An Introduction to Organizational Theory

Organizational Theory is the macro level analysis of firms or organizations. It analyzes the firm as a whole. It deals with people at a broader level - how organizations are structured and designed, the motives behind control and coordination mechanisms for communication and day to day activities etc.

In fact, we analyze the organization in all perspectives for its success, thus making its connection with other areas like strategy or operational efficiency or financing. It tries to understand how one designs the appropriate organization structure to help handle interdependence, manage diversity and cope with uncertainty. OT differs from organizational behavior such that, OB takes a micro approach and deals in a root level with the behavior of people.

Organization Theory broadly deals with:

- Structure of a firm
- Design of the firm
- Managing Uncertainties
- Organizational Politics
- Organizational Culture

The organizational failure results from ill-structured forms, high levels of uncertainty which are not managed properly and human factors like bounded rationality or opportunism. The degree of complexity, formalization and centralization of authority/decision making dissipates the Organizational Structure. Organizational Theory deals how we can build world class organizations and maintain it to be one. Mintezberg's Model ( provides the authentic view of the affect of structure in organizations. Another important aspect of the structure of an organization is the linkage mechanisms for effective communication and coordination. It can be:

- Pooled Coupling (pooled resources;each unit works independently; Eg: franchisees or bank branches)
- Sequential Coupling (high interdependence; Eg: Assembly line)
- Reciprocal Coupling (Looping communication reciprocally; Eg: hospitals in which communication channel flows back and forth between doctors to lab to pharmacy to lab to doctors).

Linkage mechanisms (Communication) can be:

1) Vertical Or Horizontal or Diagonal
2) Personal or Impersonal
3) Permanent or Temporary (Committees or Task Forces)
4) Advisory or Authoritative

Organizational Theory also studies about the impact of incentives,whether tangible or intangible in order to keep the employees motivated and positive cooperation among each other. These in turn is affected by the structure of the firm and other complex attributes.

Another area that OT deals with is the linkage and coordination mechanisms to manage interdependence within organizations. They include:

- Markets [Commercial Contract]
- Bureaucracies [Employment Contract]
- Clans (An organic association that resembles a kin network without (in majority) involving blood relations) [Psychological Contract]

Market mechanism is effective when performance ambiguity is low; therefore high levels of goal in-congruence and opportunism can be tolerated. The key here is formalization. Clan organization is most effective and efficient when goal congruence and opportunism are low; therefore high levels of performance ambiguity can be tolerated. The key here is socialization. Bureaucracy is most efficient when all three factors - goal in-congruence, opportunism and performance ambiguity are moderate. The key here is to include both formalization and socialization.

Organizations face four facets of uncertainty:

1) Technology
2) Environment
3) Size
4) Strategy

Technology refers to the work processes, techniques, machines and actions used to transform organizational inputs like materials or information into outputs like products or services(Ref: Perrow's Definition -

"Different technologies impose different kinds of demand on individuals and organizations, and those demands had to be met through an appropriate structure" - Joan Woodward (

Two themes underlay the uncertainty when we take the organization-environment in perspective: One is the amount of complexity in terms of domain,information and change. Second is the scarcity of resources - raw materials, skill sets or financial resources.

The information and change complexity can be resolved with structural flexibilities. Some optimal suggestions are:

- For Medium Sized - Organic v/s Mechanistic(Bureaucratic) - Latest thought is to combine both to achieve high problem solving skills (organic) and efficiency (mechanistic)

- For Large - Buffer Organizations in which buffer departments will directly take care of the uncertainties from the environment and keep the technical core from any distractions

- For Very large - Loose Couplings to minimize subunit interdependence

The resource uncertainty can be handled with the help of favourable linkages, joint ventures & ownerships, control of environment/domain, associations, lobby group etc.

As mentioned, Strategy is one of the important factors that affect the design of an organization. To get a elaborate view on the role of strategy see the post on Introduction to Strategy.

For a company's success, technology, structure & strategy must be aligned.

Some of the other interesting topics that were discussed in my class were:
Managing learned helplessness (Giving up and quitting because you believe that whatever you do it doesn’t make any difference)
Developing Organizational Citizenship Behavior (Going above and beyond the call of duty for the sake of the organization and its mission, objectives & vision)

An advisable format of change in the organizational culture is to start as a clan, move towards bureaucracy, later into market mechanism and finally back to clan. Structurally it is advised from simple structure to professional bureaucracy & product focus to adhocracy with clan control.

The most important Managerial Skills required for a manager or a leader are:

- Planning, Organizing, Coordinating & Controlling (Rational actor model based on task oriented roles)
- Negotiating, Team Building, Maintaining & developing personal network (Organizational politics model based on relationship oriented roles)
- Willing to take calculated risks & having a vision

Another aspect, that the organizational theory deals with is the organizational politics. I learned from the class discussions that politics is not always bad and in some cases a requirement. Read more about organizational politics @

Last but not the least, organizational politics also deals with organizational culture and its impact on a firm's success. Hear from Peter M Senge about Organizational Culture here

"The successful implementation of both TQM and downsizing programs, as well as the resulting effectiveness of the organizations’ performance, depended on having the improvement strategies embedded in a culture change. When TQM and downsizing were implemented independent of a culture change, they were unsuccessful. When the culture of these organizations was an explicit target of change, so that the TQM or downsizing initiatives were embedded in an overall culture change effort, they were successful. Organizational effectiveness increased. Culture change was key." (from Diagnosing & Changing Organizational Culture by Cameron & Quinn

Organizational Theory also deals with Organization design and development which is an action oriented systematic, continuous and ongoing process of planned change through the application of knowledge of a number of discipline, not just limited to behavioral sciences. Peter F. Drucker in his classic article "The Theory of Business" deals in detail how one should go with it. Some excerpts:

A theory of the business has three parts. First, there are assumptions about the environment of the organization: society and its structure, the market, the customer, and technology. Second, there are assumptions about the specific mission of the organization. Third, there are assumptions about the core competencies needed to accomplish the organization's mission. The assumptions about environment define what an organization is paid for. The assumptions about mission define what an organization considers to be meaningful results; in other words, they point to how it envisions itself making a difference in the economy and in the society at large. Finally, the assumptions about core competencies define where an organization must excel in order to maintain leadership.

The specifications of a valid theory of the business are four fold:

1. The assumptions about environment, mission, and core competencies must fit reality.
2. The assumptions in all three areas have to fit one another.
3. The theory of the business must be known and understood throughout the organization.
4. The theory of the business has to be tested constantly.

There are two preventive measures to keep an organization alert and capable of rapidly changing itself and its theory.

1. Abandonment - Do a thorough analysis of your products and processes every couple of years or an optimum number of years and redesign them if required
2. Study the environment and non customers

To diagnose problems early, managers must pay attention to the warning signs. A theory of the business always becomes obsolete when an organization attains its original objectives. Rapid growth is another sure sign of crisis in an organization's theory. Any organization that doubles or triples in size within a fairly short period of time has necessarily outgrown its theory. There are two more clear signals that an organization's theory of the business is no longer valid. One is unexpected success - whether one's own or a competitor's. The other is unexpected failure - again, whether one's own or a competitor's.

Key Seasoning Lessons in Executive Development (from "On breaking the glass ceiling" by Lisa A Mainiero)

Stage 1: Political Naivete
Stage 2: Building Credibility
Stage 3: Refining a style
Stage 4: Shouldering responsibilities 


Openware/Free Courses:

Lecture Name: 30 - Organization Theory - I by Prof. K.B. Akhilesh, IISc Bangalore
Must Read Articles:

Single Loop and Double Loop Learning, Chris Argyris and Donald Schon
Teaching Smart People How to Learn, Chris Argyris
Diagnosing Organizational Culture, Roger Harrison
The Theory of Business, Peter F Drucker

Reference Books:

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