Scholars of organizations are fond of pointing out the ubiquity of organizations in everyday life. As sociologist Amitai Etzioni elegantly put it in his 1964 book Modern Organizations, “We are born in organizations, educated by organizations, and . . . spend much of our lives working for organizations” (1). On top of this, people choose to belong to affinity group organizations, such as religious congregations, political parties, and recreational clubs; depend on organizations like the police, fire departments, and the military for their security; and are taxed and regulated by the government—a singularly large and multifaceted organization. Organizational theory provides an understanding for how organizations operate, both internally and in the larger environment, and thus is critical to understanding the dynamics underlying much of modern society.
The world of organizations is diverse. Organizations include both formal and informal groups, nonprofit and for-profit businesses, private entities, and the government itself. Partly because of this diversity, there is no single definition of what counts as an organization. Existing definitions vary in regard to how much emphasis they put on issues such as formalization, goal specificity, interdependence with other organizations, and internal culture, which in turn means that each definition tends to capture the essence of some organizations better than others. The study of organizations is also highly interdisciplinary. Organizational theory benefits from contributions of political scientists, sociologists, management scholars, and psychologists, among others.
Three Classical Viewpoints On Organizations
In political science, where much current organizational work is carried out in schools of public affairs or public administration, the focus of research is often on institutional organizations such as political parties and legislatures, interorganizational relationships, and organizational form. Scholar ship in political science also puts comparatively more emphasis on the study of public and nonprofit organizations than for-profit organizations. From these diverse perspectives, three viewpoints have emerged that at various times have dominated research on organizations: W. Richard Scott and Gerald F. Davis call these the rational, natural, and open system perspectives. Although all three perspectives inform current research in the field, they are also historically situated and loosely reflect the evolution of thought on organizations.
Rational System Perspective
The rational system perspective emphasizes the utility of organizations, and definitions emerging from this perspective tend to highlight formal structure, specificity of goals, and purposeful action. In this viewpoint, organizations are seen as efficient solutions to managing complex tasks. They have clear objectives and are created to accomplish specific goals. Historically, this perspective is strongly associated with the early work that served to define the field of organizational theory, which began emerging in the late nineteenth century. The classic writings of Max Weber on bureaucracy come from a rationalist perspective, as does the work of Frederick Taylor and other proponents of scientific management, which attempted to use scientific methods to uncover the most efficient approach to accomplishing specific tasks, such as how to design a factory in order to produce minimum waste of time and materials. The work of Herbert Simon and James March on decision making in organizations and the work of Oliver Williamson on transaction costs and vertical integration also come from a rational system perspective.
Natural System Perspective
By contrast, the natural system perspective, which emerged partially as a critique of the rational system perspective, is more concerned with human interaction, informal structure, and social order. Definitions emerging from this perspective emphasize the collective nature of organizations and the goal of maintaining the organization itself, as opposed to accomplishing the output goals of the organization. Proponents have argued that this more holistic view, which takes into account no rational behavior and interpersonal relationships, is more revealing of the real agenda and functioning of any given organization. Two influential schools of thought that emerged from the natural systems perspective are Elton Mayo’s human relations school, which emphasized social cohesion and the work environment, and sociologist and legal scholar Philip Selznick’s institutional approach, which looked at organizations as adaptive structures that, through the process of institutionalization, become “infused with value beyond the technical requirements at hand” (Selznick, 17).
Open System Perspective
Much of the historic work stemming from the rational and natural systems perspectives tended to overlook how organizations were impacted by the environment in which they operated and therefore either implicitly or explicitly viewed organizations as closed systems. The open system perspective emerged in contrast to that assumption. Most research done since the mid-twentieth century recognizes organizations as open systems, while also having a preference for the instrumental focus of the rational system perspective or the informal processes focus of the natural system perspective. An open system perspective recognizes that organizations are influenced by their larger environment and that they, in turn, influence that environment. This perspective has been greatly shaped by general system theory, which is a large interdisciplinary field with relevance to organizational theory in that it sees organizations as one of many types of systems—social, biological, electrical—that can be studied scientifically. System theory has contributed to our current understanding of organizations as open, complex, goal-directed, and loosely coupled systems.
Definitions that have emerged from the open system perspective emphasize not the formal or informal structure of organizations, but rather their interdependencies and boundary-spanning behavior. According to an open system perspective, organizations are constantly changing to adapt to dynamic environments. For example, contingency theory, as articulated by scholars Paul R. Lawrence and Jay N. Lorsch, emerged from this perspective and is concerned with organizational form. According to this theory, there is no one “best” organizational form; rather, organizations should be designed in order to suit their specific environment. An open system perspective also recognizes that, while all systems are comprised of smaller subsystems and embedded in larger macrosystems, they cannot be understood by studying each part individually. System dynamics, best associated with the pioneering work of Jay Forrester, is a method of creating computer models that clarify the functioning of complex systems. System dynamics, used frequently in policy analysis and design, focuses attention primarily on feedback loops and information flows and has provided important insights on issues ranging from the U.S. economy to urban poverty to curricular design in public schools.
Levels Of Analysis
Methodologically, organizations have been studied in a variety of ways. There are studies on organizations that use experimental methods such as Mayo’s classic research revealing the Hawthorne effect, large scale surveys, ethnographic case studies such as Rosabeth Moss Kanter’s landmark 1977 book Men and Women of the Corporation, and innovative network models. The method chosen is generally related to both the theoretical framework of the study as well as the level of analysis of the study. These levels of analysis can be roughly broken down to three categories: microlevel studies of social psychology and intraorganizational relationships, studies of organizational-level structure and processes, and ecological or macrolevel studies of interorganizational relationships and the interaction of organizations with their larger environments. These categories are not exclusive and the boundaries between them are quite porous.
Research at the social psychological level has focused on individual participants in organizations, as well as group processes, team dynamics, leadership, and intraorganizational networks. This type of research looks at the organization as context and is concerned with the impact of the organization on individual or group members. Twenty-first-century concerns about job design and achieving balance between work life and home life often fall into this category.
Organizational level research looks at the structure and processes of organizations themselves. Research can focus on the whole organization, various departments or units within the organization, or how the organization interacts with its environment. This level of analysis focuses on such issues as organizational goal setting, the impact of organizational age and size, use of technology, and organizational structure. Contemporary concerns include how race and gender impact hiring practices, communication networks within organizations, and organizational innovation.
Research at the ecological level looks at groups or populations of organizations and tends to focus on how they interact with their environment and with each other. Studies of interorganizational networks, organizational fields, industry level beliefs, institutional logics, social movements, and markets are all examples of this level of research. The increasing boundary spanning behavior of organizations is an area of contemporary concern, as is how organizations learn from one another, and changes in market development.
Many lines of research cross these boundaries, however. One of these areas is the study of organizational decision making—an area of research that has been particularly important to political scientists. For example, one of March and Simon’s key innovations is the concept of bounded rationality. In their view, formalization—an organization level variable—produces rules, routines, and constraints on individual action and decision making. Rational behavior is thus bounded by the context in which it takes place. Jonathan Bendor has extended the notion of bounded rationality by investigating experimentally how norms and bureaucracy—the set of rules, structures, and procedures in place that guide administrative labor—ultimately help shape individual action.
Dominant Strands In Contemporary Literature
Several major approaches to studying organizations have been particularly influential since the 1960s and merit further discussion. Four in particular—transaction cost economics, resource dependency theory, network analysis, and new institutional theory—all recognize organizations as open systems and tend to focus on the organizational and ecological levels of analysis, rather than the social psychological. Although each has a different emphasis and they are often used alone, the theories are not mutually exclusive and there are many examples of research that have attempted to draw connections between them in order to further advance the field.
Transaction Cost Economics
Transaction cost economics (TCE), based largely on the work of Ronald Coase and Oliver Williamson, is concerned with questions of why organizations exist, how they draw and redraw boundaries, and how interorganizational relationships and organizational form are structured. Scholars of TCE see organizations as engaged in multiple exchange relationships with one another—indeed, from this perspective, organizations exist in part to manage complex exchange relationships. Two examples of an exchange relationship are the relationships between a manufacturer and a supplier of raw materials, and the relationships between the same manufacturer and the distributor of their finished product. These exchange relationships come with transaction costs—essentially, the costs involved in contracting, planning, and monitoring these relationships with other organizations.
TCE asserts that organizations will always want to minimize transaction costs, which become higher either as transactions become more uncertain or frequent or as they must account for the opportunistic behavior of others. Such opportunistic behavior can occur when organizations are overly dependent on one another. If transaction costs become too high, organizations may opt for vertical integration, which is when one firm owns or controls multiple steps in a value chain, creating a hierarchy. For example, manufacturing is vertically integrated when the same company owns both the supply and the distribution chain. Government is vertically integrated when it provides mandated services or produces needed goods directly; it is vertically disintegrated when it contracts out for services to be provided or produces goods itself.
Resource Dependency Theory
Based on the work of Richard Emerson and explicated largely by organizational behavior scholars Jeffrey Pfeffer and Gerald R. Salancik, resource dependency theory is concerned with how organizations negotiate the environment in which they operate, highlighting the interplay between the political and the economic as well as the importance of power. As with the TCE perspective, in this framework, organizations are seen to be in multiple exchange relationships with other actors in their environment. If these exchanges become unbalanced, in particular, or if organizations become too dependent on one particular source of resources such as a supplier or a funder, then power differences arise that can have a deleterious impact on the organization. To resolve this problem, organizations must constantly monitor their environment and find ways to reduce dependency and maintain power over providers of key resources.
Research using resource dependency theory highlights several tactics that organizations can use to help maintain control over their environment. One tactic is to attempt to control the behavior of other powerful players through what are known as bridging mechanisms, such as through the use of co-optation, which is incorporating outside stakeholders into the organization, or through mergers or alliances. This control can be accomplished by vertical integration. Alternatively, organizations can coordinate their action with others by joining or forming associations, such as trade associations or coalitions. By joining with others who face similar power-dependence relationships they can exercise more control over resources, share information, and take steps to heighten legitimacy. A third option is to try to influence government and other policy-making bodies to achieve beneficial legislation or regulatory changes. Some organizations can also try to reincorporate, change identities, or even move their base of operations. All of these are attempts to gain control over their environment, particularly to gain a power advantage in key economic and political relationships in ways that will allow the organization maximum flexibility and room for growth.
Network Analysis
Due to rapid improvements in computing power, as well as methodological advances, network analysis—more a methodological approach than a theory—has been a large growth area in organizational studies. Emphasizing the relational elements of the organizational environment, this line of research explores how an organization’s position in a larger network of actors, as well as the structure of that network, can impact the organization and its behavior in a variety of ways. Network analysis can also usefully help explain interpersonal relationships inside of and across organizations. In network analysis, actors—organizations, people, or departments—are called nodes and those nodes are connected by ties. A tie can be defined in many different ways, from geographical closeness, such as who sits nears whom, to friendships, to financial connections. Looking at networks helps us understand how it is not just the characteristics or attributes of a node that matter for its behavior, but also its ties to other entities.
When looking at networks, specific features are often measured when analyzing the impact of network position. At the most basic level, these include (1) the distance between nodes— whether they are directly connected, or whether they are only connected through a separate node; (2) centrality in the network—how many direct ties a single node has compared to other nodes in the network; (3) clustering—how tightly connected everyone in the network is to each other; (4) and structural equivalence—two or more nodes are equivalent when they share a similar pattern of relationships, even if they are not connected directly to one another, such as in the case of competitors. Network models of analysis have been used to study many different kinds of issues that involve organizations. Some examples include the influence of network relationships on federal policy making, the role of interlocking members of boards of directors, and the coordination of government and nonprofit organizations in providing publicly funded human services.
New Institutional Theory
The new institutional theory of organizational analysis, primarily associated with sociology but engaged by scholars in many different social science disciplines, relates to but is not the same as institutional theories in economics or the institutionalism talked about in positive theory or regime theory in political science. It is, however, arguably the most influential theory of organizations found in the modern literature. It arose partly in response to scholars Peter R. Berger and Thomas Luckmann’s 1966 book The Social Construction of Reality, and it focuses on how cultural elements of an organization’s environment impact and, to some extent, constrain its behavior.
Scholars working in this area argue that organizational fields—which consist of all organizations operating in a given functional area plus other relevant organizational stakeholders and exchange partners, such as funders, suppliers, and regulators—become highly structured and institutionalized over time in ways that decrease diversity and constrain action.
Institutional rules and expectations are thought to be enforced in three broad ways: (1) Regulative elements consist of material consequences or other sanctions, outlined in rules and laws, for noncompliance with institutional expectations. (2) Normative effects promote conformity through moral order and social obligation, such as when internalized ideas about appropriate action guide behavior. (3) Cultural-cognitive elements guide organizations and their leaders to act in culturally proscribed, taken-for-granted ways. This effect explains the process of how shared understandings lead organizations to discount some forms of action as inappropriate or impossible.
In a classic 1977 paper titled “Institutionalized Organizations: Formal Structure as Myth and Ceremony,” sociologists John W. Meyer and Brian Rowan initiated this vigorous line of research when they pointed out that institutionalized rules regarding work practices, policies, and technologies function as myths in organizational fields, to which organizational members must conform. They argue that many organizations conform in ways that are more ceremonial rather than functional, however, create divisions between formal structure and everyday work activities, which are only loosely coupled.
This argument was followed up by an influential 1983 article by scholars Paul W. DiMaggio and W. W. Powell, “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields,” in which they explore why there is so much homogeneity rather than variation in organizational forms and practices. They argue that there are three different forms of isomorphism—the process by which organizations come to resemble one another—and that organizations are susceptible to each in their efforts to be seen as legitimate members of an organization’s field. Isomorphism guides organizational practices and decision making even when it is not necessarily the most efficient course of action, because it confers legitimacy, which in turn helps grant the organization access to the resources it needs. The three forms are coercive, mimetic, and normative. In coercive isomorphism, pressure is exerted upon an organization by political influence, by other organizations on which they are dependent, or by cultural expectations that are impossible to violate. In mimetic isomorphism, organizations imitate the practices of other successful members of their organizational field. Organizations may frequently do this under conditions of uncertainty or goal ambiguity. In normative isomorphism, processes of professionalization occur; many organizational fields are dominated by professionals who have already been socialized into certain understandings of what legitimate action entails in a given industry.
Research in the new institutionalist tradition has largely focused on problems stemming from these arguments, such as how organizations acquire and maintain legitimacy, the process of social reproduction, and the impact of these processes on organizational and field-level practices. Over time, however, critics came to argue that new institutionalists did not explain sufficiently how organizational actors work to change their environment. Critics thus suggested new institutionalists needed to engage more with the concepts of agency and power. More recent work has tried to address these concerns with the recognition that some organizational fields feature competing logics from which individual organizations can choose, as well as a recognition that organizations can and do often choose how to respond to institutional pressures, and they do not always do so in strictly isomorphic ways.
Emerging Fields Of Study
This long and fruitful history of research and theorizing has produced a substantial body of literature on organizations. Sociologists W. Richard Scott and Gerald F. Davis, in their 2007 book Organizations and Organizing: Rational, Natural, and Open System Perspectives, point out several trends in the world of organizations to which scholars will need to pay increasing attention. These trends include an increasingly mobile workforce, increased interdependence between organizations, the breakdown of traditional distinctions between the nonprofit, for-profit, and public sectors, and changing modes of communication due to changes in information technology. Improvements in transportation and an increased focus on global markets and development have made organizations themselves more mobile as well. These developments have resulted in the fact that organizations have changed over the years, as have the theories used to study them, but they have not diminished in significance. Organizations remain a singularly important component of economic, political, and social action, and their study remains an exceptionally productive and interdisciplinary line of social science research.
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