TOPIC 2

ORGANIZATION THEORIES
Lesson Objectives
• Explain the need for a theory to examine
organizations
• Explain the types of theories
• Briefly highlight the history of organization
theory
Why do we need a theory to examine
organizations?
• A theory is necessary to provide a systematic explanation of any
study.
• A theory can be defined as an explanation of some phenomenon,
consisting of principles that state relationships observed in association
with that phenomenon (Hodge et al., 2003).
• Organization theory can therefore be perceived as a set of related
concepts, principles and hypotheses about organizations that explain
components of organizations and how they relate to each other.
Types of theories
• Two major types of theories are identified (Hodge et al., 2003):
1.Descriptive theory and
2. Normative theory

• A descriptive type theory attempts to describe the nature of the

relationship among various sub – systems of the organization and its
environment.
• It provides a better perspective of understanding organizations which
leads to better management practices.
Normative theory
• A normative theory, also referred to as prescriptive theory, suggests
how things should be or what can be done to conditions identified by
descriptive theory.
• It informs managers about what they should do. It therefore helps
managers to seek to improve various aspects of an organization so as
to attain organizational efficiency and effectiveness
A brief history of organization theory
• We briefly trace the history of organization theory so that we can
appreciate the present knowledge of organizations. We note certain
overlaps in the evolution of management theory.
• Many concepts of organizations can be traced to ancient times
(Hodge et al., 2003). For instance, there is a mention of organizations
and organizing in ancient China and Greece. We also find references
to division of labor and delegation in the old testament part of the
Bible. However, modern organizations and their systematic study
began with the Industrial Revolution in Europe.
The principle of division of labor
• One of the earliest contributors to what is now known as
‘organization theory’ was a well celebrated economist by the name
Adam Smith (1723-1790).
• He demonstrated that, greater efficiency can be attained through the
division and specialization of labor. He based his principle on a factory
case in which through specialization and division of labor among
workers, 10 people could produce as many as 48,000 pins per day
(Hodge et al., 2003).
The principle of division of labor
• Smith’s work laid the foundation for later organizational and industrial
theories like those of Max Weber and Fredrick Taylor.
• More importantly is the fact that issues of enhancing organizational
efficiency have preoccupied the minds of managers throughout the
ages.
The classical school
• Weber was a German Sociologist who became the most influential
contributor to organization theory in his time. He presented
bureaucracy as an ideal form of organization which was simply an
extension of the Patriarch family organization model (Hodge et al.,
2003).
• Bureaucracy as proposed by Weber was a rational, efficient alternative
approach for managing organizations since it recognizes authority
flows and relationships among organization members. This enhances
responsibility and accountability among members of the organization,
thereby leading to attainment of greater organizational efficiency and
effectiveness.
The classical school
• Organization and management theories in this category perceive
organization issues from different directions. We have two main
proponents in this school: Fredrick Winslow Taylor (1856-1915) and
Henri Fayol (1841-1925).
• Taylor focused on rationalizing jobs beginning from the lowest level of
the organization. Fayol concentrated on providing a rational model for
top management of an organization (Hodge et al., 2003).
The classical school cont.
• Taylor attempted to develop the principles of scientific management
which some theorists in later years considered them to be
‘dehumanizing’ and ‘exploitive of workers’ (Hodge et al., 2003).
• He emphasized the need to attain efficiency and how management
could maximize its return on labor by employing his principles.
The classical school cont.
• According to Henri Fayol, the management functions of co-ordination
and specialization are extremely important; and co-ordination is best
achieved using four of his principles:
• the scalar chain
• unit of command
• span of control
• expectation principles (Hodge et al., 2003)
Meanwhile, specialization was achieved by how departments were
formed and how jobs were grouped, therefore, the departmentalization
principle.
The approaches of Fredrick W. Taylor and
Henri Fayol have two things in common:
they proposed the best way to manage organizations
they attempted to develop rational techniques to help build structure
and processes necessary to co-ordinate actions in an organization
(Hodge et al., 2003).
The Departmentalization principle
• According to this principle, similar tasks or functions should be grouped
within the same department or unit. It also emphasized, a rational
authority structure for organizations. This attempted to devise one
single best way of managing organizations. This somehow led to the
demise of classical theorists in the sense that, there is certainly no one
best way of accomplishing something (Hodge et al., 2003).
• A number of researchers (in what came to be known as the human
relations school) began to examine the social human aspects of an
organization. They preferred the normative other than the descriptive
approach, that is, a shift of focus from, ‘what was thought organizations
should be to what organizations real were like’
The human relations school
• This explored the role of groups and social processes within an
organization. Several researchers contributed to the development of
this theory, however the most significant is Elton Mayo and his
Hawthorne studies (Hodge et al., 2003)
The human relations school
• The studies questioned the rational, efficiency-oriented views of
scientific management principles. That, these were inadequate in so
far as addressing the human side of enterprise is concerned.
• More objectively, the Hawthorne studies found out that, workers
were more responsive to group involvement and managerial attention
than to financial incentives. Therefore, group interactions and social
climate are important to job performance.
The contingency school
• This school maintains that, the relationship among organizational
characteristics especially between structure and size, technology and
environment, are dependent on the situational context (Hodge et al.,
2003). Therefore, there is no one best way of managing an
organization.
• Only the prevailing situation and circumstances will dictate the best
way to manage an organization. To succeed in a turbulent business
environment, managers must employ varied management strategies
and tactics.
Contemporary perspectives
• More recently, several new ways of viewing organizations have
emerged (Hodge et al., 2003). They attempt to address the short-
comings of earlier suggested theories. Four of these theories are:
• organizational economics
• institutional theory
• cultural perspectives
• ecological perspectives.
• We briefly highlight each of them in this lesson.
Organizational economics theories
• According to Hodge, Anthony, & Gales (2003), two theories based on
industrial and organizational economics include:
• transactions cost theory and
• agency theory
• Both approaches have a similar central focus: they view organizations
as bundles of transactions of contract binding workers and owners
together.
According to Agency Theory, the primary interest of owners as ‘principals’ and
workers as ‘agents’ are essentially different.

Owners seek to maximize the return on investment by most efficient use of the
organization (including the workers).

Agents on one hand seek to minimize their efforts and maximize their
remuneration (pay). To protect their interests, principals will use various forms
of contract and organizing to ensure that agents carry out their jobs.
The transaction cost theory explores the transactions taking
place both inside and outside the organization.

They include transactions between managers and owners,

managers and subordinates, suppliers and producers, and
sellers and buyers.
Institutional theory

• This theory argues that social reality is constructed by organization

members (Hodge et al., 2003). The process by which actions are
repeated and given meaning is defined as institutionalization.
• It emphasizes the similarities among organizations, hence
organizational members bend to social pressures to conform to
conventional or institutional beliefs.
 Questions to reflect on
• 1. Explain the importance of organizational theory
• 2. Briefly summarize the works of the following pioneers of organization theory:
• Adam Smith
• Max Weber
• Fredrick W. Taylor
• Henri Fayol
• Elton Mayo
• 3. Distinguish between normative theory and descriptive theory.
• 4. Explain the departmentalization principle
• 5. To what extent do you agree with the contingency school?
• 6. Evaluate the contributions of contemporary theories to efficiency and effectiveness of
• modern organizations.