Theme 8: Strategy & Organisation– Article + Reading Questions
Simon 1991: Organizations and Markets
Classical and neoclassical economic theory markets are the center of the stage actors: workers,
consumers, firms, owners of resources governments market exchanges generally involve only
prices and quatities
Modern economic theory a large part of the behaviour of the system now takes place inside the
skins of firms, and does not consist just of market exchanges actors: employees organizational
economies
The primacy of profit as the enforcer of organizational efficiency is replaced by organizational goals,
combined with organizational identifications and with material rewards and supervision, all of which
motivate employees to work towards these goals.
How are the employees of firms motivated to work for the maximization of the firm’s profit?
Employees should accept organizational goals and authority as bases for their actions.
Authority the employment contract - workers maximize their utility by accepting the
authority of the firm; that is, by agreeing to accept orders from the profit maximizers in
charge incomplete contract some of its terms are unspecified
zone of acceptance/indifference: the range of actions the employee will be directed to
perform by obeying orders
Rewards employees may be motivated to accept authority by giving them material
rewards, promotion, and recognition for advancing the organization’s goals as defined by the
management Rewards only operate satisfactorily when certain conditions are met: The
employee’s contribution to the organization’s goals must be measurable with reasonable
accuracy
Organizational identification employees identifying with organizational goals
Coordination organizations, through the authority mechanism, provide a means for
coordinating the activities of groups of individuals in ways that are not easily achieved by
markets
o A major use of authority in organizations is to coordinate behaviour by promulgating
standards and rules of the road, thus allowing actors to form more stable
expectations about the behaviour of the environment. Since organizations provide a
mechanism (authority) for establishing the rules of the road, which markets do not,
one might even expect organizations rather than markets to be the environments in
which the behaviour called ‘rational expectations’ would be most often observed.
Willingness of employees at all levels to assume responsibility got producing results – not simply
“following the rules” – is generally believed to be a major determinant of organizational success.
The new institutional economics transaction costs and opportunism information
asymmetry/incomplete information principal-agent theory agency theory: treats the
employment contract as an optimal contract between principal and agents, and studies how
contractual arrangements can deal with shirking and other motivational problems
Acces to information, negotiation costs, and opportunities for cheating are most often treated as
exogenous variables that do not themselves need to be explained. They introduce a sort of
bounded rationality
A fundamental feature of the new institutional economics is that it retains the centrality of markets
and change. All phenomena are to be explained by translating them into (or deriving them from)
market transactions based upon negotiated contracts. i.e. employers = principals and employees =
agents.
Organizational economy or market economy?
, When a situation becomes more complex central planning tends to increase the ability of actors
to respond rationally reduces
The choice between prices or quantities to coordinate the activity levels of different organizations or
parts of organizations does not by itself dictate the respective roles of organizations and markets.
Prices may be used to coordinate the activities of different parts of single organizations, provided
that some way can be found to determine what the market prices should be, and quantity
adjustments can be made between different organizations as well as within them.
Difference in the operation of coordination mechanisms within and between organizations:
a. Coordination between organizations depends almost wholly on economic motivations and
rewards, and becomes seriously imperfect wherever major externalities are present that
cannot be removed by enforceable contract arrangements.
b. Within organizations, on the other hand, identification is a powerful force for combatting
externalities produced by attachment to subgoals, by virtue of the loyalty it can produce to
the goals of the whole system. A department will be less likely to skimp (bezuinigen) on
quality to cut costs if its members identify with the final product. In particular, identification
becomes an important means for removing or reducing those inefficiencies that are labelled
as ‘ moral hazard’ and ‘opportunism’.
The growth of organizations may have only little to do with efficiency, but may be produced mainly
by simple growth mechanisms.
The existence and effectiveness of large organizations does depend on some set of powerful
coordinating mechanisms being available. These means of coordination in organizations, taken in
combination with the motivational mechanisms create possibilities for enhancing productivity and
efficiency through the division of labour and specialization.
Waterman, Peters & Philips 1980: Structure is not organization
Diagnosing and solving organizational problems means looking not merely to structural
reorganization for answers but to a framework that includes structure and several related factors.
A structure is not an organization when we reorganize what we do is to restructure much more
goes on in the process of organizing than the charts, boxes, dotted lines, position descriptions, and
matrics can possibly depict too often we behave as if we don’t know this if we want change, we
change the structure
Structure follows strategy get the strategy right and the structure follows
The main problem in strategy execution: getting it done organization
Organizational learning and decision making is pictured as a stream of choices, solutions, decision
makers, and opportunities interacting almost randomly to make decisions that carry the organization
toward the future. unconventional view by March
In the face of complexity and multiple competing demands, organizations simply can’t handle
decision making in a totally rational way. Not surprisingly, then, a single blunt instrument - like
structure – is unlikely to prove the master tool that can change organizations with best effect.
Herbert Simon:
Satisficing settling for adequate instead of optimal solutions
The limits of rationality bounded rationality
Simon 1991: Organizations and Markets
Classical and neoclassical economic theory markets are the center of the stage actors: workers,
consumers, firms, owners of resources governments market exchanges generally involve only
prices and quatities
Modern economic theory a large part of the behaviour of the system now takes place inside the
skins of firms, and does not consist just of market exchanges actors: employees organizational
economies
The primacy of profit as the enforcer of organizational efficiency is replaced by organizational goals,
combined with organizational identifications and with material rewards and supervision, all of which
motivate employees to work towards these goals.
How are the employees of firms motivated to work for the maximization of the firm’s profit?
Employees should accept organizational goals and authority as bases for their actions.
Authority the employment contract - workers maximize their utility by accepting the
authority of the firm; that is, by agreeing to accept orders from the profit maximizers in
charge incomplete contract some of its terms are unspecified
zone of acceptance/indifference: the range of actions the employee will be directed to
perform by obeying orders
Rewards employees may be motivated to accept authority by giving them material
rewards, promotion, and recognition for advancing the organization’s goals as defined by the
management Rewards only operate satisfactorily when certain conditions are met: The
employee’s contribution to the organization’s goals must be measurable with reasonable
accuracy
Organizational identification employees identifying with organizational goals
Coordination organizations, through the authority mechanism, provide a means for
coordinating the activities of groups of individuals in ways that are not easily achieved by
markets
o A major use of authority in organizations is to coordinate behaviour by promulgating
standards and rules of the road, thus allowing actors to form more stable
expectations about the behaviour of the environment. Since organizations provide a
mechanism (authority) for establishing the rules of the road, which markets do not,
one might even expect organizations rather than markets to be the environments in
which the behaviour called ‘rational expectations’ would be most often observed.
Willingness of employees at all levels to assume responsibility got producing results – not simply
“following the rules” – is generally believed to be a major determinant of organizational success.
The new institutional economics transaction costs and opportunism information
asymmetry/incomplete information principal-agent theory agency theory: treats the
employment contract as an optimal contract between principal and agents, and studies how
contractual arrangements can deal with shirking and other motivational problems
Acces to information, negotiation costs, and opportunities for cheating are most often treated as
exogenous variables that do not themselves need to be explained. They introduce a sort of
bounded rationality
A fundamental feature of the new institutional economics is that it retains the centrality of markets
and change. All phenomena are to be explained by translating them into (or deriving them from)
market transactions based upon negotiated contracts. i.e. employers = principals and employees =
agents.
Organizational economy or market economy?
, When a situation becomes more complex central planning tends to increase the ability of actors
to respond rationally reduces
The choice between prices or quantities to coordinate the activity levels of different organizations or
parts of organizations does not by itself dictate the respective roles of organizations and markets.
Prices may be used to coordinate the activities of different parts of single organizations, provided
that some way can be found to determine what the market prices should be, and quantity
adjustments can be made between different organizations as well as within them.
Difference in the operation of coordination mechanisms within and between organizations:
a. Coordination between organizations depends almost wholly on economic motivations and
rewards, and becomes seriously imperfect wherever major externalities are present that
cannot be removed by enforceable contract arrangements.
b. Within organizations, on the other hand, identification is a powerful force for combatting
externalities produced by attachment to subgoals, by virtue of the loyalty it can produce to
the goals of the whole system. A department will be less likely to skimp (bezuinigen) on
quality to cut costs if its members identify with the final product. In particular, identification
becomes an important means for removing or reducing those inefficiencies that are labelled
as ‘ moral hazard’ and ‘opportunism’.
The growth of organizations may have only little to do with efficiency, but may be produced mainly
by simple growth mechanisms.
The existence and effectiveness of large organizations does depend on some set of powerful
coordinating mechanisms being available. These means of coordination in organizations, taken in
combination with the motivational mechanisms create possibilities for enhancing productivity and
efficiency through the division of labour and specialization.
Waterman, Peters & Philips 1980: Structure is not organization
Diagnosing and solving organizational problems means looking not merely to structural
reorganization for answers but to a framework that includes structure and several related factors.
A structure is not an organization when we reorganize what we do is to restructure much more
goes on in the process of organizing than the charts, boxes, dotted lines, position descriptions, and
matrics can possibly depict too often we behave as if we don’t know this if we want change, we
change the structure
Structure follows strategy get the strategy right and the structure follows
The main problem in strategy execution: getting it done organization
Organizational learning and decision making is pictured as a stream of choices, solutions, decision
makers, and opportunities interacting almost randomly to make decisions that carry the organization
toward the future. unconventional view by March
In the face of complexity and multiple competing demands, organizations simply can’t handle
decision making in a totally rational way. Not surprisingly, then, a single blunt instrument - like
structure – is unlikely to prove the master tool that can change organizations with best effect.
Herbert Simon:
Satisficing settling for adequate instead of optimal solutions
The limits of rationality bounded rationality
