ORGANIZATIONAL

BEHAVIOR-II
ORGANIZATIONAL STRUCTURE, CULTURE
AND CHANGE
PROF. DEVI VIJAY

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 Why do we need to study
Organizational Design and Change?
■ Gives us starting points to
understand these omnipresent social
structures with which we engage in
our everyday lives
¨ Strategic, cultural, and political
perspectives
■ To analyze and make sense of
organizations so they can be changed
and improved.
– As managers, leaders, entrepreneurs,
consultants
■ Organizations as Tools by which we
can achieve common objectives
– Increase Wealth
– Better useDo not
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Primary questions that we engage with in the
course are…
Why do Organizations Exist?
• Concepts around Stakeholders, effectiveness.
• Transaction cost economics
Do those associated with a firm agree about how it should be managed?
• Stakeholders
• Sensemaking
• Rationality, Bounded Rationality
• Agency Theory
Why do some organizations outperform others?
• Managing in a changing global environment (Session 2)
• Organization Design, Structure( Sessions 3, 4,5)
• Organizational Culture (Session 6)
• Organizational Decision Making (Session 8)
• Change Management (Session 9)
• Alternative Forms of Organizing (Session 10)

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 WHAT IS AN
ORGANIZATION?

What is not an Organization?

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What is an Organization?

■ Organizations are conceived as

social structures created by
individuals to support the
collaborative pursuit of
specified goals – Richard Scott
■ A Tool
– Coordination of human interests
– Common Goals
– Betterment of societal resources?

What is not an organization?

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 Characteristics of Organizations:
Dominant Rational View
■ Purposes, objectives, goals
– Action is oriented towards achieving purpose, goals, objectives
– Organization Design impacts Action
– Elements of Organizational Design: Organization Structure,
Organization culture, Communication processes, HR practices
– Changes occur as organizations learn
– Future-oriented actions
– Actions are assigned to roles, responsibilities assigned to roles
■ Organizations are built on Rules that provide for
Rationality

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What are some problems with rational choice
metaphor for organizations?

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Bounded Rationality (Simon,
1957)
■ Limitations and Constraints on Human Behavior
■ Limitations to rational behavior:
– Uncertainty
– Opportunism
– Information Asymmetry
– Cognitive processing
■ People satisfice rather than undertake optimally rational decisions
– Satisfice: Accepting decisions that are both sufficient and satisfying

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 But Also…

■ Corporate Greed
■ Ideology

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Organizational Stakeholders

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 Therefore, what do managers
do within organizations?
■ The task of managing is to manage conflicting rationalities in the overall
interests of the organization
■ This entails a subtle balance of political, technical and creative skills

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Why do Organizations exist?

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How do we measure Organizational
Effectiveness?

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 DO THOSE ASSOCIATED WITH THE FIRM
AGREE WITH HOW IT SHOULD BE MANAGED?

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Agency Theory Perspectives

■ Principal-Agent Problem: Delegation of decision-making

authority to agent
– Information Asymmetry
– Threat of opportunistic behavior
– Divergent Goals of principals and agents: short versus long term goals; self-interest
■ Moral Hazard
– Agents can engage in risky behavior because risks are not borne by them; borne
only in part
– Arises out of information asymmetry
■ Self-dealing: Agents taking advantage of their position to act
in their own interest rather than interest of other stakeholder

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 Solving the Agency Problem

– Governance Mechanisms
■ The role of the board of directors:
– Stock-based compensation schemes that are linked to the
company’s performance
– Promotion tournaments and career paths

Critique of Agency theory? Default assumptions:

- Trust/Opportunism
- Free market economics

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ORGANIZATION
AND ITS
ENVIRONMENT
Session 2

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 Organizational Economics

■ Adam Smith and the invisible hand.

■ If markets are so good at coordinating economic exchanges,
why are all exchanges not managed through markets?
■ Cost of managing economic exchanges across markets is
greater than the cost of managing economic exchanges within
the boundaries of an organization.
– Discovery of price, negotiating contracts, inspections, settling disputes

Markets and Organizations are alternative instruments for managing

same transactions – Coase (1937; Williamson, 1975)
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 Williamson’s Transaction Cost Theory

■ Markets and hierarchies: ‘governance mechanisms’.

– Instruments for completing a set of transactions,
■ Market forms of governance: rely on prices,
competition, and contracts to keep all parties to an
exchange informed of their rights and responsibilities.
■ Hierarchical forms of governance: bring parties to an
exchange under the direct control of a third party ('the
boss').
– authoritative third party keeps all parties to an exchange
informed of their rights and responsibilities.
– third party has the right to directly resolve any conflicts that might
emerge in an exchange.
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Transaction Cost Theory

■ Transaction costs:
– the costs of negotiating, monitoring, and governing exchanges
between people
■ Search and Information costs, Bargaining costs,
Policing and enforcement costs
■ Ex-post, Ex-ante costs
■ Transaction cost theory:
– the goal of an organization is to minimize the costs of
exchanging resources in the environment and the costs of
managing exchanges inside the organization

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Core Assumptions

■ Uncertainty and Bounded Rationality

– those who engage in economic transactions are “intendedly rational, but
only limitedly so” (Simon 1 947: xxiv).
■ Uncertainty, Information-asymmetry
¨ Risk and Asset Specificity

¨ Investments in skills, machinery, knowledge and information that

have use in one exchange but no value in another exchange
■ Opportunism and Small numbers
– “refers to the incomplete or distorted disclosure of information, especially
to calculated efforts to mislead, distort, disguise, obfuscate, or otherwise
confuse' partners in an exchange.”

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Figure 3.8: Sources of Transaction Costs

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Transaction Costs and Linkage Mechanisms

■ Transaction costs are low when:

– Organizations are exchanging nonspecific goods and services
– Uncertainty is low
– There are many possible exchange partners
■ Transaction costs are high when:
– Organizations begin to exchange more specific goods and
services
– Uncertainty increases
– The number of possible exchange partners falls

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 Using Transaction Cost Theory to Choose an
Interorganizational Strategy (cont.)
■ Managers deciding which strategy to pursue must take the following
steps:
– Locate the sources of transaction costs that may affect an exchange
relationship and decide how high the transaction costs are likely to be
– Estimate the transaction cost savings from using different linkage
mechanisms
– Estimate the bureaucratic costs of operating the linkage mechanism
– Choose the linkage mechanism that gives the most transaction cost savings at
the lowest bureaucratic cost
Bureaucratic costs: internal transaction costs
ØBringing transactions inside the organization minimizes but
does not eliminate the costs of managing transactions
ØManagers can weigh the savings in transaction costs of
particular linkage mechanisms against the bureaucratic costs
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Environmental Contingency: General and Specific
Environment

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 Changing Contexts for Managing
■ Managing always takes place in an organizational world subject
to many changing contextual factors
– Organizations and technological changes
– Changing relations of service and production
– The implications of going global
– Changing conceptions of time and space
– Changing demographics; changing values

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Why do managers wish to understand the environment of
an organization?

■ Opportunities and ■ Sources of Uncertainty

threats that arise
■ Control Uncertainty;
Control Resources

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Organization and its
environment
■ Environmental dynamism, ■ But are opportunities
richness, complexity out there or are they
– Is this an objective parameter? constructed?
– E.g. Entrepreneurial ecosystem in
Kolkata ■ Is the environment out
– Small slice of a big pie or Big slice of there or enacted?
a small pie – Conditions in the environment or
■ Defining the environment of an the perception of the
organization inherently implies environment
defining the boundary of an – Co-creation
organization
– Tricky: as a student of IIMC - are
you a member? Are you a customer?
A Raw material? A Product?
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Resource Dependence Theory

■ The goal of an organization is to minimize its

dependence on other organizations for the supply of
scarce resources and to find ways of influencing them
to make resources available
■ Organizations seek to choose the inter-organizational
strategy that offers the most reduction in uncertainty
with the least loss of control

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 Inter-organizational Strategies for Managing Resource
Dependencies
■ Competitive
■ Symbiotic interdependencies:
interdependencies:
– Exist among organizations that
– Organizations and its suppliers compete for scarce inputs and
and distributors outputs

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 Resource dependence

Symbiotic Competitive

Reputatio Strategic Mergers, Collusion / 3rd party Strategic Mergers,

Co - optation Cartels linkage Alliance Takeovers
n Alliance Takeovers

Long term
Joint Venture
contract

Minority
Network
ownership

Informal Formal Informal Formal

 Cartels
■ Usually in oligopolies with a
handful of players selling a
homogenous product
■ Goal is joint profit
maximization
■ Market sharing/Regions
■ Control market supply and/or
prices
■ Decreases product innovation,
quality control
■ Firms don’t need to spend on
advertising

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Org Design in Popular Culture!

“I'll make him an offer he can't refuse.”

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Org Design in Popular Culture!

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ORGANIZATION AND ITS
ENVIRONMENT

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Franchising

■ A franchise is a business that is authorized to sell a

company’s products in a certain area
■ The franchiser sells the right to use its resources (name
or operating system) in return for a flat fee or share of
profits

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Keiretsu

■ Japanese system for achieving the benefits of formal

linkages without incurring its costs
– Example: Toyota has a minority ownership in its suppliers
■ Affords substantial control over the exchange relationship
■ Avoids bureaucratic cost of ownership and opportunism

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Outsourcing

■ Moving a value creation that was performed inside the

organization to outside companies
■ Decision is prompted by the weighing the bureaucratic
costs of doing the activity against the benefits
– Increasingly, organizations are turning to specialized companies to
manage their information processing needs

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