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Organizational Theory Design and Change Chapter 02
Organizational Theory Design and Change Chapter 02
CHAPTER SUMMARY
This chapter examines the role that managers and stakeholders play in the organization. Every company has two main groups of stakeholders: (1) inside stakeholdersshareholders, managers, and the workforce; and (2) outside stakeholderscustomers, suppliers, the government, trade unions, local communities, and the general public. Although stakeholders have competing interests, an organization must minimally satisfy them all. Satisfying stakeholders creates problems due to competing goals, allocating rewards, and choosing a time frame to measure effectiveness. Difficulties arise in measuring organizational effectiveness even if stakeholders have shared goals. An organization must select the best way to achieve goals. Agency theory explains the relationship between top management and the board of directors. Ethics and ethical behavior is discussed, including the sources of ethics, moral hazard, and how to create an ethical organization.
Inside stakeholders are closest to an organization and have a direct claim on organizational resources. Q: Name some inside stakeholder groups. A. Inside stakeholders include shareholders, managers, and employees. Shareholders are company owners who buy stock to earn dividends and stock appreciation. They can withdraw support if inducements fall below contributions.
Organizations create value for stakeholdersthose with an interest, claim, or stake in the organization. Stakeholders are motivated to participate in an organization if they receive inducements or rewards that exceed their contributions. Organizational stakeholders include inside and outside stakeholders. (Table 2.1)
The government wants companies to compete fairly and comply with laws pertaining to employee pay, safety, discrimination, and other issues. The government contributes to organizations by standardizing rules. Trade unions directly impact a companys productivity and effectiveness, but union demands can conflict with shareholder demands. Local communities: The economics of a community, including real estate and employment, depend on local businesses. The general public: The wealth of a nation is tied to the success of its businesses. The public wants corporations to behave in a socially responsible way. The public was upset in 1992 when the president of United Way misused funds. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Refer to discussion question 1 here to highlight the potential controversy between shareholders and managers. _________________________________________________________________________________ _________________________________________________________________________________
2.2
1 Competing Goals
Shareholders own the company, thus managers should maximize shareholder wealth. Yet ownership and control are separated because managers control the company and can pursue personal interest. They may focus on short-term profits instead of long-term growth or avoid risk taking because they control their own salaries.
2 Allocating Rewards
Reward allocation is important because it motivates stakeholders, yet it is difficult to determine the distribution of excess rewards. Which criteria should measure effectiveness, short-term profit, growth, or
Organizations are coalitions of stakeholders who bargain to balance inducements with contributions. An organization must minimally satisfy the interests of all stakeholders who often have conflicting goals. To win stakeholder approval, the organization faces the problems of competing goals, allocating resources, and balancing short- and long-term goals.
Managing Stakeholder Interests Satisfying stakeholders such as customers, employees, and the government reaches the ultimate goal of satisfying managers and shareholders.
2.3
Shareholders are the legal owners of the corporation, and they are represented by a board of directors, who act as trustees. The board has the legal authority to hire, fire, and discipline top management. However, the responsibility of using organizational resources to create value is delegated to managers. Authority is the power to hold people accountable for what they do. Figure 2.1 shows the reporting relationships of a large company.
Other Managers
Other corporate managers include senior vice presidents and vice presidents. Vice presidents report to senior vice presidents, who report to executive vice presidents. Companies may also have general managers or divisional managers. These managers are present only in companies that are organized into separate business divisions. For example, a person could be in charge of the Frito-Lay Division of Pepsi-Cola. These managers are divisional management and not corporate management and they determine policies for the divisions that they run instead of objectives for the organization as a whole. Divisional managers generally report to a member of the topmanagement team. Managers at the next level are called functional managers; these managers are in charge of a certain function, like marketing or finance. Functional managers are responsible for developing capabilities in their area that lead to core competences.
The theory is typically used to describe relationships that could exist when managers dont have a clear picture of or understanding of the job at hand. Consider a job such as a delivery driver. They are basically on the road with little supervision, so they have more information than their managers do regarding the day-to-day requirements of the job. If that is combined with incentive to pursue selfinterests, the situation is such that bad things are possible. For example, a delivery driver may decide to spend company time running personal errands, because it is in his best interests, and management will not find out. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________
2.4
Ethics are the moral principles or beliefs about what is right or wrong. These principles help guide managers when the best course of action is not clear, or when different stakeholders have different needs. Because management decisions are often difficult, it is useful to understand the frameworks that individuals use in making ethical decisions. Table 2.2 discusses three models that are relevant for management, the utilitarian model, the moral rights model, and the justice model.
Professional Ethics
Individual Ethics
These are the personal and moral standards that individuals use to structure their interactions with people.
Self-Interest
Individuals face ethical issues when they weigh personal interests against the impact of their actions on others. Research suggests that individuals with high stakes are more likely to behave unethically. Companies with financial problems are more likely to commit unethical and illegal acts (price fixing).
Outside Pressure
The probability of unethical behavior increases when outsiders pressure individuals to perform. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________
2.5
Ethical people create an ethical organization. An employee decision is ethical if it falls within acceptable standards in the organizations environment, is communicated to all affected parties and is approved by those with whom the decision maker has significant personal relationships. An unethical decision hurts stakeholders in a manner that is unacceptable in the organizations environment. Top managers influence a companys ethical culture. As a figurehead, a manager models the company position on ethics and promotes ethical behavior through employee incentives. A manager informs customers and stakeholders about values and allocates resources to social causes.
3.
What is the agency problem? What steps can be taken to solve it?
The main focus of this is to understand the problems that can occur when individuals that need to work together have different goals, and have the opportunity and motivation to pursue their own self interests. The solution is to make sure systems are in place that keep everyone focused on the same goals. 4. Why is it important for managers and organizations to behave ethically? Because society is better off, and the organization is better off in the long-term. Look at the longterm benefits of Johnson & Johnsons decision as compared to Dow Corning. Look at Arthur Andersen. The point is, there are financial reasons to behave ethically as opposed to it just being the right thing to do. 5. Ask a manager to describe an instance of ethical behavior that she or he observed and an instance of unethical behavior. What caused these behaviors, and what were the outcomes? Make sure the focus is on the long-term outcomes, so that students can see the real value of ethical behavior. 6. . This is easy to do, because most management decisions have an ethical component. Search business magazines such as Fortune or Business Week for an example of ethical or unethical behavior, and use the material in the chapter to analyze it.
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TEACHING SUGGESTIONS
1. In small groups, have the students identify all of the stakeholders of a well known organization, such as their local gas station, church, or electric company. Have them make a list of all of the stakeholders, and discuss what their interest or claim in the organization is. This helps them to relate the theory to actual practice. 2. A role play can be used to encourage a discussion on ethics. The setting will be a government warehouse. One student will be a warehouse worker who overhears the supervisor, another volunteer, make a deal with a distributor, a third volunteer. The distributor comes to the warehouse, which contains cleaning supplies, and says to the supervisor: This warehouse has thousands of items. If you will bypass procurement procedures, I can sell you brooms at a lower price and give you a 5% commission on the deal. The supervisor states that he or she is tired of paperwork and that will be fine. The supervisor does not know that the worker overheard the conversation. Discuss what the worker should do. Use the utilitarian, moral rights, and justice models to compare solutions from different perspectives. 3. In light of the recent corporate scandals, make sure the students really understand the value of behaving ethically. Point out that huge companies like Arthur Andersen really cant afford to have a
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