Organisation theory: an interdisciplinary approach 2006 PDF

Organisation theory: an interdisciplinary approach P. Abell 2790127 2006 Undergraduate study in Economics, Management, Finance and the Social Sciences Organisation theory: an interdisciplinary approach P. Abell 2790127 2006 Undergraduate study in Economics, Management, Finance and the Social Scie...

Organisation theory: an interdisciplinary approach P. Abell 2790127 2006 Undergraduate study in Economics, Management, Finance and the Social Sciences Organisation theory: an interdisciplinary approach P. Abell 2790127 2006 Undergraduate study in Economics, Management, Finance and the Social Sciences This guide was prepared for the University of London External Programme by: P. Abell, Professor of Management, Interdisciplinary Institute of Management, London School of Economics and Professor of Social Research Methods, Copenhagen Business School. This is one of a series of subject guides published by the University. We regret that due to pressure of work the author is unable to enter into any correspondence relating to, or arising from, the guide. If you have any comments on this subject guide, favourable or unfavourable, please use the form at the back of this guide. This subject guide is for the use of University of London External students registered for programmes in the fields of Economics, Management, Finance and the Social Sciences (as applicable). The programmes currently available in these subject areas are: Access route Diploma in Economics Diplomas for Graduates BSc Accounting and Finance BSc Accounting with Law/Law with Accounting BSc Banking and Finance BSc Business BSc Development and Economics BSc Economics BSc Economics and Finance BSc (Economics) in Geography, Politics and International Relations, and Sociology BSc Economics and Management BSc Information Systems and Management BSc International Relations BSc Management BSc Management with Law/Law with Management BSc Mathematics and Economics BSc Politics BSc Politics and International Relations BSc Sociology. The External Programme Publications Office University of London Stewart House 32 Russell Square London WC1B 5DN United Kingdom Web site: www.londonexternal.ac.uk Published by: University of London Press © University of London 2006 Printed by: Central Printing Service, University of London, England  Contents Contents Introduction 1 Aims and objectives 1 Learning outcomes 2 How to use this subject guide 2 Examination advice 2 Reading advice 3 A note about the appendices 5 Syllabus 6 Chapter 1: Getting started 9 Essential reading 9 Further reading 9 Aim of the chapter 9 Learning objectives 9 1.1 Introduction 9 1.2 Division of labour, specialisation and productivity 18 1.3 Co-ordination; markets and organisations 19 1.4 Co-ordination and information 22 1.5 Organisational control and co-ordination 26 1.6 Hierarchy and the boundaries of the firm/organisation 27 A reminder of your learning outcomes 29 Sample examination question 29 Chapter 2: Organisational control and co-ordination; information and knowledge 31 Essential reading 31 Aim of the chapter 31 Learning objectives 31 2.1 Introduction 31 2.2 The psychologists’ and sociologists’ approach 33 A reminder of your learning outcomes 36 Sample examination questions 36 Chapter 3: Co-ordination and control: monitoring 37 Essential reading 37 Further reading 37 Aim of the chapter 37 Learning objectives 37 3.1 Introduction 37 3.2 Taylorism and Fordism 40 3.3 The de-skilling debate 43 3.4 Technology, co-ordination, control and monitoring 44 A reminder of your learning outcomes 47 Sample examination questions 47 Chapter 4: Co-ordination and control: incentives and motivation 49 Essential reading 49 Aim of the chapter 49 Learning objectives 49 4.1 Introduction 49 4.2 The contribution of sociologists and psychologists 52 A reminder of your learning outcomes 54 Sample examination questions 54 i Organisation theory: an interdisciplinary approach Chapter 5: Control and co-ordination: incentives, groups and teams 55 Essential reading 55 Further reading 55 Aim of the chapter 55 Learning objectives 55 5.1 Introduction 55 5.2 The economists’ contribution 56 5.3 The contribution of psychologists and sociologists 57 A reminder of your learning outcomes 60 Sample examination questions 60 Chapter 6: Co-ordination and control: power and authority 61 Essential reading 61 Further reading 61 Aim of the chapter 61 Learning objectives 61 6.1 Introduction 61 6.2 Bargaining and power 62 6.3 Sociologists’ and psychologists’ approaches to power and kindred concepts 64 6.4 Contested conceptual matters 66 6.5 Influence, groups and individuals 68 6.6 Gender and power 69 6.7 Marxism and power 70 6.8 The role of power and allied concepts in organisation theory 71 A reminder of your learning outcomes 71 Sample examination questions 71 Chapter 7: Co-ordination and control: culture 73 Essential reading 73 Further reading 73 Aim of the chapter 73 Learning objectives 73 7.1 Introduction 73 7.2 Trust 74 7.3 Norms, institutions 77 7.4 Altruism and commitment 77 A reminder of your learning outcomes 78 Sample examination questions 78 Chapter 8: Co-ordination and control: participation and democracy 79 Essential reading 79 Further reading 79 Aim of the chapter 79 Learning objectives 79 8.1 Introduction 79 8.2 Voting theory 81 8.3 Capital, labour and organisational democracy 82 A reminder of your learning outcomes 84 Sample examination questions 84 Chapter 9: Organisation change, evolutionary and adaptive approaches 85 Essential reading 85 Further reading 85 Aim of the chapter 85 Learning objectives 85 9.1 Introduction 85 9.2 Creationism 86 ii  Contents 9.3 Darwinian evolution 87 9.4 Lamarkian evolution 88 9.5 Neo-institutionalism 89 A reminder of your learning outcomes 90 Sample examination question 90 Chapter 10: Vertical boundaries 91 Essential reading 91 Further reading 91 Aim of the chapter 91 Learning objectives 91 10.1 Introduction 91 10.2 Vertical contracting and strategic choice 98 A reminder of your learning outcomes 100 Sample examination question 100 Chapter 11: Horizontal boundaries 101 Essential reading 101 Further reading 101 Aim of the chapter 101 Learning objectives 101 11.1 Introduction 101 11.2 Diversification 101 11.3 Sociological and psychological approaches 103 11.4 The development of diversified companies 104 A reminder of your learning outcomes 105 Sample examination question 105 Chapter 12: Hierarchical boundaries 107 Essential reading 107 Further reading 107 Aim of the chapter 107 Learning objectives 107 12.1 Hierarchies 107 12.2 Some properties of hierarchies 108 12.3 Constructing a hierarchy 110 12.4 Empirical relationships 112 12.5 Designing organisations 113 A reminder of your learning outcomes 116 Sample examination questions 116 Chapter 13: Is there one best way to organise? 117 Essential reading 117 Further reading 117 Aim of the chapter 117 Learning objectives 117 13.1 Introduction 117 13.2 Efficiency and effectiveness 117 13.3 Comparison of models 119 A reminder of your learning outcomes 122 Sample examination question 122 iii Organisation theory: an interdisciplinary approach Appendix 1.1: Qualitative causal diagrams 123 Appendix 1.2: Network analysis – an introduction 125 Appendix 4.1: A simple principal–agent model 127 Appendix 5.1: Introduction to decision theory and game theory 129 Decision theory 129 Game theory 130 Appendix 5.2: Levels of analysis 137 Appendix 6.1: A simple model of sequential bargaining 139 Appendix 6.2: Bargaining failure 141 Appendix 9.1: Introduction to evolutionary game theory 143 Appendix 9.2: Logistic growth – an introduction 147 Appendix 10.1: Transaction cost analysis (Williamson’s analysis) 149 Appendix 12.1: The nature of hierarchy 151 Appendix 12.2: Administrative costs 153 Appendix 12.3: Horizontal differentiation and size 155 Appendix 13: Sample examination paper 157 iv  Introduction Introduction Welcome to this unit, Organisation theory: an interdisciplinary approach, which is a further unit and offered under a number of degree and diploma programmes. This is an interdisciplinary unit drawing centrally upon psychology, sociology, economics and, to a lesser extent, management theory. The subject guide is structured around readings from two textbooks. One is written substantially from an economic perspective on organisations or firms (to use the economists’ favoured term). The other adopts a much more psychological and sociological standpoint. You might well ask why I adopt an interdisciplinary approach. For instance, many courses carry the titles ‘organisation theory’ (largely a sociological term) and ‘organisation behaviour’ (largely a psychological term). ‘Organisation theory’ and ‘organisation behaviour’ are more often than not taught independently of each other and both almost completely separately from theories of the firm/organisation deriving from economics. In my view, however, this is wrong. It is no longer intellectually sensible to proceed in this manner. Each discipline has its own contribution to make and one can only begin to understand the structure and functioning of organisations by incorporating insights from each. Sometimes they complement each other, sometimes they invite alternative interpretations and sometimes they are in conflict – though much less often than many suppose. Economists inevitably pay more attention to organisations with a clear economic purpose (firms) whereas the other disciplines take a wider viewpoint embracing any sort of organisation (for example, churches, prisons and so on). Of course these also have their economic aspects. The central difference in emphasis is upon those organisations that are held together by monetary incentives and those that are otherwise co-ordinated, for example, by cultural norms or power and coercion. As we shall see, however, most organisations use a mixture of mechanisms designed to hold them together. This subject guide will concentrate upon ‘economic’ organisations though both textbooks invite you to think about a more varied menu of organisations. I hope that you enjoy this guide and wish you good luck with your studies. Aims and objectives This unit explores the ways in which organisations can be designed (by management or others) in order to achieve their objectives. It will expose you to the ways in which economists, psychologists and sociologists address this and related issues. It is, therefore, an interdisciplinary study, comparing and contrasting the contribution of the core social science disciplines to the study of organisations. The unit draws upon both theoretical and empirical materials and you will be encouraged to draw upon your own local knowledge in pursuing your studies. There will be an emphasis (though not exclusively) on organisations set up with an economic objective. 1 Organisation theory: an interdisciplinary approach Learning outcomes On completing this unit you should be able to: describe the essential features of organisations discuss the factors shaping these features describe the evolution of different organisational designs/types discuss how managers may build and change organisations describe how different organisational forms impact on the individual within organisations. How to use this subject guide The aim of this guide is to help you to interpret the syllabus. It outlines what you are expected to know for each area of the syllabus and suggests relevant reading to help you to understand the material. It must be emphasised that this guide is intended to supplement the textbooks, not replace them. It is important to appreciate that the different topics covered are not self-contained. There is a degree of overlap between them and you are guided in this respect by cross-referencing between different chapters. In terms of studying this subject, the chapters of this guide are designed as self-contained units of study, but for examination purposes you need to have an understanding of the subject as a whole. Examination advice Structure of the examination The examination for this subject is a formal three-hour unseen written examination in which you will be required to answer four questions from a choice of twelve. A sample examination paper is included at the end of this guide. The examiner attempts to ensure that all of the topics covered in the syllabus and subject guide are examined. Some questions could cover more than one topic from the syllabus since the different topics are not self- contained. Examination preparation You should ensure that you answer four questions, allowing an approximately equal amount of time for each question. Remember to devote some time prior to answering each question to planning your answer, and please write clearly and legibly. You should ensure that the question answered is the question posed, and not a pre-learnt answer that has little bearing on the question. Take care to structure your answers clearly by the use of paragraphs, and make sure your answers are closed with a summary or conclusion. You might want to illustrate your answers with the use of simple diagrams like the ones that I use throughout this guide. You are welcome to do this but please do not spend a lot of time drawing very precise diagrams with rulers, etc. This is not necessary. A clear hand-drawn diagram is fine. You may also want to refer to writers or theories that you have read about if their work is relevant to the question. Don’t worry about this too much, or 2  Introduction waste your time by putting full references but, for example, ‘Powell and DiMaggio) (1991)’ would indicate to the examiner perfectly adequately who or what you were referring to. The sample examination paper in this subject guide indicates the format and structure of the examination paper from 2007 onwards. Students are told about any changes to examination papers for the following year in the final paragraph of the Examiners’ reports; for example, any changes to the 2008 examination paper will be notified at the end of the 2007 Examiners’ report for this unit. The reports and examination papers, which you should use as part of your preparation for exams, can be found on the University of London External Programme web site at www.londonexternal.ac.uk/studentarea/lse/exams.shtml. The reports on the web site are usually available several months before you receive the printed reports. The Examiners’ reports contain valuable information about how to approach the examination and so you are strongly advised to read them carefully. Reading advice Essential reading This subject guide is structured around readings from two textbooks. They are: Buchanan, D. and A. Huczynski Organizational behaviour: an introductory text. (London: Prentice Hall, 2004) fifth edition [ISBN 0273682229]. Douma, S. and H. Schreuder Economic approaches to organisations. (London: Prentice Hall, 2002) third edition [ISBN 0273651994]. I shall refer to these texts respectively as ‘B and H’ and ‘D and S’ throughout the subject guide. Occasionally I shall refer to other books and papers where I feel these two essential reading texts don’t adequately cover the requisite material. Unlike many other subject guides, you can, by and large, follow the unit from the pages of the two texts. However, they often refer you to copious further literature, so if there is a particular part of the unit you find interesting you may wish to follow your own interests. I should emphasise that you can study the unit perfectly well by restricting your attention to the subject guide, the two essential texts and the occasional additional references I provide. I have, though, attempted to keep the latter to a minimum. The readings from the textbooks I recommend are indicated at appropriate points in the text of the subject guide. The guide does not provide a summary of the readings but rather tries to achieve a theoretical synthesis. In respect of learning activities, opportunities to stop and criticise and practical examples or cases, both texts provide these along with summaries. I have provided learning objectives in this subject guide which complement those provided in the textbooks. In both textbooks, the central concepts are listed in the left-hand margins. Further reading To help you read extensively, all external students have free access to the University of London online library where you will find either the full text or an abstract of many of the journal articles listed in this subject guide. You will need to have a username and password to access this resource. Details can be found in your handbook or online at: www.external.ull.ac.uk/index.asp?id=lse 3 Organisation theory: an interdisciplinary approach Abell, P. ‘Is rational choice theory a rational choice of theory?’ in Coleman, J.S. and T.J. Fararo Rational choice theory. (Newbury Park, Calif.; London: Sage, 1992) [ISBN 0803947615]. Abell, P. ‘A model of informal structure (culture) of organisations’, Rationality and Society 8 1997, pp. 363–7. Abell, P. and D. Reyniers ‘The emergence and viability of participating firms’ in Munshi, S. and B.P. Abrahams (eds) Good governance, democratic societies and globalisation. (Thousand Oaks, Calif.: Sage, 2004) [ISBN 0761998489]. Alvesson, M. and H. Willmott (eds) Critical management studies. (London; Newbury Park, Calif.: Sage, 1992) [ISBN 0803984553; 0803984545 (hbk)]. Arrow, K.J. Social choice and individual values. (New York: Wiley, 1963). Besanko, D., D. Dranove and M. Shanley Economics of strategy. (New York; Chichester: Wiley, 1996) [ISBN 0471598496]. Burns, T. and G.M. Stalker The management of innovation. (Oxford: Oxford Unversity Press, 1994) [ISBN 0198288786]. Campbell, J.L., J.R. Hollingsworth and L.N. Lindberg Governance of the American economy. (Cambridge: Cambridge University Press, 1991) [ISBN 052140827X]. Carroll, G.R. and M.T. Hannon The demography of corporations and industries. (Princeton, NJ; Chichester: Princeton University Press, 2004) [ISBN 0691120153]. Fligstein, N. The transformation of corporate control. (Cambridge, Mass.; London: Harvard University Press, 1990) [ISBN 0674903595]. Grossman, S. and O. Hart ‘The costs and benefits of ownership: a theory of vertical and lateral integration’, Journal of Political Economy 94(4) 1986, pp. 691–719. Guillen, M.F. Models of management: work authority and organisation in comparative perspective. (Chicago, Ill. London: Chicago University Press, 1994) [ISBN 0226310361]. Industrial Democracy Group Industrial democracy in Europe revisited. (Oxford: Oxford University Press, 1993) [ISBN 0198287860]. Kreps, P. ‘Corporate culture and economic theory’ in Alt, J. and K. Shepsle (eds) Perspectives on positive political economy. (Cambridge: Cambridge University Press, 1990) [ISBN 0521398517]. Lukes, S. Power: a radical view. (Basingstoke: Palgrave Macmillan, 2005) second edition [ISBN 0333420926]. Milgrom, P. and J.R. Roberts Economics, organization and management. (Englewood Cliffs, NJ: Prentice Hall, 1992) [ISBN 0132246503; 0132239761]. Miller, G.J. Managerial dilemmas. (Cambridge: Cambridge University Press, 1992) [ISBN 0521457696; 052137281X (pbk)]. Mills, A.J. and P. Tancred Gendering organizational analysis. (Oxford: Pergamon Press, 1992) [ISBN 0803945590]. Muthoo, A. Bargaining theory with applications. (Cambridge: Cambridge University Press, 1999) [ISBN 0521576474 (pbk)]. Noble, D.F. Forces of production. (New York; Oxford: Oxford University Press, 1986) [ISBN 0195040465]. Powell, W. and P. DiMaggio (eds) The new institutionalism in organizational analysis. (Chicago, Ill.: University of Chicago Press, 1991) [ISBN 0226677095 (pbk); 0226677087]. Richardson, G.P. Feedback thought on social science and systems theory. (Philadelphia: University of Pennsylvania Press, 1991) [ISBN 0812213327]. Richerson, P.J. and R. Boyd ‘The evolution of human ultrasociality’ in Eibl- Eibersfeldt, I. and F.K. Slater (eds) Ethnic conflict and indoctrination. (Oxford: Berghahn, 2001) [ISBN 1571817662]. 4  Introduction Scott, W.R. and S. Christensen The institutional construction of organizations. (Thousand Oaks, Calif.; London: Sage, 1995) [ISBN 0803970706; 0803970714 (pbk)]. Teece, D. ‘Toward an economic theory of the multiproduct firm’, Journal of Economic Behaviour and Organisation 1982, p. 3. Tomer, J.F. The human firm. (London: Routledge, 1999) [ISBN 0415199271 (pbk)]. Vanek, J. The labor-managed economy. (Ithaca, NY: Cornell University Press, 1977) [ISBN 0801409551]. Wasserman, S. and K. Faust Social network analysis. (Cambridge: Cambridge University Press, 1994) [ISBN 0521387078 (pbk); 0521382696 (hbk)]. Whitley, R. and P. Kristensen (eds) The changing European firm. (London: Routledge, 1996) [ISBN 041513000X (pbk); 0415129990]. Williamson, O.E. ‘The economics of organization: the transaction cost approach’, American Journal of Sociology 87(3) 1981, pp. 548–77. Works cited Alchian, A.A. and H. Demsetz ‘Production, information costs and economic organization’, American Economic Review 62 1972, pp. 777–95. Blau, P. and R. Schoenherr The structure of organizations. (New York: Basic Books, 1971) [ISBN 0465082408]. Braverman, H. Labor and monopoly capital. (New York: Monthly Review Press, 1974) [ISBN 0853459401]. Chandler, A. Strategy and structure. (Cambridge, Mass.: MIT Press, 1962) [ISBN 0262530090]. Coase, R.H. ‘The problem of social costs’, Journal of Law and Economics 3 1960, pp. 1–44. Elster, J. (1989) ‘Social norms and economic theory’, Journal of Economic Perspectives 3(4) 1989, pp. 99–117. Lawrence, P.R. and J.W. Lorsch Organization and environment. (Boston: Division of Research, Harvard University, 1967) [ISBN 0875840647]. Mintzberg, H. Mintzberg on management. (New York: Free Press, 1989) [ISBN 0029213711]. Nelson, R.R. and S.G. Winter An evolutionary theory of economic change. (Cambridge, Mass.: Belknap Press, 1982). Reprinted 2005 [ISBN 0674272285 (pbk); 0674272277]. Pugh, D.S. Organisation theory. (Harmondsworth: Penguin, 1990) [ISBN 0140124733 (pbk)]. Roberts, J. The modern firm. (Oxford: Oxford University Press, 2004) [ISBN 0195040465]. A note about the appendices At the end of this guide there is a series of appendices which have been provided to supplement various chapters. I think that it is important for you to have an opportunity to look at the mathematics which supports the theories and arguments, and it also provides you with more detail on some of the theories mentioned in the chapters. I must stress that you do not need to be able to use or apply the mathematics; as I mentioned above, the essential reading for this unit is the two core textbooks. The appendices are purely additional information for those of you who want to understand and explore the subject in more depth. 5 Organisation theory: an interdisciplinary approach Syllabus Exclusions This subject has replaced 33 Organisation theory and may not be taken if a student is taking or has passed 33 Organisation theory. Prerequisites If you are taking this unit as part of a BSc degree, the following are prerequisites: either unit 10 Introduction to sociology, or unit 21 Principles of sociology, or unit 79 Elements of social and applied psychology, or unit 02 Introduction to economics. Syllabus topics 1. Introduction Attempts to define organisations of differing types and differing objectives. Normative and positive theories. Division of labour, specialisation, productivity, economies of scale and the problem of co-ordination (motivations/incentives and information). Markets and organisations as alternative co-ordinating mechanisms. Contrasting market and employment contracts (incentives, risk sharing and information assets). The market–organisational contractual continuum. Competitive markets, ‘real’ markets, long-term contracts (fixed cost to cost plus), joint ventures, alliances, informal networks, franchising, etc. Co-ordination and role of: motivation/incentives, communication/information/knowledge, bargaining power and authority, culture/norms/trust/commitment, democratic process. Introduction to the nature of hierarchical organisations. Vertical boundaries (make-buy). Horizontal boundaries (divisional, conglomerates, etc.). Hierarchical structures (size, span, depth). Ownership/governance. 2. Theories of boundaries Transaction costs; assumptions, bounded rationality, opportunism, incomplete contracts; transactional characteristics, asset specificity, uncertainty, complexity, frequency. Team production and externalities. Property rights theory. Monopoly power, information knowledge and rents, competitive advantage. Role of managerial objectives/motivation. Role of legislation (national variations). Ideology. 3. The evolution of organisations Evolution of contracts. 6  Introduction Evolution of organisational types: peer groups, multifunctional; multi- divisional, conglomerates, alliances, networks, long-term (relational) contracting. Centralised v decentralised organisation (discretion). 4. Studying organisations Organisation, group and individual levels of study and their interrelationship. Contribution of statistical models and case studies. Contribution of elementary game theory (one-shot and repeated). Contribution of network (graph theoretic) models. Critical theories of organisation. 5. Organisations as contractually co-ordinated mechanisms Taylor, standardisation, rationalisation and scientific management; ‘Fordism’. Theories and critiques of bureaucracy. Centralisation, decentralisation and discretion/incomplete contracts. Organisation as an algorithm. Control loss, co-ordination loss. 6. Organisations as incentive/motivationally co-ordinated mechanisms Introduction to principal–agent theory. Team production and externalities. Psychological models of motivation: human relations; human resource management; group and team context (production); motivational reactions to organisational design. 7. Organisations as authority/power/co-ordinated mechanisms Nature of power. Authority and influence. Bargaining power. Sources of power. Power and participation/decentralisation. 8. Organisations as information/knowledge distributively co-ordinated mechanisms Co-ordination and information (games). Theory of teams. Hidden information/action. Demand for information and participation. 9. Organisations as ‘culturally’ co-ordinated mechanisms Nature of culture. Trust, leadership, sacrifice and commitment. Social capital. Corporate culture/ambient cultures. National business systems. 7 Organisation theory: an interdisciplinary approach 10. Determinants of hierarchal structures (shape) Contingency theory. Population ecology/institutional theory. Hierarchy (or hybrid organisation) as an optimal mechanism – given operating environment – for combining: rules/contracts, incentives, authority, information, culture. 11. Corporate governance Ownership and control; participation and organisational democracy. 8  Chapter 1: Getting started Chapter 1: Getting started Essential reading Buchanan, D. and A. Huczynski Organizational behaviour: an introductory text. (London: Prentice Hall, 2004) fifth edition [ISBN 0273682229] Chapters 1 and 14, pp. 1–25, 179–90, 427–35, 438–44, 490–6, 503–15. Douma, S. and H. Schreuder Economic approaches to organisations. (London: Prentice Hall, 2002) third edition [ISBN 0273651994] Chapters 1 and 3, Sections 2.5, 2.6, 8.4, pp. 155–6. Further reading Milgrom, P. and J.R. Roberts Economics, organization and management. (Englewood Cliffs, NJ: Prentice Hall, 1992) [ISBN 0132246503] Chapter 1. Miller, G.J. Managerial dilemmas. (Cambridge: Cambridge University Press, 1992) [ISBN 0521457696] Chapter 1. Aim of the chapter To introduce and compare economic, sociological and psychological approaches to organisations. Learning objectives By the end of this chapter and the essential reading, you should be able to discuss the following terms and concepts: organisations as control/co-ordination mechanisms assumptions of rational and self-interested behaviour/action ideal types division of labour transactions/exchanges; control/co-ordination; governance motives/incentives competitive markets normative and positive theory market–organisation continuum di-graphs and graphs roles/contracts/norms incomplete information/uncertainty discretion vertical, horizontal, hierarchical and financial boundaries. 1.1 Introduction All societies that we know of seem to possess some kinds of organisations; they are probably cultural universals. Organisations are, however, not easy things to define as they are, particularly in modern societies, rather varied in nature. It is, nevertheless, useful to open with a definition, in order to focus our studies. We may start as follows: 9 Organisation theory: an interdisciplinary approach Organisations are constructed mechanisms for controlling and co-ordinating human activities and symbolic and physical resources in order to achieve certain objectives. Activity Now read Section 1.1 in D and S. A great deal of organisation theory is concerned with describing and explaining the occurrence of different sorts of mechanisms for achieving control and co-ordination. Although there is no settled consensus about the definition of these central concepts, let us start with the following. Control mechanisms are the means by which the actions/behaviour of actors (sometimes individual human beings, sometimes groups or collections of human beings) are motivated in order to achieve the objectives of the organisation. Co-ordination mechanisms are the means by which the actions/behaviours of actors (again, individual or collective) are brought into alignment with each other in order to achieve the objectives of the organisation. Note here that the terms action and actors are sociological in derivation. Psychologists may refer to behaviour whereas economists may refer to behaviour and agents. Sociologists distinguish between action, which means motivated or intentional behaviour, and behaviour itself. In regard to the above definition of organisation, you should note that: organisations are usually consciously constructed (but by whom?) with an objective in mind (but whose objective?) there may be differing opinions within an organisation about what its objectives are or should be there may be many different mechanisms for controlling and co- ordinating human activities both within and outside organisations the objectives of an organisation may change over time organisations can be more or less effective (efficient) in achieving their objectives. We shall study these issues, among others; you might, however, ponder two fundamental questions at this early stage in your studies: Why are some human activities co-ordinated/controlled within organisations whereas others are not? How are (should) the boundaries of organisations (be) drawn? If you know the answers to these questions, you don’t really need to study this unit. If you don’t, then I hope the unit will prove helpful and interesting. The study of organisations: a multidisciplinary approach Until quite recently it was largely sociologists and psychologists who studied organisations. Management theorists also made a contribution. They all asked questions about how organisations impacted upon human activities and vice versa. Pugh (1990) defines organisational behaviour (the favoured term of psychologists) as follows: The study of the structure and functioning and performance of organisations and the behaviour of groups and individuals within them. Activity Now read Chapter 1, pp. 1–5, in B and H. 10  Chapter 1: Getting started Economists traditionally evidenced little interest in the ‘structure and functioning’ of organisations (or firms as they would call organisations with an economic objective). Firms were almost invariably treated as ‘black boxes’ with the particular objective of maximising profits (often in a competitive market environment; see Section 1.3). Thus, questions were not normally posed as to how their internal arrangements (control and co- ordination mechanisms) achieved this objective. Indeed, quite often the profit-maximising objective was pictured as being a consequence of competitive evolutionary forces which drive out firms that do not operate according to this particular objective (see Chapter 9). Recently, however, this situation has changed and now, as D and S’s book testifies, we have several economic approaches to organisations. So modern organisation theory increasingly must become a multidisciplinary endeavour, combining ideas from economics, management theory, psychology and sociology. Some other disciplines like anthropology and operations research also have relevant things to say. Unfortunately, multidisciplinarity is not entirely acknowledged in the respective disciplines, with the result that studies of organisations still tend to evolve independently of each other and there are currently no textbooks which straddle the disciplinary boundaries. Indeed, most books carrying the title ‘organisation theory’ are written almost exclusively from a sociological perspective. Psychologists tend to use the phrase ‘organisation behaviour’. Furthermore, the level of sustained rigour, so essential in modern social science, is markedly different across the disciplines. Much economics, but little psychology and sociology, is expressed mathematically. Although mathematics is not essential to rigour, it is very helpful, but – failing mathematical exposition – clear prose is most important. You will, unfortunately, encounter texts which are far from transparent, particularly in the sociological tradition. I shall try to avoid referencing such texts though you will find them referred to in Buchanan and Huczynski’s book – these authors tend to use the term ‘difficult’ to describe them. In my view, they are often not difficult but obscure. It is useful to start with a brief overview of the differing perspectives adopted by each discipline when studying organisations. Activity Now read and compare Chapter 1 in D and S with Chapter 1 in B and H. The economists’ approach to the study of organisations Economists integrate their theories of organisation (or firms as they call organisations with an economic objective) into a standard theory of production. You will probably have encountered this theory in your introductory economics. Activity To revise, if necessary, read Section 2.4 in D and S. 1 Economists will almost invariably assume that economic actors (or agents)1 Be careful: this term is used both generally, as here, and, will behave/act rationally. They will usually seek to understand the more specifically, in ‘structure and functioning’ (control and co-ordination) of organised firms, principal–agent theory; assuming that those involved are rational optimisers (they may, however, see Chapter 4. relax this assumption in various ways). In so doing, they will unfailingly ask us to centre our attention upon the balance of costs and benefits in pursuing different courses of action and, thus, on how to make the best use 11 Organisation theory: an interdisciplinary approach of resources – namely, the optimal or efficient allocation of resources. Clearly, although this way of thinking is most relevant to firms, economists do invite us to apply it to all organisations. Although the conception of rational action or behaviour is technically quite difficult to tie down (you may have encountered formalisations of expected utility theory in your economics units), practically it implies an assumption whereby individuals (agents) are deemed to seek (i.e. have preferences for) the best outcome they can secure for themselves, given the range of opportunities they face (i.e. their opportunity set). These opportunities and preferences are also often deemed to be given (exogenous). If not, then the factors shaping preferences and opportunities are usually regarded as independent of each other. Furthermore, economists will usually, though not invariably, concentrate upon monetary consequences to measure the success of outcomes. The two key words are ‘best’ and ‘themselves’. Strictly speaking, rationality only implies choosing the best (i.e. optimal) course of action, given the preferences (or utility functions) and opportunities of the actor. However, economists, at least initially, usually assume, in addition, that individuals look out for themselves (i.e. they have self-regarding sentiments). That is to say, they disregard possible altruistic (positive other- regarding) and spiteful (negative other-regarding) sentiments. Furthermore, they often assume that actors have identical preferences (homogeneous preferences). Whatever assumptions they may eventually make, they are adamant that any theories of organisation should be derivable from the choices of individual actors. This is sometimes described as methodological individualism, reductionism or getting the micro foundations right. Sociologists, as we shall see, are much less inclined to worry about micro foundations. Indeed, one tradition invites us to take an 2 organisation as the unit of analysis.2 See Appendix 5.2. Those of you who have not encountered much economics before may well feel alarmed by this lengthy list of assumptions. You should recognise, however, that most economists do acknowledge that they are theoretical simplifications. Indeed, they are willing to relax most of them, other than optimality (though even this may be weakened: see the section on bounded rationality). You will find both sociologists and psychologists criticising economists for making unreal assumptions. Although economists do not often use the term, you might want to interpret self-interested optimisation as an ideal type3 and later compare 3 You may have come across this it with some of the sociologists’ ideal types.4 in unit 21 Principles of sociology. The most fundamental question that economists address in respect of 4 See section entitled ‘The organisation theory is why certain exchanges of goods and services sociological and psychological (transactions) between actors take place in markets whereas others occur perspective’ in this chapter. within organisations (firms). As you might expect, they will try to find an answer in terms of self-interested optimisers. In so doing they will make use of another ideal type – perfectly competitive markets. Activity Now read Section 2.6 in D and S. Although we shall investigate later, in detail, the choice between market and organisational transactions, it is worth commenting here upon the way in which an answer is provided. The following assumptions are made. The division of labour, which is driven by exogenous (i.e. given or assumed) technological forces, generates a pattern of potential (economic) transactions. 12  Chapter 1: Getting started These transactions could be controlled and co-ordinated (governed) by either the price mechanism in the (competitive) market or by organisation control and co-ordination. Another way of expressing this divide is between a market contract and an employment contract. You will find that economists think in terms of efficient contracts. Later I shall ask you to compare the economists’ use of the term ‘contracts’ with the sociologists’ term ‘rules’. There are various costs and benefits attached to each type of ‘governance’. The governance chosen will/should maximise net benefit. (We will return to the distinction between ‘will’ and ‘should’ below.) In fact, although this is the standard manner in which ‘transaction costs’ economics analyses the problem, one needs to be a little cautious. As we shall see later, what transaction costs show is that, under certain circumstances, an organisational transaction will produce more net benefit than a market transaction. However, it does not follow that an organisation makes an efficient use of resources. All it will show is that organisations, in those circumstances, are better than the market. One would need additional theoretical ideas to show that the organisation is ‘first best’ (i.e. efficient). Let us now assume that an organisation is chosen. The major contribution of economists to organisation theory is principal–agent theory (PA theory). Activity We will study principal–agent theory later but you might now like to look at the beginning of Chapter 7 in D and S. PA theory seeks to answer the question: what sort of incentives (usually monetary ones) must a (rational) principal (which for the moment might be the owner-manager of a firm) set, in order to motivate (i.e. control) their (rational) agent in order to contribute the agent’s efforts to achieve the principal’s objectives (usually profit maximisation)? So PA theory, as formulated, is a theory of optimal incentives that controls the activities of the agent. If we now extend the idea to two or more agents then it is a matter of co-ordination (see the opening definition of an organisation). It is important to recognise that PA theory is a general theory of how one person or group of persons can get others to work effectively for them. Economists’ theories of organisation can be used positively (i.e. to describe and explain how organisations actually do control and co-ordinate their constituent activities) and normatively (i.e. to describe and explain how organisations should control and co-ordinate their activities). You should recognise here that the ‘should’, in the economists’ conception of normative theory, ultimately relates to the efficient allocation of scarce resources. As we shall later find, because neither psychologists nor sociologists start their enquiries from this standpoint, they do not draw a sharp distinction between positive and normative theory. Their objectives are more often than not directed at positive theory. But be careful here: the positive use of theory is not the same thing as positivism (i.e. broadly the idea that the physical and social sciences have identical explanatory logics). Activity If you are not familiar with the above issue, you might read pp. 14–25 in B and H. 13 Organisation theory: an interdisciplinary approach The psychologists’ approach to the study of organisations Psychologists, who usually use the term ‘organisational behaviour’, address two main issues. 1. How do organisational features (e.g. their control and co-ordination systems) impact upon individual and group behaviour within organisations? 2. How (to what extent) does individual and group behaviour contribute to the achievement of organisational objectives (which may be much broader than economic ones)? Activity Now read Chapter 1, pp. 1–14, in B and H. Psychologists may or may not assume that behaviour (i.e. action) is optimal but, generally, assume (or find evidence for) a much broader range of motivating factors than economists do (for example, status, self-esteem, work satisfaction, personal or group power and so on). Furthermore, they are more likely than economists to assume individual differences in motivations. B and H refer to this as the ‘organisational dilemma’ (p. 19). You should eventually ask the question as to whether this picture of diverse heterogeneity among individual human beings (the organisational dilemma) can be made consistent with the economists’ PA model. A principal would have to design incentive systems which acknowledge the more elaborate and diverse preferences (utility functions) of his/her agents. Furthermore, principals may themselves have non-economic objectives, like a desire (economists’ term: a ‘taste’) for power. Psychologists also explore altruistic motives under the heading of commitment: individuals may be committed to an organisation or part thereof, in the sense that they may make sacrifices for others in the organisation. Whereas economists will usually assume that people arrive at an organisation pre-equipped with clear preferences (constructed from beliefs and values), psychologists study how preferences constructed from beliefs (truth), affects (likes/dislikes) and values (good and bad) are acquired within organisations. Like sociologists (see below) they emphasise learning, socialisation and behavioural modification. Furthermore, since they entertain individual differences, they engage with issues about ‘controlling and co-ordinating diverse personality types’. Studying and categorising personalities inevitably leads to a consideration of the emotional side of human beings (emotions like openness, hostility, impatience and ambition). There is a marked contrast in how psychologists and economists start thinking about the action/behaviour of individuals in organisations. Economists, as we have seen, will start with a simple ideal- type model of individuals. Psychologists, on the other hand, will often emphasise the ‘organisational dilemma’ in incorporating a wide variety of dispositions. Such disputes may undermine at least a simple common-sense notion of rational action. Both economists and psychologists also recognise that organisations are significantly controlled and co-ordinated by the flow of human communication. Again, whereas economists treat the issue in an abstract way in terms of information distributions – ‘who knows what and will rationally impart or conceal what’ (Chapter 2), psychologists concentrate upon much finer-grained distinctions. They have developed descriptive theories of different sorts of communication (e.g. verbal/non-verbal, impression, management and so on). 14  Chapter 1: Getting started Finally, whereas economists tend to assume that individuals perceive the world ‘the way it is’ (despite many philosophical reservations about this), psychologists find room for misperception and systematically biased perception. All this might incline you to the view that the two disciplinary approaches are deeply incompatible. But this would, I think, be over-hasty. You must always, in adjudicating between different models of individuals (some more detailed than others), ask the question: ‘What am I trying to explain?’ If, for instance, you are trying to understand the difference in performance between firms then a rather simple model of the individual will probably suffice. If you want to explain the differing experience of church-goers at their place of worship, then a much more detailed model of perception, communication and emotional response will be needed. One of the advantages of theories like PA is that they can be adjusted to incorporate richer models of human beings. Don’t be over-hasty in finding irreconcilable differences (as some practitioners of particular approaches often are) between different intellectual traditions. The sociologists’ approach to the study of organisations Sociologists, while addressing identical questions to those posed by psychologists, have in addition placed their study of organisations in a much wider context. They have asked questions like: what impact do organisations have upon society at large: how do evolved systems of beliefs and values (i.e. culture) and the distribution of power in society influence the ways in which organisations are structured and function (are controlled and co-ordinated)? Furthermore, while pondering these ‘macro’ questions, they engage with issues about the appropriate way to conceive of social (or organisational) science. Activity Now read Chapter 1, pp. 15–25, in B and H. The sociological study of organisations has been strongly influenced by Max 5 5 Weber’s ideal type of bureaucracy. Broadly speaking, Weber thought If you have access to it, you that the control and co-ordination of activities within modern organisations may also like to re-read the section on Weber in unit 21 are achieved by formally specifying the rules of appropriate behaviour or Principles of sociology. action for most organisation participants (certainly, the organisationally subordinate participants – think of those working on a production line). A bureaucracy is, for Weber, characterised by (among other things): an exogenously generated division of labour a hierarchical authority/power structure formal rules of behaviour/action. A useful way to think about a bureaucracy is as an algorithm specifying the standards (i.e. a set of interrelated rules) of appropriate activity for each organisational participant (compare this with a completely automated system). If the appropriately specified rules are followed (a big if!) then control and co-ordination should be achieved. Clearly there is some similarity between the economists’ concept of employment contract and the sociologists’ concept of rules. You will eventually need to understand how sociologists use and further develop the idea of bureaucracy, but for the moment, note that, in contrast to the economists’ perspective, the concepts of power and authority (see 15 Organisation theory: an interdisciplinary approach Chapter 6) are brought into prominence. Indeed, Weber spoke of ‘rational bureaucratic authority’ as the mechanism for controlling and co-ordinating a modern organisation (but note when he was writing). Observe the word rational here. Weber used the term to mean an efficient means to an end; so bureaucracies are conceived as efficient collective mechanisms (means) for achieving a given objective. We now know, however, that this is a very partial picture. Precisely what Weber meant by rational is much disputed, but we can assume that he was pretty much in accord with the economists in his use of the term. So, for the moment, a bureaucracy is a mechanism which is deemed to result in an efficient allocation of resources. Sociologists (and psychologists) also place considerable emphasis upon social norms as a mechanism of achieving, and, indeed sometimes offering resistance to, organisational control and co-ordination. By ‘social norms’ they mean widely accepted beliefs about appropriate standards of behaviour (action) in specified circumstances. Social norms (which should be contrasted with personal norms) can arise from the wider society (societal norms) or a section of society (e.g. social class norms) or even be generated within organisations. You will need to distinguish between mechanisms that generate social norms and mechanisms that can rely upon, or are indeed needed to defeat, already existing norms. Social norms have a contingent feature: people tend to follow them only as long as others do so. You should draw a distinction (though it is not always done) between rules (after Weber) and social norms. Both enjoin certain sorts of behaviour or action but rules don’t necessarily have to be widely accepted. Sociologists usually see social norms as a component part of culture. This latter concept, as we shall see later, is very difficult to tie down – there are literally scores of different definitions in the literature. It relates, however, to the ‘symbolic and physical resources’ mentioned in our opening definition of organisation. ‘Corporate culture’ (whatever it might mean) is sometimes described as a controlling and co-ordinating mechanism which is either generated within an organisation or draws upon the ambient 6 6 See Chapter 7. culture surrounding the organisation. Sociologists (and recently some economists) have come to study how ‘institutions’ impact upon organisation design. The basic idea is that, rather than trying to understand how organisations are structured and function in terms of individual motivations, one starts with a received (exogenous) way of doing things (an institution) which is then copied. Since social norms are also propagated in this manner, it is sometimes a little difficult to know why we need both terms. Institutions are, however, often best interpreted as bundles of norms and ways of looking at the world (social cognition). For instance, institutions have been defined by Powell and DiMaggio as: ‘cognitive, normative and regulative structures and activities that provide stability and meaning to social behaviour’. We shall look at institutional ideas in Chapter 12. The study of organisational change tends to divide economists and sociologists. Since economists usually want to study organisations that are at an efficient equilibrium, change is not placed at the centre of things. Organisations that are not in equilibrium are treated as of little interest. The exceptions to this way of reasoning are evolutionary models, that we shall study in Chapter 9. Sociologists pay more attention to change and we shall distinguish between adaptive and selection-based models. The latter often operate through an understanding of birth and death rates. 16  Chapter 1: Getting started Finally, sociologists and some economists have taken an interest in how democracy or voting procedures might be used as a control and co- ordinating mechanism (see Chapter 8). For instance, contrast a firm owned by shareholders on the basis of one share one vote; a consumer co- operative where each member consumer has a vote; and a producer co- operative where the ‘workers’ control and co-ordinate on the basis of equal voting power. An initial comparison of the three differing perspectives You have encountered, but in outline only, three differing disciplinary perspectives about effecting the control and co-ordination of human activities within organisations. They suggest the following mechanisms: rationally designed monetary incentives (employment contracts) broader incentives (rational or otherwise?) rules of behaviour/action power and authority norms and culture democratic precepts. You might be troubled at this stage, wondering how economists can apparently ignore much of the complexity in human motivation and relationships which the other two disciplines seem to wish to embrace. Many non-economists voice such complaints about economics. One needs, however, to be careful in making this sort of complaint. In the final analysis, economists are concerned to understand how individuals respond to relative price changes (or, more generally, the balance of benefits and costs). They would argue that, characteristically, human motivations remain unaltered through these changes and, as a consequence, one can isolate the effect of price changes without delving into broader matters. You should think carefully about this as you progress in your studies. Notice that this argument is not exclusive to ‘monetary prices’; it could equally be applied to balance and costs of a non-pecuniary nature. Activity At this early stage in your studies you should try preliminary answers to the following questions: To what degree are the various approaches of organisation theory compatible with each other? To what degree are they contradictory? Do they complement each other? I would not expect you to have clear answers at this stage. Although we have tended to follow the economists and think in terms of firms, you should get into the habit of thinking about organisations in general. For instance, hospitals and churches – do you think the above-identified control and co-ordination mechanisms apply to these sorts of organisation? 17 Organisation theory: an interdisciplinary approach 1.2 Division of labour, specialisation and productivity Introduction All disciplines are agreed that the need for organisation largely arises because of the division of labour. In a society of self-sufficiency there would be no division of labour between individuals, no need for exchange of goods and services (transactions), nor any organisations except perhaps the family and organisations of social control. But note, even within the family there is usually a division of labour. A division of labour is defined as the splitting of activities into component parts which are then performed separately. Activity Now read ‘The pin factory’ on p. 4 in D and S. The division of labour leads to specialisation, and increased specialisation can lead (but see Section 2.2) to increased productivity (i.e. output per unit of input, such as time or effort). Activity Read Sections 1.2 and 1.3 in D and S. It is often useful to express these simple ideas in terms of a diagram, as in Figure 1.1 (see Appendix 1.1). Division of labour (+) Specialisation (+) Productivity Figure 1.1 Economists often consider a division of labour as given (exogenous) and then ask how organisations and markets can be built upon it. Alternatively, they see it as driven by competitive market forces that procure an optimal division of labour, leading to optimal productivity. Some sociologists, on the other hand, study how the division of labour is generated both within organisations and in the wider society. That is to say, they search for explanations of why the division of labour takes a particular direction – the assumption often being that, rather than being optimal in a narrow economic sense, it is shaped by issues pertaining to power and 7 7 See Chapter 6. authority. Scientific management (Taylorism) Activity Now read pp. 427–35 in B and H and compare it with Section 1.2 in D and S. 18  Chapter 1: Getting started Scientific management and its extension, Fordism, have until recently been extremely influential in ‘work design’ – or what we might term the detailed division of labour. Fordism is sometimes described as ‘Taylorism plus the production line’. Activity Now read pp. 438–44 in B and H. For criticism of the simple proposition that the division of labour invariably leads to increased productivity, see page 435 in B and H and page 7 in D and S. The basic idea is that human beings may react negatively to ‘too much’ fragmentation of activities and this may reduce their productivity or increase the difficulties in achieving co-ordination and control. We shall return to these issues (see Section 3.2) and also to the associated concept of de-skilling. Nevertheless, keeping this potential line of criticism in mind, it is still useful to start our analysis with an exogenous division of labour necessitating some mechanism of control and co-ordination. 1.3 Co-ordination; markets and organisations Introduction If we assume that an exogenous division of labour leads to improved efficiency, then we need to pose two strongly interrelated questions: 1. How should (normative theory) and how are (positive theory) activities, generated by the division of labour, controlled/incentivised/ motivated? 2. How should (normative theory) and how are (positive theory) exchanges (transactions), generated as a consequence of the division of labour, co-ordinated? The questions are interrelated in the sense that individuals need to be controlled/incentivised/motivated to co-ordinate their activities. However, in this section we concentrate upon co-ordination. Activity Now re-read Sections 1.4 and 1.5 in D and S. D and S identify two distinct methods for co-ordinating activities (you may read these as ideal types – later we will complicate the picture): organisation co-ordination competitive market co-ordination. I call these ‘methods’, not mechanisms, since each (particularly organisation) may involve a number of the mechanisms identified at the end of Section 1.1. We will return to the market/organisation choice in a moment. Co-ordination and di-graphs At this stage it will prove helpful to develop diagrams which can depict transactions/exchanges. Activity Now read Appendix 1.2. Consider a division of labour generating a sequence of activities (a production line would be an example) as in Figure 1.2. 19 Organisation theory: an interdisciplinary approach Output/Input Output/Input Output/Input ! ! ! Activity/Agent 1 Activity/Agent 2 Activity/Agent 3 Activity/Agent 4 Figure 1.2 The points (nodes) represent activities performed by distinct agents, where the output of one agent becomes the input of the next one down the line (a sequence of arcs). Figure 1.2 is a di-graph. We shall find that di-graphs or graphs are often constructive in depicting various features of organisations, so you should familiarise yourself with the basic ideas. Note that they can be used at different levels of aggregation. The di-graph in Figure 1.2 could, in principle, be further decomposed in the division of labour so the activities could be disaggregated into a finer picture. At a more aggregate level the di-graph in Figure 1.3 depicts rather aggregate activities. ! ! ! ! Oil extraction Shipping Refining Wholesaling Retailing Figure 1.3 Each of the aggregate activities might be a separate organisation or they may all be integrated into a single organisation embracing oil extraction to retailing of refined products or any other combination. It would be interesting to know which is the most efficient arrangement or, failing this, why one arrangement is found rather than another. Market co-ordination Activity Read Section 2.6 in D and S. If transactions are co-ordinated through the (perfectly competitive) market, then the equilibrium price is a ‘sufficient statistic’ (see p. 8 in D and S) in effecting both control and co-ordination. Note carefully the conditions necessary for one to be able to say that markets are perfectly competitive. If the four individual activities depicted in Figure 1.2 were to be so co- ordinated, then agent 1 would sell his/her output to agent 2, 2 to 3 (both at equilibrium prices) and so on down the chain. In Figure 1.3, at a higher level of aggregation, the price mechanism would co-ordinate the various organisations, though they themselves would presumably have an internal division of labour. You may encounter the term value chain to describe chains of transactions at any level of aggregation. The competitive market at equilibrium also guarantees the optimal (i.e. Pareto efficient) level of trade (exchange or transaction). This is a very neat guarantee, but all is dependent upon the perfect-market assumptions. What would happen if there were not many buyers and sellers and/or the parties to trade were not fully informed? We can’t answer these questions at the moment. But notice that if all (exogenously generated) transactions were to be embedded in perfectly competitive markets then, in theory, all transactions could be controlled and co-ordinated by market prices. In such a world, there would apparently be no need for any organisations – at least those which co-ordinate transactions – at all. 20  Chapter 1: Getting started Organisational co-ordination If the activities in Figure 1.3 were to be brought into a single organisation, then the flow of inputs and outputs would not normally (though there are exceptions) be co-ordinated by the price mechanism but rather by an organisational mechanism. This is the subject matter of our future studies. Again a diagram may help to fix ideas. Consider a transaction between A and B, then the choice between co-ordinating it using a market or an organisation can be depicted as in Figure 1.4. Co-ordinator/Manager A B ! A ! B Price mechanism Figure 1.4 Note that the organisational choice assumes a co-ordinator/manager with, shall we say, a hierarchical relation to both A and B. We might also assume here that the co-ordinator will need to motivate/control A and B – perhaps using a variety of those mechanisms we earlier identified. We now have what we might term a hierarchical division of labour. The co- ordinator/manager can also be described as having span of control of 8 8 two. See Section 1.6. One way of describing the adoption of an organisation as in Figure 1.4 is to say that the price mechanism is suppressed in favour of an administered or planned transaction. Another way of describing this situation is to say that the choice is between ‘buy’ (market) and ‘make’ (organisation). Yet a further locution is to contrast a purchasing with an employment contract. You could now imagine putting various types of organisational co- ordination onto the transactions depicted in Figure 1.3. Although many organisations are constructed by co-ordinating transactions (the term ‘vertical integration’ is often used), activities can also be brought into an organisation where there is no obvious transaction, as in Figure 1.5 (the term ‘horizontal integration’ is often used). A B ! ! ! ! Input Output Input Output Figure 1.5 I say ‘obvious transaction’ because, as we shall see later, there may be less obvious transactions relating to the hierarchical division of labour. Markets and organisation in economics We can imagine a given (i.e. exogenous) division of labour generating a network (di-graph) of potential transactions. There are then two ideal- typical co-ordination methods: 21 Organisation theory: an interdisciplinary approach 1. All the transactions in the network (di-graph) are co-ordinated by markets (no organisations). 2. All the transactions in the network (di-graph) are co-ordinated by an organisation (a planned economy). Activity For further reading on this, see Milgrom and Roberts (1992) Chapter 1. This is a very abstract, but nevertheless useful, way of thinking about the choice between a market and a planned economy. Of course all economies (even those described as planned) comprise a mixture of plan (organisation) and market. But I hope you will agree that the intriguing questions are: firstly, where should the boundaries of organisations be drawn on the network (the normative question)? Secondly, where are they actually drawn (the positive question)? And, finally, if the answers to these two questions are different – why so? 1.4 Co-ordination and information The economic perspective Activity Read Section 1.6 in D and S. Economists tend to interpret the (rational) choice between market and organisational co-ordination in terms of the information available to the potential contracting parties (e.g. the information required to enter into a purchasing or an employment contract). In the ideal typical world of perfectly competitive markets where all contracting parties are deemed to possess all the information required to make fully informed rational choices (about past, present and future contingencies), they are indifferent between market and organisational co-ordination. It is when information is incomplete (and in practice it nearly always is) that the choice is pertinent for contracting parties. Note, in passing, that this argument would not work if parties had a taste for power, which, in turn, is only generated inside organisations (see Chapter 6). You might now begin to think in terms of the choice between ‘real’ markets (rather than perfectly well-informed competitive markets) and organisations. Activity Read Section 2.5 in D and S. Economists distinguish between: complete contracts – where all the relevant information (i.e. all possible contingencies, past, present and future are covered) is available to the contracting parties when the contract is entered into incomplete contracts – where all the relevant information is not available to at least one party. A diagram might help you to appreciate the possible distribution of relevant information between contracting parties – call them A and B (see Figure 1.6). 22  Chapter 1: Getting started Rectangle: Complete information A B A's private information Common B's private information (asymmetric information) information (asymmetric information) Figure 1.6 From Figure 1.6 you should distinguish: complete information common information private information/asymmetric information. We progress, therefore, to the viewpoint whereby the rational choice between organisation and ‘real’ markets is one of information and incomplete contracts. Thus you will later encounter the idea that an organisation is a nexus of (incomplete) contracts, particularly in what I have termed the hierarchical division of labour. Activity You might like to make a preliminary reading of Section 7.5 in D and S, though you will not find it easy at this stage. Organisation theory becomes a search for optimal or efficient non-market contracts. You will find as we progress that whenever economists analyse a situation (normatively or positively) in terms of contracts, they raise issues about: optimal incentives (see Chapter 4) the distribution of information – who knows what the optimal distribution of risk and uncertainty. This is because in a world of incomplete contracting one cannot be certain about the future and therefore the allocation of resources is a risky/uncertain business. So organisations and markets can, from an economist’s point of view, be studied as the interplay of: incentive mechanisms information-revealing mechanisms insurance or risk/uncertainty sharing mechanisms (who bears the risk/uncertainty?). The sociological and psychological perspective Activity Read Chapter 6, pp. 179–90, in B and H. Chapter 6 in B and H will give you a good idea of how important both psychologists and sociologists view communication to be (i.e. the flow of information between individuals and groups) for the functioning of organisations. They are entirely in accord with economists in this respect. 23 Organisation theory: an interdisciplinary approach Psychologists, however, study the process of information transmission in much more detail than economists. For instance, they study non-verbal communication, and link communication into issues surrounding organisational power and manipulation (see Chapter 6) and culture (see Chapter 7). But they agree that information/communication always underpins co-ordination and control (including markets, of course). We shall see later how economists envision the strategic manipulation of information (in a world of incomplete and asymmetric information) in order to gain advantage. You should eventually seek to link the detailed psychological study of communication to the economists’ approach to information revelation in designing incentive mechanisms. Sociologists, as we have noted, tend to analyse organisations from the standpoint of the operation of rules. Although you will not find the idea addressed in your textbooks, it is useful to find a parallel between sociologists’ use of the term rules and economists’ conception of contracts. Both words are used to describe what – attendant upon the division of labour – actors/agents (should) do in differing circumstances (contingencies). Economists will almost invariably regard employment contracts (complete or incomplete) as co-ordinating and controlling activities through the use of appropriate financial incentives and monitoring (i.e. observing compliance with the contract). So, information flows and distributions are tied into this way of looking at organisations. Sociologists, on the other hand, are more likely to consider a wider range of mechanisms, but notably power and authority, in enforcing the rules. Note that economists are divided as to whether organisations and employment contracts do or do not involve power relations (see Chapter 6). A lot depends on how we eventually define this difficult concept. But sociologists often regard information asymmetries as indicative of power differentials – those with relevant information are relatively powerful compared to those without it. Weber’s ideal type of bureaucracy may be equated with the economists’ ideal type of complete contracts. Both, of course, serve as exaggerated benchmarks enabling us to reason about what would happen under ‘ideal’ circumstances. But notice that if, as we argued earlier, we have complete contracts then the choice between organisation and market is not determined. So if we choose to equate complete contracts and rules, we are then inevitably held to the idea whereby if a perfect Weberian bureaucracy could be realised (i.e. an algorithm written covering all possible contingencies), then control and co-ordination could equally be achieved in a market or an organisation. So, the argument for organisation, or shall we say partial bureaucracy, arises only in default, when a complete bureaucracy cannot be so designed. Although not expressing themselves in this manner, a number of sociologists working within the Weberian tradition have suggested that as uncertainties increase, we encounter the limits of bureaucracy. Uncertainty (i.e. incomplete information, particularly about the future) implies that it is not possible to specify in advance the appropriate rules (to complete the contract). So, organisations arise when rules can only partially control and co-ordinate activities. You will find that many different words are used by sociologists to describe the level of uncertainty – for example, turbulence, unpredictability, noise, and so on. It is best, however, to use the term ‘uncertainty’ as it is common to economics and sociology. We might find a common picture as in Figure 1.7. 24  Chapter 1: Getting started (+) (+) Incomplete information ! Uncertainty ! Incomplete rules Figure 1.7 The question now arises as to how organisational control and co-ordination are to be achieved when the contracts/rules are incomplete (as they always are, but to differing degrees); that is to say, when information about controlling and co-ordinating activities is incomplete. Sociologists use the terms formalisation and standardisation to describe the degree to which an organisation is bureaucratised or explicitly rule governed (see Chapter 11). It is useful to have a concept for situations where contracts/rules (i.e. pertinent information) are incomplete. Economists use the terms residual or extra-contractual control; sociologists, unfortunately, use many words, but I suggest we use the term discretion. I shall use both terms, depending on context. If the contracts/rules which are designed to achieve the co-ordination and control of activities are not fully specified, then how should the residual control/discretion be handled? Much of organisation theory is concerned with this issue. All organisations are a mixture of contractual and discretionary mechanisms. Economists will seek to understand the balance between the two in terms of the costs and benefits of gathering additional information to reduce the degree of incompletion. Figure 1.8 summarises our arguments so far. (+) (+) (+) Incomplete information ! Uncertainty ! Incomplete rules ! Discretion Figure 1.8 Note that this way of thinking can still lead to either a market or an organisation. Activity Can uncertainty-generated discretion be best handled within the framework of a market (where price is a sufficient statistic) or an organisation (where employment contracts will operate)? Both psychologists and sociologists recognise that individuals may, in various systematic ways, not perceive things in an entirely ‘objective’ manner, but their perceptions can have real behavioural consequences. (There are some social scientists who even reject the whole notion of an objective reality.) It is important to distinguish between systematic factors affecting perception and random mistakes. Activity Now read Chapter 7 in B and H. You should use the chapter as a resource – it is not necessary to commit its contents to memory. Economists have also recently begun to study systematic cognitive departures from expected utility theory. The ideas are referred to as prospect theory. For instance, people are often ‘overconfident’ (underestimate the probability of events that carry negative utility (value)). Economists are currently strongly divided over the extent to which the precepts of prospect theory should be incorporated into mainline theory. 25 Organisation theory: an interdisciplinary approach 1.5 Organisational control and co-ordination Introduction Activity Now read Chapter 3 in D and S. In the previous section I urged you to find an intellectual parallel between two ideal types – Weberian bureaucracy and complete contracting. The real world is more complex. Organisations are co-ordinated and controlled by diverse mechanisms, sometimes complementary, sometimes alternative (substitutes) to each other. D and S, in Section 3.2, review six mechanisms 8 8 identified by Mintzberg (1989). These, in some ways, cut across the two Note: the co-ordination ideal types. Standardisation of work processes, standardisation of outputs, mechanisms are: standardisation of skills and standardisation of norms are each finer-grade mutual adjustment distinctions of the rules/contract concept. direct supervison s