Organization theory is a theoretical perspective which conceives of organizations as complex social actors and investigates how the structures they adopt affect their behavior. The field takes a broad view of the term "structure" including not only formal structure, but also informal and network relationships and cultural and cognitive aspects of the organizations. As such, it addresses broad questions of how and why organizations come to be, take the forms they do, behave as they do, and survive or fail. With its focus on organizations as a collective entity, organization theory complements organizational behavior, which focuses on individuals and small groups within the larger field of organization studies.
BACKGROUND AND ORIGINS
Organization theory was derived from several fields, including sociology, economics, anthropology, and political science. Many scholars in these fields have influenced organization theory, including Emile Durkheim, Karl Marx, Adam Smith, and Max Weber. Of these, Weber most directly influenced organization theory with his work on authority and bureaucracy.
Writing around the turn of the twentieth century, Weber identified two sources of authority that dominated previous social organization: traditional authority, vested in established patterns of behavior passed down through generations, and charismatic authority, vested in an individual’s powers of attraction and influence over others. He also identified a third form, rational-legal authority, in which authority is vested in individuals selected based on rules and legally binding processes designed to identify those best qualified to exercise it. This rational-legal authority is the basis of Weber’s theory of bureaucracy, in which he posited that organizing in this manner could generate remarkable social advances comparable in magnitude to the economic advances of the Industrial Revolution. Furthermore, Weber’s ideal view of rationality comprised two types: substantive rationality, which determines what a social group’s goals, values, and ideals should be, and formal rationality, which governs how a social group allocates resources and measures progress toward those goals and ideals. In an oft-quoted passage he warned that formal rationality without substantive rationality could lead to a dehumanizing "iron cage." While some critics suggest that early English translations of Weber did not sufficiently reflect the true spirit of his work, Weber has nevertheless provided a foundation upon which much of organization theory has been built.
Building on Weber and others, more recent organization theorists have generally emphasized two primary perspectives on the nature and function of organizations, which have been elaborated into a number of influential theories of organizations. The first of these perspectives considers organizations as rational and efficient solutions to various problems associated with cooperation, complexity, and uncertainty. The second perspective considers organization not on the basis of its rational structure and function but rather on the basis of its social meaning and value.
ORGANIZATIONS AS RATIONAL SOLUTIONS TO SOCIAL PROBLEMS
Some of the earliest theories of organizations emerged in the wake of the Industrial Revolution and were characterized by the search for universal organizing principles. Influential among these early theorists were Frederick Taylor and Henri Fayol, whose work can be characterized as the application of mechanical and industrial engineering principles to the management and control of human labor. However, in the 1960s organization theorists turned attention from universal organizing principles to theories that argued that ideal organization structures were not one-size-fits-all, but instead contingent on various factors within the organization and its environment.
In 1967, Paul Lawrence and Jay Lorsch introduced contingency theory, which claimed that the best way to organize depends upon the characteristics of an organization’s environment. Lawrence and Lorsch argued that organizations’ environments vary widely and that organizations come to reflect this variety by rationally adopting structures best suited to their environments. They showed that the degree of volatility and uncertainty in an organization’s environment affects things like the formalization of an organization’s structure, the centrality of its decision making, the time horizon upon which it focuses, and how it divides itself into departments and its tasks. Lawrence and Lorsch’s emphasis on contingencies proved influential, and several other contingency-based theories of organizations emerged in the 1970s. Among these are agency theory, transaction cost economics, and resource dependence theory.
Agency theory focuses on the fact that, in organizations, one person (the agent) acts at the behest of another (the principal). This principal—agent relationship exists in organizations between stockholders and managers and between managers and employees. Agency theorists assume that both agents and principals have self-interests and that these interests frequently diverge. This creates a need for principals to monitor the agents, which is difficult and expensive since agents often have more expertise than principals and cannot be continuously and directly observed. Agency theorists therefore depict organizational structures as rational attempts to establish complex yet efficient systems of cooperation, which differ from organization to organization and task to task depending on the information asymmetry between principals and agents.
Transaction cost economics (TCE) is closely related to agency theory, but instead of emphasizing how organization structures govern internal principal—agent relationships, TCE emphasizes that organizations are rational and efficient solutions to managing the relationship between itself and other organizations in its environment. Oliver Williamson, who introduced TCE in the mid-1970s, argues that small-scale transactions (i.e., simple and immediate exchanges of goods and services) do not require organizations; however, as transactions become more complex and uncertain, organizations are needed to monitor and limit the liabilities of these risks. TCE also explains organizational boundaries on the basis of transaction costs: Functions for which the costs of external transactions are too great are brought inside the organization, while those available for less total cost elsewhere are performed externally.
The resource dependence view of organizations, like TCE, emphasizes an organization’s relationship to other organizations but focuses on how an organization’s structures are contingent on the nature and scarcity of the resources it needs to operate rather than on the complexity and uncertainty of its transactions. More so than the other contingency-based theories, the resource dependence view emphasizes the role of management in negotiating the dependencies resulting from an organization’s resource needs, and specifies a number of strategies that firms may undertake to do this under different dependency conditions.
The rational/efficient assumptions within contingency-based theories of organizations also underlie the theories of population ecology and co-evolution, which conceptualize the environment shared by organizations in the same or related fields as an ecosystem. These theorists employ ecological and evolutionary mechanisms, (e.g., variation, selection, specialization) to explain how organizations come to be and survive or fail. In this stream of research, organizational success, failure, and form are contingent upon environmental adaptation, fit, and population density.
ORGANIZATIONS AS EMBODIMENTS OF VALUE AND MEANING
Another approach to addressing the questions of how organizations come into being and why they take the forms they do is based on the conception of organizations as embodiments of value and meaning. Many of these theories can be traced to Peter Berger and Thomas Luckmann’s The Social Construction of Reality (1966), in which they suggest that, in the context of social science, "knowledge" and "reality" are subjectively created rather than objectively discovered. Theories based on this approach shift their emphasis from identifying efficient ways of organizing to understanding the purpose or meaning derived from organizing a particular way. The shift was essentially a move from Weber’s formal rationality to substantive rationality, which critics held had been slighted by modernist social science and its natural preference for formal rationality.
One example of this branch of organization theory comes under the generic heading of institutional theory, which grows out of the concept of social institutions. While diverse definitions of institutions abound, reflecting the evolution and variety of theories under this rubric, common to all of them is the idea of stable patterns of social interaction that over time become vested with value and power. Within organization theory, institutions were first associated with the processes by which leaders infuse organizational structures or processes with value beyond their technical requirements, resulting in their reproduction and stability. In this stream of research, sometimes termed old institutionalism, the focus is on creating meaning and infusing values from within the organization.
This is contrasted with neo-institutional theory, or new institutionalism, which focuses on how external aspects of the context in which organizations exist affect their structures and processes. In a seminal piece from 1983, Paul DiMaggio and Walter Powell suggested the similarity among organizations in a field was the result of their common environment, which comprised three distinct forces for conformity: coercive forces, such as a common regulatory environment; normative forces, such as professionalization and standardized professional education (e.g., accounting); and mimetic forces, in which organizations copy visible or successful others when facing uncertainty. The idea that processes and structures result from passively adapting to external pressures contrasted directly with old institutionalism, which theorized they were actively infused with value from within. Later, in response to criticisms that neo-institutional conceptions of organizations were too passive and static, neo-institutionalists highlighted institutional change, where organizations dynamically adapt to changing institutional environments, and institutional entrepreneurship, where actors actively shape the institutional environments in which they exist. These advances, along with the concept of institutional work, have blurred the distinctions between old and new institutionalism.
These blurred distinctions are also evident in organizational culture and organizational identity, both of which focus on how organizations enact meaning within their social contexts. Organizational identity theorists address the issues of "who we are" as an organization and show a similar focus on the reproduced social meaning (i.e., what is enduring, central, and distinctive) within an organization, and how that affects the structures and processes of organizations. Work on organizational culture focuses directly on the meaning systems of organizations at three levels: artifacts, the rituals and symbols employed in an organization; values, the conscious beliefs about what should or should not be; and assumptions, the deeply held and often unconscious beliefs that guide how members make sense of an organization. Consistent with the work on the social construction of reality, this suggests that organizational action flows from values about what should or should not be, but is constrained by assumptions about what is or can be.