Organizational Behavior-II

ORGANIZATIONAL THEORY, DESIGN, AND CHANGE

BY GARETH R. JONES AND MARY MATHEW
 About this course
 A contemporary and up-to-date account of the changing business
environment and how it affects the way organizations are structured –
with an objective of increasing effectiveness
 Complexity of strategic and organizational challenges confronting
managers
 Continual search for ways to change organizational design to work
smarter and enhance performance
 A new vocabulary to understand organizations, and conceptual tools to
analyse and change it
Living in a VUCA world!

QP-1
VUCA stands for Volatile, Uncertain, Complex, Abrupt.
Yes (O) / No (X)
 Evaluation components

1. Quizzes – 25%
 5 quizzes
 Weightage 5% for each quiz
 Each quiz based on the previous session

2. Mini-Project – 25%
3. End-term Examination – 50%
Introductory Discussion
on Basic Concepts
CHAPTERS 1, 2 AND 4
 Learning objectives
 Explain why organizations exist, and what purposes they serve
 Differentiate between organizational structure and culture
 Appreciate the way in which many contingency factors influence the design
of organizations
 Identify the various stakeholder groups and their interests or claims on an
organization
 Describe the agency problem, and the mechanisms that can be used to reduce
agency costs
 Describe the four basic design challenges confronting managers; and how
these challenges can be addressed simultaneously
 Understand the design choices between creation of either a mechanistic or
organic structure
Organizations and
organizational effectiveness
 What is an organization?
 Response to, and a means of satisfying some human need/s
 Tool used by people to coordinate their actions to obtain something
they desire or value – to achieve their goals
 New technology – new organizations – new needs discovered
 Organizations transform/ die when new needs replace older needs

 Entrepreneurship – people with necessary skills, knowledge and risk-

taking ability recognize opportunities to satisfy needs
 Gather and use resources to meet those needs
Thinking about organizations…

QP-2
Nobody has ever seen or touched an organization.
Yes (O) / No (X)
 Definitions of “Organization”
 “A continuous system of differentiated and coordinated human
activities utilizing, transforming and welding together a specific set of
human, material, capital, ideational and natural resources into a unique
problem-solving whole, engaged in satisfying particular human needs
in interaction with other systems of human activities and resources in
the environment.” (Bakke, 1959)
 “Social units deliberately constructed and reconstructed to seek
specific goals.” (Etzioni, 1964)

Four elements:
(1) two or more members; (2) goal/s guiding members’ activity; (3)
distinctive roles assigned to different members; (4) authority system that
is accepted as governing decisions
 Organizations create Value
 Organizations are value-creation systems that take inputs from the
environment and use skills and knowledge to transform these inputs
into finished goods and services
Concepts…

QP-3
Economies of scope are cost savings achieved when an
organization manufactures products in large volumes.
Yes (O) / No (X)
 Why do organizations exist?

1. Powerful tools for exponential growth – use of technology –

economies of scale and scope
2. Increase specialization and division of labour
3. Economize on transaction costs
4. Exert power and control
5. Manage the organizational environment – interdependent relationships
 Designed for stability and control
 Organizational theory, design and change

Organizational structure: the formal system of task and authority

relationships that control how people coordinate their actions and use
resources to achieve organizational goals.
Dimensions – complexity, formalization, centralization

Organizational culture: the set of shared values and norms, that helps
shape the behavior of employees with other employees/ suppliers/
customers etc.
 Organizational theory, design and change

Organizational design: the process by which managers select and manage

aspects of structure and culture so that an organization can control the activities
necessary to achieve its goals
Organizational change: the process by which organizations move from their
present state to some desired future state to increase their effectiveness. Entails
organizational redesign and transformation.
Organizational theory: the study of how organizations function and how they
affect and are affected by the environment in which they operate (structure and
design)
 Organizational design – Context/ environment

Context factors external to the Context factors internal to the organization

organization
Social Change in characteristic of work force New leadership. Workforce demographics

Technological A new technology has an impact on business Systems integration – cut out duplication of effort

Environmental New standards come into play Crisis with a product (failure, resulting in recall)

Economic Import/ export barriers or tariff changes New business strategy/ competitor grabs market
share
Political Change in govt. Lobbying required. Chairman / Board disagree with CEO
Legal Legal/ compliance requirements Too many internal standards
Culture…

QP-4
Organizations that provide essentially the same goods and
services will always have similar organizational cultures.
Yes (O) / No (X)
 Organizational design – Key factors
 Business environment
 Strategy – organization’s objectives/ goals
 Technology/ operations

 Requires holistic thinking about the organization – structures,

processes, people, performance measures, culture
 Future-oriented – dealing with contingencies
 Gaining competitive advantage
 Managing diversity (surface-level vs. deep-level)
 Promoting efficiency, speed and innovation
 Importance of Organizational design:
Organization life cycle
Formalization
& Control
Stage Elaboration of
1) Rules & Structure
Collective Stage Structures 1) Complex Structures
1) Informal Formalized 2) Decentralisation
Communication 2) Emphasis 3) Market Diversified
2) High on Efficiency
Org. size commitment

Entrepreneurial
Stage
1) Ambiguous goals Decline
2) High Creativity 1) Emp. turnover
2) Increased
Conflicts

Organizational age
 Consequences of poor organizational design
 Decline of the organization’s sales and profits
 Layoffs occur and talented employees leave to take positions in
growing organizations
 Resources become harder to acquire
 Resulting crisis may result in organizational failure

 TOYOTA’s struggles with organizational structure

 2009-10: recall of 8 million vehicles
 Toyota production system (TPS) – emphasis on efficiency
 Rigid corporate culture/ hierarchy
Stakeholders, managers
and ethics
 Importance of stakeholders
 Stakeholders: People who have an interest, claim, or stake in an
organization, in what it does, and in how well it performs
 Inside stakeholders: shareholders, managers, workforce
 Outside stakeholders: customers, suppliers, government, community…

 In general, stakeholders are motivated to participate in an organization

if they receive inducements that exceed the value of the contributions
they are required to make.
Inducements and contributions of stakeholders
Stakeholders…

QP-5
Organization should satisfy the interests of all stakeholders
Yes (O) / No (X)
 Organizational effectiveness

 Stakeholders may have conflicting goals

 Organization must minimally satisfy the interests of all stakeholders
 To win stakeholder approval, the organization faces the problems of
competing goals, allocating resources, and balancing short- and long-
term goals
 Allocating profits

 Shareholders delegate to managers – authority and responsibility – use

organization’s resources – create value and meet organization’s goals
 We need responsible leadership and responsible organizations
 Agency theory perspective
 A relationship exists when one party (the principle) delegates decision-
making authority or control to another (the agent)
 Moral hazard: (a) principal finds it very difficult to evaluate how well
the agent has performed because the agent possesses an information
advantage; (b) agent has an incentive to pursue goals and objectives
that are different from the principal’s

 Solving the agency problem – governance mechanisms (board of

directors); stock-based compensation schemes
 Assumption – selfish, rational actor who seeks to maximize his/her
individual utility (amoral)
 CEO salary vs. average employee salary?
 Stewardship perspective (ethical)
 Assumption – moral actor who perceives greater utility in pro-
organizational, collectivistic behaviors (self-actualization)
 Steward leader would not substitute self-serving behavior for
cooperative behavior
 Aims to maximize the needs/ interests of all stakeholders
 Long-term orientation
 Stewardship behaviors can be enacted across all levels of the
organization – stewardship culture
 Stewardship: “the extent to which the leader willingly subjugates
his/her personal interests to act in the protection of others’ long-term
welfare”
 Can you think of any Indian steward leader?
Basic challenges of
organizational design
 Key terms
 Role: set of task-related behaviors required of a person by his or her
position in an organization
 As the division of labor increases, managers specialize in some roles and
hire people to specialize in others
 Specialization allows people to develop their individual abilities and
knowledge within their specific role
 Organizational structure is based on a system of interlocking roles
 Authority: the power to hold people accountable for their actions and to
make decisions concerning the use of organizational resources.
 Control: the ability to coordinate and motivate people to work in the
organization’s interests
 Design challenge 1: Differentiation

 The process by which an organization allocates people and resources to

organizational tasks.
 Establishes the task and authority relationships that allow the
organization to achieve its goals

 Division of labor: the degree of specialization in the organization

 In a simple organization, differentiation is low (low division of labor)
 In a complex organization, differentiation is high (high division of labor)
 Sub-units: Functions and divisions

 Function: a subunit composed of a group of people, working together,

who possess similar skills or use the same kind of knowledge, tools, or
techniques to perform their jobs
 Division: a subunit that consists of a collection of functions or
departments that share responsibility for producing a particular good or
service.

 Organizational Complexity: the number of different functions and

divisions possessed by an organization (degree of differentiation)
Sub-units: Functions and divisions
 Types of Functions
1. Production functions: manage and improve the efficiency of an
organization’s conversion processes so that more value is created
(Production operations, production control, and quality control)
2. Support functions: facilitate an organization’s control of its relations with its
environment and its stakeholders (purchase, sales and marketing, public
relations, and legal affairs)
3. Maintenance functions: enable an organization to keep its departments in
operation (administration, engineering)
4. Adaptive functions: allow an organization to adjust to changes in the
environment (research and development, market research, corporate
planning)
5. Managerial functions: facilitate the control and coordination of activities
within and among departments (top mgt, middle mgt and lower mgt)
 Vertical and horizontal differentiation
 Hierarchy: a classification of people according to their relative
authority and rank
 Vertical differentiation: the way an organization designs its hierarchy of
authority and creates reporting relationships to link organizational roles
and subunits.
 Establishes the distribution of authority between levels

 Horizontal differentiation: the way an organization groups

organizational tasks into roles and roles into subunits (functions and
divisions)
 Roles are differentiated according to their main task responsibilities.
Differentiation…

QP-6
‘Research and development’ is an example of a
maintenance function.
Yes (O) / No (X)
 Design Challenge 2: Balancing differentiation
and integration
 Horizontal differentiation is supposed to enable people to specialize and
become more productive.
 Specialization often limits communication between subunits, creates
subunit orientation that reduces communication making coordination
difficult.

 Subunit orientation: a tendency to view one’s role in the organization

strictly from the perspective of the time frame, goals, and interpersonal
orientations of one’s subunit.
 Integration: the process of coordinating various tasks, functions and
divisions, so they work together and not at cross-purposes.
 Integration mechanisms
1. Hierarchy of authority: dictates “who reports to whom”
2. Direct contact: managers meet face to face to coordinate activities.
Problematic as manager in one function has no authority over a manager in
another. Establishing personal relationships and professional contacts helps.
3. Liaison roles: a specific manager is given responsibility for coordinating
with managers from other subunits on behalf of their subunits
4. Task force: managers meet in temporary committees to coordinate cross-
functional activities.
5. Team: a permanent task force used to deal with ongoing strategic or
administrative issues.
6. Integrating department: a new department intended to coordinate the
activities of functions or divisions.
 Design Challenge 3: Balancing centralization
and decentralization
 Centralization: the authority to make important decisions is retained by
top level managers. Top managers coordinate activities to keep the
organization focused on its goals.
 Decentralization: the authority to make important decisions is delegated
to managers at all levels in the hierarchy. Promotes flexibility and
responsiveness.

 Ideal balance: Enabling middle and lower managers who are at the
scene of the action to make important operational decisions. Allowing
top managers to focus on long-term strategy making.
 Any disadvantage of decentralization?
 Design Challenge 4: Balancing
standardization and mutual adjustment
 Standardization: conformity to specific models or examples.
 Defined by rules and norms
 Mutual adjustment: People use their judgment rather than standardized
rules to address problems, guide decision making, and promote
coordination.
 Formalization: the use of rules and procedures to standardize operations
 Socialization: the process by which organizational members learn the
norms of an organization and internalize these unwritten rules of conduct.
 Challenge: Using rules and norms to standardize behavior, and to allow
for mutual adjustment – opportunity to discover new ways to achieve
goals.
 Mechanistic and organic structures

Mechanistic
 Induces people to behave in predictable, accountable
ways
 Decision-making authority is centralized
 Subordinates are closely supervised
 Information flows mainly in a vertical direction
along a clearly defined path
 Hierarchy- principal integrating mechanism
 Tasks and roles coordinated primarily through
standardization and formal written rules
 Best suited to organizations that face stable,
unchanging environments
Organic
 Structures that promote flexibility, so people
initiate change and can adapt quickly to changing
conditions
 Decision making distributed throughout the
hierarchy
 Coordination is achieved through mutual
adjustments
 Status conferred by ability to provide creative
leadership
 Encourages innovative behavior
 Suited to dynamic environments
 Contingency approach to organizational design
Lawrence and Lorsch: Differentiation, integration and the environment
 Investigated how companies in different industries differentiate and integrate
their structures to fit the environment
 Three industries that experienced different levels of uncertainty:
1. The plastics industry
2. The food-processing industry
3. The container or can-manufacturing industry
 Environment is perceived as more unstable and uncertain: effective
organizations are less formalized, more decentralized, and rely more on
mutual adjustment.
 Environment is perceived as stable and certain: effective organizations have a
more centralized, standardized, and formalized structure
 Contingency approach to organizational design

Burns and Stalker: Organic vs. mechanistic structures

 Found that organizations need different kinds of structure to control
their activities based on the environment
 Organic structures are more effective when the environment is unstable and changing
 Mechanistic structures are more effective in stable environments
Integration…

QP-7
The marketing and manufacturing managers of the sportswear division of a
sports goods company meet to discuss the launch of a new line of football
jerseys. The integrating technique used in this case is ________.
A) integrating role
B) direct contact
C) task force
D) integrating department