Organization equilibrium and efficiency

The basic value criteria that will be employed in making decisions and choices among alternatives in an organization will be selected for the organization primarily by the controlling group—the group that has the power to set the terms of membership for all the participants. If the group that holds the legal control fails to exercise this power, then, of course, it will devolve on individuals further down the administrative hierarchy.

Whatever group exercises the power of determining the basic value criteria will attempt to secure through the organization its own personal values—whether these be identified with the organization objective, with the conservation objectives, with profits or what not. But their power of control does not in any sense imply that the control group exercises an unlimited option to direct the organization in any path it desires, for the power will continue to exist only so long as the controlling group is able to offer sufficient incentives to retain the contributions of the other participants to the organization. No matter what the personal objectives of the control group, their decisions will be heavily influenced by the fact that they can attain their objectives through the organization only if they can maintain a positive balance of contributions over inducements, or at least an equilibrium between the two.

For this reason the controlling group, regardless of its personal values, will be opportunistic—will appear to be motivated in large part at least by conservation objectives. It may be worth while to illustrate this more fully in the case of widely different organization types.

1. Equilibrium in Commercial Organizations

In business organizations, the control groups can ordinarily be expected to be oriented primarily toward profits and conservation.5 They will attempt to maintain a favorable balance of incoming contributions over outgoing incentives m two ways: first by modifying the organization objective in response to customer demand; and second, by employing the resources, monetary contributions, and employees’ time and effort in such a manner as to attain a maximum of inducement to employees, and a maximum of attainment of organization objectives with these resources. A detailed examination of the way in which this is accomplished leads to the theory of what the economist calls “the economics of the firm.” Such an examination cannot be undertaken here. One point does require notice, however: the second type of adjustment—that of using the given resources as effectively as possible in the light of the organization objective—makes efficiency a basic value criterion of administrative decision in such organizations.

It might be asked why most commercial organizations, if their basic adjustment is opportunistic, do tend usually to maintain fairly stable objec- tives. The answer to this is threefold. First, there are “sunk costs” which make immediate and rapid adjustment unprofitable even from the standpoint of conservation. Second, the organization acquires know-how in a particular field—really an intangible sunk cost, or more properly, “sunk asset.” Third, the organization acquires goodwill, which is also a sunk asset that may not be readily transferable to another area of activity. Stated differently, a change in organization objectives ordinarily entails decreased efficiency in use of resources (sunk costs and know-how) and a loss of incentives otherwise available to maintain a favorable balance (goodwill).

2. Equilibrium in Governmental Agencies

In the governmental agency the “customer,” i.e., the legislative body, is the ultimate controlling group. Since this group can contribute to the organization whatever funds are necessary to attain the organization objective, it is less obvious on casual examination that such an organization is a system in equilibrium. It may be expected, also, that opportunistic modification of the organization objective is less prominent in such organizations than in commercial organizations.

Closer examination tends to reduce the importance of these differences. First, the legislature and the electorate to which it is responsive have changing tastes and objectives. Second, the control of the legislative body over the public agency is usually of a relatively passive and general nature, and the real initiative for the formulation of objectives often—perhaps almost always—lies in the top administrative group. This group may be strongly imbued with the organization objectives, with conservation aims, or both, and, within the limits of its discretion, may play very much the same role as the management group in commercial organizations.

In any event, efficiency comes forth again as a basic criterion of deci-

to attain a maximum of organization objectives, however these be deter- mined, with the resources at its disposal.

3. Equilibrium in Non-Profit Private Organizations

The non-profit organization (a professional association, or a private school, for example) is likely to differ from the ordinary business organization in several respects. For one thing, there is not a conflict—always possible in business organizations—between profit aims and the other types of objectives discussed. Moreover, the control group is likely to be identified closely with the organization objective, and hence opportunism, though an important element in the equilibrium of such orgniza- tions, is likely to be of the type previously described as “tactical.” On the other hand, the criterion of efficiency will play the same role in these organizations as in the others that have been described.

4. Elements in Common

These illustrations will perhaps serve to suggest the wide variety of possi- e organization forms. The reader undoubtedly can suggest other forms from his own experience and is aware of the numerous modifications these forms can undergo, particularly with respect to the motivation of the control group.

The same analysis can be applied to segments of organizations, the departments, divisions, and sections of which they are built. The adminis- trators directing these segments, within the limits of discretion permitted them, behave in a fashion quite comparable to the groups that control autonomous organizations.

These illustrations indicate that there are at least two elements common to all organizational forms. They all have some equilibrating mechanism or mechanisms; and in all of them efficiency is a basic criterion of administrative choice.

5. The Criterion of Efficiency

The criterion of efficiency is such an important element in organization decision-making that an entire chapter will be devoted to it. Before leaving the present discussion, however, it may be well to give the term a more precise definition. The criterion of efficiency demands that, of two alternatives having the same cost, that one be chosen which will lead to alternatives leading to the same degree of attainment, that one be chosen which entails the lesser cost.

Where resources, objectives, and costs are all variable, organization decisions cannot be reached purely on the basis of considerations of efficiency. Where the amount of resources and the organization objectives are givens, outside the control of the administrator, efficiency becomes the controlling determinant of administrative choice.

Source: Simon Herbert A. (1997), Administrative Behavior, Free Press; Subsequent edition.

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