requires mutual adjustments between an
organizations input environment, internal technology, and output environment.
b. From an economic point of view, there are costs involved in establishing,
coordinating, and controlling these component activities; and they will be called
transaction costs.
c. Since input and output activities occur between the boundaries of an organization
and its environment, all organizations are dependent upon their environment in
varying degrees. This organizational rationality requires an open-system
perspective; i.e., one that includes a consideration of environmental dependence,
uncertainty, complexity, and restrictiveness.
Propositions For Reacting to the Environment (Thompson, 1967)
A. Under norms of rationality, organizations seek to seal off their core technologies from
environmental influences by the following increasingly costly methods.
1. Buffering by surrounding technical cores with input and output components
- stockpiling materials, supplies, i.e., warehousing
- regular preventive maintenance of equipment
- Personnel training and orientation, socialization
- These are methods that permit the technical core to operate at constant rate because
they absorb environmental fluctuations
2. Smoothing or Leveling (e.g., Peak load pricing; scheduling)
- Methods that attempt to reduce fluctuations in environment
3. Forecasting or anticipating environmental Fluctuations of those things that can not be
buffered or leveled (e.g., Forecasting cyclical patterns of fluctuations)
- Where patterns not discernable, more sophisticated or, management science, and
statistical decision theories are used.
4. Rationing (last resort to ward off environmental penetrations of technical core)
- Unsatisfactory solution for it indicates that core technology is not operating at its
maximum
B. As the uncertainty or instability of the environment increase, organizations will rely in
increasing amounts on buffering, smoothing, forecasting, and rationing, in that order, to seal
off their technical core. However, transaction costs of these reactive strategies are also
increasingly more costly to the organization.
C. Core technologies rest on closed system logic, but are embedded in larger environment
within and without organization. The ability of an organization to establish boundaries for
rational action is a function of:
1. The constraints an organization must face

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2. The contingencies an organization must meet, and
3. The variables an organization can control.
Proactive Strategies for Enhancing Control Over Environment
- Under norms of rationality organizations seek to minimize power of task environment
elements over them by:
1. Maintaining Alternatives (i.e., increase environmental complexity).
(e.g., Scattering dependencies by having many suppliers in factor markets and consumers
in product markets in order to diversify risks).
- This strategy is most likely where many alternatives exist in the environment (i.e., where
we are near to perfect competition and the actions of anyone is insignificant) or where
environmental restrictiveness is low.
2. Seek Prestige: the cheapest way of acquiring power a favorable image is an important
way to control dependence.
3. Seek Power relative to those on whom organization is dependent. This strategy is most
likely to occur when support capacity is concentrated in one or a few elements in the
environment (i.e., high environmental restrictiveness and low environmental complexity).
a. Cooperative Strategies: Requires that the organization demonstrate its capacity
to reduce uncertainty for another - agent in the environment and make a
commitment to exchange that capacity.
b. Cooperative strategies include:
(1) Contracting negotiated argument
(2) Coopting absorbing new elements into policy making
(3) Coalescing becoming involved in joint ventures
- Contracting, coopting, and coalescing will most likely occur when the
environmental instability, or uncertainty of exchanges, are low,
medium and high, respectively.
4. Seek to Enlarge Domain through mergers and acquisitions.
- When the organization faces an environment that is highly restrictive (i.e., many
constraints and few alternatives) and uncertain, under norms of rationality it will seek to
enlarge its domain; i.e., place its boundaries around those activities, which, if left to the
environment, would be crucial contingencies.
-

The form of domain expansion is a function of the organizations predominant

technology.
a. If long-linked Technology (i.e., Sequential)
expand domain by vertical integration

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b. If mediating Technology (i.e., Pooled) expand
by increasing populations and markets served
c. If Intensive Technology (i.e., Reciprocal)
expand by incorporating the objects worked on
Balancing of Components
- Capacities of input, process, and output components are not necessarily continuously divisible.
Hence, slack exists and commitments are made for future use of acquired resources.
- When excess capacity exists, the rational organizational strategy is to:
a. Grow until least reducible component is fully occupied.
b. Enlarge domain to use up slack.

Effects of Environmental Uncertainty, Complexity & Restrictiveness

Implied in the type of domain chosen by an organization are various degrees of uncertainty,
complexity, and restrictiveness of environments that organizational decision makers choose to live with,
which in turn significantly influence the alternatives available in solving the organizational design
problems.
Domain uncertainty refers to the level of agreement among organizational decision makers on
the strategy priorities of an organization, as well as the extent to which methods to achieve given ends
are clearly understood or predictable. Defined in this way, domain uncertainty is the basic dimension
underlying most conceptions of organizational rationality. March and Simon (1958) and Thompson
(1967) point out that rational action is rooted on the one hand in known or agreed-upon results or ends,
and on the other hand in certainty about cause-effect relationships. Specifically, with reference to the
Thompson and Tuden (1959) types of decision strategies in Figure 2, it becomes clear that when people
agree on the results desired of an organization, organization problems can be solved rationally using
either computational or judgmental decision strategies. However, when there is little or no agreement
on the domain or goals of an organization, the rational model is replaced with partisan or anarchic
models of choice (e.g., the garbage can model by Cohen et al., 1972). Here power, bargaining, and
negotiation among partisan decision makers overshadow analytical approaches to solving organizational
problems.
Domain complexity is the diversity or heterogeneity of products, markets, and geographical
territories that decision makers choose for the organization to operate in. It is the dimension that
underlies much of the literature on how diversification strategies affect organizational structure
(Chandler, 1962; Wrigley, 1970; Rumelt, 1974). Because humans have a limited capacity for retaining
conscious information, as domains become more complex organizations carve up their production
function and design problems into quasi-independent simpler problems and assign them to various
loosely coupled divisions. However, personnel within these loosely coupled divisions managing
different domain components develop different norms about interpersonal behavior, organizational
goals, structuring of activities, and time span of attention (Lawrence and Lorsch, 1967). Thus with
increasingly complex domains, there is likely to be decreasing interdivisional agreement on

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organizational goals, but increasing agreement on sub-goals within divisions. As overall domain
complexity increases, macro-decisions about organization problems become increasingly non-rational,
while micro-decisions within divisions tend to be more rational.
Domain restrictiveness refers to the market structure in which a firm chooses to operate, in terms
of governmental regulation, economic competition, barriers to entry, and unionization of the labor force,
as well as an organizations internal flexibility of technologies, surplus of resources, and specificity of
domain statement (Williamson, 1975; Miles and Cameron, 1978; Khandwalla, 1977). Domain
restrictiveness is a dimension central to addressing the current debate on the relative importance of
externally versus internally driven models of organization structure and behavior (e.g., Aldrich, 1979;
van de Ven, 1979; McKelvey, 1979). At relatively low levels of domain restrictiveness, models
emphasizing internal leadership and individual choice, are instrumental in shaping organizations, while
externally driven models, for example, the population ecology model, become increasingly salient when
domains are highly restrictive.
Perhaps more productive and interesting than resolving this debate are the qualitatively different
strategies organizations employ to solve their production function and organization design problems
over the range from low to high domain restrictiveness. Three sets of strategies are summarized here
and discussed in greater detail in Ouchi and Van de Ven (1980). One set of strategies is to obtain
closure to the production function and organization design problems by limiting production quotas or
operations to the amount of resources that an organization can control during an operating period
through buffering, leveling, forecasting, and rationing techniques (Thompson, 1967). Second, an
organization can decrease the criticality of any single restrictive source by initiating market transactions
with a larger number of alternative suppliers, customers, and in more diverse product lines. This
decreases a firms domain restrictiveness by increasing its domain complexity and reducing uncertainty
or risk. Third, an organization can set out to expand control over its domain by coopting, coventuring,
or merging with other organizations that represent critical contingencies for the organization.
The second and third strategies are analogous to the markets and hierarchies framework
proposed by Williamson (1975). He argues that the decision over whether resource transactions are
executed across markets (strategy 2) or by hierarchy within a firm (strategy 3) depends on the degree of
opportunism of decision makers and the perceived uncertainty and restrictiveness of an organizations
domain. Holding opportunism constant, the greater the domain restrictiveness and uncertainty, the more
strategy 3 is preferred to strategy 2. Of course combinations of these strategies are often employed by
organizations simultaneously, particularly those with complex domains. Organizations facing
heterogeneous environments will segment their markets and adopt unique strategies for coping with
each (Thompson, 1967).
See Further Notes on Organization Design

Figure 1
ORGANIZATIONAL STRATEGIES FOR COPING
WITH ENVIRONMENTAL DEPENDENCIES

COST OF STRATEGIES
HIGH-----------------------------------------------------LOW

REACTIVE STRATEGIES THAT

CHANGE ORGANIZATIONS

PROACTIVE STRATEGIES THAT

CHANGE MARKETS

A. Seal Off Core Technology

1. buffering
2. leveling
3. forecasting
4. rationing

A. Inter-Organizational Structures
1. trade associations
2. joint ventures
3. cartels

B. Environmental Surveillance
1. boundary spanning and intelligence
2. overlapping board membership
3. personnel transfers

B. Mergers
1. vertical integration
2. horizontal integration
3. diversification

C. Create New Products/Enter New Markets

1. product diversification
2. imitation and licenses
3. innovation and patents

C. Change Market Rules & Norms

1. enhance benefits of regulation
2. use antitrust to self-advantage
3. political action to change regulation

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Agreement on ends or goals
High----------------------------------------------------------Low

Uncertainty of means
to achieve ends

----------------------

Low

High

Computational
or programmed
decision-making

Bargaining or
negotiated
decision-making

Judgmental or
non-programmed
decision-making

Heuristic or
inspirational
decision-making

Prevailing norms:
rationality and
efficiency

Prevailing norms:
social power and
influences

Figure 2 Thompson and Tuden (1959) typology of decision-making strategies under

varying conditions of agreement on ends and uncertainty of means.