Organization Theory(Organization Ecology, Organization Economics, Institutional)

8/11/2019 Organization Theory(Organization Ecology, Organization Economics, Institutional)

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OrganizationTheory

Aaron M. Perez

MBA-TEP

Organization Management

for the class of Dr. Neri Pescadera


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Questions

Why do firms emerge ?

What factors determine organizational

survival, growth and demise ? Why are firms structured in a specific way

?


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Organization Ecology Theory

Organization - an organized body of people

with a particular purpose, especially a

business, society, association, etc.

Ecology - the branch of biology that deals

with the relations of organisms to oneanother and to their physical surroundings.


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Overview

ORG

Customers Competitors

SuppliersRegulators


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History

Introduced in 1977 by Michael T. Hannan

and John H. Freeman in their article The

population ecology of organizations The article was later refined in their book

Organizational Ecology (1989)


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Aspects

Focus on how organizations operate among their peers

and within the natural environments dictated by the

nature of the work they do

Aims to explain how social, economic and politicalconditions affect the relative abundance and diversity of

organizations

Utilizes insights from biology, economics and sociology,

and statistical data analysis in understanding theconditions on how organizations emerge, grow and die

Often argue that many failures are due to causes

external to organizations (radical position that is almost

viewed as blasphemous)


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Core Concepts

FOUNDING of orgs de novo, merger, spin-off, in-

migration

MORTALITY thru disbanding, merger, out-migration

INERTIA Inflexibility means most orgs unable to change

form by adapting to new environmental conditions

DENSITY total N of orgs in the population at time t

LEGITIMATION org form becomes institutionalized,

socially taken-for-granted (constitutive legitimation)

COMPETITION rivalry within an industry for resources


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Theory Fragments

Inertia and Change

reliable/ accountable

Niche Width

distinguishing between generalist and specialist

Resource Partitioning

division of resources such that a few dominant

species exploit most of the available resources while

other species divide the remainder (i.e. fastfood

Jollibee, McDonalds, KFC etc)


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Theory Fragments

Density Dependence

rates of founding and mortality are dependent on the

number of organizations (density) in the market (i.e.

fast food and restaurants Jollibee, McDonalds,Cindys, BurgerMachine, Minute Burger )

Age Dependence

Liability of newness

Liability of adolescence

Liabilities of aging/ liability of obsolescence (i.e.

Philippine pagers & Internet Service Providers)


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Organization Economics Theory

the use of economic logic and methods to

understand the existence, nature, design,

and performance of organizations,especially managed ones


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Nature of the Firm


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Nature of the Firm

Reasons to establish a firm (hierarchy)

1. To avoid the transaction costs of the price

mechanisma. Discovering relevant prices

b. Costs of negotiating deals

c. Costs of writing/rewriting contracts

2. Haggling over division of surplus


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Nature of the Firm

Size determinants

1. The number and costs of transactions

a. Upper limit: When the costs rise to the point where

internalizing a transaction equals the cost of making thetransaction in the market.

b. Lower limit: If the firms costs of transactions exceed

the markets costs it does not come into existence.


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Transaction Cost Theory

A theory accounting for the actual cost of outsourcing

production of products or services including transaction

costs, contracting costs, coordination costs, and search

costs. The inclusion of all costs are considered whenmaking a decision and not just the market prices.

Essentially this theory illustrates the make versus buy

decision for companies.


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Efficiency Wages Theory

The idea of the efficiency wage theory is that it may benefit firms to

pay workers a wage higher than their marginal revenue product.

The argument is that paying workers a higher wage may lead to

increased productivity from the worker. If a worker gets a relatively

higher wage, he may feel more loyal and devoted to the company.

With a higher wage, he may also fear being made unemployed and

so will work harder to make sure he keeps his job. Therefore,

although the firm pays more, they get more productivity from their

workers.


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Efficiency Wage Theory

Avoiding shirking: If it is difficult to measure a worker's

effort, and contingent reward systems are impossible,

there may be an incentive for him/her to shirk. The

efficiency wage increases the cost of job loss to the workermoral hazard.

Minimizing turnover: By paying efficiency wages, the

employees' incentive to quit and seek jobs elsewhere isminimized but, pattern-setting


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Adverse selection: If job performance depends on

workers' ability and workers differ from each other in those

terms, firms with higher wages will attract more able job-

seekers. Thus, the employer can be more selective toget the best applicants possible but internal labor markets

must correspond to external.

Sociological theories:Efficiency wages may result fromtraditions. Argument that higher wages encourage high

morale, which raises productivity.


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Nutritional theories:In developing

countries, efficiency wages may allow

workers to eat well enough to avoid illnessand to be able to work harder and more

productively.


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Agency Theory

Agency theory is concerned with the

relationship, in which one party (the

principal) delegates work to another (theagent), who performs that work.


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Agency Theory

Problems:

1) The first is the agency problem that arises when:

a) the desires or goals of the principal and the agent conflict;

and

b) it is difficult or expensive for the principal to verify what the

agent is actually doing. The problem here is that the principal cannot

verify that the agent has behaved appropriately.

2) The second is the problem of risk sharing that arises when theprincipal and agent have different aptitudes towards risk. The problem

here is that the principal and the agent may prefer different actions

because of the different risk preferences


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Property Rights Theory

A property right is the exclusive authority to determine

how a resource is used, whether that resource is owned

by government or by individuals. All economic goods

have a property rights attribute. This attribute has fourbroad components:

the right to use the goods

the right to earn income from the goods

the right to transfer the goods to others

the right to enforcement of property rights


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Property Rights Theory

Property rights theory as used by

economists is seen as the ability of an

individual or collective to control the use ofthe good(s).

Inappropriate to separate property

rights from human rights, as property

rights are human rights.


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Organization Economics

(Comparison of Theories)


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Organization Economics

(Comparison of Theories)


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Institutional Theory

A widely accepted theoretical posture that

emphasizes rational myths, isomorphism

and legitimacy. addresses the central question of why all

organizations in a field tend to look and act

the same [isomorphism] (DiMaggio &Powell, 1983)


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Core Concept

Organizational structures and processes tend to acquire

meaning and achieve stability in their own right, rather

than on the basis of their effectiveness and efficiency in

achieving desired ends, such as the mission and goalsof the organization

In order for an organization to survive, organizations

must conform to the rules and belief systems prevailing

in the environment (i.e. laws, regulations, customs,social and professional norms, culture, and ethics)


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Legitimacy

the quality or state of being in legitimate

(allowed according to the rules of the laws)

being accepted Follow the leader.


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Isomorphic Pressure

Coercive

Pressure from entities who have resources on which an

organization depends on

Normative

Following professional standards and practices established by

education and training methods, professional networks, and

movement of employees among firms

Mimetic

Imitation/copying of other successful organizations when anorganization is uncertain about what to do


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Thank You

Documents

Organization Theory(Organization Ecology, Organization Economics, Institutional)