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Overview of Organization Theory and Structure

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Lecture - 01An Overview – I
Welcome to this course on Organization T heory/Structure and Design. I am Zillur Rahman,a professor in the Department of Management Studies at IIT, Roorkee. Now, this is our 20hour and 40 module course which is divided in 4 parts. In the part 1, we will talk aboutintroduction to organization theory and it will cover module 1 to module 10.In part 2, we will talk about the determinants of organizational structure and it is spread outthrough module 11 to module 23. The part 3 covers organizational design and how to goabout choosing the right structural form and module 24 to module 30, we will talk about this.(Refer Slide Time: 01:12)
And the last part that is contemporary issues in organization theory, they are spread out frommodule 31st to module 40. So, now let us start with part 1 that is introduction to organizationtheory. The first topic here is an overview to this course and it will be covered in twomodules; that is module 1 and module 2.
(Refer Slide Time: 01:35)
Let us start with module 1 and this module will cover these three things; the first is that wewill define what is organization theory, then we will compare organization theory andorganizational behavior; after that, we will explain the advantages or the value in studyingorganization theory.(Refer Slide Time: 02:00)
Let us start the introduction with the Celestial Seasonings story. So, this is a story of acompany and it will make things very clear to you about organization theory. So, thiscompany is the company that brings various tea brands to the market. In 1988, the company
had sales in excess of dollar 40 million. It has made its founder Mo Siegel and John Hay –millionaires. But Celestial Seasonings was not always a large, multimillion-dollarorganization. In fact, it has grown from the most humble of the beginnings.(Refer Slide Time: 02:42)
In the summer of 1971, Mo Siegel and John Hay who were the owners of this company werein their early twenties and lived in Boulder, Colorado in USA. Mo and John decided to makeand sell herb teas and spent their summer days picking herbs in the canyons surroundingBoulder.Meanwhile, their wives Peggy Siegel and Beth Hay, they made bulk tea bags; ten thousandbulk tea bags that first summer. The two couples screened the hundreds of pounds of herbsthat the men had collected and mixed them in a concoction that would eventually be calledMo’s 24.
(Refer Slide Time: 03:32)
The completed product which they sold under the brand name of Celestial Seasoning weresold to natural food stores in the Boulder area. Now, during the first few years, the peoplethat made up Celestial Seasoning were nothing more than a group of friends and relatives.There were no job descriptions, no production line and little specialization of labour in thiscompany that is the Celestial Seasoning. So, everybody was doing everything, but somethingbegan to happen in the mid-1970s that changed the company’s structure dramatically.Demand for their herbal teas was exploding.(Refer Slide Time: 04:17)
They were moving out of health food stores and into supermarkets and other types of stores.More people had to be hired to meet the increasing demand. But with more people came theneed to develop a more formal structure within which to make and sell their herbal teas.(Refer Slide Time: 04:39)
Not surprisingly, Celestial Seasoning had lost a large degree of its one big happy familyatmosphere. So, as the demand for their product increased, the company increased in size andtherefore, they had to hire lots of people. But then, the disadvantage of this happening wasthat they had lost this one big happy family and a kind of outlet and now they had to move toa more formal kind of organization.With specialization and departmentalization came the separation of management fromworkers. Mo Siegel and John Hay created an organization. The means by which four peoplemade a few thousand dollars’ worth of tea was no longer efficient for making forty differentkinds of herbal teas, with herbs imported from thirty-five countries and generating sales inexcess of dollar 40 million a year. Now, this kind of volume requires a coordinated structureof people doing specific work task.
(Refer Slide Time: 05:52)
Increasing layers of management were required to coordinate the departmental activities. So,now, these various levels of this organization has started coming into picture. Additionally,formal written policies, regulations and rules had to be introduced to facilitate coordinationand to ensure that all employees were treated consistently and fairly.So, now you see that as they have moved from a smaller organization to a bigger organizationand from an informal organization to a formal organization i.e. to a situation where only fourpeople were working now lots of people have started working. So, now, you see that nowthey felt the need to have formal written policies, regulations and rules so that the employees,are treated consistently and fairly throughout and across the organization.
(Refer Slide Time: 06:48)
Celestial Seasonings success is as much a result of having developed a proper structure ofplanned and coordinated effort as it is of good marketing. The profitable manufacturing andselling of tea requires obtaining raw material, running efficient production operations,shipping the finished product on time and to the right place, developing new products andmany other activities. Providing any product or service requires planned coordination.(Refer Slide Time: 07:25)
As we will demonstrate, an understanding of organization theory can help managerseffectively coordinate their resources and make for more efficient provisions of product orservice. This Celestial Seasonings story illustrates the creation and growth of an organization.So, now, with this story I want to demonstrate how informal organization has now moved onwith time to become a formal organization and this is what precisely we mean by the termorganization. Perhaps not as obviously, Mo Siegel and John Hay were also involved withorganization structure, organization design and organization theory.(Refer Slide Time: 08:14)
Since all the four terms are important and are often confused, let us clarify them and we willstart with defining what is organization and then, we will move on to define what isorganizational structure, then organizational design and thereafter, we will define what isorganization theory. So, let us start with understanding what an organization is.
(Refer Slide Time: 08:36)
So, now we are talking of some basic definitions. An organization is a consciouslycoordinated social entity, with a relatively identifiable boundary, that functions on a relativelycontinuous basis to achieve a common goal or set of goals. The word consciously coordinatedthat we came across in the first line implies management. Social entity means that the unit iscomposed of people or groups of people, who interact with each other. So, the wordconsciously coordinated means management.The social entity means that a collection composed of people or groups who interact witheach other. The interaction pattern that people follow in an organization, do not just emerge;rather they are pre mediated. So, this interaction pattern i.e. how people interact, should notbe left to everyone, so that it emerges on itself, but it has to be pre-mediated; so that a propersystem of interaction gets into place.
(Refer Slide Time: 10:00)
Therefore, because organizations are social entities, the interaction pattern of their membersmust be balanced and harmonized to minimize redundancy, yet ensure that critical tasks arebeing completed. The result is that our definition assumes explicitly the need for coordinatingand the interaction pattern of people. So, this means that this coordination of people andinteraction has to be coordinated.So, another important component or aspect of this definition is that an organization has arelatively identifiable boundary. The boundary can change over time and it may not alwaysbe perfectly clear; but it there has to be a boundary. A definable boundary must exist in orderto distinguish members from non-members. So, who are the members of the organization andwho are non-members, so that is why this boundary is required.
(Refer Slide Time: 11:04)
It tends to be achieved by explicit or implicit contracts between members and theirorganization. So, these contracts may be explicit or implicit, but those contracts have to bethere.In most employment relationship, there is an implicit contract, where work is exchanged forpay. So, that is an implicit contract, that you work for us and we will pay you in return forthat work. In social or voluntary organization, members contribute in return for prestige,social interaction or the satisfaction of helping others.(Refer Slide Time: 11:49)
So, when we are talking of social and voluntary organization, there the return on the workthat the members carry out is in the form of prestige, social interaction and the satisfaction ofhelping others.But every organization has a boundary that differentiates who is and who is not the part ofthat organization. People in an organization have some continuing bond; this bond of coursedoes not mean lifelong membership. So, people in that organization, they have a bond; but itmay not be lifelong.On the contrary, organizations face constant change in their membership. So, people comeand people go. Although, while they are members, the people in an organization participatewith some degree of regularity.(Refer Slide Time: 12:55)
For a salesperson at Walmart, that may require being at work eight hours a day and five day aweek. At the other extreme, someone functioning on a relatively continuous basis as amember of Confederation of Women Entrepreneurs, that is, an organization that is engaged inthe social and economic upliftment of women through entrepreneurship may attend only afew meetings a year or merely pay the annual membership dues or membership fees.Finally, organization exists to achieve something. What is this something? These somethingsare goals and they usually are either unattainable by individual working alone or if attainableindividually are achieved more efficiently through group efforts.
(Refer Slide Time: 13:49)
So, these somethings are goals, which may not be achievable by an individual or even if theyare achievable, they can be more efficiently achieved by way of the group effort. So, that iswhy an organization exists. While it is not necessary for all members to endorse theorganization goals fully; they may endorse fully or they may not, our definition impliesgeneral agreement with the mission of the organization.So, all of those employees, all the people working for the organization, generally agree withthe mission of the organization. Members of an organization could be identified as theemployees, the managers as well as the owners. So, all of them should generally agree withthe mission of the organization; that is how an organization can achieve its goals.
(Refer Slide Time: 14:46)
So, in return for their work efforts, they will receive some compensation. Finally, theorganization’s life exists beyond that of any of its member. So, all or some of its membersmay quit, may leave, may die; but the organization will still exist. Employees can quit, butthey can be replaced so that the activities they perform can be carried on. Now, let us moveon to the second important thing, that is, what is organization structure?So, we have now understood that what an organization is. So, there are these importantthings that are there in the organization.First, it is the consciously coordinated activity; this is a social entity with identifiableboundaries that functions on relatively continuous basis that is the fourth thing and to achievecommon goals. So, these are the five things that are necessary to define an organization.Now, let us look at what is organization structure. After having understood what anorganization is, now let us look at what does this structure mean.
(Refer Slide Time: 16:14)
So, organization structure defines how tasks are to be allocated, who reports to whom, theformal coordinating mechanism and interaction pattern that will be followed. So, these arethe four things that this organization structure will define.(Refer Slide Time: 16:35)
So, we define an organization structure as having three components; first is complexity,second is formalization and the third is centralization. Now, let us look at what this threemeans and we will review each one in detail in upcoming modules. But for the time being letus start with what does this complexity means. So, complexity considers the extent of
differentiation within the organization. This includes the degree of specialization or divisionof labor, that is, the number of levels in the organizations hierarchy..So, there can be two levels or there can be twenty levels and the extent to which theorganizational units are dispersed geographically. So, it includes three things; first is thedivision of labor specialization; second, the number of levels and third is how are theorganization units geographically dispersed, spread out. The degree to which an organizationrelies on rules and procedures to direct the behavior of employees is formalization.(Refer Slide Time: 17:52)
So, there are written rules and procedures that direct the behavior of the employees which iscalled as formalization. So, how complex an organization is, will define the specialization oflabor, the number of levels in the organization and how the organization units are dispersedgeographically. How formal the organization is, will determine the rules and procedures todirect behavior of employees.Now, some organizations operate with a minimum of such standard guidelines; others, someof which are even quite small in size have all kind of regulations, instructing employees as towhat they can and cannot do. So, it does not depend upon the size of the organization.
(Refer Slide Time: 18:44)
The big organization can be less formal; a small organization can be more formal.Centralization, that is, the third important thing that we have to understand, considers wherethe locus of decision-making authority lies. In some organizations, decision making is highlycentralized. Problems flow upward and the senior executives choose the appropriate action.In other cases, decision making is decentralized. Authority is dispersed downward in thehierarchy.So, sometimes the senior executives take the decision, sometimes junior executives areempowered to take this decision. It is important to recognize that as with complexity andformalization, an organization is neither centralized nor decentralized. Centralization anddecentralization represents two extremes on a continuum. Organizations tend to becentralized or tend to be decentralized.
(Refer Slide Time: 19:47)
The placement of the organization on this continuum, however, is one of the major factorsthat determine what type of structure exists. So, these are the two extremes on thiscontinuum. So, it is not either or situation. So, organization can be here. So, it can becentralized here, it can be decentralized here or organization can be somewhere here.So, it is more decentralized than centralized or it is more centralized as compared todecentralized. The third important definition that we will talk about is what organizationdesign is. So, the third term that is organization design emphasizes the management side ofthe organization theory. So, now comes the management in this organization theory.
(Refer Slide Time: 20:33)
Organization design is concerned with constructing and changing an organization structure toachieve the organization goal. So, now constructing and changing an organization structure isto we have made the structure earlier, now we are talking about constructing and changingorganization structure so that the organization goals can be achieved.Constructing or changing an organization is not unlike building or remodeling a house. Bothbegin with an end goal. The designer then creates a means or plan for achieving that goal. Inhouse construction, that plan is a blueprint.(Refer Slide Time: 21:13)
In organization building, the analogous document is an organization chart. As businessstudents and managers, you are probably more interested in learning how to designorganization than merely knowing how organizations function. You have a managerialperspective, consistently looking for the application potential in concepts.(Refer Slide Time: 21:37)
When organization theory is studied from the perspective of the needs of managers and futuremanagers, it is oriented heavily towards organization design.(Refer Slide Time: 21:45)
Now, what is organization theory? Organization theory is the discipline that studies thestructure and design of organization. Organization theory refers to both the descriptive andprescriptive aspect of the discipline.It describes how organizations are actually structured and offers suggestion on how they canbe constructed to improve their effectiveness. Since we are clarifying terminology, it mightbe helpful in this section to differentiate the subject matter of organization theory, that is, OTfrom that of organizational behavior, that is, OB.(Refer Slide Time: 22:20)
A brief comparison of the two should assist you in understanding their different terrains aswell as their areas of overlap.
(Refer Slide Time: 22:31)
Let us look at what this organizational behavior is. It takes a micro view emphasizingindividuals and small groups. It focuses on behavior in organizations and a narrow set ofemployee performance and attitude variables like employee productivity, absenteeism,turnover and job satisfaction.Individual behavior topics typically studied in OB includes perception, values, learning,motivation and personality. Group topics include roles, status, leadership, power,communication, and conflict. In contrast, organization theory takes up macro perspective. Itsunit of analysis is the organization itself or its primary subunits.
(Refer Slide Time: 23:18)
OT focuses on the behavior of organization and uses a broader definition of organizationaleffectiveness. OT is concerned not only with employee performance and attitudes, but withthe overall organization’s ability to adopt and achieve its goal. This micro-macro distinctioncreates some kind of overlap.(Refer Slide Time: 23:41)
For instance, structural factors have an impact on employee behavior. So, students of OBshould consider the structure-behavior relationship. Similarly, some micro topics are relevantto the study of OT. But where micro and macro issues overlap, their emphasis is often
different. For instance, the topic of conflict in OB tends to focus on interpersonal andintergroup conflict that derived from personality differences and poor communication.(Refer Slide Time: 24:08)
Conflict when studied by organization theorists, emphasize problems of inter unitcoordination. While the student of OB is likely to see all conflicts as people problems, thestudent of OT tends to see the same conflict as resulting from the flaws in the organizationdesign.The issue, of course, is not that one is right and the other is wrong. Rather, OB and OTmerely emphasize different levels of organizational analysis. Now, let us see why we shouldstudy organization theory. To this point, we have assumed that you are aware of the value ofstudying organization theory.
(Refer Slide Time: 24:46)
Now, this assumption may be incorrect. Therefore, before we go on any further, let usaddress the question directly; why should we study organization theory? Organizations arethe dominant form of institutions in any society.(Refer Slide Time: 25:05)
The schools that educate us are organizations, as are the stores where we buy our food, thecompanies that make our automobiles and the people who take our income tax, collect ourgarbage, provide for our military defense and print our daily newspapers. Organizationspervade all aspects of contemporary life- society as a whole, the economy and even our
personal lives. It is not unreasonable, then to expect us to want to understand thisphenomenon that is so intervened in our lives.Even though you may have no desire to apply your knowledge, you may simply seek ananswer to why organizations with which you interact and by which you will probably beemployed are structured the way they are. At a more sophisticated level, you may want toreplace your intuitive theories of organization with one that have been derived scientificallyand systematically.(Refer Slide Time: 26:03)
Whether or not you study organization formally, you carry around with you a set of theoriesabout how organizations operate.
(Refer Slide Time: 26:11)
You make a reservation with an airline; you talk to the loan officer at your bank aboutarranging a student loan; you order it “your way” at the local fast-food outlet. You undertakeall these activities by using some “theory” about how each of these organizations operate andwhy its members behave as they do.So, the issue is not whether you should use theory for dealing with organization - reality tellsus that we use such theory every day. Doesn’t it make sense to use theories that haveundergone systematic study? When we use the phrase systematic study, we mean looking atrelationships attempting to attribute causes and effects and basing our conclusion on scientificevidence.
(Refer Slide Time: 26:54)
This is data gathered under controlled conditions and measured and interpreted in areasonably rigorous manner. The objective is to replace intuition or that “gut feeling” one hasas to “why organizations are designed as they are” and “what works best when” withscientifically-based theories. Probably the most popular reason for studying organizationtheories, that you are interested in pursuing a career in management.(Refer Slide Time: 27:28)
You want to know how organizations operate, have that knowledge based on some scientificevidence, and then use the knowledge for constructing and changing an organization’s
structure to achieve the organization’s goals or do you expect to practice organization designas a manager, administrator, personnel analyst, organizational specialist or the like.(Refer Slide Time: 27:52)
The final reason for studying OT may not be very exciting, but it is pragmatic. It may be therequirement for a particular degree or certificate you are seeking. You may perceive yourselfas a captive in a required course, believing that studying OT may offer no obvious end thathas value to you. If this is the case, then the studying of OT is only a means towards that end.It is hoped that one of your earlier reasons holds more relevance for you. Now, there are tendifferent ways of looking at organization.
(Refer Slide Time: 28:27)
Rational entities in pursuit of goals. Organization exists to achieve goals, and the behavior oforganizational members can be explained as the rational pursuit of those goals. Then, they areconsidered as coalition of power constituencies. Organizations are made up of groups, eachof which seeks to satisfy their own self-interest.These groups use their power to influence the distribution of resources within theorganization. Open systems. Organizations are input output transformation systems thatdepend on their environment for survival.(Refer Slide Time: 29:03)
Then, they are considered as meaning producing systems. Organizations are artificiallycreated entities. Their goals and purpose are symbolically created and maintained bymanagement. Loosely coupled system. Organizations are made up of relatively independentunits that can pursue dissimilar or even conflicting goals. Then, they are considered aspolitical systems. Organizations are composed of internal consistencies that seek control overthe decision process in order to enhance their position.They are considered to be instrument of domination. Organization place members into job“boxes” that constraints what they can do and individuals with whom they can interact.Additionally, they are given a boss who has authority over them.(Refer Slide Time: 29:34)
Then, they are considered as information processing units. Organization interpret theirenvironment, coordinate activities and facilitate decision making by processing informationhorizontally and vertically through a structural hierarchy.
(Refer Slide Time: 30:04)
Then, they are considered as psychic prisons. Organizations constraint members byconstructing job description, departments, divisions and standards of acceptable andunacceptable behavior. When accepted by members, they become artificial barriers that limitchoices. They are also considered at social contracts. Organizations are composed of sets ofunwritten agreement, whereby members perform certain behavior in return for compensation.To conclude, in this module we defined organization theory in detail.(Refer Slide Time: 30:37)
We have also learned in brief about various concepts like organization structure, organizationdesign theory and organization behavior. We did a comparative study of organization,organization theory and organization behavior and then, we have explained the value, theneed or the advantage in studying organization theory. These are the four books from whichthe material for this module was taken.Thank you.