IOPsych notes 1.docx

What is organizational theory? Organizational theory is the sociological study of the structures and operations of social organizations, including companies and bureaucratic institutions. Organizational theory includes the analysis of the productivity and performance of organizations and the actions...

What is organizational theory? Organizational theory is the sociological study of the structures and operations of social organizations, including companies and bureaucratic institutions. Organizational theory includes the analysis of the productivity and performance of organizations and the actions of the employees and groups within them. Economists, business analysts and academic researchers who study organizational theory are interested in understanding the dynamics of a successful business. They may evaluate the importance of the professional and social relationships among employees and structures between business leaders and their staff that encourage productivity in the workplace. Theorists can use the principles of organizational theory in combination with studies of organizational behavior and human resources. Related: A Guide to Organizational Culture and Leadership 6 organizational theories Social and behavioral scientists have developed various theories to describe the correct way to understand and approach the key to an organization's productivity and success. These organizational theories discuss different ways that managers and supervisors may address their leadership responsibilities in order to yield the most productive and efficient results. The six primary organizational theories include: 1. Classical theory Classical theory can address the primary aspects of a business's formal organizational structure. This theory discusses how to divide up professional tasks in the most efficient and effective way. Classical theorists pay particular attention to the professional dynamics and relationships within an organization and how these relationships may impact the company's function and production. Related: Informal Organizations vs. Formal Organizations The underlying purpose of this theory is to help businesses create the most beneficial structures within a company that can then help the organization accomplish its goals. The four principles of the classical theory include: Division of labor: This principle argues that the production of a commodity splits into various divisions of manufacturing, and the people work within each division according to their area of specialization. This process results in maximum product output with minimum expenses. Scalar and functional processes: The scalar process deals with a company's vertical growth, meaning the relationships between business leaders and their employees. This means that professionals in management instruct their employees, and employees carry out the actions. Structure: The principle of structure describes patterns of professional behavior that lead to the accomplishment of the organization's goals. Structure is a tool that may facilitate relationships between all aspects of the company or business. Span of control: The span of control means attributing the appropriate numbers of employees to a supervisor so they can implement the principles of coordination, planning, motivation and leadership. This is about assigning the maximum number of employees to a manager while also allowing them enough time and support to lead their staff. Related: What Is Specialization of Labor? (With Benefits and Examples) 2. Neo-classical theory Beginning with the Hawthorne studies in the 1920s, the neo-classical theory focuses on the emotional and psychological components of peoples' behavior in an organization. Sociologists and psychologists found topics like leadership, morale and cooperation contribute to professional habits and behaviors. This theory argues that a sense of belonging and social acceptance is an important aspect of positive performance in the workplace. This means that effective leaders understand how the group dynamics may contribute to the success of the organization overall. Business leaders may implement systems and strategies to improve the interpersonal skills of their employees and facilitate meaningful professional connections through motivation, counseling and communication. Related: Guide To Effective Group Dynamics 3. Modern theory Modern theory, also called modern organizational theory, includes multiple management development approaches. This theory considers interactions between people within an organization and the surrounding environment, as well as the interpersonal interactions between members of the organization. Theorists based this approach on systems analysis and used both quantitative and behavioral sciences to develop it. This means that professional leaders who adopt this theory may use statistical and mathematical information to make business decisions while also considering the satisfaction and happiness of their employees. Managers who implement this approach may require an in-depth knowledge of their employees' behaviors in order to implement programs that further their productivity and professional development. Related: Modern Theory of Management: Definition, Benefits and Types 4. Contingency theory Contingency theory, also called decision theory, views organizations as a structure composed of choice-makers, and argues that there is no one right way to make a decision. Herbert A. Simon, a primary contributor to this theory, found that while people make business decisions at all levels of an organization, employees working at higher levels make the most valuable or impactful choices. This theory argues that the ideal decision or choice may differ from one organization to another, so choices are dependent on various internal and external factors. This means that the success of a business is contingent on the decisions made by the organization's leaders. Contingency theorists believe that management is responsible for analyzing business situations and then acting accordingly to address any issues or challenges. Related: Understanding the Contingency Theory of Leadership? 5. Motivation theory The motivational theory includes the study of what drives and inspires members of an organization to work toward their professional goals. Theorists who support this approach argue that employees perform their job duties accurately and productively when management knows how to motivate them correctly. This may require business leaders to thoroughly understand their employees' behavioral patterns and preferences to recognize the most beneficial way to support them. The goal of this is to increase company productivity on the basis that appropriately encourages employees to perform more efficiently, thus increasing production and profit. Managers may consider intrinsic and extrinsic factors that can impact their employees' feelings and experiences in order to develop effective systems and managerial strategies. Related: 35 Examples of Motivation in the Workplace 6. Open systems theory Open systems theory is a concept that argues that an organization's environment influences it, and understanding the impact of this influence may help managers develop more effective leadership strategies. Theorists categorize the environmental factors that impact an organization as specific or general. Specific factors may include the vendors or distributors that a company works with, industry competitors or government agencies that control or interact with production and regulation. Alternatively, general factors include four primary aspects that occur because of the geographic location of the organization. These aspects include: Economic conditions: The geographic location of a business can have a great impact on the company's ability to grow and remain successful because of local economic trends and events, including recessions and economic upswings. Cultural values: The cultural values of a community can influence customers' viewpoints and standards. This may influence whether they support your business or organization, and business leaders may use this theory to adapt to local cultural ethics. Education systems: Areas with strong education systems may be ideal for businesses that are in the technology industry or other companies that may rely on employees with extensive academic training. Legal consideration: The legal and political environment, including the taxes and regulations on business operations, may impact the stability and security of an organization. This may influence its ability to remain productive and successful. Organizational Structure Types 1) Hierarchical Structure 2) Matrix Structure 3) Horizontal/Flat Structure 4) Network Structure 5) Divisional Structure 6) Line Organizational Structure 7) Team-based Organizational Structure Other Types of Organizational Charts 1) Hierarchical Structure The hierarchical model is the most popular organizational chart type. There are a few models that are derived from this model. In a hierarchical organization structure, employees are grouped with every employee having one clear supervisor. The grouping is done based on a few factors, hence many models are derived from this. Below are a few of those factors Function – employees are grouped according to the function they provide. The below image shows a functional org chart with finance, technical, HR, and admin groups. Geography – employees are grouped based on their region. For example, in the USA employees might be grouped according to the state. If it’s a global company the grouping could be done according to countries. Product – If a company is producing multiple products or offering different services it can be grouped according to the product or service. These are some of the most common factors, but there are many more factors. You can find org chart examples for most of these types in our diagramming community. A functional organizational chart, a variation of the hierarchical model This is the dominant mode of organization among large organizations. For example Corporations, Governments, and organized religions are hierarchical organizations with different levels of management, power or authority.  Pros: Helps establish a clear line of authority and reporting within the organization Clarifies employee roles and responsibilities Establishes a clear career path for employees which can in turn keep them motivated Allows employees to be in-depth specialists as they are more likely to have niche positions Cons: Slow decision-making due to the complicated chains of command A disconnect of lower-level employees from those of the top-level management Inconsistencies in communication due to the vertical and horizontal levels between teams Restricted information due to the very little downward flow of information to the lower-level employees 2) Matrix Structure In a Matrix organizational structure, the reporting relationships are set up as a grid, or matrix, rather than in the traditional hierarchy. It is a type of organizational management in which people with similar skills are pooled for work assignments, resulting in more than one manager to report to (sometimes referred to as solid line and dotted line reports, in reference to traditional business organization charts). For example, all engineers may be in one engineering department and report to an engineering manager. But these same engineers may be assigned to different projects and might be reporting to those project managers as well. Therefore some engineers might have to work with multiple managers in their job roles. Pros:  Helps eliminate traditional siloed communications barriers Improved decision-making due to the availability of two chains of command Allows employees to use their skills in different roles  Better use of resources which leads to increased efficiency Cons:  May result in confusion regarding roles, responsibilities, and priorities  Conflict of power between the project manager and the functional manager Blurred lines of accountability Large overhead costs due to employing several managers 3) Horizontal/Flat Structure This is an organizational chart type mostly adopted by small companies and start-ups in their early stage. It’s almost impossible to use this model for larger companies with many projects and employees. The most important thing about this structure is that many levels of middle management are eliminated. This enables employees to make decisions quickly and independently. Thus a well-trained workforce can be more productive by directly getting involved in the decision-making process. This works well for small companies because work and effort in a small company are relatively transparent. This does not mean that employees don’t have superiors and people to report to. Just that decision-making power is shared and employees are held accountable for their decisions. So in summary, when deciding on a suitable organizational chart, it is important to have an understanding of the current organizational structure of your company. Pros:  Fosters better communication and collaboration between team members More autonomy and responsibility to employees  More transparency due to limited bureaucracy Because the chain of command is shorter, it allows for faster decision-making Cons: Lack of opportunities for employee progression  Risk of power struggles arising due to the lack of a formal system   Employees may have a lower sense of accountability because they have one lead Risk of confusion because employees don’t have a clear supervisor 4) Network Structure Network organizational structure helps visualize both internal and external relationships between managers and top-level management. They are not only less hierarchical but are also more decentralized and more flexible than other structures. The idea behind the network structure is based on social networks. Its structure relies on open communication and reliable partners; both internal and external. The network structure is viewed as agiler than other structures because it has few tires, more control, and a bottom flow of decision making. Using a Network organizational structure is sometimes a disadvantage because of its complexity. The below example of a network org chart shows the rapid communication between entities. Pros:  Promotes healthy competition, innovation, and collaboration Allows organizations to adapt quickly to changes in their environment Paves way for an environment that fosters healthy competition, innovation, and collaboration Smaller, streamlined teams help save costs and contribute to improved efficiency Cons:  Due to teams being independent and small, large-scale tasks may prove difficult to accomplish Without immediate supervision, network organizations may struggle with control over employees Can create an environment where employees compete in an unhealthy manner with each other to perform tasks  When work is outsourced, secret information about the organization may get breached 5) Divisional Structure Divisional types of organizational charts have their own division which corresponds to either products or geographies. Each division contains the necessary resources and functions needed to support the product line and geography. Another form of divisional org chart structure is the multi-divisional structure. It’s also known as M-form. It’s a legit structure in which one parent company owns several subsidiary companies, each of which uses the parent company’s brand and name. The main advantage of the divisional structure is the independent operational flow, that failure of one company does not threaten the existence of the others. It’s not perfect either. There can be operational inefficiencies from separating specialized functions. An increase in accounting taxes can be seen as another disadvantage. Divisional organizational chart structure drawn with Creately Creating org chart with pictures using Creately Pros: Makes it much easier to assign responsibility for actions and results Works well in markets where there is high competition as local managers can quickly respond to changes in local conditions Tends to yield faster responses to local market conditions Helps build a culture that contributes both to higher morale and a better knowledge of the division’s portfolio Cons: Multiple divisions add more overhead costs to the organization When a number of functional areas are spread among many divisions, it might lead to inefficiencies  With skills being compartmentalized by division, it can be difficult to transfer skills or best practices across the organization Since each division may have its own strategic goal, it might not always align with the overall company strategy. 6) Line Organizational Structure Line organizational structure is one of the simplest types of organizational structures. Its authority flows from top to bottom.  Unlike other structures, specialized and supportive services do not take place in these organizations. The chain of command and each department head has control over their departments. The self-contained department structure can be seen as its main characteristic. Independent decisions can be taken by line officers because of its unified structure. The main advantage of a line organizational structure can be identified as effective communication that brings stability to the organization. Line organizational structure chart drawn with Creately Pros: It is the simplest method of administration and is easy to understand and manage Since it’s easy to add or remove levels of management, this approach can be beneficial to companies that are constantly growing and changing Since the decision-making authority is concentrated at the top, it allows for faster decisions Ensures that everyone is well-aligned with formalized rules and procedures within a line organization Cons: Being overly reliant on line officials may become an issue in instances where they aren’t available Line organizational structures are rigid and inflexible, as such they maintain discipline so rigorously that they can rarely change Might create a culture of favoritism based on relationships or friendship Since the department manager is concerned only with the activities of his own department, employees are only skilled in tasks of their own departments 7) Team-based Organizational Structure Team-based organizational structures are made of teams working towards a common goal while working on their individual tasks. They are less hierarchical and they have flexible structures that reinforce problem-solving, decision-making, and teamwork. Team organization structures have changed the way many industries work. Globalization has allowed people in all industries around the world to produce goods and services cooperatively. Especially, manufacturing companies must work together with suppliers around the globe while keeping the cost to a minimum while producing high-quality products. Pros: Communication between employees is much more free-flowing and effective Since communication is more efficient, information flows faster leading to quicker problem-solving Allows employees from different backgrounds and different skillsets to come together and learn from each other With higher flexibility, team-based organizations find it easier to adapt to a fast-changing industry environment Cons: Personality conflicts within the team can negatively impact efficiency and group harmony Have less clear promotional paths for employees Since team accomplishments are rewarded rather than individual achievements, it might prove difficult to keep individual employees motivated Underperforming employees may hide behind those who are working hard and reap the benefits Common Elements of an Organization From a manager’s perspective, operations will be successful if a common purpose is made clear across the organization to create a coordinated effort of resources. Edgar Schein, a prominent organizational psychologist, identified four key elements of an organization’s structure: common purpose, coordinated effort, division of labor, and hierarchy of authority. Each of the four elements represents an essential component of an effective structure. Further, Schein proposes that these elements are instrumental in defining the organization’s culture. Common Purpose An organization with a clear purpose or mission is one that is easy to understand and manage. A common purpose unifies employees and helps them understand the organization’s direction. Any employee working at the NASA Space Center in the 1960s knew that that organization’s common purpose was to put a man on the moon. Included with the common purpose would be the business and company strategy, mission statement, company values, and the organization’s short- and long-term objectives. The role of communicating all of these components most likely falls to managers through the company. Coordinated Effort Arguably, a manager’s most important responsibility is to coordinate the effort of work in a way that maximizes resources with the common purpose in mind. Managers will need to leverage the employees’ skill sets, experience, and personalities in a way that consistently adds value. Managers must also take into account employees’ preferences as they relate to job satisfaction and engagement. Specialization and the Division of Labor Early in the twentieth century, every employee on the Ford Motor Company assembly line had a specific, repetitive task. For instance, one person would install the wheels on the left side of the car, and another employee only installed the front bumper. By breaking the whole job down to specific standardized tasks and repeating them over and over, Ford could produce one car every ten seconds. Ford, and many other factories, demonstrated that specialization made work more efficient. Management saw this as the most efficient use of the relative skills of its employees. Employee skills at performing a task improve through repetition. Less time is spent changing tasks, in putting away tools from a prior task and getting the necessary tools for the next task. A second, and equally important, efficiency with specialization is the ease and low cost of finding and training people to do specific and repetitive tasks. Specialization continued to be used for maximum efficiency by McDonald’s, which invented the fast-food industry by specializing the work of every employee in the cooking, preparing and delivering of every meal. This model continues with newer companies such as Chipotle and Starbucks. Workers are on the job on an assembly line at a Ford Motor Company plant in Long Beach, California, in 1930. The division of labor describes the degree to which a task is divided into separate jobs or departments in order to improve efficiency. Larger firms, such as Fortune 100 companies, tend to have a high degree of division of labor; smaller entrepreneurial ventures tend to have more informal divisions of labor. For example, a large financial firm will have accountants in one department that only work on internal audits and another department where they focus on budgets and forecasting. An accountant in a small firm, however, needs to be more of a generalist and take on many different things (e.g., internal auditing, plus payroll, accounts receivable, financial planning, and taxes). Specialization requires a trade-off between breadth and depth of knowledge. Although a high degree of specialization can increase productivity, it usually has undesirable side effects such as reduced employee job satisfaction because of the repetitiveness of certain tasks. Specialization limits the agility of a workforce, as employees cannot fill in for people in other areas of the business, and employees take longer to qualify for managerial positions. Fewer job improvements will occur because employees do not get the opportunity to work on other tasks. Hierarchy of Authority Hierarchy determines the formal, position-based reporting lines and expresses who reports to whom. The U.S. Army has a tall hierarchy with about twenty ranks between a private and a general. On the other hand, Valve, an independent game developer, has a flat organization. Officially, it has no managers. With about 2.2 million employees, Walmart has a tall hierarchy, with twenty-nine senior managers all reporting to the top executive level, illustrated in the figure that follows. The top of Walmart’s organizational structure, which consists of ten additional layers.   An example of a flat organizational structure, which only has two levels of employees: the owner/CEO at the top and all other types of employees below.   The number of levels of hierarchy, in turn, determines the managers’ span of control—how many employees directly report to a manager. In tall organizational structures, the span of control is narrow. In flat structures, the span of control is wide, meaning one manager supervises many employees. In recent years, firms have delayered by reducing the headcount (often middle managers), making themselves flatter and more nimble. This, however, puts more pressure on the remaining managers who have to supervise and monitor more direct reports because of an increased span of control. Recent research recommends a span of control between fifteen and twenty direct reports. Additional Characteristics of Organizational Structures In addition to Schein’s four key elements of an organizational structure, there are a few other characteristics to consider when determining the best structure for a business. Centralization and Decentralization In centralized organizations, only the top managers make decisions, whereas the lower-level managers are tasked with carrying out the directives. The military is a prime example, as generals give the orders and each successive rank passes on these orders for following. In decentralized organizations, the decision making is pushed down to the managers who are the closest to the work or client. The term centralization refers to the degree to that decision making is concentrated to the top of the organization. To be clear, this refers to key decisions with potential impact on the business. If all proposals and decisions are made exclusively by the executive team, it is a highly centralized structure. However, if managers are allowed to make significant decisions affecting their areas of the business, it is a decentralized structure. Formalization Formalization refers to the degree to which positions in an organization are standardized. If a job is highly formalized, then the employee has little to no discretion over what to do, when to do it, and how to do it. People sometimes confuse formalization with specialization, but they aren’t the same thing. Airline pilots have highly formalized jobs, dictated by FAA regulations that must be followed before, during and after every flight. Although the captain and co-pilot do have specialized tasks to perform, they are both involved in the entire delivery of service, and are able to function in each other’s roles if needed. Further, the training required for pilots is extensive, with regular flight simulator testing for enforcement of formalized responses for known situations and challenges that can be encountered in flight. Certain jobs will have much less formalization of duties. Pharmaceutical representatives—the employees of pharmaceutical companies who call on medical offices to inform doctors of their drug’s effectiveness—have a great deal of freedom in their jobs. They each develop their own practices for gaining access to the doctors (starting with the medical office front desk staff) and generally only report on the number of physician conversations per week.