Organization

Theory
Aaron M. Perez
MBA-TEP
Organization Management
for the class of Dr. Neri Pescadera
Questions
Why do firms emerge ?
What factors determine organizational
survival, growth and demise ?
Why are firms structured in a specific way
?
Organization Ecology Theory
Organization - an organized body of people
with a particular purpose, especially a
business, society, association, etc.

Ecology - the branch of biology that deals
with the relations of organisms to one
another and to their physical surroundings.
Overview

ORG
Customers Competitors
Suppliers
Regulators
History
Introduced in 1977 by Michael T. Hannan
and John H. Freeman in their article The
population ecology of organizations
The article was later refined in their book
Organizational Ecology (1989)
Aspects
Focus on how organizations operate among their peers
and within the natural environments dictated by the
nature of the work they do
Aims to explain how social, economic and political
conditions affect the relative abundance and diversity of
organizations
Utilizes insights from biology, economics and sociology,
and statistical data analysis in understanding the
conditions on how organizations emerge, grow and die
Often argue that many failures are due to causes
external to organizations (radical position that is almost
viewed as blasphemous)
Core Concepts
FOUNDING of orgs de novo, merger, spin-off, in-
migration
MORTALITY thru disbanding, merger, out-migration
INERTIA Inflexibility means most orgs unable to change
form by adapting to new environmental conditions
DENSITY total N of orgs in the population at time t
LEGITIMATION org form becomes institutionalized,
socially taken-for-granted (constitutive legitimation)
COMPETITION rivalry within an industry for resources
Theory Fragments
Inertia and Change
reliable/ accountable
Niche Width
distinguishing between generalist and specialist
Resource Partitioning
division of resources such that a few dominant
species exploit most of the available resources while
other species divide the remainder (i.e. fastfood
Jollibee, McDonalds, KFC etc)

Theory Fragments
Density Dependence
rates of founding and mortality are dependent on the
number of organizations (density) in the market (i.e.
fast food and restaurants Jollibee, McDonalds,
Cindys, BurgerMachine, Minute Burger )
Age Dependence
Liability of newness
Liability of adolescence
Liabilities of aging/ liability of obsolescence (i.e.
Philippine pagers & Internet Service Providers)

Organization Economics Theory
the use of economic logic and methods to
understand the existence, nature, design,
and performance of organizations,
especially managed ones
Nature of the Firm
Nature of the Firm
Reasons to establish a firm (hierarchy)
1. To avoid the transaction costs of the price
mechanism
a. Discovering relevant prices
b. Costs of negotiating deals
c. Costs of writing/rewriting contracts
2. Haggling over division of surplus

Nature of the Firm
Size determinants
1. The number and costs of transactions
a. Upper limit: When the costs rise to the point where
internalizing a transaction equals the cost of making the
transaction in the market.
b. Lower limit: If the firms costs of transactions exceed
the markets costs it does not come into existence.

Transaction Cost Theory
A theory accounting for the actual cost of outsourcing
production of products or services including transaction
costs, contracting costs, coordination costs, and search
costs. The inclusion of all costs are considered when
making a decision and not just the market prices.
Essentially this theory illustrates the make versus buy
decision for companies.

Transaction Cost Theory

Transaction Cost Theory

Efficiency Wages Theory
The idea of the efficiency wage theory is that it may benefit firms to
pay workers a wage higher than their marginal revenue product.

The argument is that paying workers a higher wage may lead to
increased productivity from the worker. If a worker gets a relatively
higher wage, he may feel more loyal and devoted to the company.
With a higher wage, he may also fear being made unemployed and
so will work harder to make sure he keeps his job. Therefore,
although the firm pays more, they get more productivity from their
workers.
Efficiency Wage Theory
Avoiding shirking: If it is difficult to measure a worker's
effort, and contingent reward systems are impossible,
there may be an incentive for him/her to shirk. The
efficiency wage increases the cost of job loss to the worker
moral hazard.

Minimizing turnover: By paying efficiency wages, the
employees' incentive to quit and seek jobs elsewhere is
minimized but, pattern-setting


Efficiency Wage Theory
Adverse selection: If job performance depends on
workers' ability and workers differ from each other in those
terms, firms with higher wages will attract more able job-
seekers. Thus, the employer can be more selective to
get the best applicants possible but internal labor markets
must correspond to external.

Sociological theories: Efficiency wages may result from
traditions. Argument that higher wages encourage high
morale, which raises productivity.

Efficiency Wage Theory
Nutritional theories: In developing
countries, efficiency wages may allow
workers to eat well enough to avoid illness
and to be able to work harder and more
productively.

Agency Theory
Agency theory is concerned with the
relationship, in which one party (the
principal) delegates work to another (the
agent), who performs that work.
Agency Theory
Problems:
1) The first is the agency problem that arises when:
a) the desires or goals of the principal and the agent conflict;
and
b) it is difficult or expensive for the principal to verify what the
agent is actually doing. The problem here is that the principal cannot
verify that the agent has behaved appropriately.

2) The second is the problem of risk sharing that arises when the
principal and agent have different aptitudes towards risk. The problem
here is that the principal and the agent may prefer different actions
because of the different risk preferences
Property Rights Theory
A property right is the exclusive authority to determine
how a resource is used, whether that resource is owned
by government or by individuals. All economic goods
have a property rights attribute. This attribute has four
broad components:
the right to use the goods
the right to earn income from the goods
the right to transfer the goods to others
the right to enforcement of property rights


Property Rights Theory
Property rights theory as used by
economists is seen as the ability of an
individual or collective to control the use of
the good(s).
Inappropriate to separate property
rights from human rights, as property
rights are human rights.
Organization Economics
(Comparison of Theories)
Organization Economics
(Comparison of Theories)

Institutional Theory
A widely accepted theoretical posture that
emphasizes rational myths, isomorphism
and legitimacy.
addresses the central question of why all
organizations in a field tend to look and act
the same [isomorphism] (DiMaggio &
Powell, 1983)

Core Concept
Organizational structures and processes tend to acquire
meaning and achieve stability in their own right, rather
than on the basis of their effectiveness and efficiency in
achieving desired ends, such as the mission and goals
of the organization
In order for an organization to survive, organizations
must conform to the rules and belief systems prevailing
in the environment (i.e. laws, regulations, customs,
social and professional norms, culture, and ethics)
Legitimacy
the quality or state of being in legitimate
(allowed according to the rules of the laws)
being accepted
Follow the leader.
Isomorphic Pressure
Coercive
Pressure from entities who have resources on which an
organization depends on
Normative
Following professional standards and practices established by
education and training methods, professional networks, and
movement of employees among firms
Mimetic
Imitation/copying of other successful organizations when an
organization is uncertain about what to do




Thank You