Organization theory (1970S)

Organization theory is a modern theory of the firm which states that the goals and activities of a firm are the results of its organizational structure.

Organization theory challenges the traditional assumption of profit maximization by management, which is now seen as content to earn just satisfactory profits.

Also see: theory of the firm, satisficing, agency theory, theory of the growth of the firm, managerial theories of the firm, bureaucracy

Source:
O E Williamson, Markets and Hierarchies, Analysis and Antitrust Implications: A Study in the Economics of Internal Organizations (New York, 1975);
J B Barney and W G Ouchi, eds, Organizational Economics (San Francisco and London, 1986)

Organizational theory consists of many approaches to organizational analysis. “Organizations” are defined as social units of people that are structured and managed to meet a need, or to pursue collective goals. Theories of organizations include rational system perspective, division of labor, bureaucratic theory, and contingency theory.

In a rational organization system, there are two significant parts: Specificity of Goals and Formalization. The division of labor is the specialization of individual labor roles, associated with increasing output and trade. Modernization theorist Frank Dobbin states that “modern institutions are transparently purposive and that we are in the midst of an evolutionary progression towards more efficient forms.” Max Weber’s conception of bureaucracy is characterized by the presence of impersonal positions that are earned and not inherited, rule-governed decision-making, professionalism, chain of command, defined responsibility, and bounded authority. The contingency theory holds that an organization must try to maximize performance by minimizing the effects of varying environmental and internal constraints.

As noted by Dwight Waldo in a review of field work in 1978, “Organization theory is characterized by vogues, heterogeneity, claims and counterclaims;”^[1] even greater differentiation in theory and practice have developed since then. Organization theory cannot be described as an orderly progression of ideas, or a unified body of knowledge in which each development builds carefully on and extends the one before it. Rather, developments in theory and prescriptions for practice show disagreement about the purposes and uses of a theory of organization, the issues to which it should address itself (such as supervisory style and organizational culture), and the concepts and variables that should enter into such a theory.

Weberian bureaucracy

The scholar most closely associated with Bureaucratic theory is Max Weber. In Economy and Society, his seminal book published in 1922, Weber articulates the necessary conditions and descriptive features of bureaucracy. An organization governed under Weber’s conception of bureaucracy is characterized by the presence of impersonal positions that are earned and not inherited, rule-governed decision-making, professionalism, chain of command, defined responsibility, and bounded authority.

Weber begins his discussion of bureaucracy by introducing the concept of jurisdictional areas: institutions governed by a specific set of rules or laws.^[10] In a ‘jurisdictional area’ regular activities are assigned as official duties, the authority to assign these duties is distributed through a set of rules, and duties are fulfilled continuously by qualified individuals. These elements make up a bureaucratic agency in the case of the state and a bureaucratic enterprise in the private economy.

There are several additional features that comprise a Weberian bureaucracy:^[10]

• It is possible to find the utilization of hierarchical subordination in all bureaucratic structures. This means that higher-level offices supervise lower level offices.
• In bureaucracies, personal possessions are kept separate from the monies of the agency or the enterprise.
• People who work within a bureaucracy are usually trained in the appropriate field of specialization.
• Bureaucratic officials are expected to contribute their full working capacity to the organization.
• Positions within a bureaucratic organization must follow a specific set of general rules.

Weber argued that in bureaucracy, taking on a position or office signifies an assumption of a specific duty necessary for the organization. This conception is distinct from historical working relationships in which a worker served a specific ruler, not an institution.^[10]

The hierarchical nature of bureaucracies allows employees to demonstrate achieved social status.^[10] When an office holder is elected instead of appointed, that person is no longer a purely bureaucratic figure. He derives his power ‘from below’ instead of ‘from above’. When a high-ranking officer selects officials, they are more likely to be chosen for reasons related to the benefit of the superior than the competency of the new hire. When high-skilled employees are necessary for the bureaucracy and public opinion shapes decision-making, competent officers are more likely to be selected.^[10]

According to Weber, if ‘tenure for life’ is legally guaranteed, an office becomes perceived as less prestigious than a position that can be replaced at any time. If ‘tenure for life’ or a ‘right to the office’ develops, there is a decrease in career opportunities for ambitious new hires and overall technical efficiency becomes less guaranteed.^[10] In a bureaucracy, salaries are provided to officials. The amount is determined on the basis of rank and helps to signify the desirability of a position. Bureaucratic positions also exist as part of stable career tracks that reward office-holders for seniority.^[10]

Weber argues that the development of a money economy is the “normal precondition for the unchanged survival, if not the establishment, of pure bureaucratic administrations.”^[10] Since bureaucracy requires sustained revenues from taxation or private profits in order to be maintained, a money economy is the most rational way to ensure its continued existence.

Weber posits that officials in a bureaucracy have a property right to their office and attempts at exploitation by a superior means the abandonment of bureaucratic principles. He articulates that providing a status incentive to inferior officers helps them to maintain self-respect and fully participate in hierarchical frameworks.^[10] Michel Crozier reexamined Weber’s theory in 1964 and determined that bureaucracy is flawed because hierarchy causes officers to engage in selfish power struggles that damage the efficiency of the organization.^[11]

Weber’s ideal of bureaucracy

Weber identified the following components of bureaucracy as essential:^[12]

• Official jurisdiction on all areas is ordered by rules or laws already implemented.
• There is an office hierarchy; a system of super- and sub-ordination in which higher offices supervise lower ones.
• The management of the modern office is based upon written rules, which are preserved in their original form.
• Office management requires training and specialization.
• When the office is developed/established it requires the full working capacity of individuals.
• Rules are stable and can be learned. Knowledge of these rules can be viewed as expertise within the bureaucracy (these allow for the management of society).

When a bureaucracy is implemented, it can provide accountability, responsibility, control, and consistency. The hiring of employees will be an impersonal and equal system.^[12] Although the classical perspective encourages efficiency, it is often^[quantify] criticized as ignoring human needs. Also, it rarely takes into consideration human error or the variability of work performances (since each worker is different).

In the case of the Space Shuttle Challenger disaster, NASA managers overlooked the possibility of human error.