Organizational Theory: So Far, So Good… So What?

University Degree Business and Administrative studies

Organizational theory has moved a great distance from the beginning of the 20th century; it has an even greater distance to go. The narrative of the development of organization theory begins with scientific management (Taylor 1911), continues through classical bureaucratic studies (Weber and Gerth 1958) and so-called “natural” approaches (Barnard 1938), but then splits into two very different open-systems categories. One is a rational, economic/political branch, which starts with bounded rationality (March and Simon 1958), moves through contingency theory (Lawrence and Lorsch 1967), then (much) later blooms into the “new economics of organization,” based on theories that seek to explain the existence and structure of organizations as solutions to cooperation or coordination problems; here the exemplar is transaction cost (Williamson 1985) economics. The other is a natural, sociological/psychological branch, which includes garbage can theory (March and Olsen 1986), population ecology (Hannan and Freeman 1977), and the new (sociological) insitutionalism (Meyer and Rowan 1977). How do these approaches differ in terms of levels-of-analysis covered, explanatory power, and potential for future growth? Following these two historical paths, two trends are clear: the sophistication and combination of different levels of analysis continually improves, and with each additional theoretical model, further puzzles are solved. However, with the deep chasm separating the sociological/psychological and economic/political branches, future prospects look bleak for these groups to engage in the type of constructive dialogue that could lead to further innovations.

The first few organizational scholars used relatively simple conceptual models to explain organizational behavior, restricting their analyses to a single level of analysis and a few assumptions. Taylor focused on workers on the shop floor (individual level of analysis). While most of his work concerned prescriptions to improve productivity rather than grand theorizing, to do so he introduced the concept of the rational worker, who performed his duties in a sub-optimal fashion. His solution involved eliminating as much discretion as possible from the workers in order to force them to work in a more productive manner (and, in some cases, paying them more). Consequently, from Taylor’s model, we can explain why workers slack off: it is in their interest to do so.

Like Taylor, Weber was interested in prescriptions for organizing. However, he was much more interested in the structure of the organization than he was in the actions of individuals, and thus moved organizational theory up to a more abstract level of analysis. He constructed a model of bureaucratic (as opposed to traditional or charismatic) organizations: authority was based on the office, not on the individual; technical competence was prized; the division of labor was fixed. The benefit of this form of organization was that it was more stable, predictable, and reliable than other forms. This conceptualization explains why bureaucracies have proliferated: they were a superior form of organization.

However, Weber left out the flipside of the formal bureaucratic structure. Charles Barnard’s innovation in organizational theory was to emphasize the importance of the informal structure of organizations. He focused on cooperation problems, and concluded that a better solution to Taylor’s slacking problem was to get workers to internalize the goals of the organization through socialization. In doing so, he operated at both the individual and organizational level at once: individuals were assumed to be susceptible to social coercion; the key to coercion is the structure of the organization. Thus he provided a dual-level, normative explanation as to why some ...

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After Barnard, organizational theory suffered a split into two competing camps. The first camp (rational modelers) traces its origins back to March and Simon’s concept of bounded rationality. The strict model of individuals as rational calculators maximizing utilities gave way to concepts that better reflected reality: limited information and limited cognitive abilities, which lead individuals to seek satisfactory solutions rather than optimal solutions. Thus we have a rational explanation for such phenomena as standard operating procedures and “suboptimal” decisions within organizations.

The work of later rationalist theorists such as Lawrence and Lorsch began to take a broader look at organizational environments. However, increasing the level of analysis was pretty much their only significant innovation, since their theory added little explanatory power. Simply hypothesizing that organizations will adapt to their environments tells us only the obvious: that the “best” form of organizing is “contingent” on the environment of the organization: hence, “contingency theory.” Without specifying mechanisms or focal points via which rational managers make changes within organizations, we can explain little.

Rationalist explanations were furthered significantly by the incorporation of economic and game theory into organizational theories. As an example, take Williamson’s rediscovery of transaction cost economics. This theory seeks to explain both the existence of organizations (in order to reduce transaction costs, due to opportunism or bounded rationality), and predicts some of the structures of organizations (based on the types of exchanges and the types of costs). Thus, this theory couples very well with March and Simon’s bounded rationality, and explains why Lawrence and Lorsch were correct: an environment of complexity or uncertainty leads to bounded rationality and thereby to some organizational forms; an environment with few alternative partners leads to opportunism and thus other organizational forms. This analysis is extended by others in the “new economics of organization” school, who start from similar premises and study other issues related to contracts (such as moral hazard(Milgrom and Roberts 1992) and principal agent(Pratt and Zeckhauser 1985) problems). Thus, with recent developments, it appears that the rationalist school of thought has increased in explanatory power and scope greatly: no longer does organization theory simply seek to explain workers’ motivations or the superiority of bureaucratic structure, but it seeks to explain why organizations exist at all and why they look the way they do.

The other camp which organizational theory split into is the sociological/psychological camp. These theories have sought to explain different, yet equally important phenomena. The influential garbage can theory falls into this category. March and Olsen postulate that organizational “decisions” are “made” not on a rational, goal-oriented basis, but rather as a result of four stochastic flows (problems, solutions, participants, and choice opportunities), which combine together to produce things that can be called decisions. It deals with both the environment (from which some of the streams come) and the organization itself. One might ask what sort of phenomena such a model might explain. While it is an extreme ideal type, it does do an excellent job of explaining the types of interactions observed by researchers doing fieldwork: meetings are attended by only some participants, who only sort-of pay attention to problems which are on an agenda which was haphazardly put together, only some of which get solved in fairly suboptimal ways.

Other sociological theories compete more directly with the new economics of organization. Two key examples are the sociological institutionalism of Meyer and Rowan (see also (Powell and DiMaggio 1991)), and the population ecology approach of Hannan and Freeman. One issue which both of these approaches within sociology discuss is isomorphism among organizations in similar environments. A rational explanation would argue that these organizations appear similar because they are functionally (relatively) optimal for solving whatever cooperation or coordination problems exist in that environment. Hannan and Freeman contend that this isomorphism can be explained simply through a competing-for-resources selection mechanism. However, in their model, organizations do not rationally “adapt,” but simply are born and die based on the demands of the environment. Another tack is taken by Meyer and Rowan to explain situations in which competition for resources is less (such as states): isomorphism is due to new organizations following existing myths or scripts: recipes for success which may or may not correspond to a functionally superior organization. Organizations in a given environment thus all have the same structure because of collective beliefs about how organizations in that environment should look in order to be seen as legitimate.

Today we have these two schools of thought which range across all levels of analysis and attempt to explain some of the same sets of phenomena, such as isomorphism. Much progress has been made: from the original, strictly rational, individualistic explanations of Taylor, we have managed to expand the scope and power of organizational theory out to the ecological level. Certain developments stand out in this history of progress: Weber’s analysis of bureaucracy provided a valuable framework on which future developments have built; the concept of bounded rationality saved rational choice from a dogmatic position with strictly limited application; transaction cost economics expanded the domain of explanation of rational theories; sociological theories explained pathologies not predicted by rational explanations.

How to keep this progress moving? Organizational theory would benefit best from two future developments: interrogation of each of these schools of thought (economic/political and sociological/psychological) with the evidence, and mutual interrogation between these schools of thought. Each seems to explain some unique phenomena; therefore each would need to be included to some extent in any unified model. It is unlikely that either would be able to explain all of the phenomena the other explains without sacrificing parsimony. However, prospects for a unified paradigm and a sort of “normal science” seem bleak, since these schools seem to be composed of academically non-interactive participants. The gap has only widened in the past; it shows no signs of narrowing now. Progress may be made in each school separately, but it will be much less than could be made with a greater degree of cooperation between scholars.

Perhaps an organization is needed?

Bibliography

Barnard, C. I. (1938). The functions of the executive. Cambridge, Mass.,, Harvard University Press.

Hannan, M. T. and J. Freeman (1977). “Population Ecology of Organizations.” American Journal of Sociology 82(5): 929-964.

Lawrence, P. and J. Lorsch (1967). “Differentiation and Integration.” Administrative Science Quarterly 12: 1-30.

March, J. G. and J. P. Olsen (1986). Garbage Can Models of Decisionmaking in Organizations. Ambiguity and command: organizational perspectives on military decision making. J. G. March and R. Weissinger-Baylon. Boston, Pitman: ix, 345.

March, J. G. and H. A. Simon (1958). Organizations. New York,, Wiley.

Meyer, J. W. and B. Rowan (1977). “Institutionalized Organizations : Formal-Structure As Myth and Ceremony.” American Journal of Sociology 83(2): 340-363.

Milgrom, P. R. and J. Roberts (1992). Economics, organization, and management. Englewood Cliffs, NJ, Prentice-Hall.

Powell, W. W. and P. DiMaggio (1991). The New institutionalism in organizational analysis. Chicago, University of Chicago Press.

Pratt, J. W. and R. Zeckhauser (1985). Principals and agents : the structure of business. Boston, Mass., Harvard Business School Press.

Scott, W. R. (1998). Organizations : rational, natural, and open systems. Upper Saddle River, N.J., Prentice Hall.

Taylor, F. W. (1911). The Principles of Scientific Management. New York, Harper.

Weber, M. and H. H. Gerth (1958). From Max Weber : essays in sociology. New York, Oxford University Press.

Williamson, O. E. (1985). The economic institutions of capitalism : firms, markets, relational contracting. New York, Free Press.

To prevent citation proliferation, all further citations will be to the same articles. In order to compress ninety years into five pages, many authors have been skipped; these authors should be taken as examples, not a complete listing!

Here I follow Scott’s typology(Scott 1998), categorizing approaches by two dichotomous variables. The first is rational/natural, indicating whether the approach is principally rational (assuming goal-directed behavior, or a “logic of consequences,” at a minimum) or natural (assuming norm-directed behavior, or a “logic of appropriateness”). The second is open/closed, indicating whether it treats organizations as open or closed systems; I find this to be somewhat limiting, and will develop throughout a more complex level of analysis typology instead.

At first glance, this appears to shift the level of analysis back to individuals. However, their recognition that the demands of the external environment cause information to be difficult to obtain reflect a more sophisticated understanding; thus Scott classifies March and Simon as open systems.

If only theorizing were this easy today…

These assumptions can be relaxed substantially; assuming these are like the pre-boundedly rational calculators that once stood in for humans in theories. If we assume some sort of limited intentionality, we still get garbage can effects, even if these meetings are not truly garbage cans.