Theory Z

By: Birhanu Fanta (MBA Student: Business Administration)

December, 2019
Addis Ababa, Ethiopia

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TABLE OF CONTENTS

1. HISTORICAL DEVELOPMENT .. 1

2. THEORETICAL /CONCEPTUAL DISCUSSION .. .. 5

3. OBJECTIVES TO BE ACHIEVED . 10

4. BASIC CHARACTERISTICS .. 12

5. PROCESSES/STEPS INVOLVED 15

6. CHALLENGES OF IMPLEMENTATION . . 17
7. REMEDIALS .. 18
8. REFERENCES . 19

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 1. HISTORICAL DEVELOPMENT

One Theories of Motivation, specifically how Managers perceive workers in organization, Theory
X and Theory Y, was first introduced by Douglas McGregore in the 1960’s.
Theory Z has been called a sociological description of the humanistic organizations advocated by
management pioneers such as Elton Mayo, Chris Argyris, Rensis Likert, and Douglas McGregor. In
fact, the descriptive phrase, "Theory Z." can be traced to the work of Douglas McGregor in the
1950s and 1960s. McGregor, a psychologist and college president, identified a negative set of
assumptions about human nature, which he called Theory X. He asserted that these assumptions
limited the potential for growth of many employees.

McGregor presented an alternative set of assumptions that he called Theory Y and were more
positive about human nature as it relates to employees. In McGregor's view, managers who
adopted Theory Y beliefs would exhibit different, more humanistic, and ultimately more effective
management styles. McGregor's work was read widely, and Theory Y became a well-known
prescription for improving management practices.

But in the 1970s and 1980s, many United States industries lost market share to international
competitors, particularly Japanese companies. Concerns about the competitiveness of U. S.
companies led some to examine Japanese management practices for clues to the success
enjoyed by many of their industries. This led to many articles and books purporting to explain
the success of Japanese companies. It was in this atmosphere that Theory Z was introduced into
the management lexicon.

In the early 1980s, dozens of books and articles on this subject appeared, attempting to explain
the Japanese approach to improving industrial and technological improvement. None has been
more favorably received than Theory Z, by William Ouchi (1981), an American professor of
Management at the University of California, Los Angeles, first came to prominence for his
studies of the difference between Japanese and American Companies and their management
style on his bestselling book entitled Theory Z: How American Management can meet the
Japanese challenge. After spending years researching and examining major corporations in
Japan, and working with many of America’s most successful Fortune 500 Companies, Ouchi
carefully laid out what, why and how he believed Americans can learn from Japanese business

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success. He outlined the basic components of three different kinds of corporations: (Type J) –
the typical successful Japanese Companies, (Type A) – the typical unsuccessful American
corporations, and (Type Z) Corporations, those American enterprises which manage to
maximize their success by combining the best of both American and Japanese approach to
management.

Theory Z represents a humanistic approach to management. Although it is based on Japanese

management principles, it is not a pure form of Japanese management philosophies and
characterized by, among other things, long-term job security, consensual decision making, slow
evaluation and promotion procedures, and individual responsibility within a group context.
Proponents of Theory Z suggest that it leads to improvements in organizational performance.
In addition, Theory Z breaks away from McGregor's Theory Y. Theory Y is a largely psychological
perspective focusing on individuals and employer-employee relationships while Theory Z
changes the level of analysis to the entire organization. (Brajesh K. P., 2016)
According to Professor Ouchi, Theory Z organizations exhibit a strong, homogeneous set of
cultural values that are similar to clan cultures. The clan culture is characterized by homogeneity
of values, beliefs, and objectives. Clan cultures emphasize complete socialization of members to
achieve congruence of individual and group goals. Although Theory Z organizations exhibit
characteristics of clan cultures, they retain some elements of bureaucratic hierarchies, such as
formal authority relationships, performance evaluation, and some work specialization.
Proponents of Theory Z suggest that the common cultural values should promote greater
organizational commitment among employees.

In the following sections we will see the theoretical perspectives, objectives to be achieved, basic
characteristics, steps or processes or steps involved, challenges of implementation and some
remedial of Theory Z.

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 2. THEORETICAL /CONCEPTUAL DISCUSSION
2.1 Introduction

Theory Z represents a humanistic approach to management. Although it is based on Japanese

management principles, it is not a pure form of Japanese management. Instead, Theory Z is a
hybrid management approach combining Japanese management philosophies with U.S. culture.
In addition, Theory Z breaks away from McGregor's Theory Y. Theory Y is a largely psychological
perspective focusing on individual dyads of employer-employee relationships, while Theory Z
changes the level of analysis to the entire organization. (Encyclopedia).

Theory Z Ouchi (1981) observed that the American model of management was the opposite of
the Japanese model in every respect. His Theory Z explained how American business could meet
the Japanese challenge by pointing out the importance of organisational culture. There are seven
characteristics that have traditionally been used by the Americans (Theory A) and the Japanese
(Theory J). Theory Z is a combination of these theories, in most cases, to modify American
corporate culture and help firms compete more effectively with the Japanese.

According to Professor Ouchi, Theory Z organizations exhibit a strong, homogeneous set of

cultural values that are similar to clan cultures. The clan culture is characterized by homogeneity
of values, beliefs, and objectives. Ouchi calls an “Industrail Clan” corporate clan values will be
expressed in incentives, such as long term employment, and the result will be increased
involvement, trust, satisfaction and productivity. He sees industrial clan as embodied in
Japanease society because of the cultural environment of Japan (Jeremiah J.S.). Clan cultures
emphasize complete socialization of members to achieve congruence of individual and group
goals. Although Theory Z organizations exhibit characteristics of clan cultures, they retain some
elements of bureaucratic hierarchies, such as formal authority relationships, performance
evaluation, and some work specialization. Proponents of Theory Z suggest that the common
cultural values should promote greater organizational commitment among employees.

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Ouchi wrote a book called Theory Z: How American Business Can Meet the Japanese
Challenge (1981). In this book, Ouchi shows how American corporations can meet the Japanese
challenges with a highly effective management style that promises to transform business in the
1980s.

The secret to Japanese success, according to Ouchi, is not technology, but a special way of managing
people. "This is a managing style that focuses on a strong company philosophy, a distinct corporate
culture, long-range staff development, and consensus decision-making" (Ouchi, 1981). Ouchi claims
that the results show:

• Lower turnover
• Increased job commitment
• Dramatically higher productivity

William Ouchi doesn't say that the Japanese culture for business is necessarily the best strategy for
the American companies. Instead, he takes Japanese business techniques and adapts them to the
American corporate environment.

One of the most important pieces of this theory is that management must have a high degree of
confidence in its workers in order for this type of participative management to work. This theory
assumes that workers will be participating in the decisions of the company to a great degree.

Ouchi explains that the employees must be very knowledgeable about the various issues of the
company, as well as possess the competence to make those decisions. He also points out, however,
that management sometimes has a tendency to underestimate the ability of the workers to
effectively contribute to the decision-making process (Bittel, 1989). For this reason, Theory Z stresses
the need for the workers to become generalists, rather than specialists, and to increase their
knowledge of the company and its processes through job rotations and constant training.

Promotions tend to be slower in this type of setting, as workers are given a much longer opportunity
to receive training and more time to learn the ins and outs of the company's operations.

The desire, under this theory, is to develop a work force, which has more loyalty toward staying with
the company for an entire career. It is expected that once employees do rise to a position of high

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level management, they will know a great deal more about the company and how it operates, and
will be able to use Theory Z management theories effectively on the newer employees.

2.2 Features or Elements of Theory Z

According to Ouchi, In order to achieve the objectives of theory Z, the fulfillment of five broad
features are indispensable:-

i) Trust – By trust he meant trust between employees, supervisors, workgroups, unions,

management, and government. When trust and openness exist in an organization, the
chances of conflict are automatically reduced to the minimum.
ii) Strong Bond between Organization and Employees - This can be established in an
organization among others by providing long time employment, highly conducive
environment, participatory decision making, and slowing down of evaluation and
promotion which can create stability of employment of employees.
iii) Employee Involvement – according to Ouchi, employee involvement comes through
meaningful participation. But this does not mean that employees participation is
necessary in all decisions. Any decision affecting employees in any way should be taken
jointly and if there is any decision which the management wants to take individually, the
employees should be informed about it so that they do not feel ignored. The idea of
employee involvement is not to slow down the decision making process but to involve
employees for their commitment and giving due recognition to them.
iv) No Functional Structure – Theory Z provides no formal structure for the organization.
Instead, it must be a perfect teamwork with cooperation along with sharing of
information, resources and plans. Ouchi believes that an integrated organization does
not have any charts, divisions or any visible structure with no formal reporting
relationships and minimum of specialization of positions and of tasks. The emphasis on
rotational aspect of employee placement enables to develop group spirit which is the
basic backbone of success.
v) Coordination of Human Beings – Leaders role is to coordinate people to achieve
productivity. This involves developing people’s skills and also the creation of new
structure, incentives, and a new philosophy of management. The purpose is to achieve

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 commitment of employees to the development of less selfish more-cooperative
approach to work.

2.3 Comparison between Type A, Type J and Type Z organizations

The basic components of three different kinds of corporations the: (Type J) – the typical
successful Japanese Companies, (Type A) – the typical unsuccessful American corporations,
and (Type Z) Corporations, those American enterprises which manage to maximize their
success by combining the best of both American and Japanese approach to management.
William Ouchi compares Type J company with type A in such a way that they differ along
seven dimensions, the most important of which is the lifetime employment in type J
compared to the short-term employment in Type A. He describes that Type Z organizations
are American Companies, such as I.B.M. and Hewlett Packard, that closely resemble elite
Japanese Companies. Ouchi proposes that Type Z as a clear alternative to the typical
bureaucratic American companies. He argues that type Z organizations have grown up in
America because under certain circumstances they have been more adaptive because the
nature of environment is changing, Type Z could replace Type A as the dominant
organization type in America. (Ouchi 1981).
Figure 1. Theory Z Model

Type A Type J Type Z

Characteristics
(American) (Japanese) (Modified)

Employment with a Usually Short-term; layoffs Especially in some of Fairly Long-term; this will
firm are quite common the large Firms, it is help develop a loyal semi-

for Life-Time, layoffs permanent workforce

are rare

Evaluation and Very fast; individuals who Very slow; big Slower; more emphasis is
Promotion of are not promoted rapidly promotions are given to training and
personnel often seek employment generally not given evaluation than to

elsewhere out for years promotion

Career paths Very specialized; people Very general; More general; emphasis is

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 tend to stay in one area personnel are on job rotation and more
(Accounting, Finance, rotated from one broadly based training in

sales, etc) for their entire area to another and order to give the person a
career become familiar with better feel for the entire
all areas of opera organization

Decision making Carried out by the Carried out by group Carried out with more
Individual Manager decision making emphasis on group

participation and consensus

Responsibility Very Implicitly & Assigned on an Individual

informal; people rely Basis

heavily on Trust and

Goodwill collective

Control Explicit/ Formal control Implicit/ Informal Moderate/ Implicit/Informal

Control control

Concern to Organization is concerned Organization is Organization concern is

Employees primarily with the worker’s concerned with the expanded to include more
work life only whole life of the aspects of the worker’s

worker – business whole life

and social

Source: Luthans, F. (1995) Organizational behavior (7th ed.) New York: McGraw Hill (p. 509)

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3 OBJECTIVES TO BE ACHIEVED

According to Ouchi, Theory Z promotes stable employment, high productivity and high morality
and employee satisfaction. The loyalty of employees is increased by offering them a job for life
with a strong focus on employee well-being both on the job as well as in their private lives.

The Main objectives of Ouchi’s theory Z are described as hereunder:

1. Increased productivity: The Japanese theory focus on the empowerment of employees

through training and other motivational avenues and this leads to increased productivity of the
employee.

2. Loyalty: The theory promotes loyalty among the employees. It focuses on providing job
security to the employee who in turn become loyal to the company.

3. Employee satisfaction: The main goal is to ensure the employees are satisfied to work in the
company. This helps boost their confidence and improve their creativity within the company.

4. Promotes trust and openness: Theory Z focuses on ensuring there is trust among the
employees, managers, and other groups. Trust in the organization ensures there is openness and
integrity among all individuals in the company.

5. Strong bond between employees and organization: Provision of a conducive working

environment and participation in management promotes a sense of pride and belonging within
the organization and this results to a strong bond between employees and the organization.

6. Employee involvement: Contribution of employees towards the decision of the firm act as a
motivational strategy and employees will contribute to the success of the organization through
their involvement.

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7. Promotes teamwork: Theory Z ensures employees are able to work together as a team. There
is no formal structure and the employees coordinate, share information, and resources with
each other.

8. Commitment of employees: The Japanese management theory focuses on the development of

employee’s skills and the creation of incentives that ensure there is coordination and
commitment of employees in their daily responsibilities.

9. Promotes generalists: According to William Ouch, employees should be knowledgeable about

various aspects of the company in order to participate in management decisions. The
management should also have confidence in them.

10. Control system: This management style ensures there is an informal organizational structure
which are aimed at boosting mutual trust among different groups of people in the organization.

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4 BASIC CHARACTERISTICS

Theory Z: As an Approach to Management

Theory Z represents a humanistic approach to management. Although it is based on Japanese
management principles, it is not a pure form of Japanese management. Instead, Theory Z is a
hybrid management approach combining Japanese management philosophies with U.S. culture.
In addition, Theory Z breaks away from McGregor's Theory Y. Theory Y is a largely psychological
perspective focusing on individual dyads of employer-employee relationships while Theory Z
changes the level of analysis to the entire organization.

According to Professor Ouchi, Theory Z organizations exhibit a strong, homogeneous set of

cultural values that are similar to clan cultures. The clan culture is characterized by homogeneity
of values, beliefs, and objectives. Clan cultures emphasize complete socialization of members to
achieve congruence of individual and group goals. Although Theory Z organizations exhibit
characteristics of clan cultures, they retain some elements of bureaucratic hierarchies, such as
formal authority relationships, performance evaluation, and some work specialization.
Proponents of Theory Z suggest that the common cultural values should promote greater
organizational commitment among employees. The primary features of Theory Z are
summarized in the paragraphs that follow.

1. Long-Term Employment

Traditional U.S. organizations are plagued with short-term commitments by employees, but
employers using more traditional management perspective may inadvertently encourage this by
treating employees simply as replaceable cogs in the profit-making machinery. In the United
States, employment at will, which essentially means the employer or the employee can
terminate the employment relationship at any time, has been among the dominant forms of
employment relationships. Conversely, Type J organizations generally make life-long
commitments to their employees and expect loyalty in return, but Type J organizations set the
conditions to encourage this. This promotes stability in the organization and job security among
employees.

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2. CONSENSUAL DECISION MAKING

The Type Z organization emphasizes communication, collaboration, and consensus in decision

making. This marks a contrast from the traditional Type A organization that emphasizes
individual decision-making.

3. INDIVIDUAL RESPONSIBILITY

Type A organizations emphasize individual accountability and performance appraisal.

Traditionally, performance measures in Type J companies have been oriented to the group. Thus,
Type Z organizations retain the emphasis on individual contributions that are characteristic of
most American firms by recognizing individual achievements, albeit within the context of the
wider group.

4. SLOW EVALUATION AND PROMOTION

The Type A organization has generally been characterized by short-term evaluations of

performance and rapid promotion of high achievers. The Type J organization, conversely, adopts
the Japanese model of slow evaluation and promotion.

5.INFORMAL CONTROL WITH FORMALIZED MEASURES

The Type Z organization relies on informal methods of control, but does measure performance
through formal mechanisms. This is an attempt to combine elements of both the Type A and
Type J organizations.

6. MODERATELY SPECIALIZED CAREER PATH

Type A organizations have generally had quite specialized career paths, with employees avoiding
jumps from functional area to another. Conversely, the Type J organization has generally had
quite non-specialized career paths. The Type Z organization adopts a middle-of-the-road
posture, with career paths that are less specialized than the traditional U.S. model but more
specialized than the traditional Japanese model.

7. HOLISTIC CONCERN

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The Type Z organization is characterized by concern for employees that goes beyond the
workplace. This philosophy is more consistent with the Japanese model than the U.S. model. The
Theory Z attempts to create a typical “organization man” who replicates all intellectual,
economical as well as social characteristics of the organization. It is one of the prime factors that
how an organization gets care and concern about its workforce? This concern & care concept
can go a long way in order to receive the best outcome from employees. This will be helpful to
employees get in tune and adjust accordingly with the spirit of the organization. Z-Type
organizations engross a process of socialization in order to standardize interpersonal
relationship. By this approach workforce, get amalgamated and committed to the sole
philosophy as well as the functional style of the organization.

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5 PROCESSES/STEPS INVOLVED
For Japanese the process of implementing Theory z is relatively easy. Cultural imperatives-as well
as corporate philosophies and fortuitous economic and historical influences- have fostered
numerous industrial clans. These clans are characterized by lifetime employment, slow
promotion and infrequent evaluation, non specialized career paths, implicit control mechanisms,
collective decision making, individual responsibility and holistic concern for employees’ social as
well as economic needs. These organizational conditions act as incentives to foster worker
involvement in close, cooperative relationship with other workers, with managers, and within
groups.

Figure 2. Ouchi’s Theory Z

Japanese version American Vesion

Cultural Imperative Managerial Decision

Corporate philosophy
Creating Industrial
Clan

Incentives
Incentives Long Term Employment
Lifetime Flat hierarchies, etc
Employment, etc

Intimacy
Involvement
Cooperation
Closeness

TRUST Work Group

Employee satisfaction and

Sense of Autonomy

Increased productivity
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Source: Jeremiah J. Sullivan, A critique of Theory Z, academy of management review 1983, Vol. 8,
No. 1, 132-142
With intimacy established, then the result should be an increase of trusting behavior in the
organization such as:-
1. A faith in equitable treatment by superiors over the long run.
2. The recognition of shared interest among the employees.
3. Open, honest, sincere behavior.
4. Unspoken mutual understanding.
5. A willingness to be obliged to another.
6. A focus on egalitarian/ Equal rights in relationship.
7. A focus on interpersonal relationship.
Trusting behavior will insure the smooth functioning of work groups, and work groups will in turn
will legitimize and develop involvement and intimacy – which will foster more trust. Thus Ouchi
views small groups as organizational tools for developing involvement and trust. His formulation
requires the transformation of the corporation into an industrial clan. It is the clan’s philosophy
and the incentives created by the philosophy that stimulate involvement, trust and pleasant
work groups.

The next step after trust development is employee feelings of autonomy and satisfaction. Here
autonomy translates into an employee’s sense of shared community in which individual needs
and goals correlate with clan needs and goals. The employee’s sense of being in control gives
way to a new sense of fitting into the community. Alienation disappears, replaced by feelings of
solidarity.

Finally, Theory Z predicts that happy, communal workers will be self-disciplined workers; the
result will be increased productivity in comparison with non-Theory Z firms.

In the American version, however, the managerial decision and the resultant corporate
philosophy creates an Industrial clan which then be motivated by long term incentives to create
intimacy and involvement which in turn create trust, employee satisfaction and result in
increased productivity.

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6 CHALLENGES OF IMPLEMENTATION
Due to these serious limitations of theory Z any organization can encounter the following
challenges when trying to adopt its implementation:
(i) Life-time employment is not much practical for business enterprises. It adds to business costs,
because employees are kept on the payroll even though there may be insufficient work. This
permanent employment practice, known as ‘nenko’, is used only by large firms, even in Japan.
Employees, too, may not like the idea of life-long employment; as they may get better job
opportunities outside the organization.

(ii)Common culture phenomenon may be difficult to obtain in practice, in many organizations, in

different countries. For example, in an Indian enterprise where people from North and South are
working jointly; language, eating habits and other attitudes may be so different that to speak of
and obtain a common culture may be totally beyond the capacity of management.

(iii)Free-from Organizational structure may be possible in a basketball team; but may create
serious chaos in a large business enterprise; where nobody will know who is responsible to
whom.

(iv) Horizontal movement of employees is not possible when skills of job at one level are not
transferable to job at the other horizontal level. Moreover, this horizontal movement comes in
the way of employee specialization so essential for effective organizational functioning.

(V)Involvement of employees in decision-making is a problem, where:

1. Unskilled or semi-skilled people are involved

2. Strategic decisions have to be taken.

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7 REMEDIALS
William Ouchi’s Theory ‘Z’ Point of Comment:
Theory Z is not a theory of motivation in a direct sense. It is an integrated version of motivational
philosophy i.e. various features of theory Z considered in conjunction with one another make for
a strong base towards motivating people. However, because of its unique features, theory Z is
not much useful and valid for countries, other than Japan.

Research into whether Theory Z organizations outperform others has yielded mixed results.
Some studies suggest that Type Z organizations achieve benefits both in terms of employee
satisfaction, motivation, and commitment as well as in terms of financial performance. Other
studies conclude that Type Z organizations do not outperform other organizations.

Difficulties in the Japanese economy in the 1990s led some researchers to suggest that the
widespread admiration of Japanese management practices in the 1970s and 1980s might have
been misplaced. As a result, Theory Z has also received considerable criticism. It is unclear
whether Theory Z will have a lasting impact on management practices in the U. S. and around
the world into the twenty-first century, but by positioning target research at the organizational
level rather than the individual level, Ouchi will surely leave his mark on management practice
for years to come.

To borrow an excerpt from a book review from Strategic Management Journal, vol. 3, 381-
387(1982), the implementation of theory z is not by itself sufficient for organizational
effectiveness. A type Z culture, depending upon its nature, can be both responsive and
unresponsive to the demands of its environment. It can be both constructive and destructive.

To conclude, Theory Z is not the perfect answer to all management problems. However,
Management can use this theory by using their judgment and skills in motivating and managing
the employees in a contingent manner in their quest to find the effective solution.

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8 REFERENCES
Website:Wikipedia:http://en.wikipedia.org/wiki/Theory-Z
Website:Encyclopedia:http://encyclopedia.com/Theory-Z
Jeremiah J. Sullivan, A critique of Theory Z, academy of management review 1983, Vol. 8, No. 1,
132-142
Ouchi, W.G. (1981). Theory Z: How American business can meet the Japanese Challenge. Reading,
MA: Addison-Wesley, 1981.
Luthans, F. (1995) Organizational behavior (7th ed.) New York: Mcgraw Hill (p. 509)
Brajesh K. P (2016). Significance of Theory Z in Indian Scenario. International Journal of
Management and Social Sciences Research (IJMSSR). Vol. 5(2).
Source: Boundless. "Ouchi's Theory Z". Boundless Business. Boundless, 21 Jul. 2015. Retrieved 13 Jan.
2016 from https://www.boundless.com/business/textbooks/boundless-business-
textbook/motivation-theories-and-applications-11/theories-of-motivation-75/ouchi-s-theory-z-359-
8432/

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