Ottd Unit 1

BA7033 ORGANIZATIONAL THEORY, DESIGN & DEVELOPMENT
UNIT I ORGANIZATION & ITS ENVIRONMENT
Meaning of Organization Need for existence - Organizational Effectiveness Creation

of Value Measuring Organizational Effectiveness External Resources Approach,
Internal Systems Approach and Technical approach - HR implications.
TABLE OF CONTENTS
1.1. ORGANIZATION ....................................................................................................... 2

1.1.1. Meaning and Definition of Organization .................................................................... 2
1.1.2. Characteristics or functions of Organization .............................................................. 3
1.1.3. The Role of Organization Theory and Design ..................................................................... 5
1.1.4. Need for Existence of an Organization .................................................................... 5
1.1.5. Organization and Societal Demands ........................................................................... 8
1.1.6. Creation of Value/Value Creation b y Organization ................................................. 9
1.1.7. Importance of Organization .......................................................................................... 11
1.2. ORGANIZATIONAL THEORY...................................................................................... 12
1.2.1. Meaning and Definition of Organizational Theory ................................................. 12
1.2.2. Types of Organizational Theories ........................................................................... 13
1.2.3. Relationship between Organizational Theory and Organizational Structure, Design &
Change and Culture.................................................................................................................. 19
1.3. ORGANIZATIONAL EFFECTIVENESS ....................................................................... 20
1.3.1. Meaning and Definition of Organizational Effectiveness ..................................... 21
1.3.2. Criteria for Organizational Effectiveness .............................................................. 22
1.3.3. Indicators of Organizational Effectiveness ............................................................ 23
1.3.4. Importance of Organizational Effectiveness .................................................................. 24
1.3.5. Four Approaches to Organizational Effectiveness ........................................................ 24
1.3.6.Approaches to measuring organizational effectiveness .................................................. 30
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CHAPTER OBJECTIVE
The purpose of this chapter is to explore the nature of organization and the need for its
existence.
To understand the scope of organization theory.
To explore how organization theory can help people manage complex organizations.
To examine the ways of measuring organizational effectiveness.
1.1. ORGANIZATION
1.1.1. Meaning and Definition of Organization

A social unit of people that is structured and managed to meet a need or to pursue
collective goals. All organizations have a management structure that determines relationships
between the different activities and the members, and subdivides and assigns roles,
responsibilities, and authority to carry out different tasks. Organizations are open systems--
they affect and are affected by their environment.
According to Gary Johns, "Organizations are social inventions for accomplishing

goals through group efforts".
According to Ralph C . Davis, Organization is a group of people who cooperate

under the direction of leaderships f,or the accomplishment of a common end".
According to Louis A. Allen, "Organization is the process of identifying and grouping

work to be performed defining and delegating responsibility and authority and establishing
relationships for the purpose of enabling people to work most effectively together in
accomplishing objectives".
According to Oliver Sheldon, "Organization is the process of combining the work which
individuals or groups have to perform with the facilities necessary for its executing, that
the duties so performed provide the best channelsfor the efficient, systematic, positive and,
coordinated application of the available effort".
1.1.2. Characteristics or functions of Organization
1) Division of Labor: For effective performance of the work, the total work may be
divided into many parts and one person or a group of persons is made responsible for
completing a specific part of the work. This kind of assigning a part of the work is
called division of labor. It facilitates specialization, which improves organizational
efficiency.
2) Coordination: In any organization, different persons are assigned different

functions and yet all these functions have only one aim, accomplishment of the
enterprise objectives. To this end, an organization has to adopt suitable methods to
ensure that there is proper coordination of the different activities performed at various
work points. This implies establishment of correct and adequate relationships between:
(i) An employee and his work
(ii) One employee and another, and
(iii) One department or sub-department and another.
Failure to establish such relationship may result in different persons (or departments)
pursuing different paths, thus making it difficult for the enterprise to achieve its goals.
3) Social System: An organization is a social system. Its activities are governed by social
and psychological laws. People working in an organization are influenced in their
actions and behaviors by their social and psychological needs.
All parts of the organizational system are 'inter-dependent. Each part influences and
is influenced by any other part and also in turn by the system as a whole.
There are two aspects of an organizational social system-the formal or official,
and the informal or unofficial. The organization social system is dynamic, in
the sense that inter-personal and group relationships within it keep on changing,
and are not static.
4) Objectives: Any organization structure is bound together by, the pursuit of specific
and well-define objectives. In fact, just as objectives cannot be accomplished
without an organization, similarly all organization cannot exist for long without
objectives and goals. Thus, one is incomplete without other.
5) Cooperative Rel at i on sh ip : An organization creates cooperative relationship

among various members o the group. It cannot be constituted by one person. It requires
at least two or more persons. Organization is a system which helps in creating
meaningful relationships among persons both vertical and horizontal.
6) Well-Defined Hierarchy: An organization consists of various positions arranged in a

hierarchy with well defined authority and responsibility. The hierarchy of positions
defines the lines of communication an pattern of relationships.
7) Communication: Every organization has its own channels and methods of

communication. For success in management, effective communication is vital. This is
because management is concerned with working with others, and unless there is
proper understanding between people, it cannot be effective. The channel of
communication may be formal, informal, downward, upward or horizontal.
1.1.3. The Role of Organization Theory and Design
What topics are relevant to organization theory and design? How does a course in
management or organizational behavior differ from a course in organization theory? To answer
these questions lets examine the value a person gains through the study of organization.
The Value of Organization Theory
For people who are or will be managers, organization theory provides significant insight and
understanding to help them be better managers in a rapidly changing world. For example, one of the
greatest threats to organization today is the inability of management to adapt to the speed and chaos
of technological change. Although companies have made massive investments in technology, they
are only beginning to implement the organizational and management changes needed to make
technology and the internet competitive weapons. Understanding organization theory and design can
help managers make necessary changes by helping them see and understand how technology
interacts with other elements of the organization and its environment. As in the case of IBM, many
managers learn organization theory by trial and error. At IBM, managers did not initially understand
the situation they were in or the contingencies to which they should respond.
In a very real sense, organization theory can make managers more competent and more
influential by giving them an understanding of how organizations work. The study of organizations
helps people see and understand things other people cannot see and understand. Organization
theory provides ideas, concepts, and ways of thinking and interpreting that help managers
effectively guide their organizations. When the old approaches are no longer working, organization
theory helps managers understand why and develop new approaches to meet changing conditions.
1.1.4. Need for Existence of an Organization

Need for existence of an organization arises due to the following reasons:
1) To Increase Specialization a n d Division of Labor: Specialization refers to the
particular grouping of activities performed by an individual. People who work in the
organizations may become more productive and efficient at what they do than people
who work alone. Specialization can be achieved in one o following two ways:
i) Functional Specialization: The most well known form of specialization is
through functional specialization in which jobs are broken-down into simple and
repetitive tasks. Also known as division of labor, functional specialization creates
high substitutability among employees and facilitates their easy replacement by
management.
ii) Social Specialization: If individuals are specialized, rather than their
work, is called, social specialization. It is achieved by hiring professionals who
hold skills that cannot be readily routinized The work typically done by civil
engineers, nuclear physicists, and registered nurses is specialized, but the activities
they perform vary by situation.
An increase in either form of specialization results in increased complexity within
the organization because an increase in specialization requires more
sophisticated and expensive methods for coordination and control.
Division of labor is important in organization on following two grounds:

i) In highly sophisticatedand complex jobs, no one person can perform all the tasks, owing to
physical limitations,
ii) Limitations of knowledge act as a constraint. Some tasks require highly developed
skills; others can be performed by the untrained. If many of the tasks require a large
amount of skill, it may be impossible to find people capable of performing all the tasks
involved.
Another element in favor of division of labor is efficiency. Ones skill at performing a
task increase through repetition. Efficiency is also exhibited in reducing time spent in
changing tasks; the time spent in 'putting away one's tools and equipment from a prior step
in the work process and getting ready for another are eliminated through functional
specialization. Additionally, training for functional specialization is more efficient from the
organizations perspective. It is an easier and less costly to train workers to do a specific and
repetitive task than to train them for difficult and complex activities. Finally, division of
labor increases efficiency and productivity by encouraging the creation of special inventions
and machinery.
2) To Use Large-Scale Technology: Organization is able to take advantage of the

economies of scale and scope that result from the use of modem and automated and
computerized technology. Economies of scale is refers to the cost advantages that a
business obtains due to expansion. There are factors that cause producers average cost
per unit to fall as the scale of output is increased. An economy of scale is a long-run
concept and refers to reductions in unit cost as the size of a facility and the usage
levels of other inputs increase. The common sources of economies of scale are bulk
buying of materials. Economies of scope are also derived partially from learning by
doing. Economies of scope are cost savings that result when an organization is able to
use underutilized resources more effectively because they can be shared across several
different products or tasks. Economies of scope as well as scale can be achieved when
an organization can design an automated production line to produce several different
types of products simultaneously.
3) To Manage External Envi ron men t: No organization can exist in isolation. All
have important interactions with their environment. An organization's environment
includes not only economic, social, and political factors but the sources from which
the organization obtain inputs and the marketplace into which it releases' outputs, as
well. An organization has the resources to develop specialists to anticipate or
attempt to influence the many demands from the environment. This specialization
allows the organization to create more value for the organization, its members, and its
customers. Managing complex environments is a task beyond the abilities of most
individuals, but an organization has the resources to develop specialist to anticipate
or attempt to influence the many demands from the environment. This specialization
allows the organization to create more value for the organizations, its members, and its
customers.
4) To Economize on Transaction Costs: It is a cost incurred in making-an economic

exchange. For example, most people, when buying or selling a stock must pay a
commission to their broker; that commission is a transaction cost of doing the stock
deal. When rationally evaluating a potential transaction, it is important to consider
transaction costs that might prove significant.
When people cooperate to produce goods and services, certain problems arise. As they
learn what to do and how to work with others to perform a task effectively, people
jointly have to decide who will do which tasks (the division of labor), who-will get
paid what amounts, and how to decide if each worker is doing his or her share of the
work.
5) To Exert Power and Control: Power is defined as the capacity to influence. The
capacity may be evoked in the influence process or may remain dormant. It is not
necessary that a supervisor keeps wielding his power on the shop-floor or that a
Managing Director keeps issuing directives every day. The influence process may
turn-out to be unsuccessful of successful in varying degrees or in different ways.
Successful influence is called control. Control could be full or partial, depending on
the extent to which the influence attempts are successful. Control may be of two types
- behavior control and fate control, i.e., control over means and end respectively.
Organization can exert great pressure on individuals to conform to task and
production requirements in order to increase production efficiency.
Taken together, these five factors help to explain why often more value can be
created when people work together, coordinating their actions in an organized setting,
then they work alone. Over time, the stability created by an organization provides a
setting in which the organization and its members can increase their skills and
capabilities, and the ability of the organization to create value increases by leaps and
bounds.
1.1.5. Organization and Societal Demands

Organizations are formed to meet the demands of the society. Individuals, Corporations,
or the State may take initiative in setting-up organization to meet the existing demands
of the society or the potential demands that would need to be met. These demands can
be in the economic, social, cultural, political, and environmental sectors. Organizations
in the economic sectors are expected to provide infrastructural facilities, goods, and
services to people and create wealth for the society. In social and related sectors,
however, organizations contribute towards enhancing the quality of life of people
by providing services in health, education, environmental protection, and cultural
enrichment.
The emergence of organizations is directly related to the growing demands of the society.
With the opening-up of the economy in India in 1990's there has been an influx of numerous
multinational organizations in consumer durables, FMCG and service sectors. Also, Indian
entrepreneurs have set-up organizations in response to the ever growing and multiplying needs
in the country. Thus, financial service sector grew by leaps and bounds in mid 80's and early
90's and so did the information technology related companies and consultancy firms. The
Non-Profit Organizations (NPOs) in health, education, and environment have also grown and
will continue to grow at a fast pace.
Society places its valuable, scarce resources at the disposal of the organizations and
therefore it is legitimate on its part to expect that the resources will be efficiently utilized and
that value-added products and services will be made available to the consumers. If the
organization fails to provide output of acceptable standard to consumers, it will no
longer be in a position to acquire resources from the society and will cease to exist.
1.1.6. Creation of Value/Value Creation b y Organization
Value creation takes Creation of Value place at three stages - input, conversion, and
output. Each stage is affected by the environment in which the organization operates.
Inputs include human resources, information and knowledge, raw materials, and money
and capital. The way an organization chooses and obtains from its environment the inputs
it needs to produce goods and services determines how much value the organization
creates at the input stage.
The way the organization uses human resources and technology to transform inputs into
outputs determines how much value is created at the conversion stage. The amount of
value the organization creates is a function of quality of its skills, including its ability
to learn from, and respond to the environment. The result of the conversion process is
an output of finished goods and services that the organization releases to its environment,
where they are purchased and used by customers to satisfy their needs. The organization
uses the money earned from the sale of its output to obtain new supplies of inputs, and
the cycle begins and repeats again. An organization that continues to satisfy people's
need will be able to obtain increasing amounts of resources over-time and will be able to
create more and more value as it adds to its stock of skills and capabilities.
A value creation model can be used to describe the activities of most of the
organizations. Manufacturing companies, such as General Motors and IBM, take from the
environment component parts, skilled or semi-skilled labor, and technical knowledge,
and at the conversion stage they create value by using their manufacturing skills to
organise and assemble those inputs into outputs such as cars and computers. Service
organizations, such as Mcfronald's, A m a z o n . c o m , the Salvation Army, interact
directly with customers or clients, w ho are the inputs to their operations.
Hungry people who go to McDonald's for a meal, needy families who go to the Salvation
Army for assistance, and sick people who go to the doctor for the cure are all inputs, In the
stage, service organizations create value by applying their skills to yield an output -
satisfied hunger, took care of the family, a cured patient. A simplified model of how
McDonald's creates value is shown in figure 1.1:
McDonalds Inputs: McDonalds conversion process:
Obtained from its Environment Transforms inputs and add values to them
1) Raw materials (Ground beef, 1) Machinery (Grills, toasters, milk,
sandwich buns, potatoes, milk shake machines);
shake mix, etc.); 2) Computers (Computerized cash
2) Human Resources (Cooks, clean- registers, ordering systems,
up crew, order takers, managers); inventory tracking);
3) Information and Knowledge 3) Human skills and abilities
(Training, knowledge of fast-food (personnel trained in sandwich
industry); preparation, ordering, potato
4) Money and capital (Shareholders frying, overseeing the whole
investment); operation);
5) customers
McDonalds Environment: McDonalds Outputs:

Sale of outputs to customers Released to its Environment
1) Satisfied customers 1) Fast and cheap food
2) Potential customers 2) Satisfied Customers
3) Suppliers of meat, potatoes, 3) Satisfied shareholders
milk-shake mix
4) Population from which to choose
employees
5) Government health regulations
6) Competitors (Kentucky fried
chicken, Burger king, Taco bell)
Figure 1.1: Value creation model of Mc
Doland
1.1.7. Importance of Organization
Importance of a good organization is explained below:
,
1) Increases the Efficiency of Management: There is the maximum utilization of
workers' ability and productive capacity of the material resources under good
organization. Good organization avoids confusion, delay sand duplication of work.
2) Ensures Optimum Utilization of Human and Material Resources: 'Right

man at the right job' is fundamental to organization. Good organization brings
harmony in the efforts of the employees and the working conditions which add to the
total productivity of the enterprise.
3) Helps in the Growth of Enterprise: Good organization contributes to the

growth, diversification and expansion of all enterprises. Big and giant enterprises are
the direct result of the success of the organizing functions of management.
4) Places Proportionate Importance to the Various Activities of the Enterprise:

Organization divides the entire enterprise activities into departments and sub-
departments, each receiving attention according to its importance or role played
towards accomplishing the enterprise objective. Money and efforts are spent
proportionate to their contribution which means that emphasis is given according to their
relative importance.
S) Facilitates Coordination: Functions and activities of the various departments are

welded together to accomplish the enterprise goals. Different departments perform
their functions in a closely related manner and not as rivals.
6) Provides Facilities for Training, Testing and Development of Managerial

Personnel: By placing the persons in different departments, training can be
imparted, as also their abilities tested. This will be followed by their placement to
the places to which they are best suited.
7) Prevents Growth of Intrigues (plotting) and Corruption: Unsound

organization becomes a breeding ground of intrigues and corruption. Good
organization develops the morale, honesty, devotion to duty and the feeling of oneness
with enterprise.
8) Consolidates Growth and Expansion: Organizing practices have encouraged the
business enterprises to expand their size to an ever-increasing level. With hundreds of
employees and extensive ramifications of operations ,giant enterprises are the direct
outcome of the organizing function of management. .
9) Stimulates Creativity: Sound organization stimulates independent, creative thinking and

initiative by providing well-defined areas of work with broad latitude of the development
of new and improved ways of doing things.
10) Adoption of New Technology: The effectiveness of an enterprise is measured by

the reaction of staff members to the adoption of a new technology. In the scientific
world, there are a lot of innovations and inventions identified in the area of
production, distribution and personnel management. If the new technology is
adopted by the enterprise, the maximum benefits can be obtained in any field or
activity. A flexibleorganizational structure is needed to adopt a new technology.
1.2. ORGANIZATIONAL THEORY
1.2.1. Meaning and Definition of Organizational Theory
Organizationaltheory is the examination of an organization to identify the similar .themes

within the structure which assisting problem-solving, creating maximum efficiency and
production capacity within the organization. There are three major groups within
organizational theory viz. individual processes, group processes and organizational
processes. Organization theory is useful in a variety of fields and businesses. Typically, it is
used on a large scale to understand and manage the efficiency of a system, lower-level
employees, and higher-level employees such as managers or a chief of staff. Some
professional areas that may benefit from the use of organizational theory are facilities
in the medical field, large corporations and really any business that would like to
maximize their production. Organizational theory can be used on the corporation as a
whole or solely on specific areas that require maintenance and attention. The main goal of
organizational theory is to completely understand the structure of the organization, the
factors internal and external, need to be taken into account.
According to D.S. Pugh, "Organization theory refers to the study of the phenomena
of organizational functioning and performance and of the behavior of groups and
individuals working in them".
1.2.2. Types of Organizational Theories
1.2.2.l. Classical Theory

Classical theory is also known as traditional theory. It deals with the anatomy of
organization. Various contributors to this school of thought are Max Weber, Henry
Fayol, F.W. Taylor, Mooney and Reiley, Gulick and Urwick. The classical theorists
view organizations as machines and human beings as different components of that
machine. They consider the employees as economic men who could be motivated only
through economic rewards. This theory considers the human beings as rational and
therefore they should behave rationally, intelligently and economically. Rationality,
efficiency and economy are the goals of the organization. The rational functioning of the
workers will increase productivity and this in turn will fetch them more wages. This adds to
the prosperity of the organization and also to themselves.
Features of Classical Theory
Features of classical theory are as follows:
1) The essential character of this theory is centralization. In centralization the authority
and
control rests with the top management.
2) It is based on formal organization structure.
3) It lays special emphasis on error, its detection and rectification thereof.
4) Employees are considered to be economic men who can be motivated only through
economic reward.
5) Managers are supposed to deal with workers firmly within the system.
6) Organization has been considered as machine and workers as components of it. To
improve
the system only internal factors are considered. External factors are completely ignored.
7) Interests of workers and the organizations are considered to be the same, i.e., increasing
productivity.
Criticisms of Classical Theory

Criticisms of classical theory are as follows:
1) Reliance on Experience: Many of the writers in the classical school of management
developed their ideas on the basis of their experiences as managers or consultants with
only certain types of organizations. For example, Taylor's and Fayol's work came
primarily from their experiences with large manufacturing firms that were experiencing
stable environments. It may be unwise to generalise from those situations to others -
especially to young, high-technology firms of today that are confronted daily
with changes in their competitors' products.
2) Failure to Consider the Informal Organization: In their stress on formal
relationships in the organization, classical approaches 'tend to ignore informal
relations as characterised by social interchange among workers, the emergence of
group leaders apart from those specified by the formal organization, and so forth. When
such things are not considered, it is likely that many important factors affecting
satisfaction and performance, such as letting employees participate in decision-making
and task planning, will never be explored or tried. .
3) Unintended Consequences: Classical approaches aim at achieving high productivity,
at making behaviors predictable, and at achieving fairness among workers and between
managers and workers; yet they fail to recognize that several unintended consequences
can occur in practice. For example, a heavy emphasis on rules and regulations may
cause people to obey rules blindly without remembering their original intent.
Oftentimes, since rules establish a minimum level of performance expected of
employees, a minimum level is all they achieve. Perhaps much more could be achieved if
the rules were not so explicit.
1.2.2.2. Neo-Classical Theory
Neo-classical theory has developed as a reaction to classical approach which failed to

recognise the significance of the impact of man on structure. The classical researchers
have been focusing attention on the psychological and mechanical variables of
organizational functioning but the positive aspects of these variables could not
produce positive results in work behavior. The Neo-classical theorists have tried to
investigate the reasons for the human behavior at work. They identified some of the
variables which influenced the work behavior. Their findings evoked a new
phenomenon and focused attention on human beings in the organization. They
were named as "Behavioral Theory of Organization" or "Human Relations
Approach". Chief contributors to human relations approach are Elton Mayo, Chester
Bernard, Maslow, McGregor, and Warren Bennis.
Principles of Neo-Classical Theory

The modifications suggested by this theory over classical theory in the form of
principles are:
1) Flat Structure: Neo-classical theory advocated a flat organization
structure wherein more number of subordinates will be reporting to a single
supervisor. This is preferred instead of a tall structure because there is
communication problem due to long chain of command, motivational problem
and it is expensive. In a flat structure this is removed.
2) Decentralisation: This theory advocated decentralisation in organizational
structure. The classical theory advocated departmentation based on specialization.
On the other hand, neo-classical theory advocated decentralisation which is
closely related to that structure as wide span of control will result more
in horizontal increase in people.
3) Informal Organization: This concept was identified by neo-classical theorists.

According to the advocates of this theory formal and informal aspects 'of
organization must be studied to understand the organization functions fully.
Informal organization is an off-shoot of the limitations of formal organization.
The informal organization fulfils the needs of the members especially their
social and psychological needs. Actual organization behavior is determined
with the interaction of both formal and informal organizations.
4) Organization is a Social System: An organization is a social system which

consists of several interacting parts.
5) Human Beings may Behave Irrationally: Human beings are

interdependent. Their behavior can be predicted in terms of social and
psychological factors at work.-Human beings do not always act rationally. They
often behave irrationally in terms of the rewards they seek from the work.
6) Reconciliation of Individual and Organizational Goals: There is

always a conflict between organizational goals and that of the individuals.
Therefore, there is a need to reconcile the goals of the individual with that of
the organization.
7) Team Work: Team work is essential for successful functioning of organization

and this is to be achieved.
Criticisms of Neo-Classical Theory

Criticisms of neo-c1assical theory are as follows:
I) Certain Assumptions are Untrue: Many of the assumptions of this
theory are not true. The theory assumes that happy workers are always
productive is not true. In an organization there are sharp conflicts among
various interested groups in the group that are structural in nature and not mere
psychological. This aspect was not adequately dealt with by the neo-classical
theorists.
2) Limited Application: This theory has advocated various structures and

formats as suggested by the neo- classicists that are not applicable in all
situations. It also overlooks certain environmental constraints which a manager
cannot ignore. These shortfalls reduce the scope of applicability of this theory.
3) Lack of Unified Approach: It lacks the unified approach of organization theory. In

fact, it is not a theory at all. It simply suggests certain modifications in the old theory. It
is basically connected with organizational modification rather than organizational
transformation. So this theory also faces the same criticisms as the classical theory had.
4) Too much Emphasis on Human Factors: This theory has laid too much emphasis
on human aspect as the classical theory had on the structural aspect. It has ignored other
aspects such as formal structure, discipline, etc.
5) Short-Sightedness: The following points are to be taken as the short sightedness of

the theory. They are:
i) This theory tends to ignore the economic dimension of work satisfaction.
This is not true in all situations.
ii) This approach is concerned more with operative employees and not applicable to
top level managerial personnel.
iii) It focuses more on human aspect and not on work. By focusing on interpersonal
relations and informal groups this tends to over-emphasise the psychological aspects
at the cost of structural and technical aspects.
6) Group Decision-Making: They advocate for maintaining superiority of group
decisions over individual decisions but research findings do not testify it.
1.2.2.3. Contingency Organization Theory
Since both classical school and human relations school could not provide a better solution
to all situation, there emerged a contingency approach to organizational theory. The
authorities who are associated with contingency approach are P.R. Lawrence, J.W. Lorsch
and Woodward. The contingency school of management can be summarised as an "it all
depends" approach. It recognises that there is no one best way to manage. In the
contingency perspective, managers are faced with the task of determining which
managerial approach is likely to be most effective in a given situation. As these
situations vary, different structures turn out to be most effective. In other words the
optimal organizational structure is contingent, depending on certain contextual factors.
Therefore, this approach is labelled as contingency approach to organizational theory.
Thus, contingency thinking avoids the classical "one best way" arguments and
recognises the need to understand situational differences and respond appropriately to
them. It does not apply certain management principles to any situation.
Criticisms of Contingency Theory

Criticisms of contingency theory are as follows:
1) The theory is a complex one as it involves many environment variables.
2) This theory is theoretically complex: Due to this complexity, its empirical testing is
not
possible.
3) This theory suggests a reactive strategy and proactive strategy in coping
with'
the environmental complexity.
1.2.2.4. Systems Approach Theory

Systems approach theory is also known as modern organization theory and this was
developed in the early stage. In contributors of this theory include William G. Scott,
Chester Barnard, Richard A. Johnson, etc., theory has directed system of interrelated
parts. Parts of a system are known as sub-systems. There is inter-relationship between the
sub-systems and they are arranged in a particular sequence. This ensures the efficient
functioning of the system. A system has a boundary which maintains proper relationship
between the system and its environment.
Systems are broadly classified into two types known as open systems and closed
systems. An open system always interacts with environment whereas a closed system has
no interaction with the environment. All living systems are open systems and all non-living
systems are closed systems. An organization is an open system as it continuously interacts
'with its environment. The interaction of the organization with the environment can be
well understood by input and output model. Inputs are information, energy and materials
which the organization takes from the environment. It transforms supplies into output with
the help of men and machines and gives it environment .reaction of environment to the
outputs is called feedback mechanism with which the organization can evaluate and correct
itself. So in systems approach organizations make use of input-output analysis.
1.2.3. Relationship between Organizational Theory and Organizational Structure,

Design & Change and Culture
1.2.3.1. Organizational Theory and Organizational Structure
Structure is how something is held together via the relationships between its parts. It
is perhaps the most important concept in organizational theory. Structure is the basis of
every large administration and the structural approach tends to concentrate on top-down
delegation of authority. Almost all the well-known theories in organizational science
(such as Max Weber's bureaucratic model) are examples of the structural approach,
which usually justifies hierarchical arrangements or at least a way to pull them into
becoming more efficient or human. A structural approach is not limited to large
organizations but can be used to describe systems of all kinds. It is systems theory which
sees structure as not so much an anatomical thing, but the patterned, purposive ways people
act inside organizations, or in other words, with structure being the same as the functions
people carryout. In an approach known as structural-functionalism, the functions always
constitute the structure.
Organizational structure is important because managers coordinate and organise to

implement strategies. The form of organization influences how labor, knowledge, and
skills are allocated to tasks; establishes how information will be channeled; and affects
the efficiency and sentiment with which individuals perform. The way organizations have
been viewed historically is that th ey are social structure or architectural forms that are
characterized by tasks, specialization, hierarchy, power, and endurance. Current
organizational theory, however, has focused on other attributes such as culture and social
learning. The practitioners draw upon traditional and current theory to help understand how
to best organise people to realise strategies.
1.2.3.2. 'Organizational Theory' and 'Organizational Design and Change'

Organizational theory addresses many issues associated with organizational design.
Organizational design entailsdecisions about structure and culture. Understanding how to
create change in the difficult environment is an important skill. Organizational theory offers
rich knowledge concerning organizational change.
The study of change is grounded in the forerunners of organization theory that provided
a platform for the development of change in the context of organizations and for a
better understanding of change outcomes. These theories include scientific management,
the Hawthorne studies, IIO psychology, socio-technical theory, and organizational
development, all of which provided the basis for understanding organizational change and
its theoretical domains. It was during this period that interest in the value of change
as an influential set of concepts and techniques was more widely acknowledged.
From the 1960s onwards, a series of organizational theories emerged focusing on

exploring change in and around organizations. In a progression from the first trend, these
theories provided more developed approaches to studying change. They include
contingency theory, strategic choice theory, resource dependency theory, configuration
theory, institutional theory, behavioral theory, ecological theory, and network theory
and together they helped to strengthen and develop the field as an area of research and
practice.
1.3. ORGANIZATIONAL EFFECTIVENESS
1.3.1. Meaning and Definition of Organizational Effectiveness
Organizational effectiveness is the extent to which an organization achieves its goals with
the given resources and means. An organization is said to be effective if it is able to
achieve its goals. The goals must be achieved within the constraints of limited resources as
none of the resources provided by an organization's environment are really unlimited.
The level of output an organization achieves with its limited resources determines its
efficiency, and the extent to which it is successful in doing what it set out to do determine
its effectiveness.
For example, a company sets an objective to achieve a return on investment of 10 per cent
next year. After the year is over, it measures and finds that it has achieved 10 per cent or
more return on investment. It can be said that 'the company is effective' or 'the company
has achieved effectiveness'. If the company is only able to achieve 9 per cent or lesser
return on investment, it denotes that the company is ineffective. Of course, no
organization would reach a conclusion regarding its effectiveness on the basis of just one
or a few measures. There will be a range of measures based on multiple objectives that
organizations set for themselves. Measuring organizational effectiveness can be an inexact
science, since each individual entity will have a different list of criteria and priorities to
weight and consider through self-assessment. Understanding a company's level of
organizational effectiveness is important for several reasons - it serves as a check-in to
see how well internal procedures are meeting an initial vision, it provides investors,
donors, or employees with an idea of the company's strengths, and it highlights areas of
ineffectiveness that can be the focus of improvements.
According to Price, "Organizational effectiveness is the degree of achievement of multiple
goals".
According to Hannan and Freeman, "Organizational effectiveness is the degree

of congruence between organizational goals and observable outcomes".
According to Black and Mouton, "Organizational effectiveness is achieved when

management succeeds in being both production and people centred".
1.3.2. Criteria for Organizational Effectiveness
Criteria for organizational effectiveness are as follows:

1) Direction: Direction involves the following:
i) Setting objective,
ii) Long- and short-term planning,
iii) Entrepreneurship and sound investment,
iv) Devising appropriate organizational structures,
v) Maintaining a favourable image of the enterprise (measured by the extent the
objectives are achieved, profitability, and high share value).
2) Delegation: Motivation by encouraging well-judged decisions close to the point of

action. This implies that managers have the authority required to discharge their
responsibilities (measured or indicated by the extent to which the authority is delegated
and whether this is considered to be adequate by the subordinates; the degree of
support by the superiors).
3) Accountability: Clear understanding of who is accountable for what (without any
gaps). Accountability is related to delegation of authority.
4) Control: It deals with monitoring performance against objectives and standards. It is

measured by resource utilisation, rejection rates, quality of service, etc. It may also
include measures of attitude and morale.
5) Efficiency: Optimum use of resources and the achievement of planned levels of

output with minimum costs; input output ratio.
6) Coordination: It is related to integrate the activities and contribution of different parts

of the enterprise. It is indicated by supportive relationship; free flow of production
related activities. It may also include levels of inventories, deliveries, etc.
7) Adaptation: To measure the effectiveness of an enterprise, it is necessary to

achieve a high degree of abilityto respond to changing environment, capacity to
innovate, and solve problems. .
8) Social System and Personal Effectiveness: Maintenance of social systems and

terms and conditions of employment in order to enlist people's commitment.
Organizations should evolve appropriate personnel strategiesto include wage
administration, performance appraisal promotion, reward system, incentives, etc.
1.3.3. Indicators of Organizational Effectiveness

Someof the major organizational indicators or performance indicators of organizational
effectiveness are as follows:
1) Innovation: The term "innovation" refers to making meaningful change to improve

products, processes, or organizational effectiveness and to create new value for
takeholders. Innovation involves the adoption of an idea, process, technology,
product, or business model that is either. new or new to its proposed application.
The outcome of innovation is a discontinuous or breakthrough change in results,
products, or processes. Thus, innovation is an important indicator of organizational
effectiveness.
2) Results: It refers to outputs and outcomes achieved by an organization. Results are

evaluated on the basis of current performance; performance relative to appropriate
comparisons; the rate, breadth, and importance of performance improvements; and the
relationship of results measures to key organizational performance requirements. This
ultimately reflects organizational effectiveness.
3) Productivity: It refers to measures of the efficiency of resource use. It also

indicates organizational effectiveness. Although the term often. is applied to
single factors, such as the workforce (labor productivity), machines, materials,
energy, and capital, the productivity concept applies as well to the total resources
used in producing outputs. The use of an aggregate measure of overall productivity
allows a determination of whether the net effect of overall changes in a process -
possibly involving resource trade- offs - is beneficial.
4) Absence: Absence rates, when aggregated to organizational level, can tell the
researcher something about the effectiveness of the organization in retaining a certain
level of staff resource over time. Clearly, if staff is absent from work, they are unable
to contribute to the performance of the organization, making absence.
1.3.4. Importance of Organizational Effectiveness

1) It enhances the potential for job success, promotional opportunities and longevity with the
employer.
2) It provides a structure for organizing ones work
3) It increases understanding of the way organizations operates
4) It seeks long term survival and development through innovation, planted change,
forecasting and human resource development.
1.3.5. Four Approaches to Organizational Effectiveness

Goal Attainment Approach
Systems Approach
Strategic Constituencies Approach
Competing Values Approach
Approach Definition When useful
Goal Attainment An organization is The approach is

effective to the extent preferred when goals are
that it accomplishes its clear, time bound and
stated goals. measureable.
Systems It acquires needed A clear connection exists

resources. between inputs and
outputs.
Strategic Constituencies Strategic Constituencies Constituencies have

are at least minimally powerful influence on the
satisfied. organization, and it must
respond to demands.
Competing Values The emphasis of the The organization is

organization in the four unclear about its own
major areas matches emphases, or changes in
constituent preferences. criteria over time are of
interest.
1. Goal attainment approach

The Goal Attainment Approach states that an organizations effectiveness must be
appraised in terms of the accomplishment of ends rather than means
It is the bottom line that counts.
Based on the identification of goals and the achievement of those goals
Goals must be
- Clearly identifiable
- Consensual
- Measurable
- Time-bound
Barriers to Goal Attainment Approach

Failure to sell practitioners on goal setting to ensure commitment.
Setting goals that are not measurable and realistic.
Unwillingness to raise and lower goals to maintain optimal difficulty.
Setting too many goals.
Focusing too much on outcome goals.
2. System Approach
Here end goals are not ignored; but they are only one element in a more complex set of
criteria.
Systems models emphasize criteria that will increase the long term survival of the
organization such as
Its ability to acquire resources, maintain itself internally as a social organism & interact
successfully with its external environment.
So, this approach focuses not so much on specific ends as on the means needed for the
achievement of those ends.
Assumptions
Organizations are made up of interrelated subparts.
If any one of these subparts performs poorly, it will negatively affect the performance of the
whole system.
Effectiveness requires awareness & successful interactions with environmental
constituencies.
Mgmt has to maintain good relations
Raw materials must be secured, vacancies created by employee resignations and retirements
must be filled, declining product lines must be replaced
Changes in the economy & the tastes of customers or clients need to be anticipated and
reacted.
How Managers can apply the systems approach?

The system view looks at factors such as-
Relation with the environment
The efficiency with which the org. transforms inputs into outputs
The clarity of internal communications.
The level of conflict among the group
The degree of job satisfaction
Limitations of systems approach

The two most telling shortcomings of the systems approach relate to MEASUREMENT &
the issue of whether MEANS REALLY MATTER?
In sports, it is frequently said its whether you win or lose that counts, not how u play the
game!
Same holds true for organization.
If ends are achieved, means are not important
But systems approach focus is on MEANS necessary to achieve effectiveness rather than on
organizational effectiveness itself.
Systems Approach uses means goals
The approach that is more meaningful and which is easy to quantify should be used
Value to Managers
Managers using systems approach are less prone to look for immediate results
Less likely to make decisions
This approach increases the Managers awareness of the interdependency of organizational
activities
A final plus for the systems approach is its applicability where end goals either are very
vague or cannot be quantified.
3.Strategic-Constituencies Approach
An effective organization is one that satisfies the demands of those constituencies in its
environment from whom it requires support for its continued existence.
It seeks to appease only those in the environment who can threaten the organization's
survival.
For eg. Private universities and public universities
Assumptions
Organization should give importance to constituency then it can take this approach.
Each constituency has a unique set of values, so it is unlikely that they are preference will be
in agreement.
How can manager apply this
Asking members to identify the constituents
Evaluate the list
-How dependent on it our organization is?
-Does it have considerable power over us?
-Are there alternatives?
Identifying the expectations
-What do they want of it?
Problems
Distinguishing strategic constituencies from larger environment is not easy to practice
Identifying the expectations that the strategic constituencies hold for the organization
Value to managers
It is important for manager to understand just who it is that survival is contingent
upon
Manager might ignore or upset a group whose power could significantly hinder the
organizations operations
4. Competing Values Approach

The Competing Values Approach is the criteria of value and use in assessing an organizations
effectiveness.
Criteria
Return on investment
Market share
New product innovation
Job security
Assumptions
No best criterion for evaluating an organization effectiveness.
There cannot be one single goal that everyone can agree upon.
The concept of OE is subjective.
Problem to the approach

This approachs perception is on how well an organization is doing on the criteria rather than
clarifying in which criteria the constituencies are emphasizing.
Values to manager
By reducing a large number of effectiveness criteria, this can guide the manager in
identifying the appropriateness of different criteria to different constituencies and in different
life cycle stages.
1.3.6.Approaches to measuring organizational effectiveness
External resource approach

Internal systems approach
Technical approach
Goals to be set to measure effectiveness
External resource approach Lower costs of inputs

Obtain high-quality inputs of raw
materials and employees
Increase market share
Increase stock price
Gain support of stakeholders such as
government or environmentalists
Internal systems approach Cut decision-making time

Increase rate of product innovation
Increase coordination and motivation
of employees
Reduce conflict
Reduce time to market
Technical approach Increase product quality
Reduce number of defects
Reduce production costs
Improve customer service
Reduce delivery time to customer
1.External resource approach
A method managers use to evaluate how effectively an organization manages and
controls Its external environment
Suppliers
Customers
Competitors
government
2.Internal systems approach

A method that allows managers to evaluate how effectively an organization functions
and operates
Structure
culture
Flexibility
Co-ordination
Motivation
3.Technical approach
A method managers use to evaluate how efficiently an organization can convert some
fixed amount of organizational resources into finished goods and services
Technical effectiveness is measured in terms of productivity and efficiency (output:
input)
Process
technology

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BA7033 ORGANIZATIONAL THEORY, DESIGN & DEVELOPMENT

UNIT I ORGANIZATION & ITS ENVIRONMENT

Meaning of Organization Need for existence - Organizational Effectiveness Creation

1.1. ORGANIZATION ....................................................................................................... 2

To understand the scope of organization theory.

To examine the ways of measuring organizational effectiveness.

1.1.1. Meaning and Definition of Organization

According to Gary Johns, "Organizations are social inventions for accomplishing

According to Ralph C . Davis, Organization is a group of people who cooperate

According to Louis A. Allen, "Organization is the process of identifying and grouping

2) Coordination: In any organization, different persons are assigned different

5) Cooperative Rel at i on sh ip : An organization creates cooperative relationship

6) Well-Defined Hierarchy: An organization consists of various positions arranged in a

7) Communication: Every organization has its own channels and methods of

1.1.4. Need for Existence of an Organization

Division of labor is important in organization on following two grounds:

2) To Use Large-Scale Technology: Organization is able to take advantage of the

4) To Economize on Transaction Costs: It is a cost incurred in making-an economic

1.1.5. Organization and Societal Demands

1.1.6. Creation of Value/Value Creation b y Organization

McDonalds Environment: McDonalds Outputs:

2) Ensures Optimum Utilization of Human and Material Resources: 'Right

3) Helps in the Growth of Enterprise: Good organization contributes to the

4) Places Proportionate Importance to the Various Activities of the Enterprise:

S) Facilitates Coordination: Functions and activities of the various departments are

6) Provides Facilities for Training, Testing and Development of Managerial

7) Prevents Growth of Intrigues (plotting) and Corruption: Unsound

9) Stimulates Creativity: Sound organization stimulates independent, creative thinking and

10) Adoption of New Technology: The effectiveness of an enterprise is measured by

1.2. ORGANIZATIONAL THEORY

1.2.1. Meaning and Definition of Organizational Theory

Organizationaltheory is the examination of an organization to identify the similar .themes

1.2.2. Types of Organizational Theories

1.2.2.l. Classical Theory

Criticisms of Classical Theory

1.2.2.2. Neo-Classical Theory

Neo-classical theory has developed as a reaction to classical approach which failed to

Principles of Neo-Classical Theory

3) Informal Organization: This concept was identified by neo-classical theorists.

4) Organization is a Social System: An organization is a social system which

5) Human Beings may Behave Irrationally: Human beings are

6) Reconciliation of Individual and Organizational Goals: There is

7) Team Work: Team work is essential for successful functioning of organization

Criticisms of Neo-Classical Theory

2) Limited Application: This theory has advocated various structures and

3) Lack of Unified Approach: It lacks the unified approach of organization theory. In

5) Short-Sightedness: The following points are to be taken as the short sightedness of

Criticisms of Contingency Theory

1.2.2.4. Systems Approach Theory

1.2.3. Relationship between Organizational Theory and Organizational Structure,

Organizational structure is important because managers coordinate and organise to

1.2.3.2. 'Organizational Theory' and 'Organizational Design and Change'

From the 1960s onwards, a series of organizational theories emerged focusing on

1.3. ORGANIZATIONAL EFFECTIVENESS

According to Hannan and Freeman, "Organizational effectiveness is the degree

According to Black and Mouton, "Organizational effectiveness is achieved when

1.3.2. Criteria for Organizational Effectiveness

Criteria for organizational effectiveness are as follows:

2) Delegation: Motivation by encouraging well-judged decisions close to the point of

4) Control: It deals with monitoring performance against objectives and standards. It is

5) Efficiency: Optimum use of resources and the achievement of planned levels of

6) Coordination: It is related to integrate the activities and contribution of different parts

7) Adaptation: To measure the effectiveness of an enterprise, it is necessary to