Organizational Theory: Design, Effectiveness & Contingency
Why Organizations Exist and Their Purposes
Organizations exist because more value can be created when people work together in a coordinated and organized way than if they work alone. The purposes they serve are:
- Specialization and Division of Labor: The division of labor leads to specialization, and specialization leads to employees becoming experts in their jobs.
- Increase Large-Scale Technology:
- Economies of Scale: Cost savings that result from producing larger volumes on automated product lines.
- Economies of Scope: Cost savings that result from using underutilized resources more effectively because they can be shared across products and tasks.
- Manage Organizational Environment: The organizational environment is the source of valuable input and the marketplace where outputs are released. It’s also the source of economic, social, and political pressures that affect the organization’s ability to obtain those resources.
- Minimize Transaction Costs: These costs are associated with negotiating, monitoring, and governing exchanges between customers.
- Exert Power and Control: An organization can exert pressure on individuals to conform to task and production requirements to increase production efficiency.
Organizational Theory, Design, Change, Structure & Culture
Organizational theory informs organizational design and change by providing insights into how organizations function and how they affect and are affected by the environment. Organizational design applies the concepts of organizational theory. The design is influenced by change since, if there is a future desired state for the organization, the structure and culture of the organization will change.
Organizational structure focuses on the formal system of task and authority relationships that control how people coordinate their actions and use resources to achieve organizational goals. However, organizational culture focuses on the shared values and norms that control members’ interactions with each other and people outside the organization.
Using Organizational Theory to Increase Effectiveness
Managers can utilize the principles of organizational theory to design and change their organizations to increase organizational effectiveness by:
- Dealing with Contingencies: A contingency is an event that might occur and must be planned for. The design of an organization determines how effectively it is able to respond to various pressures in its environment and obtain scarce resources. Organizations must be ready to face challenges such as globalization and changing technology.
- Gaining Competitive Advantage: Competitive advantage is the ability of one company to outperform another because its managers are able to create more value from the resources at their disposal.
- Managing Diversity: Differences in race, gender, and national origin of organizational members have important implications for organizational culture and effectiveness. Learning how to effectively utilize a diverse workforce can result in better decision-making and a more effective workforce.
- Promoting Efficiency, Speed, and Innovation: The better an organization functions, the more value it creates. The correct organizational design can lead to faster innovation and quicker release of new products to the market.
Assessing and Measuring Organizational Effectiveness
Managers assess and measure organizational effectiveness in three principal ways:
- The External Resource Approach: Evaluates the organization’s ability to secure, manage, and control scarce and valuable skills and resources.
- The Internal Systems Approach: Evaluates the organization’s ability to be innovative and function quickly and responsively.
- The Technical Approach: Evaluates the organization’s ability to convert resources into goods and services efficiently.
Contingency Factors Influencing Organizational Design
Contingency factors significantly influence organizational design by recognizing the dynamic nature of organizations and their environment.